10-Q

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

Form 10-Q

(Mark One)
	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarter ended December 31, 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 No

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

As of February 7, 2005, there were 16,145,196 outstanding shares of the Registrant's Common Stock.

NEOWARE SYSTEMS, INC.
INDEX

PART I.	FINANCIAL INFORMATION
		Page
Item 1.	Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheet as of December 31, 2004 and June 30, 2004	3
	Consolidated Statement of Operations for the Three and Six Months Ended	4
	December 31, 2004 and 2003
	Consolidated Statement of Cash Flows for the Three and Six Months Ended	5
	December 31, 2004 and 2003
	Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and	13
	Results of Operations.
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION
Item 4.	Submission of Matters to a Security Holder	27
Item 5.	Other Information	27
Item 6.	Exhibits	28
Signatures		29

NEOWARE SYSTEMS, INC.

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

ASSETS	December 31, 2004			June 30, 2004
Current assets:
Cash and cash equivalents	$	36,286		$	17,119
Short-term investments		16,226			38,177
Accounts receivable, net		13,322			10,580
Inventories		3,847			795
Prepaid expenses and other		833			1,628
Deferred income taxes		643			643
Total current assets		71,157			68,942
Property and equipment, net		445			509
Goodwill		20,177			17,466
Intangibles, net		4,656			3,545
Deferred income taxes		145			145
	$	96,580		$	90,607
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,326		$	5,685
Accrued compensation and benefits		1,792			1,534
Other accrued expenses		1,778			1,071
Income taxes payable		1,771			854
Deferred revenue		982			739
Total current liabilities		10,649			9,883
Deferred revenue		278			235
Total liabilities		10,927			10,118
Stockholders’ equity:
Preferred stock		—			—
Common stock		16			16
Additional paid-in capital		72,574			71,718
Accumulated other comprehensive income		1,791			936
Treasury stock, 100,000 shares at cost		(100	)		(100	)
Retained earnings		11,372			7,919
Total stockholders’ equity		85,653			80,489
	$	96,580		$	90,607

See accompanying notes to consolidated financial statements.

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NEOWARE SYSTEMS, INC.

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

	Three Months Ended December 31,					Six Months Ended December 31,
	2004			2003		2004			2003
Net revenues	$	20,471		$	15,322	$	36,774		$	30,336
Cost of revenues		11,726			7,684		20,938			14,733
Gross profit		8,745			7,638		15,836			15,603
Sales and marketing		3,178			3,377		6,281			6,342
Research and development		769			687		1,433			1,408
General and administrative		1,647			1,478		3,005			2,935
Operating expenses		5,594			5,542		10,719			10,685
Operating income		3,151			2,096		5,117			4,918
Foreign exchange loss		(214	)		—		(237	)		—
Interest income, net		193			94		352			177
Income before income taxes		3,130			2,190		5,232			5,095
Income taxes		1,064			795		1,779			1,836
Net income	$	2,066		$	1,395	$	3,453		$	3,259
Earnings per share:
Basic	$	0.13		$	0.09	$	.22		$	0.21
Diluted	$	0.13		$	0.09	$	.21		$	0.20
Weighted average number of common
shares outstanding:
Basic		15,754			15,743		15,726			15,594
Diluted		16,188			16,285		16,111			16,282

See accompanying notes to consolidated financial statements.

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NEOWARE SYSTEMS, INC.

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

	Six Months Ended December 31,
	2004			2003
Cash flows from operating activities:
Net income	$	3,453		$	3,259
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation		130			136
Amortization of intangibles		647			503
Tax benefit on stock option exercises		121			1,618
Changes in operating assets and liabilities, net of effect from acquisitions:
Accounts receivable		(2,742	)		1,819
Inventories		(3,052	)		33
Prepaid expenses and other		796			(107	)
Accounts payable		(1,359	)		(573	)
Accrued compensation and benefits		258			(353	)
Other accrued expenses		707			(47	)
Income taxes payable		921			(21	)
Deferred revenue		285			186
Net cash provided by operating activities		165			6,453
Cash flows from investing activities:
Purchase of the Visara thin client business		(3,799	)		—
Purchase of the TeemTalk software business		—			(9,995	)
Purchases of short-term investments		(20,233	)		(22,056	)
Sales of short-term investments		42,184			14,414
Purchase of intangible assets		—			(125	)
Purchases of property and equipment		(66	)		(106	)
Net cash provided by (used in) investing activities		18,086			(17,868	)
Cash flows from financing activities:
Repayments of capital leases		(5	)		(3	)
Proceeds from issuance of common stock, net of expenses		—			24,609
Expenses for prior issuance of common stock		—			(3	)
Exercise of stock options and warrants		735			830
Net cash provided by financing activities		730			25,433
Effect of foreign exchange rate changes on cash		186			(28	)
Increase in cash and cash equivalents		19,167			13,990
Cash and cash equivalents, beginning of period		17,119			26,014
Cash and cash equivalents, end of period	$	36,286		$	40,004
Supplemental disclosures:
Cash paid for income taxes	$	46		$	264

See accompanying notes to consolidated financial statements.

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NEOWARE SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(unaudited)

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 December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment”, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS No. 123R) and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. The Company is required to adopt SFAS 123R in the first quarter of fiscal 2006. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. The Company is evaluating the requirements of SFAS 123R and expects that the adoption of SFAS 123R will have a material impact on its financial statements.

     In December 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004.” The American Jobs Creation Act includes a tax deduction of up to 9 percent (when fully phased-in) of the lesser of (a) “qualified production activities income,” as defined in the Act, or (b) taxable income (after the deduction for the utilization of any net operating loss carry forwards). This tax deduction is limited to 50 percent of W-2 wages paid by the taxpayer. Pursuant to FSP No. 109-1, the deduction should be accounted for as a special deduction in accordance with SFAS No. 109 rather than as a tax rate reduction. FSP No. 109-1 is effective upon issuance. The Company is eligible for this deduction beginning in fiscal 2006 and will account for it as a special deduction. The Company has not yet determined the impact that this deduction will have on its effective rate in fiscal 2006.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Asset’s” an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for nonmonetary asset exchanges beginning in the Company’s first quarter of fiscal 2006. The adoption of SFAS No. 153 will not have any effect on the Company’s financial statements.

     In December 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004.” The American Jobs Creation Act (Job Act) introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP No. 109-2 provides accounting and disclosure guidance for the repatriation provision. FSP No. 109-2 is effective immediately and the Job Act was enacted in October 2004. FSP No. 109-2 allows for time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. The Company has not yet completed evaluating the impact of the repatriation provisions. Accordingly, the Company has not adjusted amounts that have been reinvested in foreign jurisdictions under APB No. 23, “Accounting for Income Taxes — Special Areas,” to reflect the repatriation provisions of the Jobs Act.

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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 FAAS 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 per share data):

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2004			2003			2004			2003
Net income
As reported	$	2,066		$	1,395		$	3,453		$	3,259
Less:
Total stock-based employee
compensation expense determined
under the fair value based method
for all awards, net of tax		(727	)		(774	)		(1,366	)		(1,435	)
Pro forma	$	1,339		$	621		$	2,087		$	1,824
Basic earnings per share:
As reported	$	0.13		$	0.09		$	0.22		$	0.21
Pro forma	$	0.08		$	0.04		$	0.13		$	0.12
Diluted earnings per share:
As reported	$	0.13		$	0.09		$	0.21		$	0.20
Pro forma	$	0.08		$	0.04		$	0.13		$	0.11

     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%.

     In December 2004 the Company’s stockholders approved the 2004 Equity Incentive Plan (“the 2004 Plan”) and the 1995 Stock Option Plan (“1995 Plan”) and the 2002 Non-Qualified Stock Option Plan (the “2002 Plan”) were terminated as to any shares then available for future grant. The 2004 Plan permits the Company to grant equity-based awards to its directors, executives and a broad-based category of employees. The 2004 Plan provides for the issuance of up to 1,500,000 shares of common stock plus all outstanding options which terminate, expire or are canceled under the existing plans on or after December 1, 2004.

Note 4.   Business Combination

     On January 27, 2005, the Company acquired all of the outstanding stock of Mangrove Systems SAS (“Mangrove”), a privately heldprovider of Linux software solutions, for $2.6 million in cash and 153,682 shares of the Company’s common stock valued at $1.3 million plus an earn-out based upon performance. The acquisition will be accounted for using the purchase method of accounting and the results of operations of Mangrove will be included in the Company’s statements of operations from the date of the acquisition.

     On January 12, 2005 the Company entered into an Asset Purchase Agreement to acquire the TeleVideo, Inc. (“TeleVideo”); thin client business including all thin client assets, certain contract obligations, a trademark license, product brands, customer lists, customer contracts and non-competition agreements for $5.0 million in cash plus an earn-out based upon performance. The boards of both companies have approved the transaction, and the two majority stockholders of TeleVideo owning approximately 62% of its common stock have executed a written consent approving the transaction. Therefore, no further stockholder action will be required to approve the transaction, and TeleVideo will not hold a stockholders meeting in connection with the transaction. TeleVideo will file an information statement with the Securities and Exchange Commission and, subject to clearance by the SEC, will distribute it to its stockholders. The acquisition is expected to close in March 2005. The acquisition will be accounted for using the purchase method of accounting and results of operations of TeleVideo will be included in the Company's statements of operations from the date of acquisition.

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     On September 22, 2004, the Company acquired the thin client business of Visara International, Inc. (referred to as the “Visara business”), for $3.8 million in cash, including transaction costs, plus an earn-out based upon performance. 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 completed the preliminary allocation of the purchase price, based on an independent valuation, as follows: $2.1million to goodwill, $1.0 million to acquired technology and $650,000 to customer relationships. 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 Visara 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):

	Six Months Ended December 31,
	2004		2003
Total net revenue	$	38,125	$	34,506
Net income		3,490		3,251
Basic earnings per share		0.22		0.21
Diluted earnings per share		0.22		0.20

Note 5.    Goodwill and Intangible Assets

     The carrying amount of goodwill was $20.2 million and $17.5 million at December 31, 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.

     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):

		December 31, 2004
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Tradenames	Indefinite	$	266	$	—	$	266
Customer relationships	2-4 years		1,232		460		772
Distributor relationships	5 years		2,325		1,381		944
Acquired technology	5-10 years		3,368		694		2,674
		$	7,191	$	2,535	$	4,656

		June 30, 2004
	Estimated Useful Life	Gross Carrying Amount		Accumulated Amortization		Net 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

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

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2004		2003		2004		2003
Customer relationships	$	123	$	125	$	191	$	125
Distributor relationships		116		110		233		220
Acquired technologies		137		82		223		158
	$	376	$	317	$	647	$	503

     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	$	744
2006		1,111
2007		861
2008		671
2009		677
2010 through 2013		326
	$	4,390

Note 6.   Comprehensive Income

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

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2004		2003		2004		2003
Net income	$	2,066	$	1,395	$	3,453	$	3,259
Foreign currency translation adjustment		850		664		855		677
Comprehensive income	$	2,916	$	2,059	$	4,308	$	3,936

Note 7.   Revenue Recognition

     Net revenues include 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 updates 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 related support period.

     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

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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

     The following table sets forth sales to customers comprising 10% or more of the Company’s net revenue and accounts receivable balances:

	Three Months Ended		Six Month Ended
	December 31,		December 31,
	2004	2003	2004	2003
Net revenues
IBM	23%	12%	20%	13%
North American distributor	13%	*	11%	*
European distributor	*	10%	*	*

	December 31,
	2004	2003
Accounts receivable
IBM	18%	12%
North American distributor	10%	*
European distributor	14%	10%

     (*) Amounts do not exceed 10% for such period

     IBM and the Company’s distributors resell the Company’s products to individual resellers and/or end-users. 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 are significant and can vary significantly from quarter to quarter.

     For the three months ended December 31, 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 33% and 39%, respectively, of net revenues. Sales to the United Kingdom accounted for 11% of net revenue for the three months ended December 31, 2004 and 2003. For the six months ended December 31, 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 32% and 38%, respectively of net revenues. Sales to the United Kingdom accounted for 14% of net revenue for the six months ended December 31, 2004. No single international region accounted for more than 10% of net revenue for the six months ended December 31, 2003.

     The Company depends upon a limited number of 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 substantial 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 at December 31, 2004 increased and may continue to increase and the Company’s cash balances may decrease, although the Company’s management does not believe that such changes have had or will 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.

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     The Company also depends on limited sources to supply several other industry standard components and relies on certain foreign suppliers, which also 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):

	December 30, 2004		June 30, 2004
Purchased components and subassemblies	$	295	$	234
Finished goods		3,552		561
	$	3,847	$	795

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.    Short-term Borrowings

     In December 2004, the Company entered into an Offering Basis Loan Agreement with a bank under which the Company can request short-term loan advances up to an aggregate principal amount of $10.0 million. Upon such request, the bank would provide the Company with the interest rate, terms and conditions applicable to the requested loan advance. The funds would be committed upon agreement of such terms by both parties. Unless otherwise agreed to by the bank, the term for any advance cannot exceed 180 days. There were no borrowings under the Offering Basis Loan Agreement during the three months ended December 31, 2004.

     Prior to entering into the Offering Basis Loan Agreement the Company had a line of credit agreement with a bank, which provided for borrowings up to $2.0 million subject to certain limitations, as defined. The line of credit matured on December 31, 2004. During the six months ended December 31, 2004 and 2003, there were no borrowings under the line.

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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 per share data):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2004		2003		2004			2003
Net income	$	2,066	$	1,395	$	3,453	$	3,259
Weighted average shares outstanding:
Basic		15,754		15,743		15,726		15,594
Effect of dilutive employee stock options		434		529		385		673
Effect of dilutive warrants		—		13		—		15
Diluted		16,188		16,285		16,111		16,282
Earnings per common share:
Basic	$	0.13	$	0.09	$	0.22	$	0.21
Diluted	$	0.13	$	0.09	$	0.21	$	0.20

     The following table sets forth the potential common shares that were excluded from the dilutive earnings per share computations (in thousands):

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2004	2003	2004	2003
Employee stock options	1,621	225	1,392	129
Warrants	13	—	13	—
	1,634	225	1,405	129

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.

     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. During fiscal 2004, the Company began providing for a three-year warranty period. As of December 31, 2004, the Company’s standard warranty service period ranges from one to three years.

     The changes in the Company’s warranty liability are as follows for the six months ended December 31, 2004 (in thousands):

Accrued warranty cost at June 30, 2004	264
Provisions for warranties issued	168
Settlements made	(87	)
Accrued warranty cost at December 31, 2004	345

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Note 14.    Related Party Transactions

     For the six months ended December 31, 2003, the Company had sales of $113,000, 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, (“EMEA”) based on the location of our customers, were as follows:

	Three Months Ended								Six Months Ended
	December 31,								December 31,
	2004			2003			% Change		2004			2003			% Change
EMEA revenues	$	6,758		$	6,021		12	%	$	11,792		$	11,446		3	%
Percentage of net
revenues		33	%		39	%				32	%		38	%

      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 introducing new products that compete more effectively with PCs, 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 calendar 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. On January 27, 2005, the Company acquired all of the outstanding stock of Mangrove Systems SAS, a privately held provider of Linux software solutions and on January 12, 2005 the Company entered into an Asset Purchase Agreement to acquire the TeleVideo, Inc. thin client business including all thin client assets, certain contract obligations, a trademark license, product brands, customer lists, customer contracts and non-competition agreements. We intend to continue to evaluate strategic acquisitions and partnerships in the future.

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Financial Highlights

     Net revenue, gross profit margin and earnings per share are key measurements of our financial results. For the second quarter of fiscal 2005, net revenue was $20.5 million, an increase of 34% from the same period in fiscal 2004. Gross profit margins were 43% in the second quarter of fiscal 2005 as compared to 50% in the same period in fiscal 2004. This decrease was consistent with our strategy to compete more effectively with personal computers and to pursue large enterprise customers. Diluted earnings per share were $0.13 in the second quarter of fiscal 2005, compared to $0.09 in the same period in fiscal 2004. For the first half of fiscal 2005, net revenue was $36.8 million, an increase of 21% from the same period in fiscal 2004. Gross profit margins were 43% in the first half of fiscal 2005 as compared to 51% in the same period in fiscal 2004. Diluted earnings per share were $0.21 in the first half of fiscal 2005, compared to $0.20 in the same period in fiscal 2004.

     We have a significant balance of cash and short-term investments. As of December 31, 2004, our cash, cash equivalents and short- term investments were $52.5 million, compared to $55.3 million at June 30, 2004, which represented approximately 72% of tangible assets. We used $3.8 million in the first half of fiscal 2005 to acquire the Visara business. We utilize cash in ways that our management believes provides an optimal return on investment. Cash has principally been used to acquire businesses. Subsequent to December 31, 2004 we used $2.6 million of cash and issued 153,683 common shares valued at $1.3 million to acquire Mangrave and entered into an Asset Purchase Agreement to acquire the TeleVideo thin client business which requires the payment of $5.0 million upon consummation of the transaction.

     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 at December 31, 2004 increased and may continue to increase and our cash balances may decrease, although management does not believe that such changes have had or will 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:

• Revenue recognition

• Valuation of long-lived and intangible assets and goodwill

• 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.

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

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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 related support period.

     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 at least 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:

     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 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,

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

     We have not recorded an impairment loss on goodwill or other long-lived assets. At December 30, 2004, goodwill and amortizable intangible assets are $20.2 million and $4.7 million, respectively. A decrease in the fair value of our business could trigger an impairment charge related to goodwill and or amortizable intangible assets.

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					Six Months Ended
	December 31,					December 31,
	2004		2003		% Change			2004	2003		% Change
Net revenues	$	20,471	$	15,322	34 %		$	36,774	$	30,336	21%

     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 second quarter and the first half of fiscal 2005 over the same periods in fiscal 2004 is primarily the resultof increased unit sales of our thin client appliance products. We believe the increases were primarily driven by sales growth from increasing market acceptance of thin client products.

     In calendar 2005 we expect total net revenue to increase 20% to 30% over the same period in calendar 2004, as a result of increased penetration of the PC market, continued growth of our relationship with IBM, and the acquisitions we recently completed.

Cost of Revenues and Gross Profit Margin

	Three Months Ended December 31,								Six Months Ended December 31,
	2004			2003			% Change		2004		2003			% Change
Cost of revenues	$	11,726		$	7,684		53%	$	20,938		$	14,733		42%
Gross profit margin		43	%		50	%			43	%		51	%

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     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 second quarter and the first half of fiscal 2005 over the same periods in fiscal 2004 is primarily the resultof the additional cost associated with increased unit sales of our thin client appliance products (51% and 41%, respectively).

     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.

     Gross margins declined as planned and are expected to fluctuate in the future due to changes in product mix, reduction in sales prices due to increased sales to large enterprise customers and increased price competition, the percentage of revenues derived from thin client appliance systems and software and changes in the cost of thin client appliances, memory and other components. Accordingly, in calendar 2005 we expect gross margins to be in the range of 40% to 45%.

Selling and Marketing

	Three Months Ended							Six Months Ended
	December 31,							December 31,
	2004			2003			% Change	2004			2003			% Change
Selling and marketing	$	3,178		$	3,377		(6) %	$	6,281		$	6,342		(1)%
As a percentage of revenue		16	%		22	%			17	%		21	%

     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 decrease in selling and marketing expense in the second quarter of fiscal 2005 over the same period in fiscal 2004 is primarily due to a decrease in head count.

     We expect sales and marketing expenses to grow during calendar 2005 and to remain relatively constant as a percentage of revenue. Spending levels in any one quarter will vary depending upon the timing of individual marketing initiatives.

Research and Development

	Three Months Ended							Six Months Ended
	December 31,							December 31,
	2004			2003			% Change	2004			2003			% Change
Research and development	$	769		$	687		12%	$	1,433		$	1,408		2%
As a percentage of revenue		4	%		4	%			4	%		5	%

     Research and development expenses consist primarily of salaries, related benefits, and other engineering related costs. The increase in research and development expense in the second quarter of fiscal 2005 over the same period in fiscal 2004 is primarily the result of an increase in compensation levels.

     We believe that a significant level of research and development investment is required to remain competitive and expect research and development expenses to grow during calendar 2005 and to increase as a percentage of revenue.

General and Administrative

	Three Months Ended							Six Months Ended
	December 31,							December 31,
	2004			2003			% Change	2004			2003			% Change
General and administrative	$	1,647		$	1,478		11%	$	3,005		$	2,935		2%
As a percentage of revenue		8	%		10	%			8	%		10	%

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     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 increase in general and administrative expenses in the second quarter of fiscal 2005 over the same periods in fiscal 2004 is primarily the result of an increase in compensation levels, partially offset by a decrease in the provision for doubtful accounts.

     We expect general and administrative expenses to grow during calendar 2005 and to grow slightly as a percentage of revenue.

Income Taxes

	Three Months Ended								Six Months Ended
	December 31,								December 31,
	2004			2003			% Change		2004			2003			% Change
Income taxes	$	1,064		$	795		34	%	$	1,779		$	1,836		(3)%
As a percentage of revenue		5	%		5	%				5	%		6	%
Effective tax rate		34	%		36	%				34	%		36	%

     Our effective tax rate in the second quarter and first half 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 second quarter and first half of fiscal 2005 over the same periods in fiscal 2004 is primarily due to the fact that no EIE tax benefit was recorded in the second quarter or first half of fiscal 2004 because the EIE benefit had not been claimed.

     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 over the next two years; however, the impact of the manufacturing deduction for the Jobs Creation Act has not been determined at this time and could have a favorable impact on our effective income tax rate beginning in fiscal 2006.

Liquidity and Capital Resources

     As of December 31, 2004, we had net working capital of $60.5 million consisting primarily of cash and cash equivalents, short-term investments and accounts receivable. Our principal sources of liquidity include $52.5 million of cash and cash equivalents and short-term investments and an Offering Basis Loan Agreement with a bank under which we can request short-term loan advances up to an aggregate principal amount of $10.0 million. Upon such request, the bank would provide us with the interest rate, terms and conditions applicable to the requested loan advance. The funds would be committed upon agreement of such terms by both parties. Unless otherwise agreed to by the bank, the term for any advance cannot exceed 180 days. There were no borrowings under the Offering Basis Loan Agreement during the three months ended December 31, 2004.

     Cash and cash equivalents and short-term investments decreased by $2.8 million during the first half of fiscal 2005, primarily as a result of the acquisition of the Visara business, partially offset by the exercise of stock options. Subsequent to December 31, 2004 we used $2.6 million of cash and issued 153,682 common shares valued at $1.3 million to acquire Mangrove and entered into an Asset Purchase Agreement to acquire the TeleVideo thin client business which requires to payment of $5.0 million upon consummation of the transaction.

     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 half of fiscal 2005 compared to the same period in fiscal 2004 primarily due to, an increase in accounts receivable and an increase in inventory. Inventory primarily increased as a result of advance purchases of inventory due to our primary supplier’s financial condition. Additionally, accounts payable decreased, which was offset by an increase in income taxes payable.

     Cash flows used in investing activities: The cash out flows from investing activities in the first half of fiscal 2005 relate to the acquisition of the Visara business and a decrease in the net 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 half of fiscal 2005 was primarily the result of the exercise of employee stock options.

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Contractual Obligations

The following is a summary of our contractual obligations as of December 31, 2004:

	Year Ending June 30,
	(in thousands)
	Remainder of
	2005		2006		Total
Product purchase obligations	$	4,838	$	—	$	4,838
Operating and capital leases		313		216		529
Other purchase obligations		112		—		112
	$	5,263	$	216	$	5,479

     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 89 employees at December 31, 2001 to 116 employees at December 31, 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.

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.

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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 20 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:
•	continually develop and introduce new products and services with better prices and performance than offered by our competitors;
•	offer a wide range of products; and
•	offer high-quality products and services.

     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 six 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

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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:

• 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;

• 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

• 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:

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

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

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

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

     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.

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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 our Linux products, 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.

     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 increased inventory at December 31, 2004 and may continue to increase inventory levels and to decrease 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.

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If we are unable to continue generating substantial revenues from international sales our business could be adversely affected.

     We derive a substantial portion of our revenue from international sales . 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.

     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 12% 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.

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.

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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:

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

• hire, train and manage additional qualified personnel; and

• 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.

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. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS No. 123R) and supercedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period beginning after June 15, 2005. We are required to adopt SFAS No. 123R in the first quarter of fiscal 2006 and expect that it will have a material impact on our financial statements 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. As a result of these new regulations, it may be more difficult or expensive for us to grant options to employees, we will incur increased compensation costs, and we may change our equity compensation strategy, which may make it more difficult to attract, retain and motivate employees, each of which could materially and adversely affect our business.

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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 registered public accountants 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 and Mangrove 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 and Mangrove software to certain of our competitors, including Wyse Technology, Hewlett Packard and VXL. 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:

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

• diversion of development resources;

• injury to our reputation; or

• increased maintenance and warranty costs.

     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.

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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 regarding gross profit margins and increased revenues in calendar 2005 as the result of our marketing strategy to compete more effectively with PCs; our consummation of our acquisition of the TeleVideo thin client business; our expectation to grow the company organically and through acquisitions; anticipated lower cash balances and increased inventory levels due to our accelerated payments to one of our suppliers; our commitment to continue 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 revenues, gross margins, research and development expenses, sales and marketing expenses, and general and administrative expenses for calendar 2005 and our effective tax rate 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 (including the TeleVideo acquisition), 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.

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 December 31, 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.

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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 December 31, 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 December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 4.   Submission of Matters to a Vote of Security Holders

     On December 1, 2004, the Company held its Annual Meeting of Stockholders. The Stockholders voted to elect five members to the Board of Directors and on proposals to approve the Company’s 2004 Equity Incentive Plan and to ratify the selection of KPMG LLP as the Company's independent registered public accountants for the fiscal year ending June 30, 2005.

     Elected to the Board of Directors were Michael G. Kantrowitz (13,064,390 shares voted for election and 866,786 shares were withheld), John M. Ryan (13,050,954 shares voted for election and 880,222 shares were withheld), Christopher G. McCann (12,872,243 shares voted for election and 1,058,933 shares were withheld), John P. Kirwin, III (13,104,046 shares voted for election and 790,770 shares were withheld) and David D. Gathman (13,137,996 shares voted for election and 793,180 shares were withheld).

     The proposal to approve the 2004 Equity Incentive Plan was approved, with 4,629,967 shares voting against, 2,522,622 shares voting in favor, 29,965 shares abstaining, and 6,748,622 broker non-votes.

     The proposal to select of KPMG LLP as the Company's independent registered public accountants was ratified, with 13,562,553 shares voting in favor of ratification, 355,648 shares voting against ratification and 12,975 shares abstaining.

Item 5.   Other Information

     As reported in Item 4 of Part II of this report, our stockholders approved the Neoware Systems, Inc. 2004 Equity Incentive Plan (the “2004 Plan”) at the Annual Meeting of Stockholders held on December 1, 2004. Our Board of Directors adopted the 2004 Plan on October 19, 2004, subject to stockholder approval. The 2004 Plan terminates our 2002 Non-Qualified Stock Option Plan (the “2002 Plan”) and 1995 Stock Option Plan (the “1995 Plan”) as to any shares available for grant under such plans after December 1, 2004. As approved by our stockholders, 1,500,000 shares of newly authorized Common Stock are available for grant under the 2004 Plan, in addition to up to 1,750,000 shares of our Common Stock subject to outstanding options under the 2002 Plan and 1995 Plan if such options terminate, expire or are canceled without having been exercised on or after December 1, 2004. A description of the terms and conditions of the 2004 Plan, along with a copy of the 2004 Plan, was included in our definitive Proxy Statement dated October 25, 2004 filed with the Securities and Exchange Commission on October 25, 2004 and furnished in connection with our Annual Meeting of Stockholders held on December 1, 2004, and incorporated by reference.

     On December 1, 2004, options to acquire a total of 145,000 shares of our common stock were granted to three executive officers pursuant to the terms of the 2004 Plan and one executive officer pursuant to the terms of the 2002 Plan. In addition, each non-employee director received an automatic grant of options to acquire 7,500 shares pursuant to the 2004 Plans.

     At a meeting held on January 20, 2005, our Board of Director approved an amendment to the 2004 Plan (the “Amendment”) allowing the committee of the Board of Directors that administers the 2004 Plan to determine the amount of time, up to a maximum of 12 months, an outstanding stock option or stock appreciation right may remain exercisable after the death of a participant under the 2004 Plan. Prior to the Amendment, the 2004 Plan provided that an option or stock appreciation right would remain exercisable for a period of 12 months after the death of the participant.

     The descriptions of the 2004 Plan and the Amendment set forth above are qualified in their entireties by reference to the 2004 Plan and the Amendment filed with this report as Exhibits 10.1 and 10.2.

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Item 6. Exhibits

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

Exhibit
Numbers			Description
10.1	*†		2004 Equity Incentive Plan
10.2	*†		Amendment to 2004 Equity Incentive Plan (effective January 20, 2005)
10.3	*†		Form of Annual Director Grant Agreement under the Registrant's 2004 Equity Incentive Plan
10.4	*†		Form of Incentive Stock Option Award Agreement under the Registrant's 2004 Equity Incentive Plan
10.5	*		Form of Stock Option Award Agreement for Optionees Residing in France under the Registrant's
			2004 Equity Incentive Plan
10.6	*†		Form of Non-Qualified Stock Option Award Agreement under the Registrant's 2004 Equity
			Incentive Plan
10.7	*†		2004 Executive Bonus Plan
10.8	*†		Compensation Arrangement between the Registrant and Peter Bolton dated December 1, 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
*		Filed herewith.
†		Management contract or arrangement.

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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:	February 9, 2005	By: /s/ MICHAEL KANTROWITZ
		Michael Kantrowitz
		Chairman, President and Chief Executive Officer
Date:	February 9, 2005	By: /s/ KEITH D. SCHNECK
		Keith D. Schneck
		Executive Vice President and Chief Financial Officer

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EX-10

                                                                    Exhibit 10.1


                              NEOWARE SYSTEMS, INC.
                           2004 EQUITY INCENTIVE PLAN
                           --------------------------

SECTION 1. PURPOSE OF THE PLAN; EFFECTIVE DATE.

         1.1. PURPOSE. This 2004 Equity Incentive Plan (the "Plan") is intended
to promote the interests of Neoware Systems, Inc., a Delaware corporation (the
"Company"), by: (a) enabling the Company and its subsidiaries to recruit and
retain highly qualified employees, directors and consultants; (b) providing
those employees, directors and consultants with an incentive for productivity;
and (c) providing those employees, directors and consultants with an opportunity
to share in the growth and value of the Company.

         1.2 EFFECTIVE DATE. The Plan was approved by the Board on October 19,
2004 and will become effective immediately upon its adoption by the stockholders
of the Company. The date of its approval by the stockholders is hereby
designated the "Plan Effective Date."

SECTION 2. DEFINITIONS. For the purposes of the Plan, the following definitions
shall be in effect:

         2.1. AWARD: a grant of Options, SARs, Restricted Shares or Restricted
Share Units pursuant to the provisions of the Plan.

         2.2. AWARD AGREEMENT: with respect to any particular Award, the written
document that sets forth the terms of that Award.

         2.3. BOARD: the Company's Board of Directors.

         2.4. CHANGE IN CONTROL: a change in ownership or control of the Company
effected through any of the following transactions:

                  2.4.1. the direct or indirect acquisition by any person or
related group of persons (other than the Company or any majority-owned
subsidiary or any employee benefit plan sponsored by the Company or any trust or
investment manager for the account of such a plan) of beneficial ownership
(within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing
more than 50% of the total combined voting power of the Company's outstanding
securities;

                  2.4.2. a change in the composition of the Board over a period
of 24 months or less such that a majority of the Board members ceases, by reason
of one or more contested elections for Board membership, to be comprised of
individuals who either (a) have been Board members continuously since the
beginning of such period, or (b) have been elected or nominated for election as
Board members during such period by at least a majority of the Board members
described in clause (a) who were still in office at the time such election or
nomination was approved by the Board;





                  2.4.3. the consummation of any consolidation, share exchange
or merger of the Company (a) in which the stockholders of the Company
immediately prior to such transaction do not own at least a majority of the
voting power of the entity which survives/results from that transaction, or (b)
in which a stockholder of the Company who does not own a majority of the voting
stock of the Company immediately prior to such transaction, owns a majority of
the Company's voting stock immediately after such transaction; or

                  2.4.4. the liquidation or dissolution of the Company or any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the Company,
including stock held in subsidiary corporations or interests held in subsidiary
ventures.

         2.5. CODE: the Internal Revenue Code of 1986, as amended.

         2.6 COMMITTEE: the committee appointed by the Board to administer and
interpret the Plan in accordance with Section 3.1.

         2.7. COMMON STOCK: shares of the Company's common stock.

         2.8 EMPLOYEE: an individual who performs services while in the employ
of the Company or any of its Subsidiaries, subject to the control and direction
of the employer entity not only as to the work to be performed but also as to
the manner and method of performance.

         2.9. EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.

         2.10 EXERCISE DATE: the date on which all conditions for exercise,
including without limitation the giving of written notice to the Company and
payment of the exercise price, have been satisfied.

         2.11 FAIR MARKET VALUE: the Fair Market Value per share of Common Stock
determined in accordance with the following provisions:

                  2.11.1. NASDAQ. If the Common Stock is at the time traded on
the Nasdaq National Market, the Fair Market Value shall be the closing selling
price per share on the date in question, as such price is reported by the
National Association of Securities Dealers on the Nasdaq National Market or any
successor system. If there is no reported closing selling price for the Common
Stock on the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation exists.

                  2.11.2 OTHER NATIONAL SECURITIES EXCHANGE. If the Common Stock
is at the time listed or admitted to trading on any national securities
exchange, then the Fair Market Value shall be the closing selling price per
share on the date in question on the exchange determined by the Committee to be
the primary market for the Common Stock, as such price is officially quoted in

                                       2


the composite tape of transactions on such exchange. If there is no reported
sale of Common Stock on such exchange on the date in question, then the Fair
Market Value shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.

                  2.11.3 NOT PUBLICLY TRADED. If the Common Stock is on the date
in question neither listed nor admitted to trading on any national securities
exchange nor traded on the Nasdaq National Market, then the Fair Market Value of
the Common Stock on such date shall be determined by the Committee in its sole
and absolute discretion.

         2.12.  INCENTIVE STOCK OPTION:  an Option intended to be and designated
as an "Incentive Stock Option" within the meaning of Section 422 of the Code.

         2.13. MISCONDUCT: (a) the commission of any act of fraud, embezzlement
or dishonesty by the Participant, (b) any unauthorized use or disclosure by such
individual of confidential information or trade secrets of the Company or of any
Subsidiary, (c) any failure to perform any specific lawful direction of the
Company's Board or officers of the Company, (d) any refusal or neglect to
perform such individual's duties in connection with his or her employment, (e)
any conviction of, or entering of a plea of nolo contendere to, a crime which
constitutes a felony, or (f) any other misconduct by such individual adversely
affecting the business or affairs of the Company, each as determined by the
Committee in its sole and absolute discretion; provided, however that if a
Participant and the Company or any of its Subsidiaries have entered into an
employment agreement, consulting agreement or other similar agreement that
specifically defines "misconduct," "cause" or another similar term, then with
respect to that Participant, "Misconduct" shall have the meaning ascribed to
such term in that agreement. The foregoing definition shall not be deemed to be
inclusive of all the acts or omissions which the Company or any Subsidiary may
consider as grounds for the dismissal or discharge of any Participant or other
individual in the Service of the Company.

         2.14. NON-QUALIFIED OPTION: an Option that is not an Incentive Stock
Option.

         2.15. OPTION: an option to purchase shares of Common Stock (including
Restricted Shares, if the Committee so determines) granted pursuant to Section
6, 7 or 8 hereof.

         2.16. OPTIONEE: a person to whom an Option is granted under the Plan.

         2.17. PARTICIPANT: a person who is issued an Award under the Plan.

         2.18. PERMANENT DISABILITY: a permanent and total disability as defined
in Section 22(e)(3) of the Code.

         2.19 QUALIFYING PERFORMANCE CRITERIA: the performance criteria set
forth in Section 13.3.2.

                                       3


         2.20. RESTRICTED SHARES: shares that are granted under and subject to
restrictions pursuant to Section 10 of the Plan.

         2.21. RESTRICTED SHARE UNIT: a right granted under and subject to
restrictions pursuant to Section 11 of the Plan.

         2.22. SAR: a stock appreciation right granted under and described in
Section 9 of the Plan.

         2.23. SERVICE: the performance of services on a periodic basis for the
Company (or any Subsidiary) in the capacity of an Employee, a non-employee
member of the Board or an independent consultant, except to the extent otherwise
specifically provided in the applicable Award Agreement.

         2.24. SUBSIDIARY: each corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, provided each such
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.

         2.25 TEN PERCENT STOCKHOLDER: a stockholder owning 10% or more of the
total combined voting power of all classes of stock of the Company or any
related corporation of the Company.

SECTION 3. ADMINISTRATION OF THE PLAN.

         3.1. THE COMMITTEE. The Board shall appoint a Committee to administer
and interpret the Plan. The Committee shall consist of two or more Board
members, each of whom is "independent" as defined in the rules of the Nasdaq
Stock Market, is an "outside director" as defined under Code Section 162(m) and
related Treasury Regulations and may be a "non-employee director" as defined
under Rule 16b-3 of the Exchange Act. Members of the Committee shall serve for
such period as the Board may decide. The Committee shall have full power and
authority (subject to the express provisions of the Plan, including without
limitation Sections 3.2, 3.3 and 3.4 below) to establish rules and regulations
for the proper administration of the Plan and to make such determinations under,
and issue such interpretations of, the provisions of the Plan and any
outstanding Award thereunder as it may deem necessary or advisable. Decisions of
the Committee shall be final and binding on all parties. No member of the Board,
or delegate thereof, will be liable for any good faith determination or act in
connection with the Plan or any Award.

         3.2. DELEGATION OF AUTHORITY. The Board may appoint one or more
officers of the Company, Board members, or a committee of officers and/or Board
members to act individually or jointly, as set forth in the delegating
resolution. To the extent permitted in accordance with Section 157 of the

                                       4


Delaware General Corporation Law and within the limits established by the Board
at the time of the delegation, each such person shall have the authority to
grant Awards to Participants who are not subject, as a result of their
relationship to the Company or ownership of the Company's securities, to Section
16 of the Exchange Act, and solely with respect to any Awards so granted,
references in the Plan to the Committee will be deemed also to refer to such
persons to whom authority has been granted.

         3.3. APPROVAL OF DISCRETIONARY DIRECTOR GRANTS. The Board must ratify
any grants of Awards under the Plan (other than those made pursuant to Section
7) to any non-employee Board member.

         3.4. ADMINISTRATION OF NON-EMPLOYEE DIRECTOR GRANTS. Administration of
the grants made pursuant to Section 7 of the Plan shall be self-executing, and
the Committee shall exercise no discretionary functions with respect to such
option grants. Administration of discretionary grants made to non-employee Board
members under Section 8 shall be administered by the Committee, subject to
Section 3.3.

SECTION 4. ELIGIBILITY.

         4.1. ELIGIBLE PERSONS. Subject to the terms of the Plan, the persons
eligible to participate in the Plan shall be limited to the following:

                  4.1.1 officers and other Employees of the Company (or any
Subsidiary);

                  4.1.2. non-employee members of the Board and the non-employee
members of the board of directors of any Subsidiary; and

                  4.1.3. consultants who provide Services to the Company (or any
Subsidiary), provided such Services are not in connection with the offer or sale
of securities in a capital-raising transaction.

         4.2. DETERMINATION OF ELIGIBILITY. Subject to the terms of the Plan,
the Committee and, to the extent consistent with the Plan and the Board's
delegation, the persons to whom authority has been delegated under Section 3.2,
shall have full authority to determine which eligible individuals are to receive
Awards.

SECTION 5. STOCK SUBJECT TO THE PLAN

         5.1. NUMBER OF SHARES AVAILABLE FOR GRANT. The maximum number of shares
of Common Stock which may be issued under the Plan shall not exceed 1,500,000
shares, plus up to an aggregate maximum of 1,750,000 shares subject to options
outstanding as of December 1, 2004 under the Company's 1995 Stock Option Plan
and 2002 Non-Qualified Stock Option Plan that terminate, expire or are canceled
without having been exercised on or after December 1, 2004, subject to
adjustment from time to time in accordance with the provisions of Section 5.4.

                                       5


         5.2. ANNUAL PER-PARTICIPANT LIMIT. The aggregate number of shares of
Common Stock subject to Options or SARs granted under the Plan in any fiscal
year of the Company to any one Participant in the Plan shall not exceed 500,000
shares. The aggregate number of shares subject to Restricted Share or Restricted
Share Units granted under the Plan during any fiscal year of the Company to any
one Participant shall not exceed 250,000. Notwithstanding the foregoing
limitations, no non-employee Board member may receive Awards in any given fiscal
year of the Company (not including automatic grants of Options under Section 7)
with respect to more than 100,000 shares. Notwithstanding anything to the
contrary in the Plan, the foregoing limitations shall be subject to adjustment
under Section 5.4.

         5.3. FORFEITED AWARDS AND OTHER SHARES AGAIN AVAILABLE FOR GRANT. If
and to the extent that an Option, SAR or Restricted Share Unit expires,
terminates or is canceled, surrendered or forfeited for any reason without
having been exercised or settled in full, the shares of Common Stock associated
with that Option, SAR or Restricted Share Unit will again become available for
grant under the Plan. Similarly, if and to the extent any Restricted Share is
canceled, forfeited or repurchased for any reason, that share will again be
available for grant under the Plan. Further, if any share that would otherwise
be issued to a Participant in connection with (a) his or her exercise of an
Option or (b) settlement of an SAR or Restricted Share Unit is instead withheld
or surrendered by the Company pursuant to Section 13.2 in settlement of a tax
withholding obligation associated with an Option, SAR or Restricted Share Unit
or is withheld by the Company in satisfaction of the exercise price payable upon
exercise of an Option or SAR, that share will again become available for grant
under the Plan. The number of shares that will be considered issued under the
Plan shall equal the number of shares issued upon exercise or settlement of an
Award and shall not include the number of shares returned to the Company upon
cancellation, expiration, forfeiture, surrender or repurchase of an Award, or
the number of shares delivered to the Company in payment or satisfaction of the
purchase price, exercise price or tax withholding obligation resulting from an
Award.

         5.4. ADJUSTMENT. Should any change be made to the Common Stock issuable
under the Plan by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration, then appropriate adjustments shall be made to (a) the maximum
number and/or class of securities issuable under the Plan, (b) the maximum
amount and/or class of securities for which any one individual participating in
the Plan may be granted Options, separately exercisable SARs, Restricted Shares
and Restricted Share Units for any given year under the Plan, (c) the number
and/or class of securities for which automatic Option grants are to be
subsequently made per eligible non-employee Board member under Section 7 of the
Plan, (d) the number and/or class of securities and price per share in effect
under each Option and SAR outstanding under the Plan, and (e) the number of
Restricted Share Units outstanding under the Plan and/or the class of securities
referenced for determining payment in respect thereof. Such adjustments to
outstanding Awards are to be effected in a manner intended to avoid the
enlargement or dilution of rights and benefits under such Awards. The
adjustments determined by the Committee shall be final, binding and conclusive.

                                       6


SECTION 6. STOCK OPTIONS; IN GENERAL

         6.1. OPTION GRANT AND AWARD AGREEMENT. Subject to the terms of the
Plan, the Committee and, subject further to the delegating resolution, the
persons who are delegated authority under Section 3.2, are authorized to grant
Incentive Stock Options and Non-Qualified Options (including Options to purchase
Restricted Shares) to eligible individuals. Each granted Option shall be
evidenced by an Award Agreement in the form that is approved by the Committee
and that is not inconsistent with the terms and conditions of the Plan.

                  6.1.1. NO ISOS FOR NON-EMPLOYEES. Individuals who are not
Employees may only be granted Non-Qualified Options.

                  6.1.2. $100,000 ISO LIMIT. The aggregate Fair Market Value
(determined as of the respective date or dates of grant) of the Common Stock for
which one or more Incentive Stock Options granted to any Employee under the Plan
(or any other option plan of the Company or any Parent or Subsidiary) may for
the first time become exercisable during any one calendar year shall not exceed
the sum of $100,000. To the extent the Employee holds two or more such Options
which become exercisable for the first time in the same calendar year, the
foregoing limitation on the exercisability of such options as Incentive Stock
Options shall be applied on the basis of the order in which such Options are
granted. Should the number of shares of Common Stock for which any Incentive
Stock Option first becomes exercisable in any calendar year exceed the
applicable $100,000 limitation, then that Option may nevertheless be exercised
in that calendar year (or thereafter in accordance with its terms) for the
excess number of shares as a Non-Qualified Option.

         6.2. EXERCISE PRICE. The exercise price per share of each option
granted under the Plan shall be fixed by the Committee, in accordance with the
following provisions: The exercise price per share of Common Stock subject to an
Option shall in no event be less than 100% of the Fair Market Value of such
Common Stock on the grant date; provided that, if the individual to whom an
Incentive Stock Option is granted is a Ten Percent Stockholder, then the
exercise price per share shall not be less than 110% of the Fair Market Value
per share of Common Stock on the grant date.

         6.3 EXERCISABILITY AND TERM OF OPTIONS. Each option granted under the
Plan shall be exercisable at such time or times and during such period as is
determined by the Committee and set forth in the Award Agreement evidencing the
grant. No such option, however, shall have a maximum term in excess of ten years
measured from the grant date (five years if the option is an Incentive Stock
Option granted to a Ten Percent Stockholder).

         6.4. PAYMENT OF THE EXERCISE PRICE. The exercise price shall become
immediately due upon exercise of the Option and shall be payable in one or more
of the forms specified below as permitted by the Committee:

                                       7


                  6.4.1 by cash or check made payable to the Company;

                  6.4.2. in shares of Common Stock held by the Optionee;

                  6.4.3. pursuant to a broker assisted exercise; or

                  6.4.4 by such other forms of consideration as determined by
the Committee.

         6.5. TRANSFER OF AN OPTION.

                  6.5.1 IN GENERAL; NO TRANSFERS. During the lifetime of the
Optionee, the Option, together with any related SAR, shall be exercisable only
by the Optionee and shall not be assignable or transferable by the Optionee,
except for a transfer of the Option by will or by the laws of descent and
distribution following the Optionee's death or, with respect to Options other
than Incentive Stock Options, if permitted in any specific case by the
Committee, pursuant to a domestic relations order (as defined under the Code or
Treasury Regulations).

                  6.5.2. COMMITTEE MAY PERMIT TRANSFER OF NON-QUALIFIED OPTIONS.
Notwithstanding the foregoing provisions of this Section 6.5, the Committee may
provide that an Optionee may transfer Non-Qualified Options to family members or
other persons or entities according to such terms as the Committee may
determine, provided that the Optionee receives no consideration for the transfer
of an Option and the transferred Option shall continue to be subject to the same
terms and conditions as were applicable to the Option immediately before the
transfer.

         6.6. NO STOCKHOLDER RIGHTS. An Optionee shall have no stockholder
rights with respect to any shares covered by the Option until such individual
shall have exercised the Option and paid the exercise price for the purchased
shares.

         6.7. EXERCISE AND FORFEITURE FOLLOWING TERMINATION OF SERVICE.

                  6.7.1. IN GENERAL. Upon a Participant's death or termination
of Service, all Options and SARs held by the Participant that are not
exercisable immediately prior to the death or termination of Service shall
terminate immediately.

                  6.7.2. EXERCISE PERIOD FOLLOWING TERMINATION. In the event of
a Participant's death or termination of Service, the following provisions shall
govern the exercise period applicable to the portion of Options and SARs held by
the Participant that is exercisable immediately prior to the Participant's death
or termination of Service:

                           (a) Other than Death, Permanent Disability or
Misconduct. If a Participant terminates Service for any reason other than death,
Permanent Disability or Misconduct, then each outstanding Option and SAR held by
such Participant shall remain exercisable during the three-month period
following the date of such termination of Service.

                                       8


                           (b) Disability. If a Participant terminates Service
by reason of his or her Permanent Disability, then each outstanding Option and
SAR held by the Participant shall remain exercisable during the 12-month period
following the date of such termination of Service.

                           (c) Death. If a Participant dies while holding one or
more outstanding Options or SARs, then each such Option and SAR shall remain
exercisable during the 12-month period following the date of the Participant's
death. During such limited period, the Options and SARs may be exercised by the
personal representative of the Participant's estate or by the person or persons
to whom the Options and SARs are transferred pursuant to the Participant's will
or in accordance with the laws of descent and distribution.

                           (d) Misconduct. Upon termination of the Participant's
Service for Misconduct, all outstanding Options and SARs held by the Participant
shall terminate immediately and cease to be outstanding.

                           (e) Expiration. Subject to the discretion of the
Committee under Section 6.7.4, upon the expiration of the applicable exercise
period provided for in this Section 6.7.2 or (if earlier) upon the expiration of
the term of the Option or SAR, the Option or SAR shall terminate and cease to be
exercisable for any shares for which the Option or SAR has not been exercised.

                           (f) Change of Control Agreements. Notwithstanding any
other provision of this Section 6.7, with respect to a particular Participant,
if there is any conflict between this Section 6.7 and any employment agreement
or change of control agreement between the Participant and the Company, such
agreement will control.

                  6.7.3. NO EXERCISE AFTER EXPIRATION OF TERM. Notwithstanding
the foregoing or any other provision of this Plan, under no circumstances shall
any Option or SAR be exercisable after the specified expiration date of the
Option's term.

                  6.7.4. COMMITTEE DISCRETION. The Committee shall have complete
discretion, exercisable either at the time the Option is granted or at any time
while the Option remains outstanding:

                           (a) to extend the period of time for which the Option
(other than Options granted pursuant to Section 7) or SAR is to remain
exercisable following the Participant's death or cessation of Service other than
for cause from the limited period in effect under Section 6.7.2 to such greater
period of time as the Committee shall deem appropriate; provided that in no
event shall such option be exercisable after the specified expiration date of
the Option or SAR term; and/or

                                       9


                           (b) to permit one or more Options or SARs held by the
Participant (other than Options granted pursuant to Section 7) to be exercised,
during the limited post-Service exercise period applicable under this Section
6.7, not only with respect to the number of vested shares of Common Stock for
which each such Option or SAR is exercisable at the time of the Participant's
cessation of Service but also with respect to any other shares subject to that
Option or SAR.

         6.8 NO REPRICING. Other than in connection with a change in the
Company's capitalization (as described in Section 5.4), the exercise price of an
Option may not be reduced without stockholder approval (including canceling
previously awarded Options and regranting them with a lower exercise price).

SECTION 7. STOCK OPTIONS; AUTOMATIC GRANTS FOR NON-EMPLOYEE DIRECTORS.

         7.1. ELIGIBILITY. The individuals eligible to receive automatic option
grants pursuant to the provisions of this Section 7 shall be limited to (a)
those individuals who are serving as non-employee Board members on the Plan
Effective Date, (b) those individuals who are first elected or appointed as
non-employee Board members on or after the Plan Effective Date, whether through
appointment by the Board or election by the Company's stockholders, and (c)
those individuals who are re-elected to serve as non-employee Board members at
one or more annual meeting of the Company's stockholders (each an "Annual
Stockholders Meeting") held on or after the Plan Effective Date. Each
non-employee Board member eligible to receive one or more automatic option
grants pursuant to the foregoing criteria shall be designated an "Eligible
Director" for purposes of the Plan.

         7.2. GRANT DATES. Option grants shall be made under this Section 7 on
the dates specified below:

                  7.2.1. INITIAL GRANT. Each Eligible Director who is first
elected or appointed as a non-employee Board member on or after the Plan
Effective Date shall automatically be granted, on the date of such initial
election or appointment (as the case may be), a Non-Qualified Option to purchase
10,000 shares of Common Stock upon terms and conditions of this Section 7.

                  7.2.2. ANNUAL GRANT. On the date of each Annual Stockholders
Meeting, beginning with the first Annual Stockholders Meeting held on the Plan
Effective Date, each individual who will continue to serve after such meeting as
an Eligible Director shall automatically be granted a Non-Qualified Option to
purchase an additional 7,500 shares of Common Stock upon the terms and
conditions of this Section 7, provided he or she has served as a non-employee
Board member for at least six months prior to the date of such Annual
Stockholders Meeting.

         7.3. NO LIMITATION. There shall be no limit on the number of shares of
Common Stock for which any one Eligible Director may be granted Options under
this Section 7 over his or her period of Board service.

                                       10


         7.4. EXERCISE PRICE. The exercise price per share of Common Stock
subject to each Option grant made under this Section 7 shall be equal to 100% of
the Fair Market Value per share of Common Stock, on the automatic grant date.

         7.5. OPTION TERM. Each Option grant under this Section 7 shall have a
term of ten years measured from the automatic grant date, subject to earlier
termination in accordance with Section 7.7 below.

         7.6. EXERCISABILITY AND VESTING. Each Option grant under this Section 7
shall vest and be exercisable for any or all of the shares subject thereto, as
follows.

                  7.6.1. INITIAL GRANT. The shares of Common Stock subject to
each Option granted pursuant to Section 7.2.1 shall vest and be exercisable in
full six months from the date of grant. The right to exercise such Options will
expire on the tenth anniversary of the date on which the Options were granted.

                  7.6.2. ANNUAL GRANT. The shares subject to each Option granted
pursuant to Section 7.2.2 shall vest and be exercisable on a cumulative basis as
to 3,750 shares beginning six months from the date of grant and 3,750 additional
shares of Common Stock beginning on the first anniversary of the date of grant.
The right to exercise such Options will expire on the tenth anniversary of the
date on which the Options were granted.

         7.7. EFFECT OF TERMINATION OF BOARD SERVICE. Upon cessation of Service
as a non-employee Board member (for reasons other than retirement or death),
only those Options exercisable at the date of cessation of service shall be
exercisable by the non-employee Board member. Such Options shall be exercisable
for a period of three months from cessation of Service of the non-employee Board
member or the expiration of the Option, whichever period is shorter.

         Upon the retirement or death of a non-employee Board member, Options
shall be exercisable as follows:

                  7.7.1 RETIREMENT. Upon retirement as a non-employee Board
member after the non-employee Board member has served for at least six
consecutive years as a director, all Options shall continue to be exercisable
during their terms as if such person had remained a non-employee Board member.

                  7.7.2 DEATH. In the event of the death of a non-employee Board
member while a member of the Board, the Options granted to him or her shall be
exercisable, to the extent then exercisable, for a period of one year from the
date of the non-employee Board member's death, or until the expiration of the
Option, whichever period is shorter.

         7.8. OTHER OPTION TERMS APPLY. Except to the extent inconsistent with
the terms of this Section 7, all Options granted pursuant to this Section 7
shall be subject to the terms and conditions of Sections 1 through 6 and
Sections 12 and 13 of the Plan.

                                       11


SECTION 8. DISCRETIONARY OPTION GRANTS TO NON-EMPLOYEE DIRECTORS

         8.1. OPTION GRANTS. The Committee, upon ratification by the Board,
shall have the authority to grant discretionary Non-Qualified Options to
non-employee Board members under this Section 8. Participants granted Options
under this Section 8 may be selected from among those non-employee Board members
who, in the opinion of the Committee and the Board, have the capacity to devote
themselves to the Company's success.

         8.2. OPTION TERMS. Except to the extent inconsistent with the terms of
this Section 8, each Option granted pursuant to this Section 8 shall be a
Non-Qualified Option governed by the terms and conditions specified under
Sections 1 through 6 and 12 and 13 of the Plan.

                  8.2.4. EFFECT OF TERMINATION OF SERVICE. Subject to the
discretion of the Committee under Section 6.7.4, Section 7.7 of the Plan shall
apply to the termination of Options granted to non-employee Board members under
this Section 8, except that upon termination of the non-employee Board member's
Service for Misconduct, all outstanding Options held by the non-employee Board
member shall terminate immediately and cease to be outstanding.

SECTION 9. STOCK APPRECIATION RIGHTS

         9.1. IN GENERAL. Subject to the terms of the Plan, the Committee and,
subject further to the delegating resolution, the persons authorized under
Section 3.2, are authorized to grant SARs to eligible individuals. Each granted
SAR shall be evidenced by an Award Agreement in the form that is approved by the
Committee and that is not inconsistent with the terms and conditions of the
Plan. The grant of an SAR provides the holder the right to receive the
appreciation in value of shares of Common Stock between the date of grant and
the date of exercise. SARs may be granted alone ("Stand-Alone SARs") or in
conjunction with all or part of any Option ("Tandem SARs"). In the case of a
Non-Qualified Option, a Tandem SAR may be granted either at or after the time of
the grant of such Option. In the case of an Incentive Stock Option, a Tandem SAR
may be granted only at the time of the grant of such Option.

         9.2. EXERCISE. An SAR may be exercised by a Participant by giving
notice of intent to exercise to the Company to the extent that the SAR is then,
by its terms, exercisable. Upon the exercise of a Stand-Alone SAR, a Participant
will be entitled to receive, in either cash and/or shares of Common Stock, as
specified in the Award Agreement or determined by the Committee, an amount equal
to the excess, if any, of (a) the Fair Market Value, as of the date the SAR (or
portion thereof) is exercised, of the shares covered by the SAR (or portion
thereof) over (b) the Fair Market Value of the shares covered by the SAR (or a
portion thereof) as of the date the SAR was granted.

                                       12


                  9.2.1. OTHER TERMS.

                           (a) Term of SAR. Unless otherwise provided in the
applicable Award Agreement at the time of grant, the term of an SAR will be ten
years, and in any event shall not exceed ten years.

                           (b) Exercisability. SARs will vest and become
exercisable at such time or times and subject to such terms and conditions as
will be determined by the Committee at the time of grant.

                           (c) Termination of Service. Unless otherwise provided
by the Committee at the time of grant, SARs will be subject to the terms of
Section 6.7 with respect to exercise following termination of Service.

SECTION 10. RESTRICTED SHARES.

         10.1. IN GENERAL. Subject to the other terms of the Plan, the Committee
and, subject further to the delegating resolution, the persons authorized under
Section 3.2 may grant Restricted Shares to eligible individuals and may impose
conditions, including continued employment or performance conditions, on such
shares as it deems appropriate. Each issued Restricted Share shall be evidenced
by an Award Agreement in the form that is approved by the Committee and that is
not inconsistent with the terms and conditions of the Plan. The terms and
conditions applicable to a Restricted Share issuance, including the vesting
periods and conditions, the form of consideration payable, if any, and the
Company's right to repurchase unvested Restricted Shares upon a Participant's
termination of employment shall be determined by the Committee; provided,
however, that in no event shall the grant, issuance, retention, vesting and/or
settlement of Restricted Shares that are based on performance criteria and level
of achievement versus such criteria be subject to a performance period of less
than one year and no condition that is based upon continued employment or the
passage of time shall provide for vesting or settlement in full of a Restricted
Share Award over a period of less than three years from the date the Award is
made, other than as determined by the Committee in its sole discretion upon a
Change in Control or upon the Participant's death or cessation of Service other
than for cause.

         10.2. STOCKHOLDER RIGHTS. The Participant shall have full stockholder
rights with respect to any shares of Common Stock issued to him or her as
Restricted Shares under the Plan, whether or not his or her interest in those
shares is vested. Accordingly, the Participant shall have the right to vote such
shares and to receive any regular cash dividends paid on such shares. Any new,
additional or different shares of stock or other property (including money paid
other than as a regular cash dividend) which the Participant may have the right
to receive with respect to his or her unvested shares by reason of any stock
dividend, stock split, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Company's receipt of consideration or by reason of any Change in Control,
shall be issued subject to (i) the same vesting requirements applicable to his
or her unvested shares and (ii) such escrow arrangements as the Committee shall
deem appropriate.

                                       13


         10.3. UNVESTED SHARES MAY BE ESCROWED. Unvested Restricted Shares,
including any unvested Restricted Shares purchased pursuant to the exercise of
an Option, may, in the Committee's discretion, be held in escrow by the Company
until the Participant's interest in such Restricted Shares vests or may be
issued directly to the Participant with restrictive legends on the certificates
evidencing such unvested shares.

         10.4. TRANSFERABILITY OF SHARES. The Participant shall have no right to
transfer any unvested shares of Common Stock issued to him or her under this
Section 10. For purposes of this restriction, the term "transfer" shall include
(without limitation) any sale, pledge, assignment, encumbrance, gift or other
disposition of such shares, whether voluntary or involuntary. However, the
Participant shall have the right to make a gift of unvested shares issued to him
or her under this Section 10 to his or her spouse or issue, including adopted
children, or to a trust established for such spouse or issue, provided the
transferee of such shares delivers to the Company a written agreement to be
bound by all the provisions of the Plan, including without limitation this
Section 10, and the Award Agreement applicable to the gifted shares.

SECTION 11. RESTRICTED SHARE UNITS. Subject to the other terms of the Plan, the
Committee and, subject further to the delegating resolution, the persons
authorized under Section 3.2, may grant Restricted Share Units to eligible
individuals and may impose conditions, including continued employment or
performance conditions, on such units as it may deem appropriate. Each granted
Restricted Share Unit shall be evidenced by an Award Agreement in the form that
is approved by the Committee and that is not inconsistent with the terms and
conditions of the Plan. Each granted Restricted Share Unit shall entitle the
Participant to whom it is granted to a distribution from the Company in an
amount equal to the Fair Market Value (at the time of the distribution) of one
share of Common Stock. Distributions may be made in cash and/or shares of Common
Stock. All other terms governing Restricted Share Units, such as number of units
granted, vesting, performance criteria, if any, time and form of payment and
termination of units shall be set forth in the Award Agreement; provided,
however, that in no event shall the grant, issuance, retention, vesting and/or
settlement of Restricted Share Units that is based on performance criteria and
level of achievement versus such criteria be subject to a performance period of
less than one year and no condition that is based upon continued employment or
the passage of time shall provide for vesting or settlement in full of a
Restricted Share Award over a period of less than three years from the date the
Award is made, other than as determined by the Committee upon a Change in
Control or upon the Participant's death or cessation of Service other than for
cause.

SECTION 12. CHANGE IN CONTROL. Notwithstanding anything to the contrary set
forth in this Plan, upon or in anticipation of any Change in Control, the Board
may (but shall not be required to), in its sole and absolute discretion and
without the need for the consent of any Optionee or Participant, take one or
more of the following actions contingent upon the occurrence of that Change in
Control:

                                       14


         12.1. cause any or all outstanding Options and SARs held by
Participants affected by the Change in Control to become fully vested and
immediately exercisable, in whole or in part;

         12.2. cause any or all outstanding Restricted Shares and Restricted
Share Units held by Participants affected by the Change in Control to become
non-forfeitable, in whole or in part;

         12.3. cancel any Option held by a Participant affected by the Change in
Control in exchange for an option to purchase common stock of any successor
corporation;

         12.4. cancel any or all Restricted Shares or Restricted Share Units
held by Participants affected by the Change in Control in exchange for
restricted shares of or restricted share units in respect of the common stock of
any successor corporation;

         12.5. redeem any or all Restricted Shares held by Participants affected
by the Change in Control for cash and/or other substitute consideration with a
value equal to the (a) the number of Restricted Shares to be redeemed multiplied
by (b) the Fair Market Value of an unrestricted share of Common Stock on the
date of the Change in Control;

         12.6. cancel any Option or SAR held by a Participant affected by the
Change in Control in exchange for cash and/or other substitute consideration
with a value equal to (a) the number of shares subject to that Option or SAR,
multiplied by (b) the difference between the Fair Market Value per share of
Common Stock on the date of the Change in Control and the exercise price of that
Option or SAR; and

         12.7. cancel any Restricted Share Unit held by a Participant affected
by the Change in Control in exchange for cash and/or other substitute
consideration with a value equal to (a) the number of Restricted Share Units,
multiplied by (b) the Fair Market Value per share of Common Stock on the date of
the Change in Control.

SECTION 13. MISCELLANEOUS PROVISIONS.

         13.1. AMENDMENT AND TERMINATION OF THE PLAN AND AWARDS. Except as
provided herein, the Board has complete and exclusive power and authority to
amend, modify or terminate the Plan (or any component thereof) in any or all
respects whatsoever at any time. No such amendment, modification or termination
shall adversely affect the material economic rights with respect to Awards then
outstanding under the Plan, unless the Participant consents to such amendment,
modification or termination. In addition, the Board may not, without the
approval of the Company's stockholders, amend the Plan to (a) increase the total
number of shares reserved for the purposes of the Plan and the maximum number of
shares for which any one individual may be granted Awards for any given year
under the Plan, except for permitted adjustments under Section 5.4 of the Plan,
(b) change the persons or class of persons eligible to receive Awards, (c) other
than in connection with an adjustment under Section 5.4, reduce the exercise
price of outstanding Options (including canceling previously awarded Options and

                                       15


regranting them with a lower exercise price), or (d) otherwise amend the Plan in
any manner requiring stockholder approval by law or under the listing
requirements of the NASDAQ National Market or other market or exchange on which
the Common Stock is at the time listed or admitted to trading.

         13.2. TAX WITHHOLDING. No later than the date as of which an amount
first becomes includible in the gross income of the Participant for federal
income tax purposes with respect to any Award under the Plan, the Participant
will pay to the Company, or make arrangements satisfactory to the Board
regarding the payment of any federal, state or local taxes of any kind required
by law to be withheld with respect to such amount. If determined by the Board,
the minimum required withholding obligations may be settled with shares of
Common Stock, including shares of Common Stock that are part of the Award that
gives rise to the withholding requirement. The obligations of the Company under
the Plan will be conditioned on such payment or arrangements, and the Company
will, to the extent permitted by law, have the right to deduct any such taxes
from any payment of any kind otherwise due to the Participant.

         13.3. QUALIFYING PERFORMANCE-BASED COMPENSATION.

                  13.3.1 GENERAL. The Committee may establish performance
criteria and level of achievement versus such criteria that shall determine the
number of shares of Common Stock to be granted, retained, vested, issued or
issuable under or in settlement of or the amount payable pursuant to an Award,
which criteria may be based on Qualifying Performance Criteria or other
standards of financial performance and/or personal performance evaluations. In
addition, the Committee may specify a percentage of an Award that is intended to
satisfy the requirements for "performance-based compensation" under Section
162(m) of the Code, provided that the performance criteria for any portion of an
Award that is intended by the Committee to satisfy the requirements for
"performance-based compensation" under Section 162(m) of the Code shall be a
measure based on one or more Qualifying Performance Criteria selected by the
Committee and specified in writing at the time the Award is granted not later
than ninety (90) days after the commencement of the period of service to which
the performance goals relates, provided that the outcome is substantially
uncertain at that time. The Committee shall certify the extent to which any
Qualifying Performance Criteria has been satisfied, and the amount payable as a
result thereof, prior to payment, settlement or vesting of any Award that is
intended to satisfy the requirements for "performance-based compensation" under
Section 162(m) of the Code. Notwithstanding satisfaction of any performance
goals, the number of shares of Common Stock issued under or the amount paid
under an Award may, to the extent specified in the Award Agreement, be reduced
by the Committee on the basis of such further considerations as the Committee in
its sole discretion shall determine.

                  13.3.2 QUALIFYING PERFORMANCE CRITERIA. For purposes of this
Plan, the term "Qualifying Performance Criteria" shall mean any one or more of
the following performance criteria, either individually, alternatively or in any
combination, applied to either the Company as a whole or to a business unit,
Subsidiary or business segment, either individually, alternatively or in any

                                       16


combination, and measured either annually or cumulatively over a period of
years, on an absolute basis or relative to a pre-established target, to previous
years' results or to a designated comparison group, in each case as specified by
the Committee in the Award: (i) cash flow; (ii) earnings (including gross
margin, earnings before interest and taxes, earnings before taxes, and net
earnings); (iii) earnings per share; (iv) growth in earnings or earnings per
share; (v) stock price; (vi) return on equity or average stockholder's equity;
(vii) total stockholder return; (viii) return on capital; (ix) return on assets
or net assets; (x) return on investment; (xi) revenue; (xii) income or net
income; (xiii) operating income or net operating income; (xiv) operating profit
or net operating profit; (xv) operating margin; (xvi) return on operating
revenue; (xvii) market share; (xviii) contract awards or backlog; (xix) overhead
or other expense reduction; (xx) growth in stockholder value relative to the
moving average of a peer group index; (xxi) credit rating; (xxii) strategic plan
development and implementation; (xxiii) improvement in workforce diversity, and
(xxiv) any other similar criteria. The Committee may appropriately adjust any
evaluation of performance under a Qualifying Performance Criteria to exclude any
of the following events that occurs during a performance period: (A) asset
write-downs; (B) litigation or claim judgments or settlements; (C) the effect of
changes in tax law, accounting principles or other such laws or provisions
affecting reported results; (D) accruals for reorganization and restructuring
programs; and (E) any extraordinary non-recurring items as described in
Accounting Principles Board Opinion No. 30 and/or in management's discussion and
analysis of financial condition and results of operations appearing in the
Company's annual report to stockholders for the applicable year.

           13.4.  EFFECTIVE DATE AND TERM OF PLAN.

                  13.4.1. EFFECTIVE DATE. The Plan will become effective on the
Plan Effective Date (as defined in Section 1.2).

                  13.4.2. TERM OF THE PLAN. The Plan will continue in effect
until the 10th anniversary of the Plan Effective Date; provided that any Option
that is granted prior to such 10th anniversary may extend beyond that date.

         13.5. NO EMPLOYMENT OR SERVICE RIGHTS. Neither the action of the
Company in establishing the Plan, nor any action taken by the Committee
hereunder, nor any provision of the Plan shall be construed so as to grant any
individual the right to remain in the employ or service of the Company (or any
Subsidiary) for any period of specific duration, and the Company (or any
Subsidiary retaining the services of such individual) may terminate such
individual's employment or service at any time and for any reason, with or
without cause. Nothing in the Plan will prevent the Board from adopting other or
additional compensation arrangements, subject to stockholder approval if such
approval is required; and such arrangements may be either generally applicable
or applicable only in specific cases.

                                       17


         13.6 UNFUNDED STATUS OF PLAN. The Plan is intended to be "unfunded."
With respect to any payments not yet made to a Participant by the Company,
nothing contained herein will give any such Participant any rights that are
greater than those of a general creditor of the Company. In its sole discretion,
the Committee may authorize the creation of grantor trusts or other arrangements
to meet the obligations created under the Plan with respect to Awards.

         13.7. REPRESENTATIONS; LEGENDS. The Board may require each Participant
to represent to and agree with the Company in writing that the Participant is
acquiring securities of the Company for investment purposes and without a view
to distribution thereof and as to such other matters as the Board believes are
appropriate. The certificate evidencing any Award and any securities issued
pursuant thereto may include any legend which the Board deems appropriate to
reflect any restrictions on transfer and compliance with securities laws.

         13.8. REGULATORY MATTERS. The implementation of the Plan, the granting
of any Award under the Plan and the issuance of any shares under the Plan shall
be subject to the Company's procurement of all approvals and permits required by
regulatory authorities having jurisdiction over the Plan, the Awards granted
under it, and the Common Stock issued pursuant to it. All certificates for
Common Stock or other securities delivered under the Plan shall be subject to
such share-transfer orders and other restrictions as the Board may deem
advisable under the rules, regulations, and other requirements of the Securities
Act of 1933, as amended, the Exchange Act, any stock exchange or automated
quotation system upon which the Common Stock is then listed or quoted, and any
other applicable federal or state securities laws.

         13.9. INVALID PROVISIONS. In the event that any provision of the Plan
is found to be invalid or otherwise enforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provision contained herein as invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid or unenforceable provision was not contained in the Plan.

         13.10. BOARD ACTION. Notwithstanding anything to the contrary set forth
in the Plan, any and all actions of the Committee, taken under or in connection
with the Plan and any agreements, instruments, documents, certificates or other
writings entered into, executed, granted, issued and/or delivered pursuant to
the terms hereof, will be subject to and limited by any and all votes, consents,
approvals, waivers or other actions of all or certain stockholders of the
Company or other persons required by:

                  13.10.1. the Company's Certificate of Incorporation (as the
same may be amended and/or restated from time to time);

                  13.10.2. the Company's Bylaws (as the same may be amended
and/or restated from time to time); and

                                       18


                  13.10.3. any other agreement, instrument, document or writing
now or hereafter existing, between or among the Company and its stockholders or
other persons (as the same may be amended from time to time).

         13.11. GOVERNING LAW. The Plan and all Awards granted hereunder shall
be governed by and construed in accordance with the laws of the Commonwealth of
Pennsylvania without regard to the application of the principles of conflicts of
laws.

         13.12. SUCCESSORS AND ASSIGNS. The provisions of the Plan shall inure
to the benefit of, and be binding upon, the Company and its successors or
assigns and the Participants and Optionees, the legal representatives of their
respective estates, their respective heirs or legatees and their permitted
assignees.

         13.13. NOTICES. Any notice to be given to the Company pursuant to the
provisions of the Plan shall be addressed to the Company in care of its
Secretary (or such other person as the Company may designate from time to time)
at its principal executive office, and any notice to be given to a Participant
will be delivered personally or addressed to him or her at the address given
beneath his or her signature on his or her Award Agreement, or at such other
address as such Participant may hereafter designate in writing to the Company.
Any such notice will be deemed duly given on the date and at the time delivered
via personal, courier or recognized overnight delivery service or, if sent via
facsimile, on the date and at the time faxed with confirmation of delivery or,
if mailed, on the date five days after the date of the mailing (which will be by
regular, registered or certified mail). Delivery of a notice by telecopy (with
confirmation) will be permitted and will be considered delivery of a notice
notwithstanding that it is not an original that is received.

                                       19

EX-10

                                                                    Exhibit 10.2


                              NEOWARE SYSTEMS, INC.

                     AMENDMENT TO 2004 EQUITY INCENTIVE PLAN

         Pursuant to action taken by the Board of Directors of Neoware Systems,
Inc. (the "Corporation") at a meeting of the Board of Directors held on January
20, 2005, an amendment to the Corporation's 2004 Equity Incentive Plan (the
"Plan") was adopted authorizing an amendment to Section 6.7.2(c) of the Plan.

         Section 6.7.2(c) of the Plan is hereby amended, effective January 20,
2005, to read as follows:

                  (c) Death. If a Participant dies while holding one or more
         outstanding Options or SARs, then each such Option and SAR shall remain
         exercisable during the 12-month period, or such lesser period as
         determined by the Committee, following the date of the Participant's
         death. During such limited period, the Options and SARs may be
         exercised by the personal representative of the Participant's estate or
         by the person or persons to whom the Options and SARs are transferred
         pursuant to the Participant's will or in accordance with the laws of
         descent and distribution.

EX-10

                                                                    Exhibit 10.3


                              NEOWARE SYSTEMS, INC.
                           2004 EQUITY INCENTIVE PLAN

                         ANNUAL DIRECTOR GRANT AGREEMENT
                         -------------------------------

         Neoware Systems, Inc. (the "Company") hereby grants to _____________
(the "Optionee") an option (the "Option") to purchase a total of 7,500 shares of
the Company's Common Stock, at the price and on the terms set forth herein, and
in all respects subject to the terms and provisions of the Neoware Systems, Inc.
2004 Equity Incentive Plan (the "Plan") applicable to Automatic Grants for
Non-Employee Directors as described in Section 7 of the Plan, which terms and
provisions are incorporated by reference herein. Unless otherwise defined
herein, capitalized terms used but not defined herein shall have the meanings
given to them in the Plan.

         1. NATURE OF THE OPTION. The Option is intended to be a Non-Qualified
Stock Option and is NOT intended to be an incentive stock option within the
meaning of Section 422 of the Code.

         2. DATE OF GRANT. The Option is granted as of _________ __, 200_ (the
"Date of Grant").

         3. TERM OF OPTION. The Option shall have a term of ten years from the
Date of Grant and shall terminate at 5:00 p.m. on ____________ __, 200_ unless
it is terminated at an earlier date pursuant to the provisions of this Agreement
or the Plan.

         4. OPTION EXERCISE PRICE. The Option exercise price is $ ____ per
Share.

         5. EXERCISE OF OPTION.

                  5.1 EXERCISABILITY AND VESTING. Subject to Section 12 of the
Plan, the Option shall become vested and will become exercisable during its term
only in accordance with the terms and provisions of the Plan and this Grant
Agreement, over a period of one year, with the Option becoming exercisable with
respect to 50% of the shares subject to the Option on the six-month and one-year
anniversaries, respectively, of the Date of Grant, until the Option is
exercisable with respect to 100% of the shares; provided that vesting shall
cease upon the Optionee's termination of Service, except in the event of the
Optionee's retirement in accordance with Section 7.7.1 of the Plan.

                  5.2 METHOD OF EXERCISE. The Option shall be exercisable by
written notice from the Optionee to the Company setting forth the Optionee's
election to exercise the Option and the number of shares in respect of which the
Option is being exercised. Such notice shall be signed by the Optionee,
delivered to the Company in a manner consistent with Section 13.13 of the Plan,
and accompanied by payment of the exercise price. The Option will be deemed to
be exercised upon the receipt by the Company of such notice and payment of the
exercise price. The Optionee shall have no right to vote or receive dividends
and shall have no other rights as a stockholder with respect to the shares with





respect to which the Option is exercised, notwithstanding the exercise of the
Option, until the issuance by the Company (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing the shares that are being issued
upon exercise of the Option. The Company will issue (or cause to be issued) such
stock certificates promptly following the exercise of the Option. The
certificate or certificates for the shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall contain any
legend as may be required under the Plan and/or applicable law.

                  5.3 RESTRICTIONS ON EXERCISE. The Option may not be exercised
if the issuance of the shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations. As
a condition to the exercise of the Option, the Company may require the Optionee
to make any representations and warranties to the Company as may be required by
the Plan or any applicable law or regulation.

         6. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any consideration payable to the
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of the Option or the sale or other disposition
of the shares issued upon exercise of the Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such taxes or if no
consideration is payable to the Optionee, then upon the request of the Company,
the Optionee (or such other person entitled to exercise the Option) shall pay to
the Company an amount sufficient for the Company to satisfy any federal, state
or local tax withholding requirements the Company may incur as a result of the
grant or exercise of the Option or the sale or other disposition of the shares
issued upon the exercise of the Option. Unless otherwise determined by the
Board, the minimum required withholding obligation arising in connection with
the exercise of the Option may be settled with shares, including shares that
would otherwise be payable to the Optionee in connection with the exercise of
the Option.

         7. THE PLAN. This Grant Agreement is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as it may be amended from time to time in accordance with the terms thereof.
Pursuant to the Plan, the Board is authorized to adopt rules and regulations not
inconsistent with the Plan as it shall deem appropriate and proper. A copy of
the Plan in its present form is attached hereto and a copy will be available for
inspection during business hours by the Optionee or the persons entitled to
exercise the Option at the Company's principal office.

         8. ENTIRE AGREEMENT. This Grant Agreement, together with the Plan,
represents the entire agreement between the parties.

         9. GOVERNING LAW. This Grant Agreement shall be construed in accordance
with the laws of the Commonwealth of Pennsylvania without regard to any
conflicts of laws.

                                       2


         10. AMENDMENT. Subject to the provisions of the Plan, this Grant
Agreement may only be amended by a writing signed by the Company and the
Optionee.

                  IN WITNESS WHEREOF, this Award Agreement has been executed by
the parties on this [date].


                                        NEOWARE SYSTEMS, INC.

                                        By:
                                            -----------------------------------


                                        Name:
                                              ---------------------------------


                                        Title:
                                               --------------------------------






                                       3



                        CERTIFICATION AND ACKNOWLEDGMENT
                              OF STOCK OPTION GRANT
                                      UNDER
                     NEOWARE SYSTEMS, INC. 2004 EQUITY PLAN
                     --------------------------------------

The Optionee hereby acknowledges receipt of the Stock Option Grant Agreement
dated __________ __, 200_ ("Agreement"), and the Neoware Systems, Inc. 2004
Equity Plan ("Plan"), a copy of which is attached to the Agreement, and
certifies and represents that he or she has read and is familiar with the terms
and provisions of the Agreement and Plan, and hereby accepts the Option subject
to all of the terms and provisions of the Plan and Agreement. The Optionee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board or the Committee concerning the Plan.


                                        Signature:
                                                   ----------------------------


                                        Name:
                                              ---------------------------------

Date: ________________

Please return this certification to _______________ within 10 days of receipt.


                                       4

EX-10

                                                                    Exhibit 10.4


                              NEOWARE SYSTEMS, INC.
                           2004 EQUITY INCENTIVE PLAN

                     INCENTIVE STOCK OPTION AWARD AGREEMENT
                     --------------------------------------

         Neoware Systems, Inc. (the "Company") hereby grants to _____________
(the "Optionee") an option (the "Option") to purchase a total of _________
shares of the Company's Common Stock, at the price and on the terms set forth
herein, and in all respects subject to the terms and provisions of the Neoware
Systems, Inc. 2004 Equity Incentive Plan (the "Plan") applicable to Incentive
Stock Options, which terms and provisions are incorporated by reference herein.
Unless otherwise defined herein, capitalized terms used but not defined herein
shall have the meanings given to them in the Plan.

         1. NATURE OF THE OPTION. The Option is intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.

         2. DATE OF GRANT. The Option is granted as of ________ __, 200_ (the
"Date of Grant").

         3. TERM OF OPTION. The Option shall have a term of ten years from the
Date of Grant and shall terminate at 5:00 p.m. on __________ __, 200_ unless it
is terminated at an earlier date pursuant to the provisions of this Agreement or
the Plan.

         4. OPTION EXERCISE PRICE. The Option exercise price is $____ per Share.

         5. EXERCISE OF OPTION.

                  5.1 VESTING. Subject to Sections 6.7.4(b) and 12 of the Plan,
and except as the Committee or the Board may accelerate the vesting of the
Option in its sole discretion, the Option shall become vested and will become
exercisable during its term only in accordance with the terms and provisions of
the Plan and this Award Agreement, over a period of four years, with the Option
becoming exercisable with respect to 25% of the shares subject to the Option on
the first, second, third and fourth anniversaries, respectively, of the Date of
Grant, until the Option is exercisable with respect to 100% of the shares;
provided that, subject to Section 6.7.4(b) of the Plan, vesting shall cease upon
the Optionee's termination of employment or other Service.

                  5.2 RIGHT TO EXERCISE. Subject to the vesting provisions of
Section 5.1 above and the termination provisions of Section 6.7 of the Plan, the
Option may be exercised in whole or in part at any time and from time to time
during the term of the Option. Any portion of the Option that is not vested is
not exercisable. The unvested portion of the Option may not be exercised until
it becomes vested in accordance with Section 5.1.





                  5.3 METHOD OF EXERCISE. The Option shall be exercisable by
written notice from the Optionee to the Company setting forth the Optionee's
election to exercise the Option and the number of shares in respect of which the
Option is being exercised. Such notice shall be signed by the Optionee,
delivered to the Company in a manner consistent with Section 13.13 of the Plan,
and accompanied by payment of the exercise price. The Option will be deemed to
be exercised upon the receipt by the Company of such notice and payment of the
exercise price. The Optionee shall have no right to vote or receive dividends
and shall have no other rights as a stockholder with respect to the shares with
respect to which the Option is exercised, notwithstanding the exercise of the
Option, until the issuance by the Company (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing the shares that are being issued
upon exercise of the Option. The Company will issue (or cause to be issued) such
stock certificates promptly following the exercise of the Option. The
certificate or certificates for the shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall contain any
legend as may be required under the Plan and/or applicable law.

                  5.4 RESTRICTIONS ON EXERCISE. The Option may not be exercised
if the issuance of the shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations. As
a condition to the exercise of the Option, the Company may require the Optionee
to make any representations and warranties to the Company as may be required by
the Plan or any applicable law or regulation.

         6. NON-TRANSFERABILITY OF OPTION. The Option may not be sold, pledged,
assigned, hypothecated, gifted, transferred or disposed of in any manner either
voluntarily or involuntarily by operation of law, other than by will or by the
laws of descent or distribution. During the Optionee's lifetime, the Option is
exercisable only by the Optionee. Subject to the foregoing and the terms of the
Plan, the terms of the Option will be binding upon the executors, administrators
and heirs of the Optionee.

         7. EARLY DISPOSITION OF STOCK. The Optionee hereby agrees that if the
Optionee disposes of any Shares received under the Option within one year after
such Shares are transferred to the Optionee or two years after the Date of
Grant, the Optionee will notify the Company in writing within 30 days after the
date of such disposition. The Optionee acknowledges that disposition of the
Shares within the later of (a) one year after such Shares are transferred to the
Optionee or (b) two years after the Date of Grant would disqualify the Option
from treatment as an Incentive Stock Option.

         8 CONVERSION TO NON-QUALIFIED OPTION. Notwithstanding anything to the
contrary set forth herein, the Option is being granted subject to the condition
that, if any amendment or restatement of the Plan adopted prior to the Date of
Grant for which stockholder approval is required for purposes of Section 422 of
the Code is not approved by the stockholders of the Company within 365 days of
the date on which the amendment or the restatement, as applicable, is adopted by
the Board, then the Option shall automatically be converted into a non-qualified
stock option.

                                       2



         9. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any consideration payable to the
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of the Option or the sale or other disposition
of the shares issued upon exercise of the Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such taxes or if no
consideration is payable to the Optionee, then upon the request of the Company,
the Optionee (or such other person entitled to exercise the Option) shall pay to
the Company an amount sufficient for the Company to satisfy any federal, state
or local tax withholding requirements the Company may incur as a result of the
grant or exercise of the Option or the sale or other disposition of the shares
issued upon the exercise of the Option. Unless otherwise determined by the
Board, the minimum required withholding obligation arising in connection with
the exercise of the Option may be settled with shares, including shares that
would otherwise be payable to the Optionee in connection with the exercise of
the Option.

         10. THE PLAN. This Award Agreement is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as it may be amended from time to time in accordance with the terms thereof.
Pursuant to the Plan, the Board is authorized to adopt rules and regulations not
inconsistent with the Plan as it shall deem appropriate and proper. A copy of
the Plan in its present form is attached hereto and a copy will be available for
inspection during business hours by the Optionee or the persons entitled to
exercise the Option at the Company's principal office.

         11. ENTIRE AGREEMENT. This Award Agreement, together with the Plan,
represents the entire agreement between the parties.

         12. GOVERNING LAW. This Award Agreement shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania without regard to
any conflicts of laws.

         13. AMENDMENT. Subject to the provisions of the Plan, this Award
Agreement may only be amended by a writing signed by the Company and the
Optionee.




                  IN WITNESS WHEREOF, this Award Agreement has been executed by
the parties on this [date].

                                        NEOWARE SYSTEMS, INC.

                                        By:
                                            -----------------------------------

                                        Name:
                                              ---------------------------------

                                        Title:
                                               --------------------------------

                                       3




                        CERTIFICATION AND ACKNOWLEDGMENT
                              OF STOCK OPTION GRANT
                                      UNDER
                     NEOWARE SYSTEMS, INC. 2004 EQUITY PLAN
                     --------------------------------------

The Optionee hereby acknowledges receipt of the Stock Option Award Agreement
dated [date] ("Agreement"), and the Neoware Systems, Inc. 2004 Equity Plan
("Plan"), a copy of which is attached to the Agreement, and certifies and
represents that he or she has read and is familiar with the terms and provisions
of the Agreement and Plan, and hereby accepts the Option subject to all of the
terms and provisions of the Plan and Agreement. The Optionee hereby agrees to
accept as binding, conclusive and final all decisions or interpretations of the
Board or the Committee concerning the Plan.


                                        Signature:
                                                   ----------------------------


                                        Name:
                                              ---------------------------------


Date: ________________

Please return this certification to ___________ within 10 days of receipt.


                                       4

EX-10

                                                                    Exhibit 10.5

                              NEOWARE SYSTEMS, INC.
                           2004 EQUITY INCENTIVE PLAN

                          STOCK OPTION AWARD AGREEMENT
                          ----------------------------
                        FOR OPTIONEES RESIDING IN FRANCE
                        --------------------------------

         Neoware Systems, Inc. (the "Company") hereby grants to _______________
(the "Optionee") an option (the "Option") to purchase a total of ____________
shares of the Company's Common Stock, at the price and on the terms set forth
herein, and in all respects subject to the terms and provisions of the Neoware
Systems, Inc. 2004 Equity Incentive Plan, as amended (the "Plan"), applicable to
Non-Qualified Stock Options, which terms and provisions are incorporated by
reference herein. Unless otherwise defined herein, capitalized terms used but
not defined herein shall have the meanings given to them in the Plan. In the
event of any conflict between the terms and conditions of the Plan and those set
forth herein, the terms of set forth herein shall govern and be determinative.

         1. NATURE OF THE OPTION. The Company intends that the Option granted
hereunder shall qualify for the favorable tax and social insurance treatment
applicable to stock options that comply with Articles L 225-177 to L 225-186 of
the French Commercial Code.

         2. DATE OF GRANT. The Option is granted as of the ___________, 200_
(the "Date of Grant").

         3. TERM OF OPTION. The Option shall have a term of ten years from the
Date of Grant and shall terminate at 5:00 p.m. on ______________, 200_ unless it
is terminated at an earlier date pursuant to the provisions of this Agreement or
the Plan.

         4. OPTION EXERCISE PRICE. The Option exercise price is $_____ per
Share, which is equal to the greater of: (i) ninety-five percent (95%) of the
average closing price of the Common Stock during the twenty (20) trading days
preceding the Date of Grant of the Option and (ii) one hundred percent (100%) of
the Fair Market Value of the Common Stock on the Date of Grant of such Option.

         5. EXERCISE OF OPTION.

                  5.1 VESTING. Subject to Sections 6.7.4(b) and 12 of the Plan,
and except as the Committee or the Board may accelerate the vesting of the
Option in its sole discretion, the Option shall become vested and will become
exercisable during its term only in accordance with the terms and provisions of
the Plan and this Award Agreement, over a period of four years, with the Option
becoming exercisable with respect to 25% of the shares subject to the Option on
the first, second, third and fourth anniversaries, respectively, of the Date of
Grant, until the Option is exercisable with respect to 100% of the shares;
provided that, subject to Section 6.7.4(b) of the Plan, vesting shall cease upon
the Optionee's termination of employment or other Service.





                  5.2 RIGHT TO EXERCISE. Subject to the vesting provisions of
Section 5.1 above and the termination provisions of Section 6.7 of the Plan, the
Option may be exercised in whole or in part at any time and from time to time
during the term of the Option. Any portion of the Option that is not vested is
not exercisable. The unvested portion of the Option may not be exercised until
it becomes vested in accordance with Section 5.1.

                  5.3 METHOD OF EXERCISE. The Option shall be exercisable by
written notice from the Optionee to the Company setting forth the Optionee's
election to exercise the Option and the number of shares in respect of which the
Option is being exercised. Such notice shall be signed by the Optionee,
delivered to the Company in a manner consistent with Section 13.13 of the Plan,
and accompanied by payment of the exercise price. The Option shall not be
payable pursuant to a broker assisted exercise before the fourth anniversary of
the Date of Grant of the Option. The Option will be deemed to be exercised upon
the receipt by the Company of such notice and payment of the exercise price. The
Optionee shall have no right to vote or receive dividends and shall have no
other rights as a stockholder with respect to the shares with respect to which
the Option is exercised, notwithstanding the exercise of the Option, until the
issuance by the Company (as evidenced by the appropriate entry on the books of
the Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing the shares that are being issued upon exercise of the
Option. The Company will issue (or cause to be issued) such stock certificates
promptly following the exercise of the Option. The certificate or certificates
for the shares as to which the Option shall be exercised shall be registered in
the name of the Optionee and shall contain any legend as may be required under
the Plan and/or applicable law.

                           Where the exercise of an Option would lead the
Company or any Subsidiary to be liable for any payment, whether due to fees,
taxes or to charges of any nature whatsoever, in place of the Optionee, such
Option shall be deemed duly exercised when (a) the full payment for the shares
with respect to which the Option is exercised is executed by the Optionee and
(b) the Optionee provides the Company with either (i) the receipt acknowledging
the Optionee's payment of any such fee, tax or charge, as above described, that
would otherwise be paid by the Company, upon exercise of the Option, in place of
the Optionee or, (ii) the full payment, under the same conditions, of any amount
to be borne by the Company due to the exercise of the Option.

                  5.4 RESTRICTIONS ON EXERCISE. The Option may not be exercised
if the issuance of the shares upon such exercise would constitute a violation of
any applicable securities laws or other laws or regulations. As a condition to
the exercise of the Option, the Company may require the Optionee to make any
representations and warranties to the Company as may be required by the Plan or
any applicable law or regulation.

                                       2



         6. SALE OR OTHER DISPOSITION OF THE SHARES. The Optionee shall not sell
or otherwise dispose of the shares issuable upon exercise of the Option
(including pursuant to a broker assisted exercise) before the fourth anniversary
of the Date of Grant of the Option. Should the Optionee breach the selling
restriction set out in this Section 6, it shall be liable for any adverse
consequences of such breach on the Company and any Subsidiary, including the
payment of any amounts which may be due by the Company and any Subsidiary to any
person in connection with such breach.

         7. NO TRANSFER OF OPTION. During the lifetime of the Optionee, the
Option shall be exercisable only by the Optionee and shall not be assignable or
transferable by the Optionee, except for a transfer of the Option by will or by
the laws of descent and distribution following the Optionee's death.

         8. EXERCISE PERIOD UPON DEATH. If an Optionee dies while holding the
Option, then the Option shall remain exercisable during the six-month period
following the date of the Optionee's death. During such limited period, the
Option may be exercised by the personal representative of the Optionee's estate
or by the person or persons to whom the Option is transferred pursuant to the
Optionee's will or in accordance with the laws of descent and distribution.

         9. WITHHOLDING. The Company or any person or entity which, directly, or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with, the Company ("Affiliate")of the Company reserves the
right to withhold, in accordance with any applicable laws, from any
consideration payable to the Optionee any taxes and social charges for which the
Optionee is liable as a result of the exercise of the Option or sale or other
disposition of the shares issuable upon exercise but which may be required to be
paid by the Company or any Affiliate of the Company.

         10. THE PLAN. Except to the extent that this Agreement is in conflict
with the Plan, this Award Agreement is subject to, and the Company and the
Optionee agree to be bound by, all of the terms and conditions of the Plan as it
may be amended from time to time in accordance with the terms thereof. Pursuant
to the Plan, the Board is authorized to adopt rules and regulations not
inconsistent with the Plan and this Award Agreement as it shall deem appropriate
and proper. A copy of the Plan in its present form is attached hereto and a copy
will be available for inspection during business hours by the Optionee or the
persons entitled to exercise the Option at the Company's principal office.

         11. ENTIRE AGREEMENT. This Award Agreement, together with the Plan,
represents the entire agreement between the parties.

         12. GOVERNING LAW. This Award Agreement shall be construed in
accordance with the laws of the Commonwealth of Pennsylvania without regard to
any conflicts of laws.

         13. AMENDMENT. Subject to the provisions of the Plan, this Award
Agreement may only be amended by a writing signed by the Company and the
Optionee.

                                       3



         14. TAX ADVICE. The Optionee understands that he or she may suffer
adverse tax consequences as a result of the exercise of the Option or sale or
other disposition of the shares issuable upon exercise. The Optionee represents
that he or she has consulted or will consult in due course with such tax
consultants as he or she has deemed or will deem advisable in connection
therewith. The Optionee is not relying on the Company or any Subsidiary for any
tax advice.

                  IN WITNESS WHEREOF, this Award Agreement has been executed by
the parties on this __________, 200_.

                                        NEOWARE SYSTEMS, INC.

                                        By:
                                            -----------------------------------

                                        Name:
                                              ---------------------------------

                                        Title:
                                               --------------------------------

                                       4




                        CERTIFICATION AND ACKNOWLEDGMENT
                              OF STOCK OPTION GRANT
                                      UNDER
                     NEOWARE SYSTEMS, INC. 2004 EQUITY PLAN
                     --------------------------------------

The Optionee hereby acknowledges receipt of the Stock Option Award Agreement
dated _____________, 200_ ("Agreement"), and the Neoware Systems, Inc. 2004
Equity Plan ("Plan"), a copy of which is attached to the Agreement, and
certifies and represents that he or she has read and is familiar with the terms
and provisions of the Agreement and Plan, and hereby accepts the Option subject
to all of the terms and provisions of the Agreement and the Plan, to the extent
that terms and provisions in the Plan do not conflict with those in the
Agreement. The Optionee hereby agrees to accept as binding, conclusive and final
all decisions or interpretations of the Board or the Committee concerning the
Plan.


                                        Signature:
                                                   ----------------------------


                                        Name:
                                             ----------------------------------

Date: _______________

Please return this certification to the Company within 10 days of receipt.

                                       5

EX-10

                                                                    Exhibit 10.6


                              NEOWARE SYSTEMS, INC.
                           2004 EQUITY INCENTIVE PLAN

                   NON-QUALIFIED STOCK OPTION AWARD AGREEMENT
                   ------------------------------------------

         Neoware Systems, Inc. (the "Company") hereby grants to
_________________ (the "Optionee") an option (the "Option") to purchase a total
of ____________ shares of the Company's Common Stock, at the price and on the
terms set forth herein, and in all respects subject to the terms and provisions
of the Neoware Systems, Inc. 2004 Equity Incentive Plan (the "Plan") applicable
to Non-Qualified Stock Options, which terms and provisions are incorporated by
reference herein. Unless otherwise defined herein, capitalized terms used but
not defined herein shall have the meanings given to them in the Plan.

         1. NATURE OF THE OPTION. The Option is intended to be a Non-Qualified
Stock Option and is NOT intended to be an incentive stock option within the
meaning of Section 422 of the Code.

         2. DATE OF GRANT. The Option is granted as of the ____________, 200_
(the "Date of Grant").

         3. TERM OF OPTION. The Option shall have a term of ten years from the
Date of Grant and shall terminate at 5:00 p.m. on _________ __ , 200_ unless it
is terminated at an earlier date pursuant to the provisions of this Agreement or
the Plan.

         4. OPTION EXERCISE PRICE. The Option exercise price is $_____ per
Share.

         5. EXERCISE OF OPTION.

                  5.1 VESTING. Subject to Sections 6.7.4(b) and 12 of the Plan,
and except as the Committee or the Board may accelerate the vesting of the
Option in its sole discretion, the Option shall become vested and will become
exercisable during its term only in accordance with the terms and provisions of
the Plan and this Award Agreement, over a period of four years, with the Option
becoming exercisable with respect to 25% of the shares subject to the Option on
the first, second, third and fourth anniversaries, respectively, of the Date of
Grant, until the Option is exercisable with respect to 100% of the shares;
provided that, subject to Section 6.7.4(b) of the Plan, vesting shall cease upon
the Optionee's termination of employment or other Service.

                  5.2 RIGHT TO EXERCISE. Subject to the vesting provisions of
Section 5.1 above and the termination provisions of Section 6.7 of the Plan, the
Option may be exercised in whole or in part at any time and from time to time
during the term of the Option. Any portion of the Option that is not vested is
not exercisable. The unvested portion of the Option may not be exercised until
it becomes vested in accordance with Section 5.1.





                  5.3 METHOD OF EXERCISE. The Option shall be exercisable by
written notice from the Optionee to the Company setting forth the Optionee's
election to exercise the Option and the number of shares in respect of which the
Option is being exercised. Such notice shall be signed by the Optionee,
delivered to the Company in a manner consistent with Section 13.13 of the Plan,
and accompanied by payment of the exercise price. The Option will be deemed to
be exercised upon the receipt by the Company of such notice and payment of the
exercise price. The Optionee shall have no right to vote or receive dividends
and shall have no other rights as a stockholder with respect to the shares with
respect to which the Option is exercised, notwithstanding the exercise of the
Option, until the issuance by the Company (as evidenced by the appropriate entry
on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing the shares that are being issued
upon exercise of the Option. The Company will issue (or cause to be issued) such
stock certificates promptly following the exercise of the Option. The
certificate or certificates for the shares as to which the Option shall be
exercised shall be registered in the name of the Optionee and shall contain any
legend as may be required under the Plan and/or applicable law.

                  5.4 RESTRICTIONS ON EXERCISE. The Option may not be exercised
if the issuance of the shares upon such exercise would constitute a violation of
any applicable federal or state securities laws or other laws or regulations. As
a condition to the exercise of the Option, the Company may require the Optionee
to make any representations and warranties to the Company as may be required by
the Plan or any applicable law or regulation.

         6. WITHHOLDING. The Company reserves the right to withhold, in
accordance with any applicable laws, from any consideration payable to the
Optionee any taxes required to be withheld by federal, state or local law as a
result of the grant or exercise of the Option or the sale or other disposition
of the shares issued upon exercise of the Option. If the amount of any
consideration payable to the Optionee is insufficient to pay such taxes or if no
consideration is payable to the Optionee, then upon the request of the Company,
the Optionee (or such other person entitled to exercise the Option) shall pay to
the Company an amount sufficient for the Company to satisfy any federal, state
or local tax withholding requirements the Company may incur as a result of the
grant or exercise of the Option or the sale or other disposition of the shares
issued upon the exercise of the Option. Unless otherwise determined by the
Board, the minimum required withholding obligation arising in connection with
the exercise of the Option may be settled with shares, including shares that
would otherwise be payable to the Optionee in connection with the exercise of
the Option.

         7. THE PLAN. This Award Agreement is subject to, and the Company and
the Optionee agree to be bound by, all of the terms and conditions of the Plan
as it may be amended from time to time in accordance with the terms thereof.
Pursuant to the Plan, the Board is authorized to adopt rules and regulations not
inconsistent with the Plan as it shall deem appropriate and proper. A copy of
the Plan in its present form is attached hereto and a copy will be available for
inspection during business hours by the Optionee or the persons entitled to
exercise the Option at the Company's principal office.

                                       2



         8. ENTIRE AGREEMENT. This Award Agreement, together with the Plan,
represents the entire agreement between the parties.

         9. GOVERNING LAW. This Award Agreement shall be construed in accordance
with the laws of the Commonwealth of Pennsylvania without regard to any
conflicts of laws.

         10. AMENDMENT. Subject to the provisions of the Plan, this Award
Agreement may only be amended by a writing signed by the Company and the
Optionee.

                  IN WITNESS WHEREOF, this Award Agreement has been executed by
the parties on this [date].

                                        NEOWARE SYSTEMS, INC.

                                        By:
                                            -----------------------------------

                                        Name:
                                              ---------------------------------

                                        Title:
                                               --------------------------------

                                       3




                        CERTIFICATION AND ACKNOWLEDGMENT
                              OF STOCK OPTION GRANT
                                      UNDER
                     NEOWARE SYSTEMS, INC. 2004 EQUITY PLAN
                     --------------------------------------

The Optionee hereby acknowledges receipt of the Stock Option Award Agreement
dated _________ __, 200_ ("Agreement"), and the Neoware Systems, Inc. 2004
Equity Plan ("Plan"), a copy of which is attached to the Agreement, and
certifies and represents that he or she has read and is familiar with the terms
and provisions of the Agreement and Plan, and hereby accepts the Option subject
to all of the terms and provisions of the Plan and Agreement. The Optionee
hereby agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board or the Committee concerning the Plan.


                                        Signature:
                                                   ----------------------------


                                        Name:
                                             ----------------------------------

Date: ________________

Please return this certification to ______________ within 10 days of receipt.

                                       4

EX-10

                                                                    Exhibit 10.7

2004 NEOWARE EXECUTIVE BONUS PLAN

PURPOSE: The Neoware Executive Bonus Plan ("Plan") is designed to motivate and
reward the achievement of key business objectives and provide a retention
incentive while maintaining alignment with shareholder value and expectations.

ELIGIBILITY: Participant's eligible under the plan are certain defined executive
level employees who are not already eligible for revenue-based incentive plans.
Employees who are hired by Neoware or are promoted/reclassified into an eligible
category during a bonus period will be eligible for a pro-rated bonus. In order
to be eligible to receive a bonus, the individual must be employed by Neoware at
the time of payment.

BONUS PERIOD: The Plan is structured as an annual plan which runs from July 1
through June 30th. Bonuses are based upon the Company's financial performance
and an employee's individual performance during the relevant bonus period.

TIMING OF BONUS PAYMENT: Although every effort will be made to process payments
on a timely basis, there is no guaranteed payment date associated with this
Plan. Payments will be made only after financial results have been reported and
recommendations have been submitted to and approved by the Compensation
Committee.

BONUS MEASUREMENT CRITERIA:
A participant's targeted bonus is 50% of base salary (target bonus percentage),
however this amount can be increased or decreased at the discretion of the
Compensation Committee based upon the criteria described below.

The actual bonus received by an employee is based upon two measurement criteria:
the Company's financial performance and individual employee performance. These
two criterion are described below.

FINANCIAL PERFORMANCE
The Company's performance as measured against its targeted financial plan for
revenue and net income during a bonus period establishes the financial
performance percentage earned under the Plan. If the Company meets its financial
goals, then the financial performance percentage earned is 100%. Financial
results higher or lower than the target will result in an adjustment up or down
of the financial performance percentage amount based on evaluation by the
Compensation Committee. The financial performance percentage is then multiplied
by the targeted bonus percentage to determine the eligible bonus percentage.

INDIVIDUAL EMPLOYEE ACHIEVEMENT
Once the eligible bonus percentage has been established for each participant,
the Compensation Committee will have discretion to adjust the bonus for
individual employees based upon job performance and achievement of individual,
functional area and departmental objectives.





APPROVALS
The actual bonus payment for all participants will be reviewed and approved by
the Compensation Committee.

DISCRETION OF THE BOARD OF DIRECTORS
Notwithstanding the above, the Compensation Committee (or, with respect to the
CEO's bonus, a majority of the independent directors of the Board), at its sole
discretion, may modify or change this Plan or its implementation at any time,
including, but not limited to, revising performance targets, bonus multipliers,
strategic goals and objectives and actual bonus payments. The Compensation
Committee or majority of the independent directors of the Board of Directors, as
applicable, shall have the sole discretion to determine (i) whether performance
targets have been achieved, (ii) whether individual goals and objectives have
been achieved, and (iii) the amount of any adjustments to an individual's bonus
multipliers based on items (i) and (ii) above and such other criteria deemed
appropriate by the Compensation Committee. As a condition to participation, each
participant will acknowledge that he or she has reviewed and understood the
Plan, the bonuses under the plan are discretionary and no bonus will be payable
unless and until the actual amount of the bonus payment is approved by the
Compensation Committee or a majority of the independent directors of the Board,
as applicable.

EX-10

                                                                    Exhibit 10.8


[Graphic Omitted: Neoware Logo]


December 1, 2005

Mr. Peter Bolton
2 Hawley Grove
Hawley Camberley
Surrey GU17 9JY, UK

Dear Peter:

Neoware is pleased to offer you the following compensation plan for your efforts
as Executive Vice President, EMEA. This plan provides you with an opportunity to
earn up to (pound)20,000 per quarter in incentive bonus for achieving agreed
upon quarterly goals and additional amounts for exceeding goals. In addition you
will be eligible to receive a (pound)10,000 executive bonus at fiscal year-end,
based upon achievement 110% of the EMEA plan for Thin Client Revenue, TeemTalk
Revenue and Margin Targets. This compensation plan replaces any previous
compensation plan.

For the purposes of this plan, "Thin Client Revenue" shall mean sales into
distribution of thin client appliances, software upgrades for thin client
appliances, and revenue from ThinPC software, all in EMEA, provided that
distribution inventory is not greater than three weeks based upon the most
recent quarter sales. "TeemTalk Revenue" shall mean all revenue from sales to
end customers of TeemTalk host access products in EMEA.

For each quarter ending December 31, 2004, March 31, 2005 and June 30, 2005,
respectively, Neoware will provide you with the opportunity to earn incentive
compensation as follows:

      o  Base Incentive - Up to (pound)20,000 if Thin Client Revenue, Gross
         Profit Percentage, Bookings and TeemTalk Revenue equals or exceeds the
         quarterly plan levels.

      o  Upside Incentives - You shall receive additional amounts if Thin Client
         Revenue, Gross Profit Percentage, Bookings and/or TeemTalk Revenue
         exceeds the quarter plan, up to a maximum of (pound)32,490.

      o  Quarterly plan amounts and base and upside incentives for each category
         are defined on Schedule 1.

      o  Should quarterly minimum targets not be met, the individual incentives
         shall be reduced to amounts listed on Schedule1.

      o  All incentive adders will be pro-rated based on actual percentage
         achieved versus plan. Upside incentives shall be payable only if total
         Neoware consolidated gross profit margin meets the defined minimum as
         listed on schedule 1.

              Bolton Compensation Plan FY04 12/1/2004 Page 1 of 2




Your base salary shall be (pound)9,533 per month plus Company pension
contribution and car allowance.

Bonuses will be paid when quarterly financial results are determined by
accounting. If distributors do not report sales-out numbers, bonus payments may
be delayed until a future period. Commission and bonus revenues are calculated
net of returns, credits, stock rotations and write-offs for nonpayment. In the
event of termination of employment for any reason, revenue from orders booked as
of the termination date that specify immediate shipment will be counted to the
date of termination and payments will remain in accordance with this paragraph.
Commission and bonus policies and payments and revenue targets are subject to
change at any time with or without notice at management or the Compensation
Comittee's discretion. Revenue targets are based upon the current company
structure, and will be adjusted in the event of any acquisitions.

Thank you very much for your contributions to the Company and its growth. Please
keep up the effort so that we continue to meet and exceed our goals in the
future.


Very truly yours,


/s/ Michael Kantrowitz
- ----------------------
Michael Kantrowitz
Chairman and CEO



I have read and understood and agree to the above compensation goals and
policies. I am aware that it is not and should not be construed to be either an
employment agreement or an employment contract.



/s/ Peter Bolton
- ----------------------
Peter Bolton, EVP EMEA


              Bolton Compensation Plan FY04 12/1/2004 Page 2 of 2

EX-31

                                                                   EXHIBIT 31.1

                                  CERTIFICATION

I, Michael Kantrowitz, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Neoware Systems, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial
    information included in this report, fairly present in all material respects
    the financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a) Designed such disclosure controls and procedures, or caused such
       disclosure controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities, particularly during the period in which this report is being
       prepared;

    b) Evaluated the effectiveness of the registrant's disclosure controls and
       procedures and presented in this report our conclusions about the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based on such evaluation; and

    c) Disclosed in this report any change in the registrant's internal control
       over financial reporting that occurred during the registrant's most
       recent fiscal quarter (the registrant's fourth fiscal quarter in the case
       of an annual report) that has materially affected, or is reasonably
       likely to materially affect, the registrant's internal control over
       financial reporting;

5.  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation of internal control over financial reporting, to the
    registrant's auditors and the audit committee of the registrant's board of
    directors (or persons performing the equivalent functions):

    a) all significant deficiencies and material weaknesses in the design or
       operation of internal control over financial reporting which are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and

    b) any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       control over financial reporting.


Date: February 9, 2005

                            /s/ MICHAEL KANTROWITZ
                            ------------------------------------------
                            Michael Kantrowitz
                            Chairman, President and Chief Executive Officer
                            (Principal Executive Officer)

EX-31

                                                                   EXHIBIT 31.2

                                  CERTIFICATION

I, Keith D. Schneck, certify that:

1.  I have reviewed this quarterly report on Form 10-Q of Neoware Systems, Inc.;

2.  Based on my knowledge, this report does not contain any untrue statement of
    a material fact or omit to state a material fact necessary to make the
    statements made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by this report;

3.  Based on my knowledge, the financial statements, and other financial
    information included in this report, fairly present in all material respects
    the financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this report;

4.  The registrant's other certifying officer and I are responsible for
    establishing and maintaining disclosure controls and procedures (as defined
    in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

    a) Designed such disclosure controls and procedures, or caused such
       disclosure controls and procedures to be designed under our supervision,
       to ensure that material information relating to the registrant, including
       its consolidated subsidiaries, is made known to us by others within those
       entities, particularly during the period in which this report is being
       prepared;

    b) Evaluated the effectiveness of the registrant's disclosure controls and
       procedures and presented in this report our conclusions about the
       effectiveness of the disclosure controls and procedures, as of the end of
       the period covered by this report based on such evaluation; and

    c) Disclosed in this report any change in the registrant's internal control
       over financial reporting that occurred during the registrant's most
       recent fiscal quarter (the registrant's fourth fiscal quarter in the case
       of an annual report) that has materially affected, or is reasonably
       likely to materially affect, the registrant's internal control over
       financial reporting;

5.  The registrant's other certifying officer and I have disclosed, based on our
    most recent evaluation of internal control over financial reporting, to the
    registrant's auditors and the audit committee of the registrant's board of
    directors (or persons performing the equivalent functions):

    a) all significant deficiencies and material weaknesses in the design or
       operation of internal control over financial reporting which are
       reasonably likely to adversely affect the registrant's ability to record,
       process, summarize and report financial information; and

    b) any fraud, whether or not material, that involves management or other
       employees who have a significant role in the registrant's internal
       control over financial reporting.


Date:  February 9, 2005

                        /s/ KEITH D. SCHNECK
                        ------------------------------------------
                        Keith D. Schneck
                        Executive Vice President and Chief Financial Officer
                        (Principal Financial Officer)

EX-32

                                                                   EXHIBIT 32.1



                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the quarterly report of Neoware Systems, Inc. (the "Company")
on Form 10-Q for the quarter ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Michael
Kantrowitz, Chairman, President and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material
     respects, the financial condition and results of operations of the Company
     as of the dates and for the periods expressed in the Report.




/s/ MICHAEL KANTROWITZ
- ----------------------
Michael Kantrowitz
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
February 9, 2005

The foregoing certification is being furnished to the Securities and Exchange
Commission pursuant to 18 U.S.C. Section 1350 as an exhibit to the Report and is
not being filed as part of the Report or as a separate disclosure document.

EX-32

                                                                   EXHIBIT 32.2



                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


In connection with the quarterly report of Neoware Systems, Inc. (the "Company")
on Form 10-Q for the quarter ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Keith
D. Schneck, Executive Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material
     respects, the financial condition and results of operations of the Company
     as of the dates and for the periods expressed in the Report.




/s/ KEITH D. SCHNECK
- --------------------
Keith D. Schneck
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
February 9, 2005

The foregoing certification is being furnished to the Securities and Exchange
Commission pursuant to 18 U.S.C. Section 1350 as an exhibit to the Report and is
not being filed as part of the Report or as a separate disclosure document.