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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                           --------------------------

                                    FORM 10-Q

                           --------------------------



(Mark One)
[X]           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
              THE SECURITIES EXCHANGE ACT OF 1934

              FOR THE QUARTER ENDED SEPTEMBER 30, 2004

[ ]           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
              THE SECURITIES EXCHANGE ACT OF 1934

              FOR THE TRANSITION PERIOD FROM _______ TO ________.


                        COMMISSION FILE NUMBER: 000-21240

                              NEOWARE SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)



             DELAWARE                                      23-2705700
 (State or other jurisdiction of               (IRS Employer Identification No.)
  incorporation or organization)


                                400 FEHELEY DRIVE
                       KING OF PRUSSIA, PENNSYLVANIA 19406
                    (Address of principal executive offices)

                                 (610) 277-8300
               (Registrant's telephone number including area code)
                   __________________________________________





Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes  [X]     No  [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes  [X]     No  [ ]

As of November 5, 2004, there were 15,721,161 outstanding shares of the
Registrant's Common Stock.


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                              NEOWARE SYSTEMS, INC.

                                      INDEX


PART I.  FINANCIAL INFORMATION
                                                                                                       PAGE
                                                                                                       ----
                                                                                                    
Item 1.    Consolidated Financial Statements

           Condensed Consolidated Balance Sheet as of September 30, 2004 and June 30, 2004................3
           Consolidated Statement of Operations for the Three Months
             Ended September 30, 2004 and 2003............................................................4
           Consolidated Statement of Cash Flows for the Three Months
             Ended September 30, 2004 and 2003............................................................5
           Notes to Consolidated Financial Statements.....................................................6

Item 2.    Management's Discussion and Analysis of Financial Condition
             and Results of Operations...................................................................11

Item 3.    Quantitative and Qualitative Disclosures About Market Risk....................................25

Item 4.    Controls and Procedures.......................................................................25


PART II.   OTHER INFORMATION

Item 6.    Exhibits......................................................................................25
Signatures...............................................................................................26




                              NEOWARE SYSTEMS, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)
                                   (Unaudited)


                                                                SEPTEMBER 30,              JUNE 30,
                           ASSETS                                  2004                      2004
                                                                -------------             ----------
                                                                                   
Current assets:
     Cash and cash equivalents.................................   $  12,473               $   17,119
     Short-term investments.....................................     38,709                   38,177
     Accounts receivable, net...................................     10,814                   10,580
     Inventories................................................      1,708                      795
     Prepaid expenses and other.................................      1,522                    1,628
     Deferred income taxes......................................        643                      643
                                                                  ---------               ----------
     Total current assets ......................................     65,869                   68,942

Property and equipment, net.....................................        464                      509
Goodwill........................................................     21,202                   17,466
Intangibles, net................................................      3,267                    3,545
Deferred income taxes...........................................        145                      145
                                                                  ---------               ----------
                                                                  $  90,947               $   90,607
                                                                  =========               ==========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable..........................................   $   4,050               $    5,685
     Accrued compensation and benefits..........................      1,237                    1,534
     Other accrued expenses.....................................      1,475                    1,071
     Income taxes payable.......................................      1,293                      854
     Deferred revenue...........................................        656                      739
                                                                  ---------               ----------
        Total current liabilities...............................      8,711                    9,883

Deferred revenue................................................        266                      235
                                                                  ---------               ----------
        Total liabilities.......................................      8,977                   10,118
                                                                  ---------               ----------


Stockholders' equity:
     Preferred stock............................................          -                        -
     Common stock...............................................         16                       16
     Additional paid-in capital.................................     71,807                   71,718
     Treasury stock, 100,000 shares at cost.....................       (100)                   (100)
     Accumulated other comprehensive income.....................        941                      936
     Retained earnings..........................................      9,306                    7,919
                                                                  ---------               ----------
        Total stockholders' equity..............................     81,970                   80,489
                                                                  ---------               ----------
                                                                  $  90,947               $   90,607
                                                                  =========               ==========


          See accompanying notes to consolidated financial statements.

                                       3



                              NEOWARE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (Unaudited)


                                                             THREE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                         ---------------------------
                                                           2004              2003
                                                         ---------         ---------
                                                                    
Net revenues...........................................  $  16,303         $  15,013
Cost of revenues.......................................      9,213             7,049
                                                         ---------         ---------
     Gross profit......................................      7,090             7,964
                                                         ---------         ---------

Sales and marketing....................................      3,102             2,965
Research and development...............................        664               721
General and administrative.............................      1,358             1,457
                                                         ---------         ---------
     Operating expenses................................      5,124             5,143
                                                         ---------         ---------

     Operating income..................................      1,966             2,821

Foreign exchange loss..................................        (23)                -
Interest income, net...................................        159                83
                                                         ---------         ---------

     Income before income taxes........................      2,102             2,904
Income taxes...........................................        715             1,041
                                                         ---------         ---------

Net income.............................................  $   1,387         $   1,863
                                                         =========         =========

Earnings per share:
     Basic.............................................  $    0.09         $    0.12
                                                         =========         =========
     Diluted...........................................  $   0.09          $    0.12
                                                         =========         =========

Weighted average number of common shares outstanding:
     Basic.............................................     15,799            15,445
                                                         =========         =========
     Diluted...........................................     16,136            16,200
                                                         =========         =========


          See accompanying notes to consolidated financial statements.

                                       4

                              NEOWARE SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      (in thousands, except per share data)
                                   (Unaudited)


                                                                                            THREE MONTHS ENDED
                                                                                               SEPTEMBER 30,
                                                                                      -------------------------------
                                                                                         2004                 2003
                                                                                      ----------           ----------
                                                                                                    
Cash flows from operating activities:
   Net income...................................................................      $    1,387           $    1,863
   Adjustments to reconcile net income to net cash provided by operating
    activities:
     Depreciation...............................................................              64                   72
     Amortization of intangibles................................................             271                  187
     Stock option benefit on deferred income taxes..............................              20                    -
   Changes in operating assets and liabilities, net of effect from acquisition:
     Accounts receivable........................................................            (233)               1,397
     Inventories................................................................            (913)                (790)
     Prepaid expenses and other.................................................             107                   46
     Accounts payable...........................................................          (1,636)              (2,263)
     Accrued compensation and benefits..........................................            (297)                (292)
     Other accrued expenses.....................................................             407                  216
     Income taxes payable.......................................................             439                  735
     Deferred revenue...........................................................             (52)                 139
                                                                                      ----------           ----------
       Net cash (used in) provided by operating activities......................            (436)               1,310
                                                                                      ----------           ----------

Cash flows from investing activities:
   Purchase of the Visara thin client business..................................          (3,774)                   -
   Purchase of the TeemTalk software business...................................               -               (9,963)
   Purchases of short-term investments..........................................         (17,900)             (16,209)
   Sales of short-term investments..............................................          17,368                  982
   Purchase of intangible assets................................................               -                 (125)
   Purchases of property and equipment..........................................             (19)                 (80)
                                                                                      ----------           ----------
       Net cash used in investing activities....................................          (4,325)             (25,395)
                                                                                      ----------           ----------

Cash flows from financing activities:
   Repayments of capital leases.................................................              (3)                  (2)
   Proceeds from issuance of common stock, net of expenses......................               -               24,609
   Exercise of stock options and warrants.......................................              69                  737
                                                                                      ----------           ----------
       Net cash provided by financing activities................................              66               25,344
                                                                                      ----------           ----------

Effect of foreign exchange rate changes on cash.................................              49                   13
                                                                                      ----------           ----------

   Increase (decrease) in cash and cash equivalents.............................          (4,646)               1,272
Cash and cash equivalents, beginning of period..................................          17,119               26,014
                                                                                      ----------           ----------
   Cash and cash equivalents, end of period.....................................      $   12,473           $   27,286
                                                                                      ==========           ==========

Supplemental disclosures:
    Cash paid for income taxes..................................................      $       31           $      264
    Cash paid for interest......................................................               2                    4


          See accompanying notes to consolidated financial statements.

                                       5

                              NEOWARE SYSTEMS, INC.

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENT


NOTE 1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements of Neoware
Systems, Inc. and Subsidiaries (the "Company") have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial statements. These statements, while unaudited, reflect all
normal recurring adjustments, which are, in the opinion of management, necessary
for a fair presentation of the consolidated financial statements. The results
for the interim periods presented are not necessarily indicative of the results
that may be expected for any future period. Certain information and footnote
disclosures included in financial statements have been condensed or omitted
pursuant to such rules and regulations relating to interim financial statements.
The consolidated financial statements included in this Form 10-Q should be read
in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
June 30, 2004, filed with the Securities and Exchange Commission on September
13, 2004.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

     In February 2004, the Financial Accounting Standards Board (FASB) issued
Emerging Issues Task Force (EITF) Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. This
EITF was issued to determine the meaning of other-than-temporary impairment and
its application to investments in debt and equity securities within the scope of
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities. This impairment accounting
guidance is effective for reporting periods beginning after June 15, 2004 and
the disclosure requirements for annual reporting periods ending after June 15,
2004. The adoption of this Interpretation did not have any impact on the
Company's financial statements.

NOTE 3. STOCK-BASED COMPENSATION

     The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations for
stock options and other stock-based awards while disclosing pro forma net income
and earnings per share as if the fair value method had been applied in
accordance with SFAS No. 123, "Accounting for Stock-based Compensation" and
SFAS No. 148, "Accounting for Stock Based Compensation Transition and
Disclosure." Had compensation cost been recognized consistent with SFAS No. 123
and SFAS No. 148, the Company's consolidated net income and earnings per share
would have been as follows (in thousands, except share and per share data):

                                                            THREE MONTHS ENDED
                                                               SEPTEMBER 30,
                                                            ------------------
                                                             2004       2003
                                                            -------    -------
Net income:
   As reported............................................  $ 1,387    $ 1,863
   Less:
   Total stock-based employee compensation expense
     determined under the fair value based method for all
     awards, net of tax...................................     (639)      (661)
                                                            -------    -------
   Pro forma..............................................  $   748    $ 1,202
                                                            =======    =======

Basic earnings per share:
   As reported............................................  $  0.09    $  0.12
                                                            -------    -------
   Pro forma..............................................  $  0.05    $  0.08
                                                            -------    -------
Diluted earnings per share:
   As reported............................................  $  0.09    $  0.12
                                                            -------    -------
   Pro forma..............................................  $  0.05    $  0.07
                                                            -------    -------

     The fair value of the Company's stock-based awards to employees was
estimated at the date of grant using the Black-Scholes option pricing model,
assuming an estimated life of five to ten years, no dividends, volatility of 70%
- - 126%, and risk-free interest rates of 2.1% - 6.8%.

                                       6

NOTE 4. BUSINESS COMBINATION

     On September 22, 2004, the Company acquired the thin client business from
Visara International, Inc. (referred to as the "Visara business"), for $3.8
million in cash, including transaction costs. The Company acquired substantially
all of the assets of the Visara business, including primarily customer lists,
intellectual property and technology, and also entered into reseller, supplier
and non-competition agreements. The acquisition was accounted for using the
purchase method of accounting. The Company has not completed the allocation of
the purchase price for this acquisition. The allocation of the purchase price
will be adjusted once the final valuation of assets acquired is completed. The
results of operations of the Visara business have been included in the Company's
statements of operations from the date of the acquisition.

     The following unaudited pro forma information presents the results of the
Company's operations as though the acquisition had been completed as of July 1,
2003. The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisition been completed as of July 1, 2003 or the results that may occur in
the future (in thousands, except per share data):

                                            THREE MONTHS ENDED
                                               SEPTEMBER 30,
                                         ------------------------
                                           2004           2003
                                         ---------      ---------
Total net revenue.....................   $  17,654      $  17,098
Net income............................       1,391          1,864
Basic earnings per share..............        0.09           0.12
Diluted earnings per share............        0.09          0.12

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

     The carrying amount of goodwill was $21.2 million and $17.5 million at
September 30, 2004 and June 30, 2004, respectively. The increase in goodwill is
due to the acquisition of the Visara business (See Note 4) and the impact of
changes in foreign exchange rates. The Company has not yet completed the
allocation of the purchase price from the acquisition of the Visara business.

     Intangible assets with finite useful lives are amortized over their
respective estimated useful lives. The following table provides a summary of the
Company's intangible assets (in thousands):


                                                                    SEPTEMBER 30, 2004
                                                 ---------------------------------------------------------
                               Estimated         Gross Carrying        Accumulated              Net
                              Useful Life            Amount            Amortization        Carrying Amount
                              -----------        --------------        ------------        ---------------
                                                                                 
Tradenames.................   Indefinite           $      259           $      --             $     259
Customer relationships.....     2 years                   543                 317                   226
Distributor relationships..     5 years                 2,325               1,265                 1,060
Acquired technology........   5-10 years                2,245                 523                 1,722
                                                   ----------           ---------             ---------
                                                   $    5,372           $   2,105             $   3,267
                                                   ==========           =========             =========


                                                                      JUNE 30, 2004
                                                 ---------------------------------------------------------
                               Estimated        Gross Carrying         Accumulated               Net
                              Useful Life           Amount            Amortization         Carrying Amount
                              -----------        --------------        ------------        ---------------
Tradenames.................   Indefinite           $      259           $      --             $     259
Customer relationships.....     2 years                   546                 273                   273
Distributor relationships..     5 years                 2,325               1,149                 1,176
Acquired technology........   5-10 years                2,253                 416                 1,837
                                                   ----------           ---------             ---------
                                                   $    5,383           $   1,838             $   3,545
                                                   ==========           =========             =========


                                       7


     The amortization expense of intangible assets is set forth below (in
thousands):

                                    THREE MONTHS ENDED
                                       SEPTEMBER 30,
                                  --------------------
                                    2004         2003
                                  -------      -------
Customer relationships..........  $    69      $    --
Distributor relationships.......      116          110
Acquired technologies...........       86           77
                                  -------      -------
                                  $   271      $   187
                                  =======      =======

     Amortization expense for customer relationships and distributor
relationships is included in sales and marketing expenses and amortization
expense for acquired technologies is included in cost of revenues.

     The following table provides estimated future amortization expense related
to intangible assets (assuming there is no write down associated with these
intangible assets causing an acceleration of expense) (in thousands):

                                                  FUTURE
          YEAR ENDING JUNE 30,                 AMORTIZATION
- ------------------------------------------    ---------------
Remainder of fiscal 2005................           $    832
2006....................................                782
2007....................................                532
2008....................................                342
2009....................................                395
2010 through 2013.......................                125
                                                   --------
                                                   $  3,008
                                                   ========

NOTE 6. COMPREHENSIVE INCOME

     Excluding net income, the Company's sources of other comprehensive income
(loss) are unrealized income (loss) relating to foreign exchange rate
fluctuations. The following summarizes the components of comprehensive income
(in thousands):

                                                    THREE MONTHS ENDED
                                                      SEPTEMBER 30,
                                                   --------------------
                                                     2004        2003
                                                   --------     -------
Net income........................................ $ 1,387      $ 1,863
   Foreign currency translation adjustment........       5          (13)
                                                   -------      -------
Comprehensive income.............................. $ 1,392      $ 1,850
                                                   =======      =======

NOTE 7. REVENUE RECOGNITION

     Net revenues included sales of thin client appliance systems, which include
the appliance device and related software, and services. The Company follows
AICPA Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP
97-2") for revenue recognition because the software component of the thin client
appliance systems is more than incidental to the thin client appliance systems
as a whole. These products and services are sold either separately or as part of
a multiple-element arrangement. Revenue is recognized on product sales when
persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable.

     Revenue related to post-contract support services is generally recognized
with the initial product sale when the fee is included with the initial product
fee, post-contract services are for one year or less, the estimated cost of
providing such services during the arrangement is insignificant, and unspecified
upgrades and enhancements offered during the period historically have been and
are expected to continue to be minimal and infrequent. Otherwise, revenue from
extended warranty and post-contract support service contracts is recorded as
deferred revenue and subsequently recognized over the term of the contract.

                                       8

     Revenue from consulting and training services is recognized upon
performance.

     Stock rotation rights and price protection are provided to certain
distributors. Stock rotation rights are generally limited to a maximum amount
per quarter and require a corresponding order of equal or greater value at the
time of the stock rotation. Price protection provides for a rebate in the event
the Company reduces the price of products which the distributors have yet to
sell to end-users. The Company reserves for these arrangements based on
historical experience and the level of inventories in the distribution channel
and reduces current period revenue accordingly.

     Product warranty costs are accrued at the time the related revenues are
recognized.

NOTE 8. MAJOR CUSTOMERS AND DEPENDENCE ON SUPPLIERS

    For the three months ended September 30, 2004 and 2003, sales directly to
IBM accounted for 15% and 16% of net revenues, respectively. IBM resells the
Company's products to individual resellers and/or end-users. Accounts receivable
from IBM as of September 30, 2004 and 2003 was $856,000 and $938,000,
respectively. The percentage of revenue derived from IBM, individual
distributors, resellers or end-users can vary significantly from quarter to
quarter.

    In addition to the Company's direct sales to IBM, IBM can purchase the
Company's products through individual distributors and/or resellers.
Furthermore, IBM can influence an end-user's decision to purchase the Company's
products even though the end-user may not purchase the Company's products
through IBM. While it is difficult to quantify the net revenues associated with
these purchases the Company believes that these sales could be significant and
can vary significantly from quarter to quarter.

    For the three months ended September 30, 2004 and 2003 revenues from Europe,
the Middle East and Africa, based on the location of the Company's primary
selling activities with its customers accounted for 31% and 36% of net revenues.
Sales to the United Kingdom accounted for 18% of net revenue for the three
months ended September 30, 2004. No single international region accounted for
more than 10% of net revenue for the three months ended September 30, 2003.

    The Company depends upon several sole source suppliers for its thin client
appliance products and for several of the components in them. One of the
Company's suppliers who supplies a sbustantial portion of the company's thin
client products has informed the Company that it is experiencing cash liquidity
constraints and is evaluating and undertaking financial restructuring actions.
As a result, the Company has agreed to accommodate the supplier by purchasing
products for inventory in advance of our contractual obligations and the
Company anticipates continuing this practice until such time as the supplier's
cash liquidity situation is resolved. Accordingly, inventory levels may
increase and the Company's cash balances may decrease, although the Company's
management does not believe that such changes would have a material adverse
impact on its financial condition. In the event that the supplier is unable to
resolve its cash liquidity constraints, the Company could face an interruption
in the supply of a substantial portion of its products. Although the Company
has identified alternative suppliers that could produce comparable products, it
is likely there would be an interruption of supply during any transition which
would limit the Company's ability to ship product to fully meet customer
demand. If this were to happen, the Company's revenue would decline and its
profitability would be adversely impacted.

    The Company also depends on limited sources to supply several other industry
standard components and relies on foreign suppliers which subject the Company to
risks associated with foreign operations such as the imposition of unfavorable
governmental controls or other trade restrictions, changes in tariffs, political
instability and currency fluctuations. A weakening dollar could result in
greater costs to the Company for its components.

NOTE 9. INVENTORIES

     Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method and consists of the following (in thousands):

                                         SEPTEMBER 30,    JUNE 30,
                                            2004           2004
                                           -------        -------
Purchased components and subassemblies.... $   344        $   234
Finished goods............................   1,364            561
                                           -------        -------
                                           $ 1,708        $   795
                                           =======        =======

                                       9

NOTE 10. INCOME TAXES

     The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under the asset-and-liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and the respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.

NOTE 11. LINE OF CREDIT

     The Company has a line of credit agreement with a bank, which provides for
borrowing up to $2.0 million subject to certain limitations, as defined. The
line of credit matures on December 31, 2004. Borrowings under the credit
agreement bear interest at the Libor Market Index rate plus 2.5% (4.34% at
September 30, 2004). At September 30, 2004 and 2003, $2.0 million was available
for borrowing under the line. During the three months ended September 30, 2004
and 2003, there were no borrowings under the line.

     The line of credit is unsecured and requires the Company to maintain a
minimum balance of $3.0 million in cash and cash equivalents with the bank. The
Company is in compliance with this condition at September 30, 2004.

NOTE 12. EARNINGS PER SHARE

     The Company applies SFAS No. 128, "Earnings per Share," which requires dual
presentation of basic and diluted earnings per share ("EPS") for complex capital
structures on the face of the statement of operations. Basic EPS is computed by
dividing net income by the weighted average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution from the exercise or
conversion of securities into common stock, such as stock options and warrants.
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except share and per share data):

                                                  THREE MONTHS ENDED
                                                     SEPTEMBER 30,
                                                  ------------------
                                                    2004      2003
                                                  --------  --------
Net income......................................  $  1,387  $  1,863
                                                  ========  ========

Weighted average shares outstanding:
   Basic........................................    15,799    15,445
   Effect of dilutive employee stock options....       337       749
   Effect of dilutive warrants..................        --         6
                                                  --------  --------
   Diluted......................................    16,136    16,200
                                                  ========  ========

Earnings per common share:
   Basic........................................  $   0.09  $   0.12
                                                  ========  ========
   Diluted......................................  $   0.09  $   0.12
                                                  ========  ========

     For the three months ended September 30, 2004 and 2003, an aggregate of
1,177 and 34, respectively, of stock options and warrants were excluded from the
calculation of dilutive earnings per share because their inclusion would have
been anti-dilutive.

NOTE 13. GUARANTEES

     INDEMNIFICATIONS

     In the ordinary course of business, from time-to-time the Company enters
into contractual arrangements under which it may agree to indemnify its customer
for losses incurred by the customer or supplier arising from certain events as
defined within the particular contract, which may include, for example,
litigation or intellectual property infringement claims. The Company has not
identified any losses that are probable under these provisions and, accordingly,
no liability related to these indemnification provisions has been recorded.

                                       10

     WARRANTY

     The Company provides for the estimated cost of product warranties at the
time it recognizes revenue. The Company actively monitors and evaluates the
quality of its component suppliers; however, ongoing product failure rates,
material usage and service delivery costs incurred in correcting a product
failure, affect the estimated warranty obligation. If actual product failure
rates, material usage or service delivery costs differ from estimates, revisions
to the estimated warranty liability would be required. The Company's standard
warranty service period ranges from one to three years.

     The changes in the Company's warranty liability during the first quarter of
fiscal 2005 is as follows (in thousands):

Accrued warranty cost at June 30, 2004                 $     264
     Settlements made                                        (39)
     Provisions for warranties                                71
                                                       ---------
Accrued warranty cost at September 30, 2004            $     296
                                                       =========

NOTE 14. RELATED PARTY TRANSACTIONS

    For the quarter ended September 30, 2004 and 2003, the Company had sales of
$8,000 and $113,000, respectively to a customer of which one of the Company's
directors is an executive officer and director.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

OVERVIEW

     We provide software, services and solutions to enable thin client appliance
computing, which is a computing architecture targeted at business customers as
an easier to manage, more secure, more reliable, and more cost-effective
solution than traditional PC-based, client server computing. Our software and
management tools secure, power and manage a new generation of smart thin client
appliances that utilize the benefits of open, industry-standard technologies
used in the PC industry to create new alternatives to full-function personal
computers and green screen terminals used in business.

     Our software runs on thin client appliances and personal computers, and
enables these devices to be secured and centrally managed, as well as to connect
to mainframes, midrange, UNIX, Linux and host systems. We generate revenues
primarily from sales of thin client appliance systems, which include the
appliance device and related software marketed under the brand names Eon and
Capio, and to a lesser extent from ThinPC thin client software for PCs, TeemTalk
host access software for servers and PCs, ezRemote Manager central management
software, and services such as training and integration.

     We sell our products and services worldwide through our direct sales force,
distributors, our alliance with IBM and other indirect channels, such as
resellers and systems integrators. Our international sales are primarily made
through distributors and resellers and are collectible primarily in US dollars,
while the associated operating expenses are payable in foreign currencies. In
addition to our headquarters in the United States, we maintain offices in the
UK, Germany, France, Austria, Sweden, Australia, and the Netherlands.

Revenues from Europe, the Middle East and Africa, based on the location of our
primary selling activities with our customers, were as follows:

                                         THREE MONTHS ENDED
                                            SEPTEMBER 30,
                                           (in thousands)
                                       ----------------------
                                         2004          2003        % CHANGE
                                       --------      --------      ---------
International revenues                 $  5,034      $  5,425         (7)%
Percentage of net revenues                   31%           36%

                                       11

     STRATEGY

     The market for thin client appliances is part of the enterprise personal
computers (PC) market. We market our thin client appliances as alternatives to
PCs in certain target markets. Our strategies are to focus on increasing sales
to large enterprise customers, primarily through our relationship with IBM, and
secondarily through other resellers and directly to end-users, and to execute
marketing initiatives designed to grow the thin client segment of the PC
industry. We expect that the combination of these actions, including the
introduction of new products, will result in increased revenues with overall
gross profit margins in approximately the 40% to 45% range in fiscal 2005.

     We expect to continue to grow the company organically and through
acquisitions. Our acquisition strategy is focused on acquiring businesses with
products that can be sold through our existing channels to the same end user
customers, leveraging our existing organization. In September 2004, we completed
the acquisition of Visara International's thin client business, which added
products that allow IBM systems, including Linux-based thin client solutions, to
connect to mainframes and midrange systems and access to the Visara customer
base. We will continue to evaluate strategic acquisitions and partnerships in
the future.

     FINANCIAL HIGHLIGHTS

     Net revenue, gross profit margin and earnings per share are key
measurements of our financial results. For the first quarter of fiscal 2005, net
revenue was $16.3 million, an increase of 9% from the same period in fiscal
2004, the result of organic growth plus revenue from the acquisition of the
Visara business. Gross profit margins were 43% in the first quarter of
fiscal 2005 as compared to 53% in the same period in fiscal 2004. Diluted
earnings per share were $0.09 in the first quarter of fiscal 2005, compared to
$0.12 in the same period in fiscal 2004, primarily because of lower gross profit
margins resulting from our strategy to compete more effectively with personal
computers.

     We have a significant balance of cash and short-term investments. As of
September 30, 2004, our cash, cash equivalents and short- term investments were
$51.2 million, compared to $55.3 million at June 30, 2004, which represented
approximately 77% of tangible assets. We used $3.8 million in the first quarter
of fiscal 2005 to acquire the Visara business. We anticipate that in upcoming
periods we will have lower cash balances, primarily as a result of lowering our
accounts payable to vendors. We utilize cash in ways that our management
believes provides an optimal return on investment. Cash has principally been
used to acquire businesses.

     One of our suppliers who provides a substantial portion of our products has
informed us that it is experiencing cash liquidity constraints and is evaluating
and undertaking financial restructuring actions. As a result, we have agreed to
accommodate the supplier by purchasing products for inventory in advance of our
contractual obligations and we anticipate continuing this practice until such
time as the supplier's cash liquidity situation is resolved. Accordingly,
inventory levels may increase and our cash balances may decrease, although
management does not believe that such changes would have a material adverse
impact on our financial condition. In the event that the supplier is unable to
resolve its cash liquidity constraints, we could face an interruption in the
supply of a substantial portion of our products. Although we have identified
alternative suppliers that could produce comparable products, it is likely there
would be an interruption of supply during any transition which would limit our
ability to ship product to fully meet customer demand. If this were to happen,
our revenue would decline and our profitability would be adversely impacted.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     We believe that there are several accounting policies that are critical to
understanding our historical and future performance, as these policies affect
the reported amounts of revenue and other significant areas that involve
management's judgments and estimates. These critical accounting policies and
estimates include:

     o   Revenue recognition
     o   Valuation of long-lived and intangible assets and goodwill
     o   Accounting for income taxes

     These policies and estimates and our procedures related to these policies
and estimates are described in detail below and under specific areas within the
discussion and analysis of our financial condition and results of operations.
Please refer to Note 1, "Organization and Summary of Significant Accounting
Policies" in the Notes to Consolidated Financial Statements in our Annual Report
on Form 10-K for the year ended June 30, 2004 for further discussion of the
Company's accounting policies and estimates.

                                       12

REVENUE RECOGNITION

     We make significant judgments related to revenue recognition. For each type
of arrangement, we make significant judgments regarding the fair value of
multiple elements contained in our arrangements, judgments regarding whether
fees are fixed or determinable, judgments regarding whether collectibility is
probable, and judgments related to accounting for potential distributor stock
rotation rights and price protection. These judgments, and their effect on
revenue recognition, are discussed below.

     Multiple Element Arrangements

     Net revenues include sales of thin client appliance systems, which include
the appliance device and related software, maintenance and technical support. We
follow AICPA Statement of Position No. 97-2, "Software Revenue Recognition"
("SOP 97-2"), for revenue recognition because the software component of the thin
client appliance system is more than incidental to the thin client appliance
systems as a whole. These products and services are sold either separately or as
part of a multiple-element arrangement. Revenue is recognized on product sales
when persuasive evidence of an arrangement exists, delivery of the product has
occurred, the fee is fixed or determinable and collectibility is probable.

     Revenue related to post-contract support services is generally recognized
with the initial product sale when the fee is included with the initial product
fee, post-contract services are for one year or less, the estimated cost of
providing such services during the arrangement is insignificant, and unspecified
upgrades and enhancements offered during the period historically have been and
are expected to continue to be minimal and infrequent. Otherwise, revenue from
extended warranty and post-contract support service contracts is recorded as
deferred revenue and subsequently recognized over the term of the contract.

     The Fee is Fixed or Determinable

     We make judgments at the outset of an arrangement regarding whether the
fees are fixed or determinable. The majority of our payment terms are within 30
to 60 days after invoice date. We review arrangements that have payment terms
extending beyond 60 days on a case-by-case basis to determine if the fee is
fixed or determinable. If we determine at the outset of an arrangement that the
fees are not fixed or determinable, we recognize revenue as the fees become due
and payable.

     Collection is Probable

     We make judgments at the outset of an arrangement regarding whether
collection is probable. Probability of collection is assessed on a
customer-by-customer basis. We typically sell to customers with whom we have had
a history of successful collections. New customers are subjected to a credit
review process to evaluate the customer's financial position and ability to pay.
If we determine at the outset of an arrangement that collection is not probable,
revenue is recognized upon receipt of payment.

     Stock Rotation Rights and Price Protection

     We provide certain distributors with stock rotation rights and price
protection. Stock rotation rights are generally limited to a maximum amount per
quarter and require a corresponding order of equal or greater value at the time
of the stock rotation. We provide price protection as a rebate in the event that
we reduce the price of products that our distributors have yet to sell to
end-users. We estimate potential stock rotation and price protection claims
based on historical experience and the level of inventories in the distribution
channel and reduce current period revenue accordingly. If we cannot reasonably
estimate claims related to stock rotations and price protection at the outset of
an arrangement, we recognize revenue when the claims can be reasonably
estimated.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL

     In connection with acquisitions, we allocate portions of the purchase price
to intangible assets, consisting of acquired technology, distributor and
customer relationships and tradenames based on independent appraisals received
after each acquisition, with the remainder allocated to goodwill.

     We assess the realizability of goodwill and intangible assets with
indefinite useful lives pursuant to SFAS No. 142, Goodwill and Other Intangible
Assets. We are required to perform a SFAS No. 142 impairment test annually, or
sooner if events or changes in circumstances indicate that the carrying amount
may not be recoverable. We have determined that the reporting unit level is our
sole operating segment. The test for goodwill is a two-step process:

                                       13

     First, we compare the carrying amount of our reporting unit, which is the
book value of the entire Company, to the fair value of our reporting unit. If
the carrying amount of our reporting unit exceeds its fair value, we have to
perform the second step of the process. If not, no further testing is needed.

     If the second part of the analysis is required, we allocate the fair value
of our reporting unit to all assets and liabilities of our reporting units as if
the reporting unit had been acquired in a business combination at the date of
the impairment test. We then compare the implied fair value of our reporting
unit's goodwill to its carrying amount. If the carrying amount of our reporting
unit's goodwill exceeds its fair value, we recognize an impairment loss in an
amount equal to that excess.

     We review our long-lived assets, including amortizable intangibles, for
impairment when events indicate that their carrying amount may not be
recoverable in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. When we determine that one or more impairment
indicators are present for an asset, we compare the carrying amount of the asset
to net future undiscounted cash flows that the asset is expected to generate. If
the carrying amount of the asset is greater than the net future undiscounted
cash flows that the asset is expected to generate, we compare the fair value to
the book value of the asset. If the fair value is less than the book value, we
recognize an impairment loss. The impairment loss is the excess of the carrying
amount of the asset over its fair value.

     Some of the events that we consider as impairment indicators for our
long-lived assets, including goodwill, are:

     o   Significant underperformance of the company relative to expected
         operating results;
     o   Our net book value compared to our market capitalization;
     o   Significant adverse economic and industry trends;
     o   Significant decrease in the market value of the asset;
     o   The extent that we use an asset or changes in the manner that we use
         it; and
     o   Significant changes to the asset since we acquired it.

     We have not recorded an impairment loss on goodwill or other long-lived
assets. At September 30, 2004, goodwill and amortizable intangible assets are
$21.2 million and $3.3 million, respectively. A decrease in the fair value of
our business could trigger an impairment charge related to goodwill.

ACCOUNTING FOR INCOME TAXES

     We are required to estimate our income taxes in each federal, state and
international jurisdiction in which we operate. This process requires that we
estimate the current tax exposure as well as assess temporary differences
between the accounting and tax treatment of assets and liabilities, including
items such as accruals and allowances not currently deductible for tax purposes.
The income tax effects of the differences we identify are classified as current
or long-term deferred tax assets and liabilities in our consolidated balance
sheets. Our judgments, assumptions and estimates relative to the current
provision for income tax take into account current tax laws, our interpretation
of current tax laws and possible outcomes of future audits conducted by foreign
and domestic tax authorities. Changes in tax laws or our interpretation of tax
laws and the resolution of future tax audits could significantly impact the
amounts provided for income taxes in our balance sheet and results of
operations. We must also assess the likelihood that deferred tax assets will be
realized from future taxable income and, based on our assessment, establish a
valuation allowance, if required.

RESULTS OF OPERATIONS

NET REVENUES

                                         THREE MONTHS ENDED
                                            SEPTEMBER 30,
                                           (in thousands)
                                       ----------------------
                                         2004          2003        % CHANGE
                                       --------      --------      ---------
Net Revenue                            $ 16,303        15,013         9%

     We derive revenues primarily from the sale of thin client appliances, which
include an appliance device and related software. The increase in net revenues
in the first quarter of fiscal 2005 over the same period in fiscal 2004 is
primarily the result of increased unit sales of our thin client appliance
products. The increase was driven by sales growth from increasing market
acceptance of thin client products and our acquisition of the Visara business.

                                       14

     We expect total net revenue to increase in fiscal 2005, as a result of
increased penetration of the PC market and continued growth of our relationship
with IBM, relatively consistent with the growth levels experienced during fiscal
2004. We believe we are seeing positive results from strategies we initiated in
fiscal 2004, and believe that if we can successfully implement these
initiatives, our revenues may grow at a faster rate. Additionally, we completed
only one acquisition in our fiscal 2004. If we complete additional acquisitions
in fiscal 2005, our revenues may grow at a faster rate.

COST OF REVENUES AND GROSS PROFIT MARGIN

                                         THREE MONTHS ENDED
                                            SEPTEMBER 30,
                                           (in thousands)
                                       ----------------------
                                         2004          2003        % CHANGE
                                       --------      --------      ---------
Cost of Revenues                       $  9,213      $  7,049         31%
Gross Profit Margin                          43%           53%

     Cost of revenues consists primarily of the cost of thin client appliances,
which include an appliance device and related software, and, to a lesser extent
overhead including salaries and related benefits for personnel who fulfill
product orders and deliver services, and distribution costs.

     The increase in cost of revenues in the first quarter of fiscal 2005 over
the same period in fiscal 2004 is primarily the result of sales growth and
higher material costs as a percentage of revenues (30%) and amortization of
intangibles related to technologies acquired in our acquisition of the TeemTalk
software business (1%). Higher material costs as a percentage of revenues are
due to changes in product mix and the introduction of new, lower priced products
designed to compete more effectively with personal computers.

     We have benefited from manufacturing efficiencies and component cost
reductions achieved through our outsourced offshore manufacturing model. This
model depends on high volume production of our thin client appliance products
using components commonly used in personal computers. Changes in this model
could have a significant impact on our gross profit margins.

     The change in gross profit margin in the first quarter of fiscal 2005 over
the same period in fiscal 2004 is attributable to changes in net revenues and
cost of revenues as previously discussed. We expect gross margins to fluctuate
or decline in the future, reflecting changes in product mix, the percentage of
revenues derived from thin client appliance systems and software, reduction in
sales prices due to increased sales to large enterprise customers and increased
price competition and changes in the cost of thin client appliances, memory and
other components. Accordingly, in fiscal 2005 we expect gross margins to be in
the range of 40% to 45%.

SELLING AND MARKETING

                                         THREE MONTHS ENDED
                                            SEPTEMBER 30,
                                           (in thousands)
                                       ----------------------
                                         2004          2003        % CHANGE
                                       --------      --------      ---------
Selling and marketing                  $  3,102      $  2,965         5%
As a percentage of net revenues              19%           20%

     Selling and marketing expenses consist primarily of salaries, related
benefits, commissions, amortization of intangibles related to customer and
distribution relationships and other costs associated with our sales and
marketing efforts. The increase in selling and marketing expense in the first
quarter of fiscal 2005 over the same period in fiscal 2004 is primarily due to
the increase in our personnel in Europe and the amortization of intangibles
related to customer relationships associated with the acquisition of the
TeemTalk software business.

     We expect sales and marketing expenses to increase moderately in absolute
dollars during the balance of fiscal 2005. Spending levels in any one quarter
will vary depending upon the timing of individual marketing initiatives.

RESEARCH AND DEVELOPMENT

                                         THREE MONTHS ENDED
                                            SEPTEMBER 30,
                                           (in thousands)
                                       ----------------------
                                         2004          2003        % CHANGE
                                       --------      --------      ---------
Research and development               $    664      $    721        (8)%
As a percentage of net revenues               4%            5%

                                       15

     Research and development expenses consist primarily of salaries, related
benefits, and other engineering related costs. The decrease in research and
development expense in the first quarter of fiscal 2005 over the same period in
fiscal 2004 is primarily the result of a reduction in the use of outside
consultants.

     We believe that a significant level of research and development investment
is required to remain competitive and expect research and development expenses
in absolute dollars in the next several quarters to be consistent with the first
quarter of fiscal 2005 or to grow moderately.

GENERAL AND ADMINISTRATIVE

                                         THREE MONTHS ENDED
                                            SEPTEMBER 30,
                                           (in thousands)
                                       ----------------------
                                         2004          2003        % CHANGE
                                       --------      --------      ---------
General and administrative             $  1,358      $  1,457         (7)%
As a percentage of net revenues               8%           10%

     General and administrative expenses consist primarily of salaries, related
benefits, corporate insurance, such as director and officer liability insurance
and fees related to the obligations of a public company and fees for legal,
audit and tax services. The decrease in general and administrative expenses in
the first quarter of fiscal 2005 over the same periods in fiscal 2004 is
primarily the result of a reduction in the use of outside consultants and a
decrease in director and officer liability insurance premiums. In addition, the
first quarter of fiscal 2004 included provisions to increase the allowance for
doubtful accounts to the present level, while no additional provision was
required in the first quarter of fiscal 2005.

     We expect general and administrative expenses to increase moderately in
absolute dollars during the balance of fiscal 2005.

INCOME TAXES

                                         THREE MONTHS ENDED
                                            SEPTEMBER 30,
                                           (in thousands)
                                       ----------------------
                                         2004          2003        % CHANGE
                                       --------      --------      ---------
Income taxes                           $    715      $  1,041        (31)%
As a percentage of net revenues               4%            7%
Effective tax rate                           34%           36%

     Our effective tax rate in the first quarter of fiscal 2005 differed from
the combined federal and state statutory rates due primarily to the tax benefit
from the Extraterritorial Income Exclusion ("EIE"). The EIE provides a tax
benefit by excluding a portion of income from qualified foreign sales from gross
income. The decrease in our effective tax rate in the first quarter of fiscal
2005 over the same period in fiscal 2004 is primarily due to the fact that no
EIE tax benefit was recorded in the first quarter of fiscal 2004 because the EIE
election had not yet been made.

     In October 2004 the EIE was repealed and will be phased out through
calendar year 2006. Absent other changes that could impact our effective tax
rate, such as the implementation of tax strategies that we are currently
evaluating, we expect our effective tax rate to be 34% for fiscal 2005 and to
increase two percentage points as the EIE is phased out.

LIQUIDITY AND CAPITAL RESOURCES

     As of September 30, 2004, we had net working capital of $57.2 million
consisting primarily of cash and cash equivalents, short-term investments and
accounts receivable. Our principal sources of liquidity include $51.2 million of
cash and cash equivalents and short-term investments and a $2.0 million line of
credit facility with Wachovia Bank, all of which was available as of September
30, 2004. The credit facility requires us to maintain a minimum cash balance of
$3.0 million with the bank. Interest on the line of credit facility accrues at
the Libor Market Index rate plus 2.5% and the facility matures on December 31,
2004. We had no borrowings under the line of credit during the three months
ended September 30, 2004 or 2003.

                                       16

     Cash and cash equivalents and short-term investments decreased by $4.1
million during the quarter ended September 30, 2004, primarily as a result of
the acquisition of the Visara business, an increase in inventory, and a decrease
in accounts payable.

     CASH FLOWS PROVIDED BY OPERATING ACTIVITIES: Our largest source of
operating cash flows are payments from our customers for the purchase of our
products. Our primary uses of cash from operating activities are for the
purchase of thin client appliances, software licenses, personnel related
expenditures and marketing expenses. Cash flow from operating activities
decreased in the first quarter of fiscal 2005 compared to the same period in
fiscal 2004 primarily due to lower profits, increased amounts due from
customers, and decreased amounts due to vendors.

     CASH FLOWS USED IN INVESTING ACTIVITIES: The cash out flows from investing
activities in the first quarter of fiscal 2005 relate to the acquisition of the
Visara business and an increase in the purchase of short-term investments. We
typically purchase short-term investments with surplus cash.

     CASH FLOWS PROVIDED BY FINANCING ACTIVITIES: The cash in flows from
financing activities in the first quarter of fiscal 2005 was primarily the
result of the exercise of employee stock options.

     CONTRACTUAL OBLIGATIONS
     The following is a summary of our contractual obligations as of September
30, 2004:

                                          YEAR ENDING JUNE 30,
                                            (in thousands)
                                   ------------------------------------
                                     2005         2006          TOTAL
                                   ---------     -------      ---------
Product purchase obligations       $   7,770     $    --      $   7,770
Operating and capital leases             294         133            427
Other purchase obligations                37          --             37
                                   ---------     -------      ---------
                                   $   8,101     $   133      $   8,234
                                   =========     =======      =========

     We expect to fund current operations and other cash expenditures through
the use of available cash, cash from operations, funds available under our
credit facility and, potentially, new debt or equity financings. Management
believes that we will have sufficient funds from current cash, operations and
available financing to fund operations and cash expenditures for the foreseeable
future. However, we may seek additional sources of funding in order to fund
acquisitions, including our ability to issue debt and equity securities under
our $100 million shelf registration, which was declared effective by the SEC on
September 29, 2003.

FACTORS AFFECTING THE COMPANY AND FUTURE OPERATING RESULTS

     Operating results for a particular future period are difficult to predict
and, therefore, prior results are not necessarily indicative of results to be
expected in future periods. Factors that could have a material adverse effect on
our business, results of operations, and financial condition include, but are
not limited to, the following:

OUR FUTURE RESULTS MAY BE AFFECTED BY INDUSTRY TRENDS AND SPECIFIC RISKS IN OUR
BUSINESS. SOME OF THE FACTORS THAT COULD MATERIALLY AFFECT OUR FUTURE RESULTS
INCLUDE THOSE DESCRIBED BELOW.

     During the past two years, we have increased operating expenses
significantly as a foundation for us to stimulate growth in our market, and we
expect to continue incurring significant operating expenses. If we do not
increase revenues or appropriately manage further increases in operating
expenses, our profitability will suffer.

     Our business has grown during the past three years through both internal
expansion and business acquisitions, and this has put pressure on our
infrastructure, internal systems and managerial resources. The number of our
employees increased from 66 employees at September 30, 2001 to 112 employees at
September 30, 2004. Our new employees include a number of senior executive
officers and other key managerial, technical, sales and marketing personnel. To
manage our growth effectively, we must continue to improve and expand our
infrastructure, including operating and administrative systems and controls, and
continue managing and integrating our personnel in an efficient manner. Our
business may be adversely affected if we do not integrate and train our new
employees quickly and effectively and coordinate among our executive,
engineering, finance, marketing, sales, operations and customer support
organizations. In addition, because of the growth of our foreign operations, we
now have facilities located in multiple locations, and we have limited
experience coordinating a geographically separated organization.

                                       17

ALTHOUGH WE HAVE GENERATED OPERATING PROFITS FOR THE PAST THREE FISCAL YEARS, WE
HAVE A PRIOR HISTORY OF LOSSES AND MAY EXPERIENCE LOSSES IN THE FUTURE, WHICH
COULD RESULT IN THE MARKET PRICE OF OUR COMMON STOCK DECLINING.

     Although we have generated operating profits in the past three fiscal
years, we incurred net losses in prior periods. We expect to continue to incur
significant operating expenses. Our operating expenses may increase in the
future reflecting the hiring of additional key personnel as we continued to
implement our growth strategy, including our plan to introduce new products to
compete with PC-based solutions and other thin client companies. As a result, we
will need to generate significant revenues to maintain profitability. If we do
not maintain profitability, the market price for our common stock may decline.

     Our financial resources may not be enough for our capital and corporate
development needs, and we may not be able to obtain additional financing. A
failure to maintain and increase our revenues would likely cause us to incur
losses and negatively impact the price of our common stock.

OUR GROSS MARGINS CAN VARY SIGNIFICANTLY, BASED UPON A VARIETY OF FACTORS. IF WE
ARE UNABLE TO SUSTAIN ADEQUATE GROSS MARGINS WE MAY BE UNABLE TO REDUCE
OPERATING EXPENSES IN THE SHORT TERM, RESULTING IN LOSSES.

     Our gross margins can vary significantly from quarter to quarter depending
on average selling prices, fixed costs in relation to revenue levels and the mix
of our business, including the percentage of revenues derived from thin client
appliances, software, third party products and consulting services. Our gross
profit margin also varies in response to competitive market conditions as well
as periodic fluctuations in the cost of memory and other significant components.
The PC market in which we compete remains very competitive, and although we
intend to continue our efforts to reduce the cost of our products, there can be
no certainty that we will not be required to reduce prices of our products
without compensating reductions in the cost to produce our products in order to
maintain or increase our market share or to meet competitors' price reductions.
Our new marketing strategy is targeted at increasing the size of the thin client
segment of the PC industry, in part by lowering prices to make thin clients more
competitive with personal computers, and in addition by selling a larger
percentage of products to large enterprise customers, who typically demand lower
prices because of their volume purchases. This strategy has resulted in, and is
expected to continue to result in a decline in our gross margins. If our sales
do not increase as a result of these new strategies, our profitability will
decline, and we may experience losses.

OUR BUSINESS IS DEPENDENT ON CUSTOMER ADOPTION OF THIN CLIENT APPLIANCES AS AN
ALTERNATIVE TO PERSONAL COMPUTERS, AND A DECREASE IN THEIR RATES OF ADOPTION
COULD ADVERSELY AFFECT OUR ABILITY TO INCREASE OUR REVENUES.

     We are dependent on the growing use of thin client appliances to perform
discrete tasks for corporate and Internet-based networks to increase our
revenues. If thin client appliances are not accepted by corporations as an
alternative to personal computers, the result would be slower than anticipated
revenue growth or even a decline in our revenues.

     Thin client appliances have historically represented a very small
percentage of the overall PC market, and if sales do not grow as a percentage of
the PC market, or if the overall PC market were to decline, our revenues may not
grow or may decline.

WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST PC AND THIN CLIENT PROVIDERS
AS A RESULT OF THEIR GREATER FINANCIAL RESOURCES AND BRAND AWARENESS.

     In the desktop PC market, we face significant competition from makers of
traditional personal computers, many of which are larger companies that have
greater name recognition than we have. In addition, we face significant
competition from thin client providers, including Hewlett Packard, Wyse
Technology and other smaller companies. Increased competition may negatively
affect our business and future operating results by leading to price reductions,
higher selling expenses or a reduction in our market share. Our strategy to seek
to increase our share of the overall PC market by targeting our core markets may
create increased pressure, including pricing pressure, on certain of our thin
client appliance products.

     Our future competitive performance depends on a number of factors,
including our ability to:

     o   continually develop and introduce new products and services with better
         prices and performance than offered by our competitors;

     o   offer a wide range of products; and

     o   offer high-quality products and services.

                                       18

     If we are unable to offer products and services that compete successfully
with the products and services offered by our competitors, including PC
manufacturers, our business and our operating results would be harmed. In
addition, if in responding to competitive pressures, we are forced to lower the
prices of our products and services and we are unable to reduce our costs, our
business and operating results would be harmed.

WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE FUTURE ACQUISITIONS WE MAY
COMPLETE, WHICH MAY MATERIALLY ADVERSELY AFFECT OUR GROWTH AND OUR OPERATING
RESULTS.

     Since June 2001, we have made five acquisitions and entered into an
alliance with IBM, and we may make additional acquisitions as part of our growth
strategy. There is no assurance that we will successfully integrate future
acquisitions into our business. We may be unable to retain key employees or key
business relationships of the acquired businesses, consolidate IT
infrastructures, combine administrative, research and development and other
operations and combine product offerings, and integration of the businesses may
divert the attention and resources of our management. Our failure to
successfully integrate acquired businesses into our operations could have a
material adverse effect on our business, operating results and financial
condition. Even if future acquisitions are successfully integrated, we may not
receive the expected benefits of the transactions if we find that the acquired
business does not further our business strategy or that we paid more than what
the assets were worth. Managing acquisitions and alliances requires management
resources, which may divert our attention from other business operations. As a
result, the effects of any completed or future transactions on financial results
may differ from our expectations. During fiscal 2004 we spent approximately $1.6
million pursuing acquisitions that we did not complete. We intend to continue to
pursue acquisitions, and if we do not complete them, the cost of pursuing
acquisitions will impact our profitability.

OUR ABILITY TO ACCURATELY FORECAST OUR QUARTERLY SALES IS LIMITED, ALTHOUGH OUR
COSTS ARE RELATIVELY FIXED IN THE SHORT TERM AND WE EXPECT OUR BUSINESS TO BE
AFFECTED BY RAPID TECHNOLOGICAL CHANGE, WHICH MAY ADVERSELY AFFECT OUR QUARTERLY
OPERATING RESULTS.

     Our ability to accurately forecast our quarterly sales is limited, which
makes it difficult to predict the quarterly revenues that we will recognize. In
addition, most of our costs are for personnel and facilities, which are
relatively fixed in the short term. If we have a shortfall in revenues in
relation to our expenses, we may be unable to reduce our expenses quickly enough
to avoid losses. As a result, our quarterly operating results could fluctuate.

     Future operating results will continue to be subject to quarterly
fluctuations based on a wide variety of factors, including:

     o   Linearity - Our quarterly sales have historically reflected a pattern
         in which a disproportionate percentage of sales occur in the last month
         of the quarter. This pattern makes prediction of revenues and earnings
         for each financial period especially difficult and uncertain and
         increases the risk of unanticipated variations in quarterly results and
         financial condition;

     o   Significant Orders - We are subject to variances in our quarterly
         operating results because of the fluctuations in the timing of our
         receipt of large orders. If even a small number of large orders are
         delayed until after a quarter ends, our operating results could vary
         substantially from quarter to quarter and net income could be
         substantially less than expected. Conversely, if even a small number of
         large orders are pulled into a quarter from a future quarter, our
         revenues and net income could be substantially higher than expected,
         making it possible that sales and net income in future periods may
         decline sequentially; and

     o   Seasonality - We have experienced seasonal reductions in business
         activity in some quarters based upon customer activity and based upon
         our partners' seasonality. This pattern has generally resulted in lower
         sales in our first and third quarters than in the prior sequential
         quarters.

     There are factors that may affect the market acceptance of our products,
some of which are beyond our control, including the following:

     o   the growth and changing requirements of the thin client segment of the
         PC market;

     o   the quality, price, performance and total cost of ownership of our
         products compared to personal computers;

     o   the availability, price, quality and performance of competing products
         and technologies; and

     o   the successful development of our relationships with software
         providers, original equipment manufacturers and existing and potential
         channel partners.

                                       19

     We may not succeed in developing and marketing our software and thin client
appliance products and our operating results may decline as a result.

BECAUSE SOME OF OUR PRODUCTS USE EMBEDDED VERSIONS OF MICROSOFT WINDOWS AS THEIR
OPERATING SYSTEM, AN INABILITY TO LICENSE THESE OPERATING SYSTEMS ON FAVORABLE
TERMS COULD IMPAIR OUR ABILITY TO INTRODUCE NEW PRODUCTS AND MAINTAIN MARKET
SHARE.

     We may not be able to introduce new products on a timely basis because some
of our products use embedded versions of Microsoft Windows as their operating
system. Microsoft provides Windows to us, and we do not have access to the
source code for certain versions of the Windows operating system. If Microsoft
fails to continue to enhance and develop its embedded operating systems, or if
we are unable to license these operating systems on favorable terms, our
operations may suffer.

BECAUSE SOME OF OUR PRODUCTS USE LINUX AS THEIR OPERATING SYSTEM, THE FAILURE OF
LINUX DEVELOPERS TO ENHANCE AND DEVELOP THE LINUX KERNEL COULD IMPAIR OUR
ABILITY TO RELEASE NEW PRODUCTS AND MAINTAIN MARKET SHARE.

     We may not be able to release new products on a timely basis because some
of our products use Linux as their operating system. The heart of Linux, the
Linux kernel, is maintained by third parties. Linus Torvalds, the original
developer of the Linux kernel, and a small group of independent engineers are
primarily responsible for the development and evolution of the Linux kernel. If
this group of developers fails to further develop the Linux kernel, we would
have to either rely on another party to further develop the kernel or develop it
ourselves. To date, we have optimized our Linux-based operating system based on
a version of Red Hat Linux. If we were unable to access Red Hat Linux, we would
be required to spend additional time to obtain a tested, recognized version of
the Linux kernel from another source or develop our own operating system
internally, which could significantly increase our costs.

ACTIONS TAKEN BY THE SCO GROUP (SCO) COULD IMPACT THE SALE OF LINUX AS AN
OPERATING SYSTEM, NEGATIVELY AFFECTING SALES OF SOME OF OUR PRODUCTS.

     SCO has taken legal action against IBM and certain other corporations, and
sent letters to Linux customers alleging that certain Linux kernels infringe on
SCO's Unix intellectual property and other rights, and that SCO intends to
aggressively protect those rights. While we are not a party to any legal
proceeding with SCO, since some of our products use Linux as their operating
system, SCO's allegations, regardless of merit, could adversely affect sales of
such products. SCO has brought claims against certain end user customers of the
Linux operating system and threatened to bring claims against other end-users of
Linux for copyright violations arising out of the facts alleged in SCO's lawsuit
against IBM. Some of these claims could be indemnified under indemnities we have
given or may give to certain customers. In the event that claims for
indemnification are brought against the customers that we have indemnified, we
could incur expenses reimbursing the customers for their costs, and if the
claims were successful, for damages.

BECAUSE WE DEPEND ON SOLE SOURCE, LIMITED SOURCE AND FOREIGN SOURCE SUPPLIERS
FOR THE DESIGN AND MANUFACTURE OF OUR THIN CLIENT PRODUCTS AND FOR KEY
COMPONENTS IN OUR THIN CLIENT APPLIANCE PRODUCTS, WE ARE SUSCEPTIBLE TO SUPPLY
SHORTAGES THAT COULD PREVENT US FROM SHIPPING CUSTOMER ORDERS ON TIME, IF AT
ALL, AND RESULT IN LOST SALES. IN ADDITION, IF WE IMPLEMENT AN OUTSOURCING
STRATEGY FOR OTHER FUNCTIONS, WE MAY FAIL TO REDUCE COSTS AND MAY DISRUPT
OPERATIONS.

     We depend upon single source suppliers for the design and manufacture of
our thin client appliance products and for several of the components in them. We
also depend on limited sources to supply several other industry standard
components. The third party designers and manufacturers of our thin client
products have access to our intellectual property which increases the risk of
infringement or misappropriation of this intellectual property.

     We primarily rely on foreign suppliers, which subjects us to risks
associated with foreign operations such as the imposition of unfavorable
governmental controls or other trade restrictions, changes in tariffs, political
instability and currency fluctuations. A weakening dollar could result in
greater costs to us for our components. Severe Acute Respiratory Syndrome and
similar medical crises could also disrupt manufacturing processes and result in
quarantines being imposed in the future.

                                       20

     We have in the past experienced and may in the future experience shortages
of, or difficulties in acquiring, certain components. A significant portion of
our revenues is derived from the sale of thin client appliances that are bundled
with our software. Third parties design and produce these thin client appliances
for us, and we typically do not have long-term supply contracts with them
obligating them to continue producing products for us. The absence of such
agreements means that, with little or no notice, these suppliers could refuse to
continue to manufacture all or some of our products that we require or change
the terms under which they manufacture our products. If our suppliers were to
stop manufacturing our products, we might be unable to replace the lost
manufacturing capacity on a timely basis. If we experience shortages of these
products, or of their components, we may not be able to deliver our products to
our customers, and our revenues would decline. If these suppliers were to change
the terms under which they manufacture for us, our manufacturing costs could
increase and our cost of revenues could increase, resulting in a decline in
gross margins. In addition, a failure of our suppliers to maintain their
viability and financial condition could result in changes in payment and other
terms of our relationships and their inability to produce and deliver our
products on time and in sufficient quantities. We have accommodated one of our
suppliers by purchasing products for inventory in advance of our contractual
obligations due to the supplier's cash liquidity constraints which may result in
increased inventory levels and decreased cash balances. In addition, if the
supplier is unable to resolve its cash liquidity constraints, we could face an
interruption of supply of our products, resulting in a decline in our revenues
and profits.

     In addition to using third party suppliers for the manufacture of our
products and supply of our components, to achieve additional cost savings or
operational benefits, we may expand our outsourcing activities where we believe
a third party may be able to provide those services in a more efficient manner.
If we are unable to effectively develop and implement our outsourcing strategy,
we may not realize cost structure efficiencies and our operating and financial
results could be materially adversely affected. In addition, if our third party
service providers experience business difficulties or are unable to provide
business process services as anticipated, we may need to seek alternative
service providers or resume providing such business processes internally which
could be costly and time consuming and have an adverse material effect on our
operating and financial results.

IF WE ARE UNABLE TO CONTINUE GENERATING SUBSTANTIAL REVENUES FROM INTERNATIONAL
SALES OUR BUSINESS COULD BE ADVERSELY AFFECTED.

     We derived a substantial portion of our revenue from international sales
during fiscal 2004 and the first quarter of fiscal 2005. Our ability to sell our
products internationally is subject to a number of risks. General economic and
political conditions in each country could adversely affect demand for our
products and services in these markets. Although most of our international sales
are denominated in US Dollars, currency exchange rate fluctuations could result
in lower demand for our products or lower pricing resulting in reduced revenue
and margins, as well as currency translation losses. In addition, a weakening
dollar has resulted in increased costs for our international operations, and
could result in greater costs for our international operations in the future.
Changes to and compliance with a variety of foreign laws and regulations may
increase our cost of doing business in these jurisdictions. Trade protection
measures and import and export licensing requirements subject us to additional
regulation and may prevent us from shipping products to a particular market, and
increase our operating costs.

BECAUSE WE RELY ON DISTRIBUTORS AND IBM TO SELL OUR PRODUCTS, OUR REVENUES COULD
BE NEGATIVELY IMPACTED IF THESE COMPANIES DO NOT CONTINUE TO PURCHASE PRODUCTS
FROM US.

     We cannot be certain that we will be able to attract or retain distributors
to market our products effectively or provide timely and cost-effective customer
support and service. None of our current distributors, including IBM, is
obligated to continue selling our products or to sell our new products. We
cannot be certain that any distributors will continue to represent our products
or that our distributors will devote a sufficient amount of effort and resources
to selling our products in their territories. We need to expand our indirect
sales channels, and if we fail to do so, our growth could be limited.

     We derive a substantial portion of our revenue from sales made directly to
IBM and through our other distributors. A significant portion of our other
revenue was derived from sales to resellers. If our distributors were to
discontinue sales of our products or reduce their sales efforts, it could
adversely affect our operating results. In addition, there can be no assurance
as to the continued viability and financial condition of our distributors, none
of which has accounted for more than 10% of our net revenues for fiscal 2004.

     As a result of our alliance with IBM, we rely on IBM for distribution of
our products to IBM's customers. Sales directly to IBM have ranged from 17% to
18% of our net sales during the past two fiscal years. IBM is under no
obligation to continue to actively market our products. In addition to our
direct sales to IBM, IBM can purchase our products through individual
distributors and/or resellers. Furthermore, IBM can influence an end-users
decisions to purchase our products even though the end-user may not purchase our
products through IBM. While it is difficult to quantify the net revenues
associated with these purchases we believe that these sales could be significant
and can vary significantly from quarter to quarter.

                                       21

OUR BUSINESS MAY SUFFER IF IT IS ALLEGED OR FOUND THAT WE HAVE INFRINGED THE
INTELLECTUAL PROPERTY RIGHTS OF OTHERS.

     Although we have not received any claims that our products infringe on the
proprietary rights of third parties, if we were to receive such claims in the
future, responding to such claims, regardless of their merit, could be time
consuming, result in costly litigation, divert management's attention and
resources and cause us to incur significant expenses. There is no assurance, in
the event of such claims, that we would be able to enter into a licensing
arrangement on acceptable terms or that litigation would not occur. In the event
that there were a temporary or permanent injunction entered prohibiting us from
marketing or selling certain of our products, or a successful claim of
infringement against us requiring us to pay royalties to a third party, and we
failed to develop or license a substitute technology, our business, results of
operations or financial condition could be materially adversely affected.

THIN CLIENT APPLIANCE PRODUCTS, LIKE PERSONAL COMPUTERS, ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE DUE TO CHANGING OPERATING SYSTEM SOFTWARE AND NETWORK
HARDWARE AND SOFTWARE CONFIGURATIONS, AND OUR PRODUCTS COULD BE RENDERED
OBSOLETE BY NEW TECHNOLOGIES.

     The PC market is characterized by rapid technological change, frequent new
product introductions, uncertain product life cycles, changes in customer
demands and evolving industry standards. Our products could be rendered obsolete
if products based on new technologies are introduced or new industry standards
emerge.

WE MAY NOT BE ABLE TO PRESERVE THE VALUE OF OUR PRODUCTS' INTELLECTUAL PROPERTY
BECAUSE WE DO NOT HAVE ANY PATENTS AND OTHER VENDORS COULD CHALLENGE OUR OTHER
INTELLECTUAL PROPERTY RIGHTS.

     Our products are differentiated from those of our competitors by our
internally developed technology that is incorporated into our products. If we
are unable to protect our intellectual property, other vendors could sell
products with features similar to ours, and this could reduce demand for our
products, which would harm our operating results.

WE MAY NOT BE ABLE TO ATTRACT SOFTWARE DEVELOPERS TO BUNDLE THEIR PRODUCTS WITH
OUR THIN CLIENT APPLIANCES.

     Our thin client appliances include our own software, plus software from
other companies for specific markets. If we are unable to attract software
developers, and are unable to include their software in our products, we may not
be able to offer our thin client appliances for certain important target
markets, and our financial results will suffer.

IN ORDER TO CONTINUE TO GROW OUR REVENUES, WE MAY NEED TO HIRE ADDITIONAL
PERSONNEL.

     In order to continue to develop and market our line of thin client
appliances, we may need to hire additional personnel. Competition for employees
is significant and we may experience difficulty in attracting qualified people.

     Future growth that we may experience will place a significant strain on our
management, systems and resources. To manage the anticipated growth of our
operations, we may be required to:

     o   improve existing and implement new operational, financial and
         management information controls, reporting systems and procedures;

     o   hire, train and manage additional qualified personnel; and

     o   establish relationships with additional suppliers and partners while
         maintaining our existing relationships.

WE RELY ON THE SERVICES OF CERTAIN KEY PERSONNEL, AND THOSE PERSONS' KNOWLEDGE
OF OUR BUSINESS AND TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE.

     Our products, technologies and operations are complex and we are
substantially dependent upon the continued service of our existing personnel.
The loss of any of our key employees could adversely affect our business and
profits and slow our product development processes. Except for our Chairman and
CEO, we generally do not have employment agreements with our key employees.
Further, we do not maintain key person life insurance on any of our employees.

                                       22

RECENT AND PROPOSED REGULATIONS RELATED TO EQUITY COMPENSATION COULD ADVERSELY
AFFECT OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.

     We have historically used stock options as a key component of our employee
compensation program. We believe that stock options and other long-term equity
incentives directly motivate our employees to maximize long-term stockholder
value, and, through the use of vesting, encourage employee retention and allow
us to provide competitive compensation packages, although in recent periods many
of our employee stock options have had exercise prices in excess of our stock
price, which could affect our ability to retain or attract present and
prospective employees. The Financial Accounting Standards Board has proposed
changes to US GAAP that, if implemented, would require us and other companies to
record a charge to earnings for employee stock option grants. This pending
regulation would negatively impact our earnings. In addition, new regulations
implemented by The Nasdaq National Market requiring stockholder approval for all
stock option plans, as well as new regulations implemented by the New York Stock
Exchange prohibiting NYSE member organizations from voting on
equity-compensation plans unless the beneficial owner of the shares has given
voting instructions, could make it more difficult for us to grant options to
employees in the future. To the extent that new regulations make it more
difficult or expensive to grant options to employees, we may incur increased
compensation costs, change our equity compensation strategy or find it difficult
to attract, retain and motivate employees, each of which could materially and
adversely affect our business.

IN THE EVENT WE ARE UNABLE TO SATISFY REGULATORY REQUIREMENTS RELATING TO
INTERNAL CONTROLS OVER FINANCIAL REPORTING, OR IF THESE INTERNAL CONTROLS ARE
NOT EFFECTIVE, OUR BUSINESS AND FINANCIAL RESULTS MAY SUFFER.

     The Sarbanes-Oxley Act of 2002 and newly enacted rules and regulations of
the Securities and Exchange Commission and the National Association of
Securities Dealers impose new duties on us and our executives, directors,
attorneys and independent registered public accountants. In order to comply with
the Sarbanes-Oxley Act and such new rules and regulations, we are evaluating our
internal controls over financial reporting to allow management to report on, and
our independent auditors to attest to, our internal controls over financial
reporting as of June 30, 2005. We are currently performing the system and
process evaluation and testing (and any necessary remediation) required in an
effort to comply with the management certification and auditor attestation
requirements of Section 404 of the Sarbanes-Oxley Act. As a result, we expect to
incur additional expenses and diversion of management's time, which could
materially increase our operating expenses and accordingly reduce our net
income. While we anticipate being able to fully implement the requirements
relating to internal controls over financial reporting and all other aspects of
Section 404 in a timely fashion, we cannot be certain as to the outcome of our
testing and resulting remediation. If our independent auditors are not satisfied
with our internal controls over financial reporting or the level at which these
controls are documented, designed, operated or reviewed, or if the independent
auditors' interpretation of the requirements, rules or regulations are different
than ours, then they may decline to attest to management's assessment or issue
an adverse opinion on management's assessment and/or our internal controls over
financial reporting. This could result in an adverse reaction in the financial
marketplace due to a loss of investor confidence in the reliability of our
financial statements, which ultimately could negatively impact the market price
of our shares.

WE LICENSE OUR TEEMTALK SOFTWARE TO OTHER THIN CLIENT PROVIDERS WHO MAY CHOOSE
TO LICENSE ALTERNATIVE PRODUCTS FROM OTHER SUPPLIERS WHO ARE NOT THEIR
COMPETITORS.

     We license our TeemTalk software, which enables thin clients to connect to
legacy systems, to certain of our competitors, including Wyse Technology and
Hewlett Packard. Although it is our strategy to continue to generate sales of
this software by licensing it to other thin client vendors, these vendors may
seek alternative products from suppliers who are not their direct competitors.
If we were to lose one or more of these customers, our revenue and profits would
decline.

ERRORS IN OUR PRODUCTS COULD HARM OUR BUSINESS AND OUR OPERATING RESULTS.

     Because our software and thin client appliance products are complex, they
could contain errors or bugs that can be detected at any point in a product's
life cycle. Although many of these errors may prove to be immaterial, any of
these errors could be significant. Detection of any significant errors may
result in:

     o   the loss of or delay in market acceptance and sales of our products;

     o   diversion of development resources;

     o   injury to our reputation; or

     o   increased maintenance and warranty costs.

                                       23

     These problems could harm our business and future operating results.
Occasionally, we have warranted that our products will operate in accordance
with specified customer requirements. If our products fail to conform to these
specifications, customers could demand a refund for the purchase price or assert
claims for damages.

     Moreover, because our products are used in connection with critical
distributed computing systems services, we may receive significant liability
claims if our products do not work properly. Our agreements with customers
typically contain provisions intended to limit our exposure to liability claims.
However, these limitations may not preclude all potential claims. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. Any such claims, whether or not successful, could
seriously damage our reputation and our business.

IF OUR CONTRACTS WITH CITRIX AND OTHER VENDORS OF SOFTWARE APPLICATIONS WERE
TERMINATED, OUR IT SERVICES BUSINESS WOULD BE MATERIALLY ADVERSELY AFFECTED.

     We depend on third-party suppliers to provide us with key software
applications in connection with our IT services business. If such contracts and
relationships were terminated, our revenues would be negatively affected.

OUR STOCK PRICE CAN BE VOLATILE.

         Our stock price, like that of other technology companies, can be
volatile. For example, our stock price can be affected by many factors such as
quarterly increases or decreases in our revenues or earnings, changes in
revenues or earnings estimates or publication of research reports by analysts;
speculation in the investment community about our financial condition or results
of operations and changes in revenue or earnings estimates, announcement of new
products, technological developments, alliances, acquisitions or divestitures by
us or one of our competitors or the loss of key management personnel. In
addition, general macroeconomic and market conditions unrelated to our financial
performance may also affect our stock price.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT
ACQUISITION OF US, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.

     Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without the
consent of our board of directors. These provisions include advance notice
procedures with respect to stockholder proposals and the nomination of
candidates for election as directors. Delaware law also imposes some
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock.

THE ISSUANCE OF ADDITIONAL EQUITY SECURITIES MAY HAVE A DILUTIVE EFFECT ON OUR
EXISTING STOCKHOLDERS AND COULD LEAD TO A DECLINE IN THE PRICE OF OUR COMMON
STOCK.

     Any additional issuance of equity securities, including for acquisitions,
may have a dilutive effect on our existing stockholders. In addition, the
perceived risk associated with the possible sale of a large number of shares
could cause some of our stockholders to sell their stock, thus causing the price
of our stock to decline. Subsequent sales of our common stock in the open market
or the private placement of our common stock or securities convertible into
common stock could also have an adverse effect on the market price of the
shares. If our stock price declines, it may be more difficult or we may be
unable to raise additional capital.

FORWARD-LOOKING STATEMENTS

     This quarterly report on Form 10-Q contains statements that are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, such as statements regarding: our expectation to
grow the company organically and through acquisitions; anticipated lower cash
balances due to our accelerated payments to one of our suppliers; our commitment
to investing in software development; our expectations regarding the growth of
our revenues as a result of increased penetration of the PC market and our
relationship with IBM; our expectations as to gross margins, research and
development expenses, sales and marketing expenses, and general and
administrative expenses for fiscal 2005; our acquisition of businesses and
technologies; the availability of cash or other financing sources to fund future
operations; cash expenditures and acquisitions, and our potential issuance of
debt and equity securities under our $100 million shelf registration. These
forward-looking statements involve risks and uncertainties. The factors set
forth below, and those contained in "Factors Affecting the Company and Future
Operating Results" and set forth elsewhere in this report, could cause actual
results to differ materially from those predicted in any such forward-looking
statement. Factors that could affect our actual results include our ability to
maintain our relationship with IBM, the timing and receipt of future orders, our
timely development and customers' acceptance of our products, pricing pressures,
rapid technological changes in the industry, growth of overall thin client sales
through the capture of a greater portion of the PC market, increased
competition, our ability to attract and retain qualified personnel, the economic
viability of our suppliers and channel partners, adverse changes in customer
order patterns, our ability to identify and successfully consummate and
integrate future acquisitions, adverse changes in general economic conditions in
the U. S. and internationally, risks associated with foreign operations and
political and economic uncertainties associated with current world events.

                                       24

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     We earn interest income from our balances of cash, cash equivalents and
short-term investments. This interest income is subject to market risk related
to changes in interest rates that primarily affects our investment portfolio. We
invest in instruments that meet high credit quality standards, as specified in
our investment policy.

     As of September 30, 2004 and June 30, 2004, cash equivalents and short-term
investments consisted primarily of corporate notes and government securities,
certificates of deposit, and other specific money market instruments of similar
liquidity and credit quality. Due to the conservative nature of our investment
portfolio, a sudden change in interest rates would not have a material effect on
the value of the portfolio.

ITEM 4. CONTROLS AND PROCEDURES

     Under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, we carried out an evaluation of the
effectiveness of our disclosure controls and procedures; as such term is defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
of September 30, 2004 (the "Evaluation Date"). Based on the evaluation
performed, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in recording, processing, summarizing and reporting in
the periods specified in the SEC's rules and forms the information required to
be disclosed by us in our reports filed or furnished under the Exchange Act.

     There have not been any changes in our internal control over financial
reporting during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

     The following exhibits are being filed as part of this quarterly report on
Form 10-Q:

     EXHIBIT
     NUMBERS      DESCRIPTION
     -------      -----------
     10.1         Asset Purchase Agreement between Neoware Systems, Inc. and
                  Visara International, Inc., dated September 22, 2004

     31.1         Certification of Michael Kantrowitz as Chairman, President and
                  Chief Executive Officer of Neoware Systems, Inc. pursuant to
                  Section 302 of the Sarbanes-Oxley Act of 2002

     31.2         Certification of Keith D. Schneck as Executive Vice President
                  and Chief Financial Officer of Neoware Systems, Inc. pursuant
                  to Section 302 of the Sarbanes-Oxley Act of 2002

     32.1         Certification of Michael Kantrowitz as Chairman, President and
                  Chief Executive Officer of Neoware Systems, Inc. pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

     32.2         Certification Keith D. Schneck as Executive Vice President and
                  Chief Financial Officer of Neoware Systems, Inc pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

                                       25

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunder duly authorized.


                            NEOWARE SYSTEMS, INC.



Date: November 8, 2004      By: /s/ MICHAEL KANTROWITZ
                            --------------------------
                            Michael Kantrowitz
                            Chairman, President and Chief Executive Officer



Date:November 8, 2004       By: /s/ KEITH D. SCHNECK
                            ------------------------
                            Keith D. Schneck
                            Executive Vice President and Chief Financial Officer



                                       26