10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2007

OR

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

Commission File Number: 000-21240

NEOWARE, INC.

(Exact name of registrant as specified in its charter.)

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

3200 Horizon Drive
King of Prussia, Pennsylvania 19406	(610) 277-8300
(Address of principal executive offices)	(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of	Name of each exchange on which registered:
the Act:	NASDAQ Global Select Market
Common Stock, par value $.001 per share
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES o NO þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
YES o NO þ

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 þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES þ NO o

Indicate by checkmark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). YES o NO þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the last reported sale price of the Common Stock as reported on the NASDAQ Global Select Market on December 31, 2006 was approximately $217, 436,000. In making such calculation, the registrant does not determine whether any director, officer or other holder of Common Stock is an affiliate for any other purpose.

The number of shares of the registrant’s Common Stock outstanding as of September 6, 2007 was 20,210,518.

NEOWARE, INC.

INDEX

	Page
PART I		3
Item 1. Business		3
Item 1A. Risk Factors		12
Item 1B. Unresolved Staff Comments		25
Item 2. Properties		25
Item 3. Legal Proceedings.		26
Item 4. Submission of Matters to a Vote of Security Holders		26
PART II		27
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		27
Item 6. Selected Financial Data		29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		41
Item 8. Financial Statements and Supplementary Data		41
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		41
Item 9A. Controls and Procedures		41
Item 9B. Other Information		41
PART III		42
Item 10. Directors and Executive Officers of the Registrant		42
Item 11. Executive Compensation		46
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		62
Item 13. Certain Relationships and Related Transactions, and Director Independence		66
Item 14. Principal Accountant Fees and Services		66
PART IV		68
Item 15. Exhibits and Financial Statement, Schedules		68
SUBSIDIARIES
CONSENT OF KPMG LLP
CERTIFICATION OF CEO PURSUANT TO SECTION 302
CERTIFICATION OF CFO PURSUANT TO SECTION 302
CERTIFICATION OF CEO PURSUANT TO SECTION 906
CERTIFICATION OF CFO PURSUANT TO SECTION 906

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PART I

Item 1. Business

Overview

     We are a leading global provider of thin client computing solutions. Our thin client software and devices enable organizations to enhance security, improve manageability, increase reliability and lower the up-front and ongoing cost of computing. Our software powers, secures and manages thin client devices and traditional personal computers, enabling these devices to run Windows^® and web applications across a network, as well as to connect to mainframes, mid-range, UNIX and Linux systems. We differentiate our thin client computing solutions by using a software-centric approach that is focused on providing standards-based technology that enables our customers to integrate our solutions into their existing IT infrastructure, leveraging their existing investments and lowering the overall cost of deployment and implementation.

     We generate revenue primarily from sales of thin client devices, which includes the device and related software which allow users to access server based applications, and to a lesser extent from our software sold on a standalone basis for use on thin client devices, personal computers and servers and complementary services such as integration, training and maintenance utilizing our global integration and development centers. To date, sales of standalone software products and services have not exceeded 10% of our consolidated revenues for any period.

     We offer a broad range of thin client computing solutions for enterprises of varying sizes and across diverse vertical markets, including the retail, financial services, healthcare, hospitality, transportation, manufacturing, and education industries and multiple levels of government. We sell our products worldwide through our alliances with IBM, Lenovo, NEC, and ClearCube, and other indirect channels such as distributors, resellers and systems integrators, and to a lesser extent through direct sales. Our customers, including those we serve through our alliance and distribution partners, include AutoZone, CVS, Daimler Chrysler, France Telecom, Lockheed Martin, Royal Bank of Canada and the VA Medical Centers. Our international sales are primarily made through distributors and are collectible primarily in US dollars, while the associated operating expenses are payable in foreign currencies. In addition to our principal headquarters in the United States, we maintain offices in Australia, Austria, China, France, Germany, and the United Kingdom.

     On July 23, 2007, we entered into an Agreement and Plan of Merger, or merger agreement, with Hewlett-Packard Company, or HP, and Narwhal Acquisition Corporation, a wholly owned subsidiary of HP, or the merger sub, pursuant to which HP has agreed to acquire all of the issued and outstanding shares of our common stock for a cash purchase price of $16.25 per share. The acquisition will be accomplished by the merger of merger sub with and into Neoware, with Neoware surviving the merger as a wholly owned subsidiary of HP. The aggregate purchase price will be approximately $214.0 million, net of our estimated cash and cash equivalents and short-term investments balance of $120.0 million as of August 31, 2007. Outstanding Neoware stock options having an exercise price less than $16.25 per share will become fully vested and converted into the right to receive an amount equal to the product of (x) the aggregate number of shares that were issuable upon exercise of the option immediately prior to the effective time of the merger and (y) the excess, if any, of $16.25 over the per share exercise price. Options having an exercise price per share equal to or greater than $16.25 per share will be cancelled without payment or consideration. Each outstanding award of Neoware restricted stock held by an employee who becomes an employee of HP immediately after the merger that is subject to vesting or other lapse restrictions and has not otherwise been forfeited immediately prior to the merger will (a) be subject to, and will become vested upon, terms and conditions that are substantially similar to those currently applicable to such restricted stock, (b) represent the right to receive the merger consideration as each share vests, subject to applicable withholding requirements, and (c) continue to be subject to the other terms and conditions of the applicable initial documentation for such restricted stock. The closing of the merger is subject to customary closing conditions, including regulatory review and Neoware stockholder approval. The merger agreement contains certain termination rights and provides that, upon the termination of the merger agreement under specified circumstances, Neoware will be required to pay HP a termination fee of $10.0 million. The merger agreement provided for a post-signing “go-shop” period which permitted Neoware to solicit certain competing acquisition proposals for 20 business days, concluding at 12:01 am, New York City time, on August 18, 2007. No competing proposals were received. The parties anticipate that the transaction will be consummated in the fourth quarter of calendar year 2007. We believe that the planned merger will be consummated; however the outcome cannot be predicted with certainty. For additional information regarding

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potential risks and uncertainties associated with the pending merger, please see the information under the caption “Risk Factors” within Part I, Item 1A.

     On August 10, 2007, we filed a preliminary proxy statement and other relevant materials with the Securities and Exchange Commission in connection with the acquisition of Neoware by HP and on August 28, 2007 we filed a definitive proxy statement with the SEC in connection with such acquisition. The definitive proxy statement was mailed to all of our stockholders and will, with the other relevant documents, be available free of charge at the SEC’s website at www.sec.gov. In addition, investors and stockholders may obtain free copies of the documents filed with the SEC from Cameron Associates, 1370 Avenue of the Americas, New York, NY 10019, +1 212 245 8800. Before making any voting or investment decision with respect to the acquisition, investors and stockholders of Neoware are advised to read the definitive proxy statement and the other relevant materials when and if completed because they will contain important information about the acquisition. The definitive proxy statement contains important information regarding the merger, and we urge all of our stockholders to read the definitive proxy statement carefully and in its entirety.

     Based in King of Prussia, Pennsylvania, Neoware had 198 full time employees as of August 31, 2007.

Industry Background and Trends

     Thin client computing is part of a centralized computing architecture that moves processing and data storage from desktops and mobile devices to centrally-managed resources, including servers within an enterprise and outsourced, professionally managed servers. The adoption of thin client computing has grown rapidly in recent years driven by secular trends in the IT industry, including increased adoption of utility computing and on-demand software, as well as growing recognition of the increased security, manageability, reliability and lower total cost of ownership that thin client computing can provide. The thin client market is expected to grow in terms of units sold, revenue and as a percentage of the total enterprise PC market, according to IDC.

     We believe there are several key drivers that are increasing the adoption of thin client computing:

• Increased adoption of on-demand and server-based utility computing architectures. In a server-based computing architecture, applications are installed and run on servers, not the desktop, and users can access these applications from desktop or mobile devices, providing the opportunity to improve security, manageability and reliability, and to lower cost. As adoption of on-demand and utility computing grows, an increasing number of enterprises are evaluating thin clients as an alternative to traditional “fat client” personal computers.

• Evolving internal and external security threats. Threats ranging from unauthorized access and data theft to computer viruses capable of crippling the IT infrastructure of entire organizations are major concerns of IT executives today. In addition, the strict security policies demanded by privacy legislation such as the Health Insurance Portability and Accountability Act (HIPAA) have led to increased spending on the protection of highly sensitive data. Thin client computing solutions can prevent theft or mismanagement of locally stored data since the data is stored on centralized servers. Moreover, enterprises can capitalize on a thin client architecture by deploying security measures rapidly throughout the enterprise from a centralized server in order to combat external security threats such as viruses.

• Need for manageability in an increasingly heterogeneous IT computing environment. The rapid advances and widespread adoption of distributed computing technologies combined with proprietary legacy systems, has led to heterogeneous hardware and software configurations that require costly maintenance and are increasingly difficult to manage, update and secure. Poorly performing applications and PC instability have been cited by IT professionals as common user complaints. Thin client computing allows IT professionals to centralize the management of applications and minimize the time spent on software upgrades and troubleshooting of individual computers.

• Increased focus on minimizing the total cost of ownership. IT departments are increasingly faced with tight budgets to address their IT challenges. As a result, IT purchases and deployments must offer low total cost of ownership and demonstrate return on investment. We believe that thin client solutions often involve lower up-front costs than traditional desktop computers, and are also likely to offer lower on-going maintenance and upgrade costs. Thin client devices reduce obsolescence as applications are run on centralized servers, which allow enterprises to upgrade performance at the server instead of replacing the

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	desktop device. According to Gartner, a leading industry analyst firm, thin client solutions can save enterprises up to 40% of the ongoing administration costs compared to an equivalent PC solution.
•	Significant advances in bandwidth and networking capabilities. Historically, using a server-based utility computing architecture was constrained due to limited bandwidth and network speed. However, the last few years have seen a considerable improvement in both wide-area network (WAN) and local-area network (LAN) performance due to inexpensive bandwidth and network optimization technologies such that access to the server via the network is a less significant factor in thin client performance. As enterprises’ WANs and LANs have become more prevalent at an affordable cost, server-based utility computing architectures have grown dramatically leading to greater adoption of thin client solutions.
•	Virtualization. New virtualization technology trends that enable consolidation of servers and desktop virtualization will drive more interest in thin client solutions. With desktop virtualization, applications no longer need to be installed on desktop PC’s thereby enabling replacement of PC’s with a thin client device.

Our Solutions

     We provide thin client computing solutions including thin client software and devices. Using a server-based computing architecture, our software, thin client devices and related services are designed to enable enterprises to enhance security, improve manageability, increase reliability, and lower the ongoing cost of computing. By employing industry standard and open-source technologies, and by moving processing to the server to reduce the obsolescence built into standard personal computer architectures, we enable enterprises to leverage utility computing to deploy modern, robust applications with greater security and high performance, often at lower cost than traditional PC-based solutions.

     Our solutions include thin client devices, software and services:

     Neoware thin client devices. Our thin client devices are built for us by third parties using industry-standard hardware used in the high-volume PC industry. Our thin client devices are bundled with our embedded software, which enables enterprises to run applications on servers and display them across wired or wireless networks. Our thin client devices are available with our software running on top of a choice of Linux, Windows CE or Windows XP Embedded (XPe) operating systems. We provide a wide range of thin client device platforms designed to address varying enterprise needs.

     Neoware software. Our software products power, secure and manage thin clients and personal computers, stream software on-demand, and integrate mainframe, midrange, UNIX and Linux applications with Windows environments and the Web. Our software solutions include:

• Neoware Device Manager is a centralized management platform for thin client devices that offers full remote configuration and control. It is based on industry-standard protocols and can interoperate with three of the industry’s top network management software platforms — IBM Tivoli, Microsoft Systems Management Server and Altiris Deployment Solution. This allows enterprise users to manage our thin clients and their PCs with a single tool.

• Neoware Image Manager is a software solution that streams Windows operating systems on-demand from a Linux or Windows server to personal computers and thin clients, allowing users to run applications locally while eliminating the need for local storage. As a result, a single virtualized operating system image that contains the operating system and hardware drivers for multiple hardware platforms can be streamed on-demand to any personal computer or thin client, regardless of a device’s hardware configuration. This eliminates the need to manage multiples images as required with other operating system deployment methods.

• Neoware TeemTalk is our host access terminal emulation software, which is installed on our thin clients and those from other vendors. Neoware TeemTalk software provides users with the ability to connect and communicate with applications on mainframes and midrange systems including servers running proprietary operating systems, UNIX and Linux. Neoware TeemTalk emulates more than 30 different “green-screen” terminals.

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• Neoware embedded Linux solutions. We provide embedded Linux solutions that include Linux thin client software, software to convert PCs into Linux thin clients and a software development environment that enables end users and systems integrators to quickly build robust Linux-based thin client solutions.

     Neoware Services. Our global services group provides development, consulting, implementation, training and support to our customers to facilitate deployment and address their specialized needs. With development and integration centers in the US, Austria, China, France, India, Germany and the United Kingdom, our services organization provides end-to-end solutions on a global basis, from evaluating a customer’s network infrastructure to resolving IT problems with the goal of helping customers to better utilize thin client technology.

     Competitive Differentiators. We believe the key competitive differentiators of our solutions include:

• Software-centric approach. We believe that the primary differentiation among thin client solutions is the software, not the hardware. As a result, we focus our development efforts on the software that secures, powers and manages thin clients, and we outsource the design, engineering and manufacturing of our thin client devices to third parties, typically in the Far East. We strive to maintain a technological edge by spending most of our R&D budget on software development, making it possible for us to offer open, secure, reliable, affordable, manageable and upgradeable thin client products that we believe enable customers to protect their investments today and in the future. In addition, this software-centric approach provides us with additional market opportunities, including the ability to turn PCs into thin clients, enabling our customers to leverage their existing investments while enjoying the benefits of thin client computing.

• Global integration skills and resources. Unlike personal computers, which are often viewed as commodity products, deploying thin client computing requires integration skills and expertise. Large, global enterprise customers often require that we integrate our thin client solutions with their existing IT infrastructure, including their legacy systems. In order to accommodate this need, we have local development and integration centers in each of the major markets in which we sell our products. This allows us to offer integration services to our customers, enabling them to more rapidly deploy our solutions.

• Ownership of thin client software technologies. In contrast with more hardware-oriented competitors that typically license much of the software on their thin client devices, we have invested in developing and acquiring software technologies that are needed for successful thin client deployments. Our software offerings include thin client remote management, terminal emulation, operating system streaming and virtualization, and embedded Linux solutions. In fiscal 2004 we acquired TeemTalk, which enables our thin clients to connect to mainframe, midrange, UNIX and Linux systems, and to emulate more than 30 different “green-screen” terminals. In fiscal 2005 we acquired the streaming and virtualization technology that enables our Neoware Image Manager software to deliver operating systems on-demand to heterogeneous PCs and thin clients from a server. In fiscal 2007, we also developed and newly introduced our Neoware Device Manager, our next generation management software. We believe that our ownership of these software technologies enables us to develop better products and to better support our customers.

• Leading Linux-based solutions. Our security, management and access software are cross-platform, and are available on Windows and Linux operating systems. According to IDC, we are the leading supplier of Linux-based thin client solutions, which can be easily integrated into customer environments, and can run on less powerful, lower-cost hardware than some Windows-based alternatives. Furthermore, our Linux-based thin client solutions provide an intuitive user interface that shields users from the complexity of the Linux operating system. In February 2005 we acquired Mangrove Systems, a company that provided embedded Linux solutions for OEMs, systems integrators and corporate customers. Mangrove’s products included Linux thin client software, software to convert PCs into Linux thin clients, and a software development environment that enables systems integrators to quickly build robust Linux-based thin client solutions. According to IDC, the Linux thin client segment of the PC industry is the fastest-growing segment of the market, and we are the leading provider of this technology.

Our Strategy

     Our objective is to be the leading global provider of thin client solutions for enterprise customers by providing a secure, manageable, and cost-effective alternative to traditional PC architectures. Key elements of our strategy include the following:

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• Continue to invest in technology development. We believe that we have developed and acquired the technology to enable a more powerful, secure and cost-effective thin computing architecture. We have a 15-year history of developing this technology and between our own expenditures and those of the companies we have acquired, we have made substantial investments in R&D. We will continue to invest in technology development to maintain a global leadership position and drive market share growth.

• Focus on the enterprise. We believe the most significant market segment for the thin client solution is the enterprise customer. As a result, we have focused our development, sales and marketing efforts on small, medium and large enterprises across a diverse set of vertical markets. Our access to this highly attractive market is considerably enhanced by our relationships with our alliance and distribution partners. We have been making significant investments to attract additional enterprise customers and gain market share. These investments include additions to the sales teams in the United States, Europe and Asia, as well as additional marketing personnel and programs designed to stimulate thin client awareness and lead generation.

• Enhance channel partnerships. To expand our access to customers, we have developed relationships with third parties that we believe have strong market positions and customer relationships. We have developed alliances with IBM, Lenovo, NEC and ClearCube, all of which sell our products to their customers. We also have expanded our network of resellers through programs to attract and incentivize resellers.

• Expand and deepen our geographic footprint. Our business was historically focused on the U.S. market. In fiscal years 2005 and 2006, we determined to expand our global footprint as part of a strategic expansion of our development and integration organization through the acquisitions of Maxspeed, Mangrove, Qualystem and ThinTune, as well as through partnerships with global distributors such as NEC, ClearCube and local providers. As a result, we now have a global footprint, with operations in the US, Europe and Asia. We believe that international markets will be a significant source of growth and we intend to continue to increase our presence by expanding our reseller relationships and through select acquisitions.

• Grow our business through strategic acquisitions. Our acquisition strategy has been focused on expanding our geographic reach, acquiring businesses with technologies that increase our ownership of core intellectual property, and with products that can be sold through our existing channels to the same end-user customers, leveraging our existing organization. We have also sought to augment our software development resources and add to our integration capability on a global basis.

• Capitalize on the growing adoption of industry-standard and open-source technologies. We believe that many enterprise customers are seeking industry-standard technologies, not proprietary solutions that require them to use a single vendor. As a result, we integrate our products into industry-standard solutions, and utilize open-source and other industry-standard technologies. In our supply chain we leverage the high volumes of the PC industry and PC supply chain techniques to lower our costs. We believe our commitment to open-source, cross-platform and industry-standard software technologies, and our use of the high volume supply chain efficiencies of the PC industry, represent significant differentiators and competitive advantages for us

History and Acquisitions

     Our Company was formed in 1995 as the result of a merger between Human Designed Systems, Inc., or HDS, a privately held technology company, and Information Systems Acquisition Corporation, a publicly held company. At the time of the merger, we changed the name of the Company to HDS Network Systems, Inc. and, in connection with the license of certain technology to Hitachi Data Systems in 1997 we changed the name of the Company to Neoware Systems, Inc. In December 2005, we changed the name of the Company to Neoware, Inc. to reflect our increased focus on providing software solutions for the thin client market.

     In November 2005, we completed the acquisition of Maxspeed, a provider of customized thin client solutions, headquartered in the United States, with research and development in China.

     In October 2005, we acquired the thin client business of TeleVideo, located in the United States, including a trademark license, product brands, customer lists, customer contracts and non-competition agreements.

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     In April 2005, we acquired all of the outstanding shares of Qualystem Technology S.A.S., located in France, a provider of software that streams Windows® operating systems on-demand from a server to other servers, personal computers, and thin clients.

     In March 2005, we acquired the ThinTune thin client business of eSeSIX Computer, located in Germany, which included customer lists, intellectual property and technology, and also entered into reseller, supplier and non-competition agreements, and acquired all of the outstanding shares of eSeSIX Tech, located in Austria, eSeSIX Computer’s development and engineering affiliate. eSeSIX Computer together with eSeSIX Tech are collectively referred to as the ThinTune thin client business.

     In January 2005, we acquired all of the outstanding shares of Mangrove Systems S.A.S., located in France, a provider of Linux software solutions. As a result of the Mangrove acquisition, we acquired customer lists, intellectual property and technology and non-compete agreements.

     In September 2004, we acquired the thin client business of Visara International, Inc, located in the United States, including customer lists, intellectual property and technology, and also entered into reseller, supplier and non-competition agreements.

     In July 2003 we acquired the TeemTalk host access product and business which included connectivity software for PC and mobile platforms, as well as for thin clients.

     In March 2002, we acquired the thin client business of Network Computing Devices, Inc. (NCD), including the ThinSTAR product line.

     In January 2002, we entered into a worldwide alliance with IBM Corporation, under which we were designated as the preferred provider of thin client appliance products to IBM and its customers. In addition, we licensed intellectual property from IBM associated with IBM’s thin client appliance products.

     In December 2001, we acquired all of the assets and assumed substantially all of the liabilities of Telcom Assistance Center Corporation, d/b/a ACTIV-e Solutions, a full service information technology consulting company in the server-based computing marketplace.

     In June 2001, we purchased the thin client business of Boundless Technologies, Inc., which included the Capio product line, associated software and intellectual property and access to the Capio distribution and customer databases.

Customers

     Our customers span a wide range of industries, including retail, healthcare, transportation, hospitality, education, financial services, government, manufacturing and telecommunications.

     The following table sets forth sales to customers comprising 10% or more of our net revenue:

	Year Ended June 30,
	2007			2006			2005
Net revenues
North American distributor		11	%		*			10	%
Lenovo		*			17	%		5	%
North American customer		*			11	%		*
IBM		*			*			14	%

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

     Under the IBM and Lenovo agreements, IBM and Lenovo sell Neoware-branded products to their customers. During the sales process, our sales and integration personnel work directly with the end customers, along with the support of IBM and Lenovo salespeople, thereby developing ongoing relationships with the customers. The strategy

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of selling Neoware-branded products and developing ongoing relationships with the end customers was designed to mitigate the risk of customer concentration from sales through IBM and Lenovo.

     IBM, Lenovo and our distributors resell our products to individual resellers and end-users. The percentage of revenue derived from IBM, Lenovo, individual distributors, resellers or end-users can vary significantly from period to period. In addition to our direct sales to IBM and Lenovo, IBM, Lenovo and their resellers can purchase our products through distributors. Furthermore, IBM and Lenovo can influence an end-user’s decision to purchase our products even though the end-user may not purchase our products through IBM or Lenovo. While it is difficult to quantify the net revenues associated with these purchases, we believe that these sales are significant and can vary significantly from quarter to quarter.

Product Development

     We believe that our ability to expand the market for our products depends in large part upon our ability to develop cross-platform enhancements to the Windows and Linux operating systems, and to continue to develop new software and hardware products that incorporate the latest improvements in performance, capability and manageability targeted specifically at host access and server-based computing environments. Accordingly, we are committed to investing significant resources in software development activities. During fiscal 2007, 2006 and 2005, research and development expenses totaled $6.9 million, $6.0 million and $3.9 million, respectively. In addition, we have acquired technology in connection with our acquisitions and our alliance with IBM.

     We significantly expanded our development resources during fiscal 2006 and 2005 with the acquisitions of Maxspeed, which has technical resources located in Shanghai, China, Mangrove Systems S.A.S. and Qualystem Technology S.A.S., which are located in France, and the ThinTune thin client business, which provides technical and support resources in Austria and Germany. In addition, we entered into an alliance with Parrus IT Solutions, an IT provider located in India, which expands our distribution, customer service, and technical support capabilities for the India market.

     Our current research and development programs include:

• Development of enhancements to the Windows CE, XP Embedded and Linux operating systems designed to make them more manageable and secure in server-based computing environments.

• Development of server-based remote management software designed to manage the wide-scale deployments of large numbers of network-connected personal computers and thin client appliances.

• Development of our TeemTalk host access product line, which provides connectivity to mainframes, minicomputers, UNIX and legacy servers from thin clients, personal computers and UNIX workstations.

• Development of our Neoware Image Manger software, which streams applications and Windows^® operating systems on-demand from a Linux or Windows server to personal computers and thin clients, allowing users to run applications locally while eliminating the need for local storage.

• Development of additional thin client devices for specialized applications such as our e900 industrialized thin client, which was introduced in fiscal 2006, and a new wireless laptop thin client device introduced in September 2006.

     There can be no assurance that any of these development efforts will result in the introduction of new products or that any such products will be commercially successful.

Marketing and Sales

     We sell our products and services worldwide through our direct sales force, distributors, our alliances with IBM, Lenovo, NEC and ClearCube, as well as other indirect channels, such as resellers and systems integrators. In addition to our headquarters in the United States, we maintain offices in the United Kingdom, Germany, France, Austria, China, and Australia. Our international sales of thin client products are primarily made through distributors and resellers and are collectible primarily in US dollars, while the associated operating expenses are payable in foreign currencies.

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     The principal objectives of our marketing strategy are to grow the thin client segment of the PC market, increase awareness of the benefits of our products, maintain our position as a recognized innovator in the thin client segment of the PC market and differentiate our products from alternative types of devices, including personal computers. Our marketing activities include participation in trade shows and conferences, advertising, press relations with leading trade publications and the publication of technical articles. We have been and are planning to continue to make significant investments to attract additional enterprise customers and gain market share. These investments will include additions to the sales teams in the United States, Europe and Asia, as well as additional marketing personnel and programs designed to broaden our distributor and reseller base and to stimulate thin client awareness and lead generation.

     We utilize distributors for our products throughout the world, and have relationships with distributors in the United States, United Kingdom, Canada, France, Scandinavia, Germany, Denmark, Belgium, Netherlands, Austria, Switzerland, Italy, Spain, Russia, Israel, India, Egypt, Latvia, Korea, Philippines, New Zealand, Australia, Malaysia, South Africa, South America, and elsewhere.

     Net revenues from sales outside of the United States, primarily in Europe, Middle East and Africa, or EMEA, represented approximately 41%, 33% and 40% of net revenues, respectively, in fiscal 2007, 2006 and 2005. A substantial portion of our international sales are transacted in US dollars, although the prices of our products are based upon the market price for alternative products, including personal computers, in each market.

Service and Support

     We provide systems integration services and technical support at customers’ sites, as well as via telephone and electronic mail. Our technical support specialists provide assistance in diagnosing problems and assisting with integrating our products with servers, networks and application software.

     We typically warrant our thin client appliance products against defects in materials and workmanship for three years after purchase by the end user. To date, we have not encountered any material product maintenance problems.

     Our products are typically not returnable by customers after they are sold. Demonstration units sold to customers under our ezDemo program are returnable within 30 days of shipment. Certain of our distributors have the right to return a limited number of products to us, based upon their sales volume in prior periods. These returns must be accompanied by a corresponding sales order of equivalent or greater value.

Competition

     The thin client segment of the personal computer market is characterized by changing technology and evolving industry standards. We experience significant competition from suppliers of personal computers, as well as other providers of thin client appliance products.

     Competitive products are offered by a number of established computer manufacturers, including Dell Computer, Hewlett Packard, Sun Microsystems and Wyse Technology and also from smaller companies offering thin client solutions. In addition, IBM, Lenovo and other PC companies sell personal computer and server products that can compete with our offerings. Personal computers can be configured with software, such as an ICA client from Citrix Systems, or an RDP client from Microsoft, that allows them to operate as thin client appliances. Thin client appliances compete favorably on a price/performance basis with personal computers and offer cost advantages in initial system installation, as well as subsequent system upgrading and administration. However, the significant market presence and reputation of personal computer manufacturers, and customers’ perceptions regarding their need for desktop application processing capability, constitute obstacles to the penetration of the personal computer portion of the market by thin client appliance suppliers. During the second half of fiscal 2007, we experienced increased competition which resulted in price reductions, reduced profit margins and loss of market share, affecting our operating results. We expect this level of competition to continue during fiscal 2008.

     Some of our competitors have substantially greater name recognition, engineering, manufacturing and marketing capabilities and greater financial resources than we do. We believe that the principal competitive factors among suppliers include technical expertise, software capabilities, breadth of product line, product

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price/performance, investment protection, network expertise, service and support, and market presence. We believe that we compete favorably with respect to these factors.

Manufacturing and Suppliers

     We provide our software and management tools on thin client appliances designed, manufactured and assembled for us by third parties. We primarily depend upon a supplier based in Taiwan with operations in China for our thin client appliance products. We have entered into an agreement with this supplier, pursuant to which the parties are only committed to purchase and manufacture products under individually accepted purchase orders. We also depend on a limited number of sole source suppliers for several other products and components. In addition to this supplier, we purchase thin client products from additional thin client device manufacturers in China, Korea and in the United States.

     Our thin client appliances utilize industry-standard hardware components used in the high-volume PC industry. We believe that this lowers the cost of designing and manufacturing our products and allows us to continue to lower the cost of our products as the costs of personal computers decline. We use this strategy to compete with other companies that design and manufacture their own proprietary hardware.

Proprietary Rights and Licenses

     We believe that our success will depend primarily on the innovative skills, technical competence and marketing abilities of our personnel as well as the ownership of our intellectual property. We currently hold one patent and have three patent filings pending, and we have recently initiated a patent program under which we will endeavor to protect our proprietary software.

     Certain technology used in our products is licensed from third parties, either on a non-royalty-bearing basis or on a royalty-bearing basis. Generally, such licenses grant us non-exclusive, worldwide rights with respect to the subject technology and terminate upon a material breach. We have licensed technology from IBM, Citrix Systems, Inc., and Microsoft Corporation, among others.

Employees

     As of August 31, 2007, we had 198 full time employees.

Other Information

     Our Internet website is located at http://www.neoware.com. We make available free of charge on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Other than the information expressly set forth in this annual report, the information contained, or referred to, on our website is not incorporated into this annual report.

     We have adopted a Code of Ethics applicable to our employees, officers and directors. The Code of Ethics is available on our website, under “http://investor.neoware.com/pages/ethics.html.” Amendments to and waivers from the Code of Ethics will also be disclosed promptly on the website. In addition, stockholders may request a printed copy of the Code of Ethics, free of charge, by contacting our Vice President of Human Resources and General Counsel at:

Neoware, Inc.
Attention: Vice President of Human Resources and General Counsel
3200 Horizon Drive
King of Prussia, PA 19406

     The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains

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reports, proxy and information statements and other information regarding issuers, such as Neoware, that file electronically with the SEC. The SEC’s Internet site is located at http://www.sec.gov.

Item 1A. Risk Factors

     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. 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 business and stock price may be materially and adversely affected if the merger with HP is not completed.

     On July 23, 2007, we entered into a merger agreement with HP and Narwhal Acquisition Corporation., a wholly owned subsidiary of HP, which provides for the merger of Narwhal Acquisition Corporation with and into Neoware, with Neoware surviving the merger as a wholly owned subsidiary of HP. The announcement of the planned merger could have an adverse effect on our revenues in the near-term if customers delay, defer, or cancel purchases in response to the announcement. To the extent that the announcement of the merger creates uncertainty among persons and organizations contemplating purchases of our products or services such that several large customers, or a significant group of small customers, delays purchase decisions pending completion of the planned merger, this could have an adverse effect on our results of operations and quarterly revenues could be substantially below the expectations of market analysts and could cause a reduction in our stock price.

     In addition, completion of the pending merger is subject to certain conditions, including approval by the holders of our common stock, regulatory approvals and various other closing conditions. We cannot be certain that these conditions will be met or waived, that the necessary approvals will be obtained or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. If the merger is not completed, we could be subject to a number of risks that may materially and adversely affect our business and stock price, including: the diversion of our management’s attention from our day-to-day business and the unavoidable disruption to our employees and our relationships with customers and strategic partners which, in turn, may detract from our ability to grow revenues and minimize costs and lead to a loss of market position that we might be unable to regain; the market price of our shares of common stock may decline to the extent the current market price of those shares reflects a market assumption that the merger will be completed; under certain circumstances we could be required to pay HP a $10.0 million termination fee; we may experience a negative reaction to any termination of the merger from our customers, employees or strategic partners which may adversely impact our future results of operations as a stand-alone entity; and the amount of the costs, fees and expenses and charges related to the merger.

Restrictions on the conduct of our business prior to the completion of the pending merger with HP may have a negative impact on our operating results.

     We have agreed to certain restrictions on the conduct of our business in connection with the proposed merger with HP that require us to conduct our business in the ordinary course consistent with past practices, subject to specific limitations. These restrictions may delay or prevent us from undertaking business opportunities that may arise pending completion of the transaction and should the merger not occur, such restrictions could have had an adverse effect on our operations during such time.

Our success depends on our ability to attract, retain and grow our business with large enterprise customers, and the long sales cycle with these customers makes planning and inventory management difficult and future financial results less predictable.

     We must retain and continue to expand our ability to reach and sell to enterprise customers by implementing our sales and marketing initiatives, adding effective channel partners and expanding our integration services. Our inability to attract and retain enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Large enterprise customers usually request special pricing and generally have longer sales cycles, which could negatively impact our revenues, and longer sales cycles could affect our ability to predict our revenues for any particular period. Additionally, as we continue to implement our new sales and

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marketing initiatives in an attempt to attract and penetrate enterprise customers, we will need to increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.

     Our sales cycle for large-scale deployments to large enterprise customers makes it difficult to predict when these sales will occur, and we may not be able to sustain these sales on a predictable basis. We often have a long sales cycle for these large enterprise sales because:

• our sales personnel generally need to explain and demonstrate the benefits of a large-scale deployment of our products to potential and existing customers prior to sale;

• our technical personnel typically spend a significant amount of time assisting potential customers in their testing and evaluation of our products and services and in integrating the products to suit their needs;

• our large-scale customers are typically large and medium size organizations that carefully research their technology needs and the many potential projects prior to making capital expenditures for IT infrastructure; and

• before making a purchase, our potential customers usually must obtain approvals from various levels of decision makers within their organizations, and this process can be lengthy.

     The long sales cycle and our lack of visibility into when these sales to enterprise customers could occur may make it difficult to predict the timing of sales, or whether they will be completed. Delays in sales could cause significant variability in our revenue and operating results for any particular period. This uneven sales pattern also will affect our inventory management and logistics costs. If predicted demand is substantially greater than actual orders received, as it was in the quarters ended June 30, and September 30, 2006, there will be an increase in inventory, which could make it necessary for us to reduce our prices or write down inventory resulting in lower gross margins and less cash. Alternatively, if orders substantially exceed predicted demand, we may not be able to fulfill all of the orders received.

Our success may depend on our ability to attract, retain and grow our business with small and medium sized customers.

     In order to successfully attract new customer segments and expand our existing relationships with enterprise customers, we must reach and retain small- and medium-sized customers and smaller project initiatives within our large enterprise customers. We have begun a sales and marketing initiative to reach these customers. We cannot guarantee that our small- and medium-sized customer sales and marketing initiatives will be successful. Our failure to attract and retain small and medium-sized customers and smaller project initiatives within our large enterprise customers could have a material adverse effect on our business, results of operations and financial condition. Additionally, as we continue to implement our sales and marketing initiatives in our attempt to attract and retain small and medium-sized customers and smaller project initiatives within our large enterprise customers, we will need to increase our operating expenses. These efforts may not proportionally increase our operating revenues and could reduce our profits.

Because we rely on resellers and distributors, including IBM and Lenovo, to sell our products, our revenues could be negatively impacted if these companies do not continue to purchase products from us.

     Our future success is highly dependent upon maintaining and increasing the number of our relationships with distributors and resellers. By relying on distributors and resellers, we may have little or no contact with the ultimate users of our products, thereby making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our products, service ongoing customer requirements, estimate end user demand and respond to evolving customer needs.

     We cannot be certain that we will be able to attract or retain resellers and distributors to market our products effectively. None of our current resellers or distributors, including IBM and Lenovo, are obligated to continue selling our products or to sell our new products, and none are precluded from selling competing products. We cannot be certain that any resellers or distributors will continue to represent our products or that our resellers or distributors will devote a sufficient amount of effort and resources to selling our products. We need to continue to expand our indirect sales channels, and if we fail to do so, our growth could be limited. A number of our distributors resell to

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their own networks of channel partners with whom we have no direct relationship. Our distribution channel could be affected by disruptions in the relationships of and with our channel partners and their networks. Because many of our indirect channel partners also sell competitive products, our success and revenue growth will depend on our ability to develop and maintain strong cooperative relationships with our channel partners.

     We cannot assure you that our channel partners will market our products effectively, receive and fulfill customer orders of our products on a timely basis or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. In order to support and develop leads for our distribution channels, we plan to continue to expand our field sales and support staff as needed. We cannot assure you that this internal expansion will be successfully completed, that the cost of this expansion will not exceed the revenues generated or that our expanded sales and support staff will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of our current or potential competitors. In addition, our channel agreements are generally not exclusive and one or more of our channel partners may compete directly with another channel partner for the sale of our products in a particular region or market. This may cause such channel partners to stop or reduce their efforts in marketing our products. Our inability to effectively establish or manage our distribution channels would impact our sales.

     In addition, our channel partners may provide services to our end user customers that are inadequate or do not meet expectations. Such failures to provide adequate services could result in customer dissatisfaction with us or our products and services due to delays in maintenance and replacement. These occurrences could result in the loss of customers and repeat orders and could delay or limit market acceptance of our products, which would negatively affect our sales and results of operations.

     We derive a significant portion of our revenue from sales made directly to IBM customers through Lenovo and through our other distributors. A significant portion of our other revenue is derived from sales to resellers. If Lenovo or our other distributors were to discontinue sales of our products or reduce their sales efforts, or if IBM salespeople were to reduce their attention to our products, it could adversely affect our operating results. In addition, the continued viability and financial condition of our distributors could deteriorate and may not be able to withstand changes in business conditions, including economic weakness, which could lead to significant delays in their payments to us or defaults on their payment obligations. Additionally, we could experience disruptions in the distribution of our products if our distributors’ financial conditions or operations weaken. Any significant delays, defaults or disruptions could have a material adverse effect on our business, results of operations and financial condition. For example, during the fourth quarter of fiscal 2006, one of our German distributors experienced significant financial difficulties and has since declared insolvency, which caused us to reverse revenues in the amount of $675,000 invoiced in April through June 2006 and to add $385,000 to our reserve for doubtful accounts in the quarter ended June 30, 2006.

     IBM and, more recently Lenovo, have been key strategic channel partners for us, distributing a substantial amount of our products. As a result of our alliances with IBM and Lenovo, we have relied on those parties for distribution of our products to their customers. Sales directly to Lenovo accounted for less than 10% of our net sales during the 2007 fiscal year, declining from 17% in our 2006 fiscal year. IBM and Lenovo are under no obligation to continue to actively market our products. In addition to our direct sales to IBM and Lenovo, IBM and Lenovo can purchase our products through individual distributors and/or resellers.

Our strategy depends on expanding and diversifying our distribution channels and if we fail in these efforts, our business could be adversely affected.

     We are engaged in expanding, and currently intend to continue to expand, our distribution channels by expanding our sales with resellers, distributors and systems integrators. In addition, an integral part of our strategy is to continue to expand and diversify our base of channel relationships by adding more channel partners with abilities to reach large enterprise customers and to sell our newer products. This has required and will continue to require additional resources, as we will need to expand our internal sales and service coverage of these customers and our marketing personnel. If we fail in these efforts and cannot continue to expand or diversify our distribution channels, our revenues and profits could be adversely affected. In addition to this expansion and diversification of our base, we will need to maintain channel partners who cater to smaller customers. We may need to add distribution partners to maintain customer satisfaction and a steady or increasing adoption rate of our products, which could increase our operating expenses. We intend to continue to invest significant resources to develop these channels, which could

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reduce our profits if our efforts do not result in significant increases in our revenues. Additionally, we have launched a price promotion program for our North American distributors which will provide them with price incentives. While we believe that this strategy will increase revenues through the distribution channel, there are no assurances that we will be successful and it may result in reduced margins.

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

     We derive a substantial portion of our revenue from international sales primarily in Europe, the Middle East and Africa, or EMEA. Our international activities, primarily in EMEA, accounted for approximately 41% of revenues during our 2007 fiscal year. In addition, a portion of our operations consists of manufacturing, software and product development, and sales activities outside of the U.S. Our ability to sell our products and conduct our operations internationally is subject to a number of risks. General economic and political conditions and the imposition of governmental controls in each country, including governmental restrictions on the transfer of funds to us from our operations outside the United States, including restrictions in China, could adversely affect our operations and demand for our products and services in these markets. We may also experience reduced intellectual property and contract rights protection as a result of different business practices in certain countries, which could have an adverse effect on our business and financial results. Although most of our international sales are denominated in U.S. 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 (which are mostly determined in local currencies), and could result in greater costs for our international operations in the future. In addition, concerns about terrorism or an outbreak of epidemic diseases such as avian influenza or severe acute respiratory syndrome, could have a negative effect on travel and our business operations, and could result in adverse consequences on our international operations.

     Changes to and compliance with a variety of foreign laws and regulations may increase our cost of doing business in these jurisdictions. We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations which may be substantially different from those in the United States. In many foreign countries, particularly those with developing economies, it is common to engage in business practices that are prohibited by United States regulations applicable to us, such as the Foreign Corrupt Practices Act, and any violations of such laws by our employees or contractors could have a material adverse effect on our business. 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. In addition, our future results could be adversely affected by difficulties in staffing, and coordinating communications among and managing our international operations, which have significantly expanded and become more complex as a result of the European acquisitions completed in fiscal 2005.

Our business is dependent on customer adoption of thin client devices 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 devices to increase our revenues. If thin client devices 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 devices 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 might not grow or might decline. Alternatively, if the market were to grow faster than expected, it could attract PC manufacturers to the thin client device segment of the PC market, which would increase competition and could adversely impact our results.

Our acquisition and alliance activities could disrupt our ongoing business, and we may not be able to successfully complete and integrate future acquisitions we may complete, which may materially adversely affect our growth and our operating results.

     In the event that the pending merger with HP is not consummated, as part of our business strategy, we engage in discussions with third parties regarding, and enter into agreements relating to, possible acquisitions, strategic

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alliances and outsourcing transactions in order to further our business objectives. In order to pursue this strategy successfully, we must identify suitable candidates for these transactions, complete these transactions, some of which may be large and complex, and manage post-closing issues such as the integration of acquired companies or employees. We may, in order to integrate acquired businesses or employees, incur significant integration and restructuring costs, both one-time and on a recurring basis. Integration and other risks of acquisitions, strategic alliances and outsourcing transactions can be more pronounced for larger and more complicated transactions, or if multiple transactions are pursued simultaneously. However, if we fail to identify and successfully complete transactions that further our strategic objectives, we may be required to expend resources to develop products and technology internally, we may be at a competitive disadvantage or we may be adversely affected by negative market perceptions, any of which may have a material adverse effect on our revenue and selling, general and administrative expenses.

     Since June 2001, we have completed ten acquisitions and entered into alliances with IBM and Lenovo, and we plan to make additional acquisitions, some of which may be large and complex, or involve technologies that are outside of our core business, as part of our growth strategy. There is no assurance that we will derive benefits from the three European acquisitions we completed in the third and fourth quarters of fiscal 2005, the Visara, TeleVideo or Maxspeed acquisitions we completed in the first half of fiscal 2006 or future acquisitions we pursue. We may be unable to retain key employees or key business relationships of the acquired businesses, consolidate IT infrastructures, integrate accounting controls, policies and procedures, manage supply chain integration, combine administrative, research and development and other operations, eliminate duplicative facilities and personnel, which could result in significant costs and expenses, combine product offerings and successfully commercialize and market acquired technology, 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 such 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 business was worth. Managing the completion and integration of acquisitions and alliances requires management resources, which may divert our attention from other business operations. In addition, we may lack experience operating in the geographic or product market of the business acquired. There are also risks associated with the realization of benefits related to commercialization and/or marketing of projects that are in the process of being completed due to the complexity of the technology, competitive pressures and changing customer needs, and therefore there can be no assurances that any such project will be commercially successful. Even when the acquired business has already developed marketable products, there can be no assurance that the products will be successfully marketed in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products. As a result, the effects of any completed or future transactions on financial results may differ from our expectations. These transactions may result in significant costs and expenses, including severance payments and additional compensation to executives and other key personnel, charges related to the elimination of duplicative facilities, assumed liabilities, and legal, accounting and financial advisory fees. Prior acquisitions have resulted in a wide range of outcomes, from successful integration of the business and increased sales and large enterprise customers to an inability to obtain the expected benefits. In connection with completing acquisitions, we may issue shares of our common stock, potentially creating dilution for our existing stockholders. We spent approximately $900,000 during fiscal 2007 pursuing an acquisition that we did not complete.

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 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, our outsourcing activities for other functions may fail to reduce costs and may disrupt operations.

     We depend upon single source suppliers for the design and manufacture of our thin client device products and for several of the associated components. 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, avian influenza and similar medical crises could also disrupt manufacturing processes and

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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 devices that are bundled with our software. Third parties design and produce these thin client devices 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. If we were unable to adequately address the supply issues, we might have to reengineer some products resulting in further costs and delays. 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. Additionally, a domestic supplier that we added in fiscal 2005 requires payments in advance of our receipt of their product. We had outstanding advances to this supplier of $1.1 million at June 30, 2007, which were recorded as a prepaid expense. In the event of increased inventory levels, as occurred at September 30, 2006, we would reduce our purchase of inventory in the short term, which could adversely affect the financial condition of our suppliers and jeopardize the continued supply of our products. Finally, if one of our suppliers failed to maintain viability, we would likely be required to honor warranties granted by them to our customers for products sold by us, which would increase our costs.

     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 have expanded, and may in the future expand, our outsourcing activities where we believe a third party may be able to provide those services in a more efficient manner. In fiscal 2006, we entered into a relationship with a third-party company that provides CRM software and services to us on an outsourced basis. To the extent that we rely on partners or third party service providers for the provision of software development services and key business process functions, we may incur increased business continuity risks. We may no longer be able to exercise control over some aspects of software development and the development, support or maintenance of operations and processes, including the internal controls associated with our business operations and processes, which could adversely affect our business. 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 the services as anticipated, we may need to seek alternative service providers or resume providing such services internally which could be costly and time consuming and have an adverse material effect on our operating and financial results.

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 operating expenses 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 operating 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 due to typical customer buying patterns in the IT industry. 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

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	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, or do not materialize, 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 completed in an earlier quarter than that which was anticipated, 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. Further, if orders substantially exceed predicted demand, we may not be able to fulfill all of the orders received in the last few weeks of the quarter;
•	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; and
•	Stock-based compensation expense — Starting in the quarter ended September 30, 2005, we began recording stock-based compensation expense as calculated pursuant to Statement of Financial Accounting Standards (SFAS) No. 123R. The non-cash impact of stock-based compensation expense during fiscal 2007 was $4.5 million.

     In addition, fluctuations in our future quarterly operating results may be caused by factors relating to our pending merger with HP, including:

• risks that the pending merger with HP disrupts current plans and operations, and the potential difficulties in employee retention as a result of the announcement or pendency of the merger;

• whether or not the conditions to the completion of the pending merger with HP are satisfied and the possibility that the merger will not be completed for any other reason;

• the effect of the announcement or pendency of the merger with HP on our customer and strategic partner relationships, operating results and business generally; and

• the amount of the costs, fees and expenses and charges related to the pending merger with HP, including the possibility that the merger agreement may be terminated under circumstances that require us to pay HP a termination fee of $10.0 million.

     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;

• the timely development and introduction of new and enhanced products; 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 device products and our operating results may decline as a result. Additionally, we plan to increase our sales and marketing expenses for our products and these efforts may not proportionately increase our sales, resulting in reduced profitability.

Our inventory management is complex as we sell a significant mix of products and our revenues and gross margins could suffer if we fail to manage the issues properly.

     We must manage inventory effectively, which involves forecasting demand and pricing issues. Demand is difficult to forecast since it depends on many factors, including pricing, changes in customer buying patterns and changes in competition. Significant unanticipated fluctuations in demand, the timing and disclosure of new product releases or the timing of key sales orders could result in costly excess inventories or the inability to secure sufficient quantities of our products to satisfy customer demand. To the extent we manufacture products in anticipation of future demand that does not materialize, or in the event a customer cancels or reduces outstanding orders, we could

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experience an unanticipated increase in our inventory, as occurred in the past several quarters. This could adversely impact our revenues, gross margins and financial condition. Our use of indirect distribution methods may reduce visibility to demand and pricing issues, and therefore make forecasting more difficult. If we have excess or obsolete inventory, we may have to reduce our prices or write down inventory to market value.

Our gross margins can vary significantly, based upon a variety of factors. If we are unable to sustain adequate gross margins we may be unable to reduce operating expenses in the short term, resulting in losses.

     Our gross margins can vary significantly from quarter to quarter depending on average selling prices, fixed costs in relation to revenue levels and the mix of our business, including the percentage of revenues derived from various thin client device models, 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 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, by selling a larger percentage of products to large enterprise customers, who typically demand lower prices because of their volume purchases, and by focusing on sales through our distribution channel. This strategy, combined with the implementation of our new sales and marketing initiatives, have resulted in, a decline in our gross margins. Additionally, we have certain newer products, including our e900 ruggedized thin client and m100 laptop product line, which have higher average selling prices and higher gross profit dollars, but lower gross margin percentages than our traditional products. If our sales do not continue to increase as a result of these strategies, our profitability will decline, and we may experience losses. Finally, our gross margins may decline if it is necessary for us to reduce the prices of our products as a result of excess inventory.

During the past several years, we have increased operating expenses significantly as a foundation for us to stimulate our growth and growth in our market, and we increased our operating expenses during fiscal 2007, and intend to continue to increase our operating expenses during fiscal 2008, including increases needed to implement our new sales and marketing and product development initiatives. If we do not increase revenues or appropriately manage further increases in operating expenses, our profitability will suffer.

     Our business has grown through both internal expansion and business acquisitions, and, as a result, we have significantly increased our operating expenses. If our revenues fail to increase as we increase our operating expenses, our profits may decline. Additionally, this growth has put pressure on our infrastructure, internal systems and managerial resources. The number of our employees increased from 186 full-time employees at June 30, 2006 to 190 full-time employees at June 30, 2007 and we expect to add a significant number of new employees during fiscal 2008. Our new employees include key managerial, technical, sales and marketing personnel, as well as international employees. 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 international operations, we now have facilities located in multiple countries, and we have limited experience coordinating a geographically separated organization. If we are unable to effectively manage our growth, our business and operating results could be adversely affected.

We may not generate sufficient future taxable income to allow us to realize our deferred tax assets.

     We have a significant amount of U.S. Federal, state and other tax loss carryforwards that will be available to reduce the taxes we would otherwise owe in the future. We have recognized the value of these future tax deductions in our consolidated balance sheets. The realization of our deferred tax assets is dependent upon our generation of future taxable income during the periods in which we are permitted, by law, to use those assets. We exercise judgment in evaluating our ability to realize the recorded value of these assets, and consider a variety of factors, including the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Our evaluation of the realizability of deferred tax assets must consider both

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positive and negative evidence, and the weight given to the potential effects of positive and negative evidence is based on the extent to which the evidence can be verified objectively. While we believe that sufficient positive evidence exists to support our determination that the realization of our deferred tax assets is more likely than not, we cannot guarantee profitable U.S operations in the future that will allow us to fully realize those assets.

Our business may suffer if it is alleged or found that we have infringed the intellectual property rights of others.

     In the course of our business, we receive notices from third parties claiming that we are infringing upon their intellectual property rights. We evaluate the validity of the claims and determine whether we will negotiate licenses to use the technology. Even if we believe that the claims are without merit, responding to such claims can 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.

     In addition, certain products or technologies developed by us, including for example the Linux-based products, may incorporate so-called “open source” software. Open source software is typically licensed for use at no initial charge, but certain open source software licenses impose on the licensee of the applicable open source software certain requirements to license or make available to others both the open source software as well as the software that relates to, or interacts with, the open source software. Our ability to commercialize products or technologies incorporating open source software may be restricted as a result of using such open source software because, among other reasons:

• open source license terms may be ambiguous and may result in being subject to unanticipated obligations regarding our products and technologies;

• competitors may have improved access to information that may help them develop competitive products;

• open source software cannot be protected under trade secret law; and

• it may be difficult for us to accurately determine the origin of the open source code and whether the open source software in fact infringes third party intellectual property rights.

Thin client device 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.

If we are unable to rapidly and successfully develop and introduce new products and manage our inventory, we will not be able to satisfy customer demand.

     We operate in a highly competitive, quickly changing environment, and our future success depends on our ability to develop and introduce new products, such as virtualization products and solutions, that our customers choose to buy. If we are unable to develop new products, our business and operating results could be adversely affected. We must quickly develop, introduce and deliver new software and hardware products. These include our Neoware Device Manager, Image Manager and Linux operating system, among others. If we fail to accurately anticipate our customers’ needs and technological trends, or are otherwise unable to complete the development of a product on a timely basis, we will be unable to introduce new products into the market on a timely basis, if at all, and our business and operating results would be materially and adversely affected.

     Once we have developed a new product, we must be able to manufacture new products in sufficient volumes so that we can have an adequate supply of new products to meet customer demand. Forecasting demand requires us to predict order volumes, the correct mix of our products and the correct configurations of these products. We must

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manage new product introductions and transitions to minimize the impact of customer-delayed purchases of existing products in anticipation of new product releases. We must also try to reduce the levels of older product and component inventories to minimize inventory write-offs. If we have excess inventory due to discontinued sales of specific products to new customers, as we had at September 30, 2006, it may be necessary to reduce our prices or write down inventory, which could result in lower gross margins. Additionally, our customers may delay orders for existing products in anticipation of new product introductions, such as may be the case with the introduction of Microsoft’s Vista operation system. As a result, we may decide to adjust prices of our existing products during this process to try to increase customer demand for these products. Our future operating results would be materially and adversely affected if such pricing adjustments were to occur and we were unable to mitigate the resulting margin pressure by maintaining a favorable mix of hardware, software and services, or if we were unsuccessful in achieving cost reductions, operating efficiencies and increasing sales volumes.

The virtualization products and solutions we are developing are based on an emerging technology and the potential market remains uncertain and may cause delays in our sales cycles.

     The virtualization products and solutions we are developing are based on an emerging technology and our success depends on customers perceiving technological and operational benefits and cost savings associated with adopting virtualization solutions. The relatively limited extent to which virtualization solutions have been currently adopted may make it difficult to evaluate the potential market for our virtualization solutions, and slower than expected growth of the market would adversely affect our growth in this area.

     The interest in virtualization in the PC market may result in longer sales cycles for us as customers attempt to resolve their virtualization strategy and delay purchasing decisions pending a final decision on their approach. The longer sales cycle could cause significant variability in our revenues and our operating results in any particular period.

We may not be able to preserve the value of our products’ intellectual property because other vendors could challenge our intellectual property rights.

     Our products are differentiated from those of our competitors by our internally developed technology that is incorporated into our products. We rely upon patent, copyright, trademark and trade secret laws in the United States and similar laws in other countries, and agreements with our employees, customers, suppliers and other parties, to establish and maintain our intellectual property rights. However, any of our intellectual property rights could be challenged, invalidated or circumvented, which could result in costly product redesign efforts, discontinuance of certain product offerings or other competitive harm. Further, the laws of certain countries do not protect our proprietary rights to the same extent as do the laws of the United States. Therefore, in certain jurisdictions in which we operate or in which we have outsourced operations we may be unable to protect our proprietary technology adequately against unauthorized third-party copying or use, which could adversely affect our competitive position and cause us to incur substantial legal fees. 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 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 device products. While we believe that this will enable us to increase our revenues, there is no assurance that we will be successful in this approach. In fact, our implementation of this strategy may result in reductions in gross and operating margins as we compete to attract business. Our inability to successfully implement this strategy could have an adverse impact on our revenues.

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

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• continually develop and introduce new products and services with better prices and performance than offered by our competitors in the PC market;

• 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 in the PC market, 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.

     As the market for our products and services continues to develop, additional companies, including companies with significant market presence in the computer software, hardware and networking industries, could enter the market in which we compete and further intensify competition. In addition, we believe that price competition could become a more significant competitive factor in the future. As a result, we may not be able to maintain our historic prices and margins, which could adversely affect our business, results of operations and financial condition.

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.

In order to continue to grow our revenues, we will need to hire additional executives and personnel and update our IT infrastructure.

     In order to continue to develop and market our line of thin client devices, we will need to hire additional executives and other personnel, including the additional sales and marketing employees we plan to hire to help implement our sales and marketing initiatives. In addition, during fiscal 2007 we experienced turnover in several senior executive and management positions. Competition for employees is significant and we may experience difficulty in attracting qualified people. Additionally, to meet our increased requirements for capacity and efficiency, we are continuing to update our information technology infrastructure. In the event that the updated systems do not meet our needs or are not deployed in a timely manner, our business may suffer.

     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. We generally do not have employment contracts, including

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non-competition agreements, with our key employees. Further, we do not maintain key person life insurance on any of our employees.

If we determine that any of our goodwill or intangible assets, including technology purchased in acquisitions, are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations.

     As a result of our completed and potential future acquisitions, we anticipate that we may have a significant amount of goodwill and other intangible assets, such as product and core technology, related to these acquisitions. We periodically evaluate our intangible assets, including goodwill, for impairment. As of June 30, 2007, we had $37.5 million of goodwill and $8.7 million of intangible assets. We review for impairment annually, or sooner if events or changes in circumstances indicate that the carrying amount could exceed fair value. Fair values are based on discounted cash flows using a discount rate determined by our management to be consistent with industry discount rates and the risks inherent in our current business model. Due to uncertain market conditions and potential changes in our strategy and product portfolio, it is possible that the forecasts we use to support our goodwill could change in the future, which could result in non-cash charges that would adversely affect our results of operations and financial condition. If impairment is deemed to exist, we would write down the recorded value of these intangible assets to their fair values and our stock price and operating results could be materially adversely affected.

We might repatriate cash from our foreign subsidiaries, which could result in additional income taxes that could negatively impact our results of operations and financial position. In addition, if foreign countries’ currency policies limit our ability to repatriate the needed funds, our business and results of operations could be adversely impacted.

     One or more of our foreign subsidiaries may hold a portion of our cash and cash equivalents. Although our intention is to reinvest the earnings of our international subsidiaries permanently, if we need additional cash to acquire assets or technology, or to support our operations in the United States, and if the currency policies of these foreign countries allow us, we might repatriate some of our cash from these foreign subsidiaries to the United States. Depending on our financial results and the financial results of our subsidiaries at the time that the cash is repatriated, we may incur additional income taxes from the repatriation, which could negatively affect our results of operations and financial position. In addition, if the currency policies of these foreign countries prohibit or limit our ability to repatriate the needed funds, our business and results of operations could be adversely impacted.

Although we have generated operating profits for the five fiscal years through our 2006 fiscal year, we have a prior history of losses and incurred operating losses for our 2007 fiscal year, and may experience losses in the future, which could result in the market price of our common stock declining.

     Although we generated operating profits in the five fiscal years through our 2006 fiscal year, we incurred net operating losses in prior periods and for fiscal 2007. We expect to continue to incur significant operating expenses. Our operating expenses are expected to increase in the future reflecting the hiring of additional key personnel as we continue to implement our growth strategy and develop new products and enhance existing products. As a result, we will need to generate significant revenues and gross profit margin 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.

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, or at all, our operations may suffer.

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Because some of our products use Linux as their operating system as well as other open source technologies, the failure of open source developers to enhance and develop open source software that we use 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 and include other open source software. Much of the open source software we use is maintained by third parties. If this group of developers fails to further develop the software, we would have to either rely on other parties to further develop this software or develop it ourselves, which would increase our costs and slow our development efforts.

If our contracts with Citrix and other vendors of software applications were terminated, our business would be materially adversely affected.

     Our thin client devices include our own software, plus software from other companies. We depend on third-party suppliers to provide us with key software applications in connection with our business. If such contracts and relationships were terminated, our revenues would be negatively affected.

Unforeseen environmental costs could impact our future earnings.

     The European Union (“EU”) has adopted a directive to facilitate the recycling of electrical and electronic equipment sold in the EU. The Waste Electrical and Electronic Equipment (“WEEE”) directive directs EU member states to enact laws, regulations and administrative provisions to ensure that producers of electrical and electronic equipment are financially responsible for specified collection, recycling, treatment, and environmentally sound disposal of products placed on the market after August 13, 2005, and from products in use prior to that date that are being replaced. The EU has also adopted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“RoHS”) directive. The RoHS directive restricts the use of lead, mercury, and certain other substances in electrical and electronic products placed on the market in the European Union after July 1, 2006. As a result of these obligations, our product distribution costs may increase and may adversely impact our financial condition. We implemented these directives during fiscal 2006. Similar legislation has been or may be proposed or enacted in other areas, including in the United States and China, the cumulative impact of which could be significant if we are unable to recover our costs to comply with these laws in the price of our products.

Recent regulations related to equity compensation could adversely affect our ability to attract and retain key personnel and affect our operating results.

     We have historically used stock options as a key component of our employee compensation program. We believe that stock options and other long-term equity incentives directly motivate our employees to maximize long-term stockholder value, and, through the use of vesting, encourage employee retention and allow us to provide competitive compensation packages, although in recent periods many of our employee stock options have had exercise prices in excess of our stock price, which could affect our ability to retain or attract present and prospective employees. The adoption of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (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 annual period beginning after June 15, 2005. We adopted SFAS No. 123R in the first quarter of fiscal 2006 and it has had a material impact on our financial statements. In addition, rules implemented by The NASDAQ Global Market requiring stockholder approval for all stock option plans, as well as 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 regulations, 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.

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,

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directors, attorneys and independent registered public accountants. In order to comply with the Sarbanes-Oxley Act and such new rules and regulations, we have recently completed our evaluation of our internal control over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal control over financial reporting. As a result, we have incurred additional expenses and diversion of management’s time, which increased our operating expenses and accordingly reduced our net income. While our evaluation resulted in our conclusion that as of June 30, 2007 our internal control over financial reporting was effective, we cannot be certain as to the outcome of our testing in future periods. If we do not maintain effective internal control over financial reporting, it 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.

Errors in our products could harm our business and our operating results.

     Because our software and thin client device 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;

• unsaleable inventory; 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 and, from time-to-time, we enter into contractual arrangements under which we agree to indemnify a customer for certain losses it may incur. 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.

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: the termination of the merger agreement with HP; 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, or actual changes in, our executive team, our financial condition or results of operations and changes in revenue or earnings estimates; the announcement of new products, technological developments, alliances, acquisitions or divestitures by us or one of our competitors. In addition, general macroeconomic and market conditions unrelated to our financial performance may also affect our stock price.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

     Our principal administrative, marketing and research and development operations are located in King of Prussia, Pennsylvania. Our primary facility consists of approximately 32,000 square feet under a lease with an

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expiration date of October 30, 2012. The annual gross rent for the facility was approximately $345,000 in fiscal 2007.

     We also lease a number of support, sales and development offices in the US, UK, Europe, China and Australia. These office leases comprise a total of approximately 32,000 square feet with lease terms that range from month-to-month to five years. Total rent expense for these facilities was $565,000 for fiscal 2007. We believe that our growth will likely require us to lease additional facilities and that suitable additional space will be available as needed.

Item 3. Legal Proceedings

     We are a defendant periodically in various litigation matters generally arising out of the normal course of business. Although it is difficult to predict the outcome of these cases, we believe that the ultimate outcome will not materially affect our business, financial position, results of operations or cash flows.

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

     None.

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Price Range of Common Stock

     Our common stock trades on the NASDAQ Global Select Market under the symbol NWRE. Prior to August 1, 2006, it traded on the NASDAQ National Market. The following table sets forth the high and low sale prices for our common stock for the periods indicated.

Fiscal 2007	High		Low
First Quarter	$	14.40	$	10.95
Second Quarter	$	15.17	$	10.68
Third Quarter	$	13.59	$	10.04
Fourth Quarter	$	14.01	$	10.08

Fiscal 2006	High		Low
First Quarter	$	17.13	$	10.30
Second Quarter	$	25.31	$	14.85
Third Quarter	$	30.50	$	21.53
Fourth Quarter	$	30.95	$	11.37

     There were approximately 131 holders of record of our common stock as of September 6, 2007.

Dividend Policy

     We have never declared or paid any cash dividends on our capital stock and do not intend to pay any cash dividends in the foreseeable future.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Neoware, Inc., The S&P 500 Index
And The S&P Information Technology Index

*	$100 invested on 6/30/02 in stock or index-including reinvestment of dividends. Fiscal year ending June 30.
	Copyright © 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

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Item 6. Selected Financial Data

     The following table sets forth our selected financial data for the periods indicated. The data set forth below should be read in conjunction with our Consolidated Financial Statements together with the related notes thereto included elsewhere herein and Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” (in thousands, except per share data):

	For the Year Ended June 30,
	2007			2006			2005			2004			2003
Statement of Operations Data:
Net revenues	$	90,401		$	107,219		$	78,784		$	63,165		$	57,522
Gross profit		32,999			44,352			34,214			30,380			25,973
Operating expenses		41,976			35,126			23,926			23,003			16,134
Operating income (loss)		(8,977	)		9,226			10,288			7,377			9,839
Interest income, net		4,158			1,937			859			392			323
Foreign exchange loss		(71	)		(59	)		(283	)		(106	)		—
Loss on investment		—			—			—			—			(300	)
Income (loss) before income taxes		(4,890	)		11,104			10,864			7,663			9,862
Income taxes (benefit)		(2,533	)		4,007			3,425			2,269			3,550
Net income (loss)	$	(2,357	)	$	7,097		$	7,439		$	5,394		$	6,312
Basic earnings (loss) per share	$	(0.12	)	$	.40		$	.47		$	0.34		$	0.46
Diluted earnings (loss) per share	$	(0.12	)	$	.39		$	.46		$	0.34		$	0.43
Weighted average number of common shares outstanding:
Basic		19,990			17,665			15,931			15,683			13,601
Diluted		19,990			18,105			16,202			16,020			14,696

	June 30,
	2007		2006		2005		2004		2003
Balance Sheet Data:
Current assets	$	154,614	$	143,834	$	67,017	$	68,942	$	42,770
Current liabilities		18,548		16,900		16,616		9,883		7,495
Working capital		135,677		126,934		50,401		59,059		35,275
Total assets		208,383		199,573		108,042		90,607		54,376
Total stockholders’ equity		188,405		181,602		89,969		80,489		46,627

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Recent Developments

     On July 23, 2007, we entered into an Agreement and Plan of Merger, or merger agreement, with Hewlett-Packard Company, or HP, and Narwhal Acquisition Corporation, a wholly owned subsidiary of HP, or the merger sub, pursuant to which HP has agreed to acquire all of the issued and outstanding shares of our common stock for a cash purchase price of $16.25 per share. The acquisition will be accomplished by the merger of merger sub with and into Neoware, with Neoware surviving the merger as a wholly owned subsidiary of HP. The aggregate purchase price will be approximately $214.0 million, net of our estimated cash and cash equivalents and short-term investments balance of $120.0 million as of August 31, 2007. Outstanding Neoware stock options having an exercise price less than $16.25 per share will become fully vested and converted into the right to receive an amount equal to (x) the aggregate number of shares that were issuable upon exercise of the option immediately prior to the effective time of the merger and (y) the excess, if any, of $16.25 over the per share exercise price. Options having an exercise price per share equal to or greater than $16.25 per share will be cancelled without payment or

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consideration. Each outstanding award of Neoware restricted stock held by an employee who becomes an employee of HP immediately after the merger that is subject to vesting or other lapse restrictions and has not otherwise been forfeited immediately prior to the merger will (a) be subject to, and will become vested upon, terms and conditions that are substantially similar to those currently applicable to such restricted stock, (b) represent the right to receive the merger consideration as each share vests, subject to applicable withholding requirements, and (c) continue to be subject to the other terms and conditions of the applicable initial documentation for such restricted stock. The closing of the merger is subject to customary closing conditions, including regulatory review and Neoware stockholder approval. The merger agreement contains certain termination rights and provides that, upon the termination of the merger agreement under specified circumstances, Neoware will be required to pay HP a termination fee of $10.0 million. The merger agreement provided for a post-signing “go-shop” period which permitted Neoware to solicit certain competing acquisition proposals for 20 business days, concluding at 12:01 am, New York City time, on August 18, 2007. No competing proposals were received. The parties anticipate that the transaction will be consummated in the fourth quarter of calendar year 2007. We believe that the planned merger will be consummated; however the outcome cannot be predicted with certainty. For additional information regarding potential risks and uncertainties associated with the pending merger, please see the information under the caption “Risk Factors” within Part I, Item 1A.

     On August 10, 2007, we filed a preliminary proxy statement and other relevant materials with the Securities and Exchange Commission in connection with the acquisition of Neoware by HP and on August 28, 2007 we filed a definitive proxy statement with the SEC in connection with such acquisition. The definitive proxy statement was mailed to all of our stockholders and will, with the other relevant documents, be available free of charge at the SEC’s website at www.sec.gov. In addition, investors and stockholders may obtain free copies of the documents filed with the SEC from Cameron Associates, 1370 Avenue of the Americas, New York, NY 10019, +1 212 245 8800. Before making any voting or investment decision with respect to the acquisition, investors and stockholders of Neoware are advised to read the definitive proxy statement and the other relevant materials when and if completed because they will contain important information about the acquisition. The definitive proxy statement contains important information regarding the merger, and we urge all of our stockholders to read the definitive proxy statement carefully and in its entirety.

Overview

     We are a leading global provider of thin client computing solutions. We generate revenue primarily from sales of thin client devices, which include the device and related software, and to a lesser extent from our software sold on a standalone basis for use on thin client devices, personal computers and servers and complementary services such as integration, training and maintenance utilizing our global integration and development centers. To date, sales of standalone software products and services have not exceeded 10% of our consolidated revenues for any period. We sell our products worldwide through our alliances with IBM, Lenovo, NEC, and ClearCube, and other indirect channels such as distributors, resellers and systems integrators, and to a lesser extent through direct sales. Our customers, including those we serve through our alliance and distribution partners, include AutoZone, CVS, Daimler Chrysler, France Telecom, Lockheed Martin, Royal Bank of Canada and the VA Medical Centers. Our international sales are primarily made through distributors and are collectible primarily in US dollars, while the associated operating expenses are payable in foreign currencies. In addition to our principal headquarters in the United States, we maintain offices in the United Kingdom, Germany, France, Austria, China, and Australia.

     Net revenues from sales outside of the United States, primarily in Europe, the Middle East and Africa (“EMEA”), based on the location of our customers, were as follows:

	Year Ended June 30,
	2007			2006			2005
International net revenues	$	37,064		$	35,226		$	31,682
Percentage change over prior period		5	%		11	%		13	%
Percentage of net revenue		41	%		33	%		40	%

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     Strategy

     The market for thin client devices is part of the enterprise personal computer (PC) market. We market our thin client devices as alternatives to PCs in certain target markets. Our strategies are to focus on selling thin client software and device products that compete effectively with PCs, increasing sales to small, medium and large enterprise customers, through our relationships with IBM, Lenovo and other resellers, as well as directly to end-users. We have been executing marketing initiatives designed to grow the thin client segment of the PC industry. We utilize third parties that we believe have strong market positions in the server-based computing market to expand our sales and marketing efforts, which allows us to develop new customer relationships as well as gain access to new markets.

     Acquisitions

     In November 2005, we completed the acquisition, pursuant to a merger, of Maxspeed Corporation, a provider of thin client solutions, headquartered in Palo Alto, California, with research, development and sales offices in Shanghai, China.

     In October 2005, we acquired the thin client business of TeleVideo, Inc., including a trademark license, product brands, customer lists, customer contracts and non-competition agreements.

     In April 2005, we acquired all of the outstanding shares of Qualystem Technology S.A.S., a provider of software that streams Windows^® and application components on-demand from a server to other servers, personal computers, and thin clients. As a result of the Qualystem acquisition, we acquired intellectual property, technology and non-compete agreements.

     In March 2005, we acquired the ThinTune thin client business of eSeSIX Computer which included customer lists, intellectual property and technology, and also entered into reseller, supplier and non-competition agreements and we acquired all of the outstanding shares of eSeSIX Tech, eSeSIX Computer’s development and engineering affiliate. eSeSIX Computer, together with eSeSIX Tech are collectively referred to as the ThinTune thin client business.

     In January 2005, we acquired all of the outstanding shares of Mangrove Systems S.A.S., a provider of Linux software solutions. As a result of the Mangrove acquisition, we acquired customer lists, intellectual property and technology and non-compete agreements.

     In September 2004, we acquired the thin client business of Visara, including customer lists, intellectual property and technology, and also entered into reseller, supplier and non-competition agreements.

     Our acquisition strategy is to integrate acquired businesses into our core business to generate increased revenues, as well as synergies for the company as a whole. This generally involves transitioning channel partners and end customers to our core products and utilizing acquired development and sales resources to support our core development, sales and marketing activities. Accordingly, we do not have the ability to accurately report revenue from our acquired businesses.

     Financial Highlights

     Net revenue, gross profit margin, and earnings per share are key measurements of our financial results. For fiscal 2007, net revenue was $90.4 million, a decline of 16% from fiscal 2006. Gross profit margin was 37% for fiscal 2007 as compared to 41% in fiscal 2006. The revenue decrease was the result of decreased sales primarily to several large enterprise customers in the US. The gross profit margin percentage decrease was primarily the result of competitive pricing resulting in reduced average selling prices (ASP), an increasing mix of XPe based product which carries a lower gross profit margin, lower revenue from direct software sales and higher overhead expenses. Diluted loss per share was $0.12 for fiscal 2007, compared to a net income of $0.39 in fiscal 2006, as a result of decreased gross profit from lower revenue and lower gross profit margins, increased operating expenses, increased stock based compensation and increased cost of amortization of acquired intangibles. Stock-based compensation expense included in these results was $102,000 in cost of products sold and $4.4 million in operating expense for fiscal 2007, and amortization of intangibles was $1.4 million in cost of products sold and $2.4 million for fiscal

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2007. Our fiscal 2007 results were also affected by approximately $1.7 million of severance costs (included in operating expenses) associated with senior management turnover and $874,000 of abandoned acquisition costs for an acquisition that did not close.

     For fiscal 2006, net revenue was $107.2 million, an increase of 36% from fiscal 2005. Gross profit margin was 41% for fiscal 2006 as compared to 43% in fiscal 2005. The revenue increase was the result of increased sales of our products, primarily to large enterprise customers. The gross profit margin percentage decrease was primarily the result of significant sales of the Neoware e900 thin client product in fiscal 2006. The Neoware e900 has higher average selling prices, higher gross profit dollars per unit sold, and lower percentage gross margins than other Neoware thin client devices. Diluted earnings per share decreased to $0.39 for fiscal 2006, compared to $0.46 in fiscal 2005, as a result of increased gross profit from revenue growth, offset by stock-based compensation expense, increased operating expenses, and increased cost of amortization of acquired intangibles, as well as a larger number of fully diluted shares due to a stock offering completed in February 2006. Stock-based compensation expense included in these results was $86,000 in cost of products sold and $3.3 million in operating expense for fiscal 2006, and amortization of intangibles was $3.2 million and $1.8 million for fiscal 2006 and 2005, respectively. Our fiscal 2006 results were also adversely affected by the significant financial difficulties of one of our German distributors, which caused us to reserve revenue of $675,000 invoiced in the fourth quarter of fiscal 2006 and to add $385,000 to our reserve for doubtful accounts.

     As of June 30, 2007, our cash, cash equivalents and short- term investments were $121.5 million, compared to $114.1 million at June 30, 2006. During fiscal 2007 we generated $3.7 million of cash from operations, received $1.7 million from the settlement of escrow matters related to the Maxspeed acquisition and received $2.5 million of cash from the exercise of stock options and related excess tax benefits.

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

• Stock-based compensation

     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 for further discussion of our accounting policies and estimates. Our senior management has reviewed our critical accounting policies and estimates and Management Discussion and Analysis with its Audit Committee.

Revenue Recognition

     For each type of arrangement, we make judgments regarding: the fair value of multiple elements contained in our arrangements, whether fees are fixed or determinable, whether collectibility is probable, and the 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 devices, which include the device and related software, maintenance and technical support as well as standalone software products and services. We follow AICPA Statement of Position No. 97-2, “Software Revenue Recognition” (“SOP 97-2”) for revenue recognition. 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.

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     Beginning in March 2007 changes were introduced to our post-contract support services whereby the cost to provide these services are not expected to be insignificant and unspecified upgrades and enhancements are expected to be more than minimal and infrequent. As a result, in March 2007 we began to defer revenue related to these services from sales of our products which include one year of post contract support services. Prior to March 2007 revenue related to post-contract support services was generally recognized with the initial product sale when the fee was included with the initial product fee, post-contract services were for one year or less, the estimated cost of providing such services during the arrangement was insignificant, and unspecified upgrades and enhancements offered during the period were expected to continue to be minimal and infrequent. Revenue from extended warranty and stand alone post-contract support service contracts is recorded as deferred revenue and subsequently recognized over the term of the contract. Vendor specific objective evidence of these amounts is determined by the price charged when these elements are sold separately.

     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 tangible and intangible assets, consisting of acquired technologies, distributor and customer relationships, tradenames and non-compete agreements 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. Our annual impairment date is June 30. 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.

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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. The impairment loss is the excess of the carrying amount of the asset over its fair value.

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

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

• 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.

     In the fourth quarter of fiscal 2007 we determined that certain tradenames were no longer going to be utilized and we wrote off the remaining net book value by recording additional amortization expense of $250,000. At June 30, 2007, goodwill and intangible assets were $37.5 million and $8.7 million, respectively. A decrease in the 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 expense 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.

Stock-Based Compensation

     Prior to June 30, 2005, we accounted for employee stock option plans based on the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and had adopted the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No.123), as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (SFAS No. 148). Accordingly, compensation cost for stock options was measured as the excess, if any, of the quoted market price of the Company’s stock at the grant date over the amount an employee must pay to acquire the stock. The Company granted stock options with exercise prices equal to the market price of the underlying stock on the date of grant; therefore, the Company did not record stock-based compensation expense under APB Opinion No. 25.

     In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, “Share-Based Payment,” (SFAS No. 123R) to require that compensation cost relating to share-based payment arrangements be recognized in financial statements. As of July 1, 2005, we adopted SFAS No. 123R using the modified prospective

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method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options are determined using the Black-Scholes valuation model, which is consistent with our valuation techniques previously utilized for stock options in footnote disclosures required under SFAS No. 123, as amended by SFAS No. 148. Such fair value is recognized as expense over the service period, net of estimated forfeitures. The adoption of SFAS No.123R resulted in no cumulative change in accounting as of the date of adoption.

     On March 29, 2005, the Securities and Exchange Commission published Staff Accounting Bulletin No. 107 (SAB No. 107), which provides the Staff’s views on a variety of matters relating to stock-based payments. SAB No. 107 requires stock-based compensation to be classified in the same expense line items as cash compensation. Information about stock-based compensation included in the results of operations is as follows (in thousands):

	Year Ended June 30,
	2007		2006
Cost of revenues	$	102	$	86
Selling and marketing		1,353		1,238
Research and development		376		394
General and administrative		2,705		1,668
	$	4,536	$	3,386

     SFAS No. 123R provides that income tax effects of share-based payments are recognized in the financial statements for those awards which will normally result in tax deductions under existing tax law. Under current U.S. federal and U.K. tax laws, we would receive a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement. We do not recognize a tax benefit for compensation expense related to incentive stock options (ISOs) unless the underlying shares are disposed of in a disqualifying disposition. Accordingly, compensation expense related to ISOs is treated as a permanent difference for income tax purposes which increases the effective tax rate.

     For stock-based compensation arrangements we make judgments about the fair value of the awards, including the expected term of the award, volatility of the underlying stock and estimated forfeitures, which impact the amount of compensation expense recognized in the financial statements.

Results of Operations

Net Revenues (in thousands):

	2007			2006			2005
Net revenue	$	90,401		$	107,219		$	78,784
Percentage change over prior period		(16	)%		36	%		25	%

     We derive revenues primarily from the sale of thin client devices, which include a device and related software and services.

     Net revenues decreased in fiscal 2007 primarily due to lower sales of our products to our top five US based large enterprise customers that contributed $6.2 million in fiscal 2007 compared to sales of $31.5 million in fiscal 2006. We experienced increases in other areas of our business including a 19% increase in our SMB and distributor groups for fiscal year 2007 and an increase in our EMEA based business compared to fiscal 2006. Unit sales of thin client devices in fiscal 2007 decreased 10% compared to fiscal 2006 primarily due to decreased sales to large enterprise customers. Average selling prices in fiscal 2007 decreased 8% compared to fiscal 2006 due to a change in product mix and competitive pricing pressure. Average selling prices will vary depending on product mix and competitive pricing situations.

     The increases in net revenues in fiscal 2006 over fiscal 2005 is due to an increase in market acceptance of thin client computing, an increase in our customer base from our selling and marketing activities, including an increase

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in sales to large enterprise customers and an increase in our business with IBM and Lenovo. Unit sales of thin client devices increased 23% in fiscal 2006 over fiscal 2005. Average selling prices increased slightly in fiscal 2006 due primarily to the change in product mix primarily resulting from the introduction of the Neoware e900, which carries a much higher selling price than our other thin client devices. Average selling prices declined slightly in fiscal 2005 due to changes in product mix, our strategy to reduce selling prices to increase sales to large enterprise customers and increased competition. Average selling prices will vary depending on product mix and competitive pricing situations. The Neoware e900 was introduced in fiscal 2006 and contributed 11% of fiscal 2006 net revenues.

     The following table sets forth sales to customers comprising 10% or more of our net revenue:

	Year Ended June 30,
	2007			2006			2005
Net revenues
North American distributor		11	%		*			10	%
Lenovo		*			17	%		5	%
North American customer		*			11	%		*
IBM		*			*			14	%

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

     Net revenues from sales outside of the United States, primarily in Europe, the Middle East and Africa (“EMEA”), based on the location of our customers, were as follows (in thousands):

	Year Ended June 30,
	2007			2006			2005
International net revenues	$	37,064		$	35,226		$	31,682
Percentage change over prior period		5	%		11	%		13	%
Percentage of net revenue		41	%		33	%		40	%

     International net revenues increased as a percentage of net revenues in fiscal 2007 compared to fiscal 2006 due to a decline in revenue in the United States and to increased revenue in EMEA due to expanded sales and marketing resources. International net revenues declined as a percentage of net revenues in fiscal 2006 compared to fiscal 2005 due to higher revenue growth in the United States, primarily as a result of an increase in sales to large enterprise customers in the United States. During the fourth quarter of fiscal 2006, one of our German distributors experienced significant financial difficulties and has since declared insolvency, which, in the fourth quarter, caused us to reverse revenues of $675,000 invoiced in April through June 2006 and to add $385,000 to our reserve for doubtful accounts.

     Cost of Revenues and Gross Profit Margin (in thousands):

	2007			2006			2005
Cost of products	$	56,035		$	61,607		$	43,833
Percentage change over prior period		(9	)%		40	%		35	%
Amortization of intangibles	$	1,367		$	1,260		$	737
Percentage change over prior period		8	%		71	%		89	%
Total cost of revenue	$	57,402		$	62,867		$	44,570
Percentage change over prior period		(9	)%		41	%		36	%
Gross profit margin		37	%		41	%		43	%

     Cost of revenues consists primarily of the cost of thin client devices, which include a device and related software, and, to a lesser extent, overhead including salaries and related benefits for personnel who fulfill product orders, delivery services, amortization of intangibles related to acquisitions, distribution costs, and beginning in fiscal 2006, stock based compensation expense.

     The decrease in cost of revenues in fiscal 2007 is primarily the result of lower unit sales offset by increased overhead costs including a $1.5 million charge for inventory obsolescence related to the Maxspeed acquisition, and

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higher labor and third party costs to support product manufacturing and service requirements. Stock-based compensation expense included in cost of revenues was $102,000 in fiscal 2007.

     The increase in cost of revenues in fiscal 2006 is primarily the result of increased unit sales and to a lesser extent to increased amortization of intangibles related to acquisitions completed in fiscal 2005 and fiscal 2006, change in product mix with the introduction of the Neoware e900 thin client product in fiscal 2006, which carries a higher unit cost, increased freight costs related to air shipments and fuel cost increases and a charge of $484,000 related to the impact of the write up of finished goods inventory to fair value related to the Maxspeed acquisition. Stock-based compensation expense included in cost of revenues was $86,000 in fiscal 2006.

     The decrease in gross profit margin in fiscal 2007 is primarily the result of declining average selling prices due to competitive pressures, a change in product mix to a larger portion of XPe based products, which generally carries a lower gross profit margin and higher overhead expense due to increase costs of labor, inventory obsolescence charges and a smaller revenue base in relation to the overall overhead costs.

     The decrease in gross profit margin in fiscal 2006 is primarily the result of increased sales of the Neoware e900 thin client device, which has a higher selling price, higher gross profit dollars per unit sold, but a lower gross profit margin than our other thin client devices.

     Sales and Marketing (in thousands):

	2007			2006			2005
Sales and marketing	$	19,541		$	16,920		$	12,118
As a percentage of net revenues		22	%		16	%		15	%
Percentage change over prior period		15	%		40	%		(3	)%

     Sales and marketing expenses consist primarily of salaries, related benefits, commissions, advertising, direct marketing, the cost of trade shows and other costs associated with our sales and marketing efforts and beginning in fiscal 2006, stock-based compensation expense.

     The increase in sales and marketing expenses in fiscal 2007, as compared to fiscal 2006, was due to a $896,000 increase in employee and contractor compensation costs. In addition, we spent $909,000 more in outside marketing services, including expenses for advertising and promotion and incurred $545,000 in severance costs due to senior level staff turnover.

     The increase in sales and marketing expenses in fiscal 2006, as compared to fiscal 2005, was due to $1.2 million of stock based-compensation expense, and an increase in employee headcount resulting in an additional $2.2 million of employee compensation cost. In addition, we spent $644,000 more in outside marketing services during fiscal 2006, including expenses for consultants and advertising and promotion.

Research and Development (in thousands):

	2007			2006			2005
Research and development	$	6,899		$	6,030		$	3,850
As a percentage of net revenues		8	%		6	%		5	%
Percentage change over prior period		14	%		57	%		38	%

     Research and development expenses consist primarily of salaries, related benefits, and other engineering related costs and beginning in fiscal 2006, stock-based compensation expense.

     The increase in research and development in fiscal 2007 is primarily the result of an increase in employee headcount and $231,000 of charges for severance costs due to senior level staff turnover.

     The increase in research and development in fiscal 2006 is primarily the result of an increase in employee headcount primarily from acquisitions resulting in an additional $1.5 million of employee compensation costs and $394,000 related to the impact of stock-based compensation expense.

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General and Administrative (in thousands):

	2007			2006			2005
General and administrative	$	12,259		$	10,211		$	6,866
As a percentage of net revenues		14	%		10	%		9	%
Percentage change over prior period		20	%		49	%		25	%

     General and administrative expenses consist primarily of salaries, related benefits, corporate insurance, such as director and officer liability insurance, fees related to the cost of operating as a public company and fees for legal, audit and tax services, and beginning in fiscal 2006, stock based compensation expense.

     The increase in general and administrative expenses in fiscal 2007 is primarily the result of an increase in employee related costs, $876,000 of charges for severance costs and $1.0 million increase in stock-based compensation expense due to senior level staff turnover and modification of our former CEO’s stock options.

     The increase in general and administrative expenses in fiscal 2006 is primarily the result of $1.7 million of stock-based compensation expense, a $269,000 increase in franchise and capital stock taxes due to revenue and asset growth, a $385,000 increase in the bad debt expense primarily related to the insolvency of a European distributor, $210,000 in higher facility costs due to the relocation into a new facility and increased costs related to managing a larger world-wide organization, partially offset by a reduction of $436,000 in consulting services primarily due to lower third party consulting costs relating to compliance with Section 404 of the Sarbanes-Oxley Act.

Amortization of Intangibles (in thousands):

	2007			2006			2005
Amortization of intangibles	$	2,403		$	1,965		$	1,058
As a percentage of net revenues		3	%		2	%		1	%
Percentage change over prior period		22	%		86	%		61	%

     Amortization of intangibles increased in fiscal 2007 and fiscal 2006 due to an increase in amortization expense related to acquired intangible assets related to acquisitions and the $250,000 write off of certain tradenames. As of June 20, 2007, we had unamortized intangible assets in the net amount of $8.7 million.

Abandoned Acquisition Costs

     During fiscal 2007, we incurred $874,000 in acquisition-related expenses which were related to acquisitions that were not consummated. These costs consisted primarily of advisory, legal, third party due diligence and accounting fees.

Interest Income, Net (in thousands):

	2007			2006			2005
Interest income, net	$	4,158		$	1,937		$	859
As a percentage of net revenues		5	%		2	%		1	%
Percentage change over prior period		115	%		125	%		119	%

     Interest income is generated from cash, cash equivalent and investment balances generally invested in tax-free, short term instruments. Interest income increased in fiscal 2007 and 2006 due to earnings on increased cash and investment, generated primarily from the common stock offering completed in February 2006 and to a lesser extent cash provided from operations.

Income Taxes (in thousands):

	2007			2006			2005
Income tax expense (benefit)	$	(2,533	)	$	4,007		$	3,425
Effective tax rate		52	%		36	%		32	%

     Our effective tax rate in fiscal 2007 was impacted by the net loss, the impact of federal tax free investment income, the Extraterritorial Income Exclusion (“EIE”), from foreign income taxes in lower tax rate countries, and

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non-deductible stock-based compensation expense. During fiscal 2007, we benefited from the impact of federal tax free investment income, the Extraterritorial Income Exclusion (“EIE”), and from foreign income taxes in lower tax rate countries. The EIE provides a tax benefit by excluding a portion of income from qualified foreign sales from gross income, however the benefit was phased out at the end of calendar 2006.

     Our effective tax rate in fiscal 2006 increased from fiscal 2005 primarily due to the non-deductible portion of stock-based compensation related to SFAS No. 123R. During fiscal 2006, we benefited from the impact of federal tax free investment income, the Extraterritorial Income Exclusion (“EIE”), the initial year impact of the manufacturing deduction for the Jobs Creation Act and from foreign income taxes in lower tax rate countries. The EIE provides a tax benefit by excluding a portion of income from qualified foreign sales from gross income, however the benefit was phased out at the end of calendar 2006.

Liquidity and Capital Resources

     As of June 30, 2007, we had net working capital of $135.7 million. Our principal sources of liquidity include $121.1 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 fiscal 2007, 2006 and 2005.

     Cash and cash equivalents increased by $56.7 million during fiscal 2007, due to $3.7 million generated from operations, $49.7 million from net sales of short-term investments, $1.7 million from settlement of outstanding escrow matters related to the Maxspeed acquisition $2.5 million from stock options and related tax benefits, partially offset by $1.7 million in purchases of property and equipment

     Cash flows provided by operating activities: Cash flow from operating activities in fiscal 2007 was $3.7 million compared to $8.4 million in fiscal 2006 and $7.2 million in fiscal 2005. These cash flows related primarily to net income (loss) adjusted for non-cash charges, including depreciation and amortization, stock-based compensation, the impact of deferred income taxes and net changes in cash flow from our operating assets and liabilities including accounts receivable, inventory and accounts payable and accrued expenses.

     Cash flows used in investing activities: In fiscal 2007 we incurred $1.7 million of expenditures for property and equipment primarily due to the purchase and implementation of a new ERP system and in fiscal 2006, we incurred $1.5 million of expenditures for property and equipment primarily due to relocation of the corporate headquarters and investments in internal systems.

     Cash flows used in investing activities in fiscal 2006 and fiscal 2005 included cash used for acquisitions of businesses totaling $17.6 million in fiscal 2006 and $20.9 million in fiscal 2005. Other investing activities included purchases and sales of short-term investments, which we typically purchase with surplus cash and purchases of property and equipment.

     Cash flows provided by financing activities: Cash flows from financing activities in fiscal 2007 relate primarily to stock option activity including related income tax benefits. Cash flows from financing activities in fiscal 2006 included $71.2 million of net proceeds from issuance of common stock, net of expenses. In February 2006, we sold 3,000,000 shares of our common stock at a public offering price of $25.25 per share. Net proceeds totaled $71.2 million after transaction costs. The exercise of employee stock options and related excess tax benefits provided $9.6 million and $1.4 in fiscal 2006 and 2005, respectively.

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     Contractual Obligations

     The following is a summary of our contractual obligations as of June 30, 2007 (in thousands):

					2009 and		2011 and		2013 and
	Total		2008		2010		2012		thereafter
Product purchase obligations	$	17,270	$	17,270	$	—	$	—	$	—
Operating leases		3,164		961		1,180		880		143
Other purchase obligations		1,030		1,030		—		—		—
	$	21,464	$	19,261	$	1,180	$	880	$	143

     The above table excludes contingent amounts payable pursuant to arrangements with executive officers which provide for severance obligations of up to an aggregate of $2.2 million.

     In connection with our acquisition of Maxspeed, we recorded a restructuring reserve of $1.4 million as of the acquisition date. The remaining balance will be used to cover agreed upon lease obligations with any residual balance payable to the Maxspeed shareholders after the expiration of the lease.

     We expect to fund current operations and other cash expenditures through the use of available cash, cash from operations, funds that may be available under our Offering Basis Loan Agreement 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.

     Off Balance Sheet

     Our guarantee agreements are discussed in Note 7 to the consolidated financial statements.

Recent Accounting Pronouncements

     See Recent Accounting Pronouncement note to the consolidated financial statements for information concerning our implementation and impact of new accounting standards.

     This annual report on Form 10-K contains statements that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements regarding: our acquisition of businesses and technologies; the growth of thin client computing, including Linux thin clients and virtualization; our continued investment in technology developments; our relationships with our alliances and channel partners; the expansion of our global organization and the growth of international markets; our initiation of a patent program to protect our proprietary software; our average selling prices depending on product mix and competitive pricing; the availability of cash or other financing sources to fund future operations; and cash expenditures and acquisitions . These forward-looking statements involve risks and uncertainties. The factors set forth below, and those contained in “Risk Factors” 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 attract and retain enterprise customers; our ability to maintain our relationship with our channel partners, including IBM and Lenovo, 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, including the former employees of the businesses we acquired; our success in implementing our product development and channel program initiatives and the rebuilding of our infrastructure within our planned timeframe; our ability to retain our newly-appointed key staff members and to maintain our relationships with our channel partners; insufficient resources to fund our virtualization initiatives; the lack of growth in thin client computing; the economic viability of our suppliers and channel partners, adverse changes in customer order patterns, our ability to identify future acquisitions and to successfully consummate and integrate recently completed and future acquisitions, our ability to protect our proprietary software, increases in the cost of thin client appliances and components, 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.

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Item 7A. 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 which primarily affects our investment portfolio. We invest in instruments that meet high credit quality standards, as specified in our investment policy.

     As of June 30, 2007, cash equivalents and short-term investments consisted primarily of corporate notes and government securities, auction rate securities, 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.

     We have operations in the United Kingdom, Germany, France, Austria, China and Australia that are subject to foreign currency fluctuations. As currency rates change, translation of the foreign entities’ statements of operations from local currencies to U.S. dollars affects year-to-year comparability of operating results. Additionally, we have investments in each of these countries for which we recognize unrealized gains and losses through other comprehensive income within stockholders’ equity for foreign currency fluctuations. A substantial portion of our non-US expenses include salary, benefits and local operating expenses and are transacted in local currencies, primarily Euros and British Pounds. Future cash flows are subject to volatility caused by changes in currency exchange rates. To date we have not established a hedging program.

Item 8. Financial Statements and Supplementary Data

     The financial statements required by this item are submitted as a separate section of this Form 10-K. See Item 15 for a listing of consolidated financial statements provided in the section titled “Financial Statements.”

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     None

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

     We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of June 30, 2007. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective such that the information required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and (ii) is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding disclosure..

     Management’s Annual Report on Internal Control Over Financial Reporting appears on page 99.

Changes in Internal Control Over Financial Reporting

     There have not been any changes in our internal control over financial reporting during the quarter ended June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

     None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance of the Registrant

     Our Board of Directors is currently comprised of seven members.

Name	Age	Position
Klaus P. Besier	56	President, Chief Executive Officer and Director
Dennis Flanagan(1)(2)	59	Chairman of the Board and Director
David D. Gathman(1)	60	Director
Leslie Hayman(3)	60	Director
John P. Kirwin, III(3)(4)	51	Director
Christopher G. McCann(4)	46	Director
John M. Ryan (1)(3)(4)(5)	72	Director

(1)	Member of the Audit Committee.
(2)	Has served as Chairman of the Board since January 29, 2007.
(3)	Member of the Compensation and Stock Option Committee.
(4)	Member of the Governance and Nominating Committee.
(5)	Served as lead independent director until January 29, 2007.

The following are biographies of each current member of the Board.

     Mr. Besier has been our Chief Executive Officer since October 31, 2006, President since July 12, 2006 and a member of our Board of Directors since December 2005. Mr. Besier served as President and Chief Executive Officer of FirePond, Inc., a global provider of e-business solutions for managing multi-channel selling, from 1997 until his retirement in December 2003 after the sale of the company. Prior to joining FirePond, he held various management positions, including the position of Chief Executive Officer of SAP America, Inc., a subsidiary of SAP AG, a provider of business application software. Mr. Besier holds a bachelor’s degree in business management and finance from the University of Economics in Berlin.

     Mr. Flanagan has served as a director of Neoware since December 2005, and as Chairman of the Board since January 2007. He has been the Chief Operating Officer of The Ayers Group, Inc., a provider of human resources services to Fortune 500 and financial services companies, since January 2004. Before joining The Ayers Group, Inc., Mr. Flanagan was President and Chief Executive Officer of Sengen, a custom software development company, until its sale in 2003. From 1986 to 2001, Mr. Flanagan served in numerous capacities within the sales, marketing and operations enterprises, including his position as President and Chief Executive Officer, of Oki Data America, a subsidiary of Oki Data Corporation of Japan and a leading provider of innovative products, services and solutions for the digital imaging and print management needs of commercial entities. Mr. Flanagan is a trustee of Quinnipiac University and the Samaritan Hospice, a member of the CEO Council for Growth in the Philadelphia region and a former Chairman of the Chamber of Commerce of Southern New Jersey.

     Mr. Gathman has served as a director of Neoware since December 2002. He has been a business consultant since January 2007. He served as the Senior Vice President and Chief Financial Officer of SunGard Higher Education Inc., a wholly-owned subsidiary of Sungard Data Systems, Inc. and leading provider of technology solutions for colleges and universities of all sizes and levels of complexity, from April 5, 2004 to January 2007. Prior to his position at SunGard Higher Education Inc., Mr. Gathman had been Vice President and Chief Financial Officer of Targeted Diagnostics & Therapeutics, Inc., which develops molecular-based technologies for the detection, diagnosis and treatment of colorectal cancer, gastrointestinal cancers and certain infectious diseases, since May 2002. From February 2001 until May 2002, Mr. Gathman served as the Senior Vice President and Chief Financial Officer of the Federal Reserve Bank of Philadelphia. Prior to that, Mr. Gathman was Chief Financial Officer of Internet Capital Group, Inc., an internet company actively engaged in business-to-business e-commerce through a network of partner companies, from January 1999 until September 2000, and Executive Vice President and Chief Financial Officer and a member of the Board of Directors of Integrated Systems Consulting Group, Inc., an information services consulting firm, from March 1994 until December 1998. Mr. Gathman is a director of

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eResearch Technology, Inc., a provider of technology-based products and services that enable the pharmaceutical, biotechnological, medical device, and contract resource companies to efficiently collect, interpret, and distribute cardiac safety and clinical data.

     Mr. Hayman has served as a director of Neoware since April 2007. He has served as the Ambassador in the Office of the CEO at SAP AG since 2005. Prior to that, he was employed by SAP AG in a number of other capacities since 1994 including Global Head of Human Resources, Chairman and CEO EMEA, President and CEO Asia Pacific, Managing Director Australia & New Zealand and Member of the Extended Board SAP AG. Prior to joining SAP, Mr. Hayman served as the CEO of Australia and New Zealand for Sun Microsystems. He had previously held leadership positions at Caylx Software, Data General and Digital Equipment Corporation.

     Mr. Kirwin has served as a director of Neoware since December 2002. He has been a principal in Argosy Partners, a manager of private investment funds, since 1989. Argosy Partners manages private investment funds with approximately $350.0 million of capital, including Argosy Investment Partners, L.P., Argosy Investment Partners II, L.P. and Argosy Investment Partners III, L.P., which are small business investment companies with an aggregate of approximately $200.0 million under management. Mr. Kirwin joined Argosy Partners on a full-time basis in January 1996 and prior to that was a corporate and securities attorney for 14 years. Mr. Kirwin holds a Juris Doctor, Order of the Coif, from the National Law Center of George Washington University and a Bachelor of Arts from Dickinson College.

     Mr. McCann has served as a director of Neoware since December 1998. He is a director of 1-800-FLOWERS.COM, a florist company that operates nationwide through franchised retail stores, telecenters and the internet, and has been its President since September 2000. From 1988 to September 2000, he served as Senior Vice President of 1-800-FLOWERS.COM. Mr. McCann is responsible for overseeing operations of all of the 1-800-FLOWERS.COM’s brands, service centers, retail and franchised stores and for its Interactive Services Division. Prior to his association with 1-800-FLOWERS.COM, he was President of Flora Plenty, a floral retail chain located in the New York metropolitan area. Mr. McCann is a director of Bluefly, Inc., a high-end internet retailer that sells designer apparel, accessories and home products at discount prices, and a member of the Board of Trustees of Marist College.

     Mr. Ryan has served as a director of Neoware since March 1995. He has been a principal in Devon Hill Ventures, a venture investing and consulting firm focusing on technology investments, since 1987, and has been a director of approximately twenty privately- and publicly-held information technology companies in which Devon Hill Ventures has invested. Mr. Ryan was the founder of SunGard Data Systems, Inc., formerly a publicly-held computer services company that has recently been taken private, and served as its Chairman and Chief Executive Officer from 1976 to 1987.

Board Independence and Expertise

     Our Board of Directors is comprised solely of outside independent directors, with the exception of the Chief Executive Officer. The Board holds executive sessions of its independent directors following each regularly scheduled meeting of the Board. The standing committees of the Board of Directors are the Compensation and Stock Option Committee, or the Compensation Committee, the Audit Committee and the Governance and Nominating Committee. Each of the current members of the Compensation Committee, the Audit Committee and the Governance and Nominating Committee are “independent” as defined in Rule 4200 of the Marketplace Rules of The NASDAQ Global Market, and, with respect to the Audit Committee, the Sarbanes-Oxley Act of 2002.

     Board Membership Criteria

     As the composition of the Board of Directors demonstrates, Neoware values experience in business, educational achievement, moral and ethical character, diversity, skills, accountability and integrity, financial literacy, high performance standards and industry knowledge. The Governance and Nominating Committee is responsible for screening, selecting and recommending to the Board candidates for election as directors.

     Audit Committee, Compensation Committee and Governance and Nominating Committee Independence

     The Board of Directors, in its business judgment, has determined that each of the members of the Audit

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Committee meets the independence requirements of the Securities and Exchange Commission (SEC) and the NASDAQ Global Market. The Audit Committee regularly holds separate executive sessions with our independent registered public accounting firm, without management present and our Chief Financial Officer and other members of our finance staff. The Board has also determined that each of the members of the Compensation Committee and the Governance and Nominating Committee satisfies the independence requirements of the NASDAQ Global Market.

Compensation Committee

     The current members of the Compensation Committee are John P. Kirwin, III, Chairman, Leslie Hayman and John M. Ryan. Klaus P. Besier was a member of the Compensation Committee until his resignation on July 12, 2006, the date upon which he became our President. Each current member of the Compensation Committee is independent from Neoware and its management.

     The Compensation Committee may, in its sole discretion, engage director search firms or compensation consultants. The Compensation Committee also may consult with outside advisors to assist it in carrying out its duties to the Company.

     The Compensation Committee Report on Executive Compensation for the 2007 fiscal year appears on page 53. A copy of the Compensation Committee Charter can be found on our website at www.neoware.com/company.html.

Audit Committee

     The members of the Audit Committee are David D. Gathman, Chairman, John M. Ryan and Dennis Flanagan. Each member of the Audit Committee is independent from Neoware and its management. In addition, the Board of Directors has determined that Mr. Gathman is an “audit committee financial expert.” The Audit Committee acts pursuant to a written charter adopted by the Board of Directors. The purpose of the Audit Committee is to assist the Board of Directors in fulfilling its oversight responsibilities regarding accounting and reporting practices, internal controls and compliance with laws and regulations.

     The Audit Committee Charter is available on our website at www.neoware.com/company.html.

Governance and Nominating Committee

     The members of the Governance and Nominating Committee are Christopher G. McCann, Chairman, John M. Ryan and John P. Kirwin, III. Each member of the Committee is independent from Neoware and its management.

     The Committee may, in its sole discretion, engage outside accountants, legal counsel and other advisors in carrying out its duties.

     The Governance and Nominating Committee Charter is available on the Company’s website at www.neoware.com/company.html.

Charters and Code of Ethics

     In addition to the Corporate Governance Guidelines, we maintain the following to support our corporate governance policies:

     Charters for Board Committees

     The Compensation Committee, the Audit Committee and the Governance and Nominating Committee use charters adopted by the Board that set forth the authority and responsibilities of the committees under the corporate governance rules of the SEC and NASDAQ.

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     Code of Ethics

     The Board sponsors our Code of Ethics, which ensures that our business is conducted in a consistently legal and ethical manner. Our General Counsel oversees compliance with the Code of Ethics. Our Code of Ethics is available on our website at www.neoware.com/company.html. All of our employees, officers and directors are required to comply with the Code of Ethics. The Code of Ethics covers all areas of professional conduct, including compliance with laws, conflicts of interest, confidentiality, corporate opportunities, use of company assets and reporting illegal or unethical behavior. The Code of Ethics describes our procedures to receive, retain and address complaints regarding accounting, internal accounting controls and auditing matters, and other illegal or unethical behavior.

Executive Officers

     Set forth below is certain information concerning our executive officers. Our executive officers are appointed annually and serve at the discretion of the Board. There are no family relationships between any of our directors and executive officers. None of the corporations or other organizations referred to below with which an executive officer has been employed or otherwise associated is a parent, subsidiary or affiliate of Neoware.

Name	Age	Position
Klaus P. Besier	56	President and Chief Executive Officer
Eric N. Rubino	48	Chief Operating Officer
Keith D. Schneck	52	Executive Vice President and Chief Financial Officer
Peter Bolton	53	Executive Vice President, EMEA
James W. Kirby	41	Executive Vice President Sales, Americas and ASPAC

     Mr. Besier has been our Chief Executive Officer since October 31, 2006, President since July 12, 2006 and a member of our Board of Directors since December 2005. Mr. Besier served as President and Chief Executive Officer of FirePond, Inc., a global provider of e-business solutions for managing multi-channel selling, from 1997 until his retirement in December 2003 after the sale of the company. Prior to joining FirePond, he held various management positions, including the position of Chief Executive Officer of SAP America, Inc., a subsidiary of SAP AG, a provider of business application software. Mr. Besier holds a bachelor’s degree in business management and finance from the University of Economics in Berlin.

     Mr. Rubino has been our Chief Operating Officer since December 2002. Prior to joining Neoware, from 1999 to 2002, Mr. Rubino served as the Chief Operating Officer for SAP America, Inc., where he managed a wide range of operational departments, including the small and medium business channel, customer support, new business development, information technology, legal, contracts, application hosting, strategic alliances, purchasing, facilities, and risk management. From 1991 to 1999, Mr. Rubino served as Corporate Secretary, Vice President and General Counsel and Senior Vice President of SAP America, Inc. In addition, Mr. Rubino has served in a variety of management positions in contracts and finance with RCA Corporation, General Electric and Bell Atlantic Business System Services, and holds a J.D., an MBA in Finance, and a B.S. in Marketing.

     Mr. Schneck has been our Executive Vice President and Chief Financial Officer since joining Neoware in April 2003. Prior to joining Neoware, from December 2000 to April 2003, he served as Chief Financial Officer of T-Networks, a venture capital-funded start up company that provided next generation fiber optical components and sub-systems to the telecommunications market. From April 1995 to December 2000, Mr. Schneck served as President and Chief Financial Officer for AM Communications, Inc., a publicly held company. Prior to that, from 1987 until 1995, Mr. Schneck held senior management positions at Integrated Circuit Systems, Inc., a publicly held company, including Chief Operating Officer and Senior Vice President Finance. Mr. Schneck is a CPA with over 10 years of public accounting experience with KPMG LLP.

     Mr. Bolton has been our Executive Vice President, EMEA since July 2003 and prior to that held various sales management positions with Neoware from November 1996 to July 2003, including UK Sales Manager, EMEA Sales Manager and Vice President of EMEA Sales. He is responsible for all sales, marketing and general management functions for Europe. Prior to joining Neoware, Mr. Bolton served as General Manager of Xanadu Systems from 1991 to 1996. Prior to that, he was employed as a Channel Manager for NeXT Computer, Inc.

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     Mr. Kirby has been our Executive Vice President of Sales, Americas & ASPAC since September 2006 and prior to that served as our Vice President of Sales from 2003 to September 2006. He is responsible for all channel and direct sales for the Americas and Asia Pacific. Prior to joining Neoware, Mr. Kirby served as the Vice President of Sales and Marketing for Astea International. He also served in a variety of executive sales, marketing, and operations management positions with Synavant, Inc., Base Ten Systems, and Honeywell, Inc. Mr. Kirby holds a B.A. from Villanova University.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Our officers, directors and greater than ten percent stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such reports furnished to us, or written representations from certain reporting persons that no other reports were required, Neoware believes that during the fiscal year ended June 30, 2007, all of its officers, directors and persons who own more than ten percent of our common stock complied with all filing requirements applicable to them.

Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS

Overview

     The Compensation Committee of our Board of Directors has responsibility for establishing and implementing our compensation philosophy, and for continually monitoring our adherence to that philosophy. The Compensation Committee reviews and approves compensation levels for all Neoware executive officers as well as all of our compensation and incentive programs, including programs applicable to our senior management team, which includes our named executive officers. With respect to our President and Chief Executive Officer, the Committee annually evaluates his accomplishments and performance against established objectives and sets his compensation level based upon such evaluation. These functions are set forth in the Compensation Committee’s Charter, which appears on our website (www.neoware.com/company.html.) and is reviewed annually by the Committee and the Board. The Compensation Committee seeks to ensure that the total compensation paid to our executives is fair, reasonable and competitive and consistent with our compensation philosophy.

     The following individuals, included in the “Summary Compensation Table for the 2007 Fiscal Year”, are referred to as our “named executive officers” throughout this report:

• Klaus P. Besier, President and Chief Executive Officer;

• Keith D. Schneck, Senior Vice President and Chief Financial Officer;

• Eric N. Rubino, Executive Vice President and Chief Operating Officer;

• Peter Bolton, Executive Vice President, EMEA;

• James W. Kirby, Executive Vice President, Sales Americas and ASPAC;

• Michael G. Kantrowitz, our former President and Chief Executive Officer; and

• Wei Ching, our former Executive Vice President of Asia.

     The Compensation Committee currently consists of three non-employee and independent directors.

     Compensation Philosophy and Objectives

     Our compensation program includes annual salary and incentive compensation, consisting of bonuses and possible long-term incentives, in the form of stock options and other equity compensation, designed to attract, motivate and retain highly qualified executives who will effectively manage our business and maximize stockholder

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value. In establishing total compensation each year, the Compensation Committee considers both individual and company performance. The Compensation Committee also informally reviews compensation levels of companies that are known to the Compensation Committee members and published compensation data of other technology companies, although the Compensation Committee does not make formal comparisons with peer group companies. In making its determinations as to all executive officers other than the Chief Executive Officer, the Compensation Committee also considers the recommendations of the Chief Executive Officer.

     Role of the Compensation Committee and Executive Officers in Compensation Decisions

          The Compensation Committee has primary responsibility for assisting the Board in evaluating potential candidates for executive positions, including the Chief Executive Officer position, and for overseeing the development of succession plans. The Compensation Committee oversees the design, development and implementation of the compensation program for the Chief Executive Officer and the other executives, including the named executive officers. The Compensation Committee evaluates the performance of the Chief Executive Officer and determines the Chief Executive Officer’s compensation in light of the goals and objectives of the compensation program. Mr. Besier assesses the performance of our other executives, including the other named executive officers, and the Compensation Committee approves their compensation based on recommendations from Mr. Besier. The Compensation Committee did not seek advice or assistance from compensation consultants during fiscal 2007.

          The Compensation Committee’s work is accomplished through a series of meetings, to ensure that all major elements of compensation are addressed and compensation and benefit programs are properly designed, implemented and monitored. As requested, Mr. Besier offers his opinions and recommendations to the Compensation Committee. The Compensation Committee may invite other members of management to attend meetings (as necessary) to discuss items within their specific areas of responsibility, although they do not play a role in their own compensation determination, other than discussing individual performance objectives with the Chief Executive Officer.

Setting Executive Compensation

     Elements of Executive Compensation

     Consistent with our compensation philosophy, the Compensation Committee has structured our annual and long-term executive compensation programs to motivate executives to achieve the business goals we set, and these programs reward the executives for achieving and exceeding those goals. The key elements of our executive compensation program are:

• base salary;

• annual cash incentive awards; and

• long-term equity incentive compensation.

     These key elements are addressed separately below. In determining each component of compensation, the Compensation Committee takes into account all other elements of an executive’s compensation package. In addition, the Compensation Committee also informally reviews compensation levels of other technology companies, including our principal competitors, if available, but we do not use benchmarking.

Components of Executive Compensation for the 2007 Fiscal Year

     Annual salary levels are established based upon job responsibility and an evaluation of individual and company performance. Combined cash and non-cash incentive compensation for named executive officers for the 2007 fiscal year ranged from 37% to 71% of total compensation. Our policy for allocating value between long-term and currently-paid compensation is to ensure adequate base compensation to attract and retain personnel, while providing strong incentives for our executives to maintain an “ownership” mentality, focusing them on maximizing long-term value creation for them and our stockholders.

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     Base Salary

     Base salary is the component of compensation that is fixed and intended to compensate our executives, based on their experience, expertise, job responsibilities and the performance of their responsibilities during the fiscal year. Consistent with our compensation philosophy that we offer compensation based on superior performance, we strive to use incentive compensation, rather than base salary, to provide executives with an above-market compensation opportunity if we exceed financial performance goals and drive increases in stockholder value.

     Each year, our Compensation Committee reviews the base salary of our executive officers. In making adjustments to base salary levels, the Compensation Committee considers:

• our performance, including revenues and profitability, compared to goals;

• our achievement of other operational goals, such as the introduction of new products, gains in market share, and strategic objectives such as entering geographic markets or acquisitions of businesses or technologies;

• the executive’s contribution to our performance;

• the executive’s level of responsibilities;

• the executive’s experience and breadth of knowledge; and

• the executive’s individual performance as assessed through annual performance reviews.

     The normal interval between salary reviews for most executive officers and most other employees is 12 months, usually completed in the quarter following the fiscal-year end. All named executive officers except Mr. Besier, received a merit pay increase for the 2007 fiscal year, averaging 5.6%. These increases were approved by the Compensation Committee in August 2006.

     Our Board and Compensation Committee determined Mr. Besier’s base salary as President in July 2006 when he assumed the position as President after considering his level of expected responsibilities, his years of experience as the chief executive officer of a multi-billion dollar organization and our historic compensation levels for this position. In October 2006, at the time that Mr. Besier assumed the position as Chief Executive Officer, his salary was increased to $375,000 after the Board and Compensation Committee considered the additional responsibilities that he would be assuming, the historic compensation levels for this position and the responsibilities related to transitioning our organization and business.

     Annual Cash Incentive Awards

     Annual cash incentive awards for our executive officers are intended to promote the achievement of our corporate and departmental financial performance goals, as well as individual performance objectives, or MBOs. An individual’s performance is evaluated based upon the achievement of his or her specific individual MBOs, and the Compensation Committee’s subjective judgment of his or her contributions to our achievement of our goals. The Compensation Committee assigns weights to the achievement of the executive’s MBOs. Each of our named executive officers participates in our Senior Officer Bonus Plan, or our Bonus Plan.

     Our Bonus Plan is designed to attract, retain and reward our executive and other senior officers based on the achievement of key business objectives while maintaining alignment of the senior officers’ interests with those of our stockholders. Our executive and other senior officers are eligible to participate in the Bonus Plan. Bonuses are measured on the achievement of specific performance targets established by the Compensation Committee based on one or more of the following criteria chosen by the Compensation Committee: revenues; earnings per share; operating income; earnings before interest, taxes, depreciation and amortization; net income; working capital; and gross profit. An executive’s bonus is determined by multiplying the executive’s base salary by his or her annual bonus percentage. Each year, the Compensation Committee selects the criteria upon which to base the Bonus Plan and the specific performance targets for the selected performance criteria for the year based on our budget. A target bonus expressed as a percentage of each executive’s base salary is then established by the Compensation Committee based on the executive’s position. After the eligible bonus percentage has been established for each executive, the Compensation Committee may, at its discretion, adjust the executive’s bonus based upon both our financial performance and the executive’s individual performance. Each executive’s bonus percentage may be increased or

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decreased at the discretion of the Compensation Committee based upon his or her individual performance and the achievement of individual, functional area and departmental objectives.

     Notwithstanding the Bonus Plan provisions, the Compensation Committee, in its sole discretion, may modify or change the Bonus Plan at any time, including, but not limited to, revising performance targets, bonus multipliers, strategic goals and objectives and actual bonus payments. The Compensation Committee has the sole discretion to determine (i) whether our performance targets have been achieved, (ii) whether individual goals and objectives have been achieved and (iii) the amount of any adjustments to an executive’s assigned target percentage based on items (i) and (ii) above or such other criteria deemed appropriate by the Compensation Committee.

     During the 2007 fiscal year, Mr. Besier, Mr. Rubino and Mr. Schneck were eligible for incentive compensation under the Bonus Plan based on achieving revenue targets. At the beginning of the fiscal year, the Compensation Committee set threshold levels for annual revenue, which were required to be attained for 100% of the bonuses to be awarded. On March 1, 2007, the Compensation Committee approved the fiscal year 2007 target bonus percentages for each of the following executive officers, as follows: Klaus P. Besier, President and Chief Executive Officer, 50%; Eric N. Rubino, Chief Operating Officer, 50%; and Keith D. Schneck, Executive Vice President and Chief Financial Officer, 50%. The Compensation Committee, upon the recommendation of the Chief Executive Officer as to each of the executives (with the exception of the Chief Executive Officer), also approved individual objectives, or MBOs for fiscal 2007 for each executive (other than the Chief Executive Officer), and the Compensation Committee approved MBOs for the Chief Executive Officer, which the executives were required to achieve to receive full bonus payments. Each executive had several (ranging from five to seven) individual MBOs tied to bonus payments.

     For fiscal 2007, we did not achieve 100% of the revenue performance goal that had been established by the Compensation Committee in accordance with the Bonus Plan. In its discretion, the Compensation Committee granted bonuses based on percentages of base salaries that were less than 100% of each executive’s target bonus percentage in accordance with the Bonus Plan, after taking into consideration corporate performance during fiscal 2007 and each executive’s performance of his MBOs and overall job performance including functional area and departmental objectives. To evaluate the executive’s performance, the Compensation Committee, together with the Chief Executive Officer, reviewed each of the executives’ performance of his MBOs (with the exception of the Chief Executive Officer’s performance), and the Compensation Committee reviewed the Chief Executive Officer’s performance of his MBOs and also overall job performance including functional area and departmental objectives. If an executive failed to achieve his individual MBOs, the Compensation Committee reduced the executive’s bonus payment accordingly. The percent of the executive’s assigned target bonus percentage was equivalent to the percent of his MBOs achieved, up to 100% subject to the Compensation Committee’s discretion to adjust an executive’s bonus up or down based upon job performance, other than achievement of MBOs, and achievement of functional area and departmental objectives. Based on this analysis, on August 5, 2007, the Compensation Committee approved the following cash bonuses under the Bonus Plan for each of the following executive officers: Mr. Besier, $160,313; Mr. Rubino, $119,064; and Mr. Schneck, $84,027.

     Mr. Bolton and Mr. Kirby, our senior sales executives, had the opportunity to earn base incentive compensation of up to a $182,000 and $213,000, respectively, if their respective regions’ overall revenues for the 2007 fiscal year equaled 100% of the annual base target level of revenues established in our budget for the 2007 fiscal year. Mr. Bolton and Mr. Kirby had the opportunity to earn incentive compensation in excess of their annual amount if overall revenues for their respective regions exceeded 100% of the annual base target level for the regions. Bonus amounts for Mr. Bolton and Mr. Kirby are calculated based on a percentage (determined by dividing the annual base target incentive by the annual base target level of revenues) multiplied by the cumulative revenues achieved during the quarter periods year-to-date. A higher percentage is applied for revenues which exceed the base target level of revenues (calculated on a year-to-date basis) measured for each quarter period. A minimum of 90% of cumulative base target revenues must be achieved in any quarter period in order to receive a payment for such quarter period. In fiscal 2007, Mr. Bolton and Mr. Kirby earned $168,489 and $217,941, respectively, under their incentive compensation arrangements.

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     Long-Term Equity Incentive Compensation

     Our equity compensation program is designed to provide the Compensation Committee the flexibility to award long-term equity compensation incentives from several types of equity-based awards. The Compensation Committee’s objective in granting equity awards is to provide a strong incentive to our executives and key employees to focus on the ongoing creation of stockholder value by offering significant compensation opportunities for superior performance. These award opportunities not only allow us to offer a competitive overall compensation package, but also further opportunities for stock ownership by our employees in order to increase their proprietary interest in Neoware and, as a result, their interest in our long-term success and their commitment to creating stockholder value.

     Long-term equity incentives under our 2004 Plan may consist of nonqualified stock options, incentive stock options (ISOs), stock appreciation rights (SARs), restricted stock, restricted stock units or any combination of the above, as the Compensation Committee may determine. The Compensation Committee historically has granted ISOs as the preferred form of equity-based compensation. Options typically vest in four equal annual installments beginning one year from the date of grant and are exercisable at an exercise price equal to or greater than the fair market value of the shares of common stock on the date of grant (which is generally the date of a regularly scheduled Compensation Committee meeting or the date of commencement of employment). Stock options typically have been granted to executive officers when the executive first joins Neoware and periodically thereafter in connection with changes in the executive’s level of responsibilities, in connection with the executive’s past and anticipated future contributions to Neoware and for other reasons at the Compensation Committee’s discretion. The size of option grants are generally based upon the executive officer’s level of responsibility, long-term growth in responsibility and contribution to the achievement of our corporate goals, considering both the number of options held by the individual and the individual’s position at the time of the new grant. Through the grant of stock options, the objective of aligning executive officers’ long-range interests with those of the stockholders is met by providing the executive officers with the opportunity to build a meaningful ownership interest in Neoware. The Compensation Committee evaluates the individual’s and Neoware’s performance and performance and stock data of similar technology companies, although it has not relied on formal comparisons, and exercises subjective judgment and discretion in view of this information and our general compensation policies and practices. We believe that ISOs effectively focus our executives on our goals and are an efficient use of shares available under the 2004 Plan.

     In granting long-term equity incentive awards, the Compensation Committee determines:

• the executive officers to receive awards;

• the number of shares in each grant to an executive officer;

• the aggregate number of shares available for the Chief Executive Officer to grant in stock options to non-executive officers pursuant to his delegated authority; and

• the terms and conditions of each award.

     The annual grant of options was not made during the 2007 fiscal year because of an insufficient number of shares available for grant under the 2004 Plan at the time. At a meeting held on June 13, 2007, the Compensation Committee approved the grant of options to acquire an aggregate of 220,000 shares to executive officers, with a grant date of July 2, 2007, the first business day of the month following the authorized action.

     Option Grant Practices. The Compensation Committee makes decisions on stock option grants based solely on our compensation and retention objectives and our established measurements of the value of these awards. Generally, each year after the end of the fiscal year, at a meeting of the Compensation Committee, the Compensation Committee approves the annual stock option awards for executive officers and the shares available for stock option grants to other employees to be approved by our Chief Executive Officer in accordance with his delegated authority. The Compensation Committee has not delegated any other aspect of the stock option grant process to any other person or committee. The grant date for executive officers is generally the date of that meeting, or a future date, and the exercise price is the closing selling price on the date of grant. We do not backdate options. In addition, we do not plan to coordinate grants of options so that they are made before announcement of favorable information, or after announcement of unfavorable information.

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     The exercise price of all awarded stock options under the 2004 Plan is equal to the closing selling price of Neoware shares on the NASDAQ Global Select Market on the date of grant.

          Retirement Plans

     We sponsor a 401(k) saving plan (the “Plan”) for all of our employees who meet certain age and years of employment requirements. Participants may make voluntary contributions to the Plan and we make a matching contribution of 50% of the first 6% of such contributions up to a maximum of $1,000 per participant per year.

          Change in Control and Severance Arrangements

     Neoware is a party to severance arrangements with each of its executive officers. Mr. Besier’s severance arrangement with Neoware provides that he will receive severance benefits equal to his base salary for a period of 12 months, a cash payment equal to his average annual bonus earned over the prior three years as Chief Executive Officer or President of Neoware and health benefits for a period of 12 months upon the occurrence of any of the following events: (a) a change in his position with Neoware which materially reduces the duties and responsibilities of his position as President and Chief Executive Officer reporting solely to our board of directors; (b) a relocation of his place of employment from the Philadelphia area; or (c) an involuntary termination of Mr. Besier’s employment with Neoware for reasons other than cause. In the event of a change in control, if Mr. Besier is not offered a position by Neoware or the acquirer as President and Chief Executive Officer reporting solely to the board of directors of the resulting company, or if he does not accept employment in any other capacity offered by the acquirer, or Neoware, Neoware will: (1) continue to pay his base salary for a period of one year from the date of termination; (2) pay him an amount equal to the average of the annual bonus that he earned over the prior three years; and (3) pay for Neoware’s portion of his health care costs under COBRA for one year. In addition, in the event that Mr. Besier is offered a comparable position following a change in control, or he accepts employment in any other capacity offered by the acquirer, all of Mr. Besier’s outstanding stock options will vest and become exercisable one year after the change in control, provided that he is still working for the Company or the acquirer at that time.

     The severance arrangement for each of our other current named executive officers provides that, in the event of a termination of employment upon a change in control, he will receive severance benefits in an amount equal to salary and Neoware’s portion of any COBRA payments for a period of one year and a cash payment equal to the average amount of his annual bonuses for the three years prior to termination. Additionally, Mr. Schneck’s outstanding options vest and become exercisable in the event of his termination in connection with a change in control.

     Options granted under our 2004 Plan, our 1995 Stock Option Plan and our Amended and Restated 2002 Non-Qualified Stock Option Plan contain provisions pursuant to which outstanding options granted under such plans may become fully vested and immediately exercisable upon a “change in control” as defined in such plans, subject to the discretion of the Compensation Committee.

     The following chart sets forth the cash severance benefit payable upon a termination of employment as described above with respect to our current named executive officers:

	Estimated
Name	Cash Severance ($) (1)
Klaus P. Besier		556,519
Keith D. Schneck		336,709
Eric N. Rubino		422,433
Peter Bolton		394,490
James W. Kirby		475,695

⁽¹⁾ For purposes of calculating the amounts reflected in this column, we have assumed that the applicable annual compensation applied for purposes of computing severance is equal to the sum of the executive officer’s base salary in effect as of July 2007, plus the average of the executive officer’s bonus for fiscal years 2005, 2006 and 2007 and the total employer contributions with respect to the executive officer’s medical and dental benefits applicable in August 2007.

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     On September 19, 2006, Mr. Roy Zatcoff resigned as our Executive Vice President, Marketing and Development, effective October 31, 2006. In connection with Mr. Zatcoff’s resignation, we entered into an agreement with Mr. Zatcoff providing for the continuation of his base salary for a period of four months, payable over our normal payroll periods, and the payment of Mr. Zatcoff’s COBRA premiums to continue his health insurance coverage for the four-month period. In exchange, Mr. Zatcoff executed a general release of claims in favor of us. We executed a limited release of claims related to Mr. Zatcoff’s performance of his employment duties in favor of Mr. Zatcoff.

     On October 30, 2006, Mr. Kantrowitz resigned from his position as our Chief Executive Officer and entered into a Termination and Services Agreement, under which Mr. Kantrowitz assumed the position of Executive Chairman of the Board of Directors. Effective on January 15, 2007, Mr. Kantrowitz’s position as Executive Chairman of the Board of Directors terminated pursuant to the terms of his Termination and Service Agreement. The agreement provided that Mr. Kantrowitz would receive a base salary equal to his current base salary as our Chief Executive Officer, other benefits (excluding any bonus and other incentive plans) and the use of a company-provided automobile for a six-month period, unless Mr. Kantrowitz’s services were terminated earlier by either Mr. Kantrowitz or Neoware. Under the agreement, Mr. Kantrowitz r receives severance benefits equal to his salary and health benefits for a period of 18 months, payment of an amount equal to one and one-half times his average annual bonus earned over the prior three fiscal years as our Chief Executive Officer and full vesting of all of his outstanding, unvested stock options, which have a post vesting exercise period extended beyond 90 days from termination as is otherwise set forth in our equity incentive and stock option plans filed with the SEC. The agreement also contains a non-competition and non-solicitation agreement for the 18-month period in which Mr. Kantrowitz receives severance benefits. In exchange for the consideration provided by us, Mr. Kantrowitz executed a general release of claims in favor of Neoware. Neoware executed a limited release of claims related to Mr. Kantrowitz’s performance of his employment duties in favor of Mr. Kantrowitz.

     On November 17, 2006, Mr. Wei Ching resigned as our Executive Vice President of Asia. Mr. Ching’s Employment Agreement provided for the continuation of his base salary for a period of one year, payable over our normal payroll periods, and the payment of Mr. Ching’s COBRA premiums to continue his health insurance coverage for one year. Additionally, Mr. Ching received the right to receive a lump sum cash payment in lieu of us paying his COBRA premiums. In exchange, Mr. Ching executed a general release of claims in our favor.

     Perquisites and Personal Benefits

     Consistent with our philosophy of “pay for performance,” perquisites and other related compensation were limited in scope and amount during the 2007 fiscal year. Mr. Bolton, our Executive Vice President, EMEA, Mr. Kantrowitz, our former President and Chief Executive Officer, and Mr. Ching, our former Executive Vice President of Asia, received automobile allowances during the 2007 fiscal year. We also paid the insurance premiums on Mr. Kantrowitz’s vehicle. There were no other perquisites for executive officers during the 2007 fiscal year, except those benefits generally available to all of our employees. For a more detailed description of the perquisites and personal benefits received by our named executive officers, see the table “All Other Compensation for the 2007 Fiscal Year.”

     Tax Deductibility of Pay

          Section 162(m) of the Internal Revenue Code places a limit of $1.0 million on the amount of compensation that the Company may deduct for Federal income tax purposes in any one year with respect to each of its five most highly paid executives. Compensation above $1.0 million may be deducted if it is “performance-based compensation” meeting certain requirements under the Internal Revenue Code. Stock option awards generally are performance-based compensation meeting those requirements and, as such are fully deductible. Restricted stock and restricted stock units in some cases may not be considered performance-based under Section 162(m) of the Internal Revenue Code and, as such, are generally not deductible by us. In addition, our annual cash bonuses are not considered performance-based under Rule 162(m) because our Bonus Plan does not satisfy all the requirements of these rules. To maintain flexibility in compensating executive officers in a manner designed to promote varying corporate goals, the Compensation Committee has not adopted a policy requiring all compensation to be deductible. Compensation paid in the 2007 taxable year subject to the deduction limit did not exceed $1.0 million for any one named executive officer. The Board continues to evaluate the effects of the statute and will comply with Code section 162(m) in the future to the extent consistent with the best interests of Neoware.

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REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

     The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management; and based upon such review and discussions, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in Neoware’s annual report on Form 10-K for the fiscal year ended June 30, 2007.

Compensation and Stock Option Committee

John P. Kirwin, III, Chairman
John M. Ryan
Les Hayman

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EXECUTIVE COMPENSATION

Executive Compensation Tables

     The following table sets forth certain information concerning the compensation earned during the fiscal year ended June 30, 2007 by our named executive officers based on total compensation earned during the 2007 fiscal year.

Summary Compensation Table for the 2007 Fiscal Year

								Non-Equity
Name and								Incentive Plan		All Other
Principal					Option			Compensation		Compensation
Position (1)	Year		Salary ($)		Awards ($) (2)			($) (5)		($) (5)		Total
Klaus P. Besier		2007		335,481		664,829			160,313		1,000		1,161,623
President & Chief Executive Officer
Eric N. Rubino		2007		277,545		268,282			119,064		1,000		665,891
Chief Operating Officer
Keith D. Schneck		2007		223,941		274,298			84,027		1,000		583,266
Executive Vice President and Chief Financial Officer
Peter Bolton		2007		250,720		88,117			168,489		37,724		702,137
Executive Vice President of EMEA
James W. Kirby		2007		228,369		127,183			217,941		1,000		574,493
Vice President of Sales
Michael G. Kantrowitz		2007		209,019		1,217,779	(3)		—		782,772		1,775,989
Former President and Chief Executive Officer
Wei Ching		2007		92,443		347,305	(4)		—		250,300		690,048
Former Executive Vice President of Asia

(1)

Mr. Besier became our President on July 12, 2006 and was subsequently named Chief Executive Officer on October 30, 2006. On October 30, 2006, Mr. Kantrowitz resigned from his position as our Chief Executive Officer and held the position of Executive Chairman of our Board of Directors until such position was terminated on January 15, 2007 pursuant to the terms of a Termination and Services Agreement, as amended, between Neoware and Mr. Kantrowitz. Mr. Ching resigned as our Executive Vice President of Asia on November 17, 2006.

(2)

Mr. Besier was granted 250,000 stock options on July 12, 2006 and 75,000 stock options on October 30, 2006. There were no other stock options grants to named executive officers during the fiscal 2007. On July 2, 2007, the following stock options were granted to the named executive officers: Mr. Besier, 50,000; Mr. Schneck, 35,000; Mr. Rubino, 50,000; Mr. Bolton, 35,000; and Mr. Kirby, 50,000. The amounts shown in the above table reflect the dollar expense recognized for financial reporting purposes with respect to the 2007 fiscal year for stock options granted to the named executive officers, in the 2007 fiscal year and in prior fiscal years (to the extent such awards remain unvested in whole or in part at the beginning of the

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	2007 fiscal year), in accordance with SFAS 123R and do not correspond to the actual value that may be realized by the named executive officers. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. For information on the valuation assumptions made in the calculation of these amounts refer to the Equity-Based Compensation Note to Neoware’s financial statements for the fiscal year ended June 30, 2007, included in this Annual Report on Form 10-K. For information on the valuation assumptions with respect to grants made prior to the 2007 fiscal year, refer to the note on “Other Stock Related Information” for the Neoware financial statements in our Annual Report on Form 10-K for the respective fiscal year-end. See the table under “Grants of Plan-Based Awards in the 2007 Fiscal Year” for information on the options granted in the 2007 fiscal year to the named executive officers.
(3)	The expenses for option awards for Mr. Kantrowitz reflect the dollar expense recognized for financial reporting purposes as required under SFAS 123R, excluding the impact of estimated forfeitures as required by the SEC rules. According to the terms of the Termination and Services Agreement with Mr. Kantrowitz, as amended, all of his outstanding and unvested stock options became vested, and the period for which his outstanding options could be exercised was extended beyond 90 days from termination as is otherwise set forth in the Company’s equity incentive and stock option plans filed with the SEC. Without the acceleration of vesting and extension of the stock options, the option awards expense to Neoware for the 2007 fiscal year for Mr. Kantrowitz under SFAS 123R (excluding the impact of forfeitures as required by SEC rules) would have totaled $313,984.
(4)	The expenses for option awards for Mr. Ching reflect the expense recognized for financial reporting purposes as required under SFAS 123R, excluding the impact of estimated forfeitures as required by the SEC rules. Upon Mr. Ching’s resignation on November 17, 2006, he forfeited 75,000 stock options resulting in actual option awards expense to Neoware of $133,213 for the 2007 fiscal year.
(5)	The amounts shown for Mr. Besier, Mr. Schneck, and Mr. Rubino reflect cash incentive awards earned by them under the Bonus Plan with respect to performance in the 2007 fiscal year. The amounts shown for Mr. Bolton and Mr. Kirby reflect cash incentive awards earned by them under their respective incentive compensations arrangement with respect to performance in the 2007 fiscal year. See page 48 of this Annual Report on Form 10-K under “Compensation Discussion and Analysis – Annual Cash Incentive Awards” for more detailed information on the Bonus Plan.
(6)	The amounts shown consist of the following items detailed in a separate table appearing on page 56:

• Contributions by the Company to the named executive officer’s 401(k) plan;

• Automobile allowances;

• Pension contributions; and

• Severance payments earned either disbursed or owed to former named executive officers.

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All Other Compensation for the 2007 Fiscal Year

     The table below presents an itemized account of “All Other Compensation” provided to our named executive officers during the 2007 fiscal year, regardless of the amount and any minimum thresholds provided under SEC rules and regulations. Consistent with our philosophy of “pay for performance,” perquisites and other compensation are limited in scope and amount.

	401(k) Matching
	Contributions		Auto			Pension			Severance		Total All Other
Name	($)		Allowance ($)			Contributions ($)			Pay ($)		Compensation ($)
Klaus Besier		1,000		—			—			—		1,000
Eric N. Rubino		1,000		—			—			—		1,000
Keith D. Schneck		1,000		—			—			—		1,000
Peter Bolton		—		17,391	(1)		20,333	(2)		—		37,724
James W. Kirby		1,000		—			—			—		1,000
Michael G. Kantrowitz		1,000		5,696			—			776,076		782,772
Wei Ching		—		10,230			—			240,070		250,300

(1)	The auto allowance for Mr. Bolton is a flat-monthly payment of £750 totaling £9,000 for the 2007 fiscal year. The exchange rate applied of 1.93233 was the average exchange rate for the entire fiscal year.
(2)	The annual pension contributions for Mr. Bolton totaled £10,522 for the fiscal year. The exchange rate applied of 1.93233 was the average exchange rate for the entire fiscal year.

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Grants of Plan-Based Awards in the 2007 Fiscal Year

     The following table sets forth information about equity awards and potential future non-equity incentive payouts provided to our named executive officers during the 2007 fiscal year under the 2004 Plan and the Bonus Plan.

Estimated Future Payouts Under Non-Equity Incentive Plan Awards

										All Other Option
										Awards:		Exercise or
										Number of		Base Price of		Grant Date
										Securities		Option		Fair Value
	Grant		Threshold		Target			Maximum		Underlying		Awards		of Option
Name	Date		($)		($)			($)		Options(2)		($/share)		Awards ($)
Klaus P. Besier				—		187,500	(1)		—		—		—		—
		07/12/2006		—		—			—		250,000		13.60		2,317,500
		10/30/2006		—		—			—		75,000		13.34		627,000
Eric N. Rubino				—		139,256	(1)		—		—		—		—
Keith D. Schneck				—		112,487	(1)		—		—		—		—
Peter Bolton				153,000		170,000	(2)		—		—		—		—
James W. Kirby				186,300		207,000	(2)		—		—		—		—
Michael G. Kantrowitz(3)				—		—			—		—		—		—
Wei Ching(3)				—		—			—		—		—		—

(1)

The amounts shown for Mr. Besier, Mr. Rubino, and Mr. Schneck reflect the potential value of the payouts under the Bonus Plan for the 2007 fiscal year if the target goals were satisfied for all performance goals. The potential payouts were performance-driven and therefore completely at risk. Under the plan, each year the Compensation Committee establishes a target bonus for each eligible executive expressed as a percentage of the executive’s base salary based on the executive’s position. As described in the Current Report on Form 8-K with the SEC on March 1, 2007, the Compensation Committee approved the fiscal year 2007 target bonus percentages for Mr. Besier, Mr. Rubino and Mr. Schneck, as follows: Mr. Besier, 50%; Mr. Rubino, 50%; and Mr. Schneck, 50%. The Compensation Committee approved performance objectives for the Mr. Besier, our Chief Executive Officer, and, upon the recommendation of Mr. Besier as to each of the eligible executives, also approved individual performance objectives for fiscal 2007 for Mr. Rubino and Mr. Schneck, which the executives must achieve to receive their full bonus payments. Each executive had between six and seven performance objectives tied to bonus payments. After the end of the fiscal year, the Compensation Committee, together with Mr. Besier, reviewed each of the other executives’ performance of his performance objectives, and the Compensation Committee reviewed Mr. Besier’s performance of his performance objectives and also overall job performance including functional area and departmental objectives. Under the Bonus Plan, if an executive fails to achieve his individual performance objectives, the Compensation Committee will reduce the executive’s bonus payment accordingly. The percent of the executive’s above assigned target bonus percentage will be equivalent to the percent of his performance objectives achieved, up to 100%, subject to the Compensation Committee’s discretion to adjust an executive’s bonus up or down based upon job performance, other than achievement of MBOs, and achievement of functional area and departmental objectives.

(2)

The amounts shown for Mr. Bolton and Mr. Kirby reflect the potential value of the payouts under their respective incentive compensations arrangement with respect to performance in the 2007 fiscal year if their target goals were satisfied for all performance goals. The potential payouts are performance-driven and therefore completely at risk. The performance criteria, performance goals and salary and incentive award percentages for determining the payouts are

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	described under “Compensation Discussion and Analysis – Annual Cash Incentive Awards” beginning on page 48 of this Annual Report.
(3)	As reflected in the “Summary Compensation Table for the 2007 Fiscal Year,” no awards were paid to Messrs. Kantrowitz and Ching, as they did not meet the plan eligibility criterion requiring employment with Neoware on the date awards are paid, except by retirement, disability or death.
(4)	The Compensation Committee met and approved the grants of stock options under our 2004 Plan Equity Incentive to Mr. Besier on July 12 and October 30, 2006. All of the stock options detailed in the table have a term of 10 years and an exercise price set at the closing selling price of our common stock on the date of grant.

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Outstanding Equity Awards at 2007 Fiscal Year-End

Number of Securities Underlying
Unexercised Options ⁽¹⁾

					Option		Option
					Exercise		Expiration
Name	Exercisable (#)		Unexercisable (#)		Price ($/Share)		Date (2)
Klaus P. Besier		10,000		—		22.04		12/01/2015
		—		250,000		13.60		07/12/2016
		—		75,000		13.34		10/30/2016
Eric N. Rubino		113,250		—		17.15		12/09/2012
		6,250		—		10.55		04/28/2013
		5,000		10,000		6.48		08/04/2014
		17,500		35,000		9.26		12/01/2014
		5,000		15,000		11.15		08/11/2015
Keith D. Schneck		50,000		—		10.55		04/28/2013
		7,500		7,500		6.48		08/04/2014
		12,500		12,500		9.26		12/01/2014
		5,000		15,000		11.15		08/11/2015
Peter Bolton		12,500		12,500		9.26		12/01/2014
		5,000		15,000		11.15		08/11/2015
James W. Kirby		—		10,000		8.78		10/06/2014
		—		12,500		9.26		12/01/2014
		5,000		15,000		11.15		08/11/2015
Michael G. Kantrowitz		100,000		—		14.55		01/15/2008
		50,000		—		16.41		01/15/2008
		21,598		—		9.26		12/31/2007
		50,000		—		11.15		12/31/2007
Wei Ching		—		—		—		—

(1)

The stock options listed above represent the number of stock options, exercisable and unexercisable, that are held by the name executive officers as of June 30, 2007, the end of our last fiscal year.

(2)

All stock options listed above vest in 25% increments per year over four years with the following exceptions: Mr. Besier’s grant of 10,000 stock options on December 1, 2005 vested six months after the grant date; and the vesting of Mr. Kantrowitz’s stock options were accelerated pursuant to the terms of the Termination and Services Agreement with Neoware dated September 30, 2006, as amended. All stock options granted to the named executive officers as set forth above have 10-year terms, subject to earlier termination or expiration in the event of termination of service or as otherwise set forth in the 2004 Plan with the following exceptions: Mr. Kantrowitz’s stock options are subject to specific termination dates as set forth in the above table pursuant to the terms of the Termination and Services Agreement with Neoware.

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Option Exercises During the 2007 Fiscal Year

	Option Awards
	Number of Shares		Value Realized
Name	Acquired on Exercise (#)		on Exercise ($)
Klaus P. Besier		—		—
Eric N. Rubino		—		—
Keith D. Schneck		—		—
Peter Bolton		—		—
James W. Kirby (1)		11,250		34,575
Michael G. Kantrowitz(2)		78,402		199,797
Wei Ching		—		—

(1)	Mr. Kirby exercised options to acquire 5,000 shares on February 26, 2007, with an exercise price of $8.78 and a market price of $12.12 and options to acquire 6,250 shares on February 26, 2007, with an exercise price of $9.26 and a market price of $12.12.
(2)	Mr. Kantrowitz exercised 15,500 stock options on May 23, 2007, with an exercise price of $9.26 and a market price of $11.68 and 62,902 stock options on May 29, 2007, with an exercise price of $9.26 and a market price of $11.84.

Compensation of Directors

     Each non-employee director receives a one-time automatic grant of options to purchase 10,000 shares of common stock under our 2004 Plan upon the director’s initial election. Thereafter, under the 2004 Plan, each non-employee director receives an automatic annual grant of options to purchase 7,500 shares of common stock. Non-employee directors are also eligible to receive equity awards at the discretion of the Board of Directors.

     In addition, during the 2007 fiscal year, all non-employee members of the Board received an annual fee of $16,000 (increased from $7,500 effective January 2007) for services as a member of the Board, $1,500 for each regular or special Board meeting attended in person, $750 for each such meeting attended by telephone and $500 for each committee meeting attended. The chairman of the Audit Committee received an annual fee of $16,000 (increased from $5,000 effective January 2007), the chairman of the Compensation Committee received an annual fee of $6,000 (increased from $1,500 effective January 2007) and the chairman of the Governance and Nominating Committee received an annual fee of $2,000 (increased from $1,500 effective January 2007), for their services during the 2007 fiscal year as chairmen in addition to the applicable meeting fees, and the independent lead director or the independent chairman of the Board earned an annual fee of $10,000. Annual fees are payable quarterly.

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Director Compensation Table

     The following table shows the compensation earned by each non-employee director in the 2007 fiscal year.

	Fees Earned or		Option Awards		All Other
Director	Paid in Cash ($)(1)		($)(2)		Compensation ($)		Total ($)
Klaus P. Besier(3)		5,250		—		—		5,250
Dennis Flanagan		38,250		30,464		—		68,714
David D. Gathman		38,750		86,150		—		124,900
Leslie Hayman (4)		4,250		25,503		—		29,753
John P. Kirwin, III		38,500		86,150		—		124,650
Christopher G. McCann		32,000		86,150		—		118,150
John M. Ryan		42,250		86,150		—		128,400

(1)

Consists of the aggregate amount of all fees earned or paid in cash for services as a director, consisting of annual board and committee chair fees and board and committee meeting fees earned by non-employee directors, as described above.

(2)

The amounts shown reflect the dollar amount of options recognized for financial statement reporting purposes for the fiscal year ended June 30, 2007 for the stock options granted to the non-employee directors. The compensation expense reflected in the table is the same as the grant date fair value pursuant to SFAS 123R. The fair value was estimated using the Black-Scholes option pricing model in accordance with SFAS 123R using material assumptions as listed in the notes to our financial statements. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions. The actual value of the options, if any, will depend on the extent that the market value of our common stock at exercise is greater than the exercise price of the option. Each non-employee director (other than Mr. Hayman) was automatically granted an option under the 2004 Plan to purchase 7,500 shares on November 30, 2006 with an exercise price of $11.17 per share. Mr. Hayman was granted an option to purchase 10,000 shares on April 27, 2007, the date on which he became a director, at an exercise price of $12.39 per share. As of June 30, 2007, the following non-employee directors held options to purchase the following number of shares:

Name	Number of Options Held
Mr. Flanagan		17,500
Mr. Gathman		47,500
Mr. Hayman		10,000
Mr. Kirwin		40,000
Mr. McCann		37,500
Mr. Ryan		37,500

(3)	Mr. Besier served as a non-employee director until July 12, 2006, the date on which he was appointed as our President.
(4)	Mr. Hayman was appointed as a director on April 27, 2007.

Compensation Committee Interlocks and Insider Participation

     The Board of Directors has determined that at the time of service each member of the Compensation Committee satisfied the definition of independence described in Rule 4200(15)(a). The Board of Directors determines the compensation of members of the Compensation Committee. Prior to his appointment as President of Neoware in July 2006, Mr. Besier served as a member of our Compensation Committee.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

BENEFICIAL OWNERSHIP OF COMMON STOCK

     The following table sets forth information regarding the beneficial ownership of Neoware common stock as of August 15, 2007 (unless otherwise noted), for:

• each person who is known by us to own beneficially more than 5% of the outstanding shares of Neoware common stock;

• each of our current directors and named executive officers; and

• all of our directors and executive officers as a group.

     Unless otherwise indicated, the address of each person named in the table below is c/o Neoware, Inc., 3200 Horizon Drive, King of Prussia, Pennsylvania 19406, and except as indicated in the table, to Neoware’s knowledge, each beneficial owner named in the table has sole voting and sole investment power over the share indicated as owned by such person, subject to applicable community property laws. The percentage listed in the table is calculated based on 20,206,243 shares of Neoware common stock outstanding on August 15, 2007. The amounts and percentage of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days.

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	Number of Shares			Percentage of Class
Name of Beneficial Owner	Beneficially Owned			Beneficially Owned
FMR Corp.		1,950,031	(1)		9.7
82 Devonshire Street Boston, MA 02109
Central Securities Corporation		1,500,000	(2)		7.5
630 Fifth Avenue, Suite 820 New York, NY 10111
T. Rowe Price Associates, Inc.		1,335,300	(3)		6.6
100 E. Pratt Street Baltimore, MD 21202
Putnam, LLC		1,001,240	(4)		5.1
One Post Office Square Boston, MA 02109
Klaus P. Besier		73,500	(5)		*
Dennis Flanagan		13,750	(5)		*
David D. Gathman		46,350	(5)(6)		*
Leslie Hayman		—			*
John P. Kirwin, III		45,750	(5)		*
Christopher G. McCann		38,750	(5)		*
John M. Ryan		88,750	(5)		*
Eric N. Rubino		157,000	(5)		*
Keith D. Schneck		83,750	(5)		*
Peter Bolton		22,500	(5)		*
James W. Kirby		15,000	(5)		*
All executive officers and directors as a group (11 persons)		585,100	(5)		2.9

*

Less than 1%

(1)

FMR Corp. filed a Schedule 13G on January 10, 2007, upon which Neoware has relied in making this disclosure. Fidelity Management & Research Company, an investment advisor to various investment companies that comprise the Fidelity Funds that own the shares of Neoware’s common stock and a wholly-owned subsidiary of FMR Corp. beneficially owns 1,950,031 shares (or 9.7%) of Neoware’s common stock. Edward C. Johnson III, Chairman of FMR Corp., along with other members of his family, collectively own 49% of the voting power of FMR Corp. The power to vote or direct the voting of the shares of common stock held by the Fidelity Funds resides with the board of trustees of the Fidelity Funds. FMR Corp. through its control of Fidelity Management & Research Company and the Fidelity Funds, and Mr. Johnson each has sole power to dispose of 1,950,031 shares.

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(2)	Central Securities Corporation filed a Schedule 13G on January 29, 2007, upon which Neoware has relied in making this disclosure.
(3)	T. Rowe Price Associates, Inc. filed a Schedule 13G on February 14, 2007, upon which Neoware has relied in making this disclosure. T. Rowe Price Associates, Inc. has sole voting power of 77,800 shares of Neoware’s common stock and the sole power to direct the disposition of 1,335,300 shares (or 6.6%) of Neoware’s common stock.
(4)	Putnam, LLC (d/b/a/ Putnam Investments) filed a Schedule 13G on February 13, 2007, upon which Neoware has relied in making this disclosure. Putnam, LLC wholly owns two registered investment advisers — Putnam Investment Management, LLC., which is the investment adviser to the Putnam family of mutual funds and beneficially owns 529,198 (or 2.7%) of the shares of Neoware commons stock subject to the Schedule 13G, and The Putnam Advisory Company, LLC, which is the investment adviser to Putnam’s institutional clients and beneficially owns 482,060 (or 2.4%) of the shares of Neoware commons stock subject to the Schedule 13G. Both subsidiaries have dispositive power over 1,001,240 shares of Neoware’s common stock as investment managers, but each of the mutual fund’s trustees has voting power over the shares held by each fund, and The Putnam Advisory Company, LLC. has shared voting power over 305,160 shares of Neoware’s common stock held by the institutional clients.
(5)	Includes options exercisable within 60 days of August 15, 2007 to purchase Neoware’s common stock issued pursuant to Neoware’s equity incentive plans as follows: Mr. Besier, 72,500 shares; Mr. Flanagan, 13,750 shares; Mr. Gathman, 43,750 shares; Mr. Kirwin, 36,250 shares; Mr. McCann, 33,750 shares; Mr. Ryan, 33,750 shares; Mr. Rubino, 157,000 shares; Mr. Schneck, 83,750 shares; Mr. Bolton, 22,500 shares; Mr. Kirby, 15,000 shares; and all executive officers and directors as a group, 507,000 shares.
(6)	Mr. Gathman beneficially owns 2,600 shares of common stock jointly with his wife.

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Equity Compensation Plan Information

     The following table sets forth information about the shares of our common stock that may be issued as of June 30, 2007 upon the exercise of options under the Amended and Restated 2004 Equity Incentive Plan (the “2004 Plan”) and the 1995 Stock Option Plan (the “1995 Plan”), which were approved by the stockholders, and shares that may be issued under options under the 2002 Stock Option Plan (the “2002 Plan”), which was not approved by our stockholders.

	(a)
	Number of				(c)
	securities to be				Number of securities
	issued upon		(b)		remaining available for
	exercise of		Weighted-average		future issuance under
	outstanding		exercise price of		equity compensation
	options,		outstanding		plans (excluding
	warrants and		options, warrants		securities reflected in
Plan category	Rights		and rights		column (a)
Equity compensation plans approved by security holders(1)		1,626,871	$	13.08		1,438,645
Equity compensation plans not approved by security holders(2)		283,324	$	13.00		—
		1,910,195	$	13.08		1,438,645

(1)

The 2004 Plan, designed to provide equity compensation to certain of our employees, officers, directors and independent contractors, authorizes the grant of incentive and non-qualified options, stock appreciation rights, restricted shares and restricted share units. The 1995 Stock Option Plan, which was replaced by the 2004 Plan, authorized the granting of incentive and non-qualified stock options. The 1995 Plan was terminated on December 1, 2004 as to any shares available for future grant. Options granted under the 1995 Plan that terminate, expire or are canceled without having been exercised after December 1, 2004 will be available for grant under the 2004 Plan.

(2)

The 2002 Plan, which was designed to provide equity compensation to certain of our employees, officers, directors and independent contractors, authorized the granting of non-qualified stock options. A total of 700,000 shares were reserved for issuance under the 2002 Plan. The option price per share for any stock option granted under the 2002 Plan was not less than the last reported trade of Neoware’s common stock on the National Association of Securities Dealers, Inc. Automated Quotation (“NASDAQ”) System on the date of grant or the day immediately preceding the date of grant. Upon the occurrence of a change in control, as defined under the 2002 Plan, the Board of Directors or committee appointed by the Board to administer the plan may, on a case-by-case basis, provide for the individual vesting of any unvested stock options held by a plan participant. The 2002 Plan did not permit the granting of incentive stock options or provide for automatic grants of options to non-employee directors. The 2002 Plan was not approved by our stockholders and was terminated on December 1, 2004 as to any shares available for future grant. Options granted under the 2002 Plan that terminate, expire or are canceled without having been exercised after December 1, 2004 will be available for grant under the 2004 Plan.

Changes in Control

     On July 23, 2007, we entered into an Agreement and Plan of Merger, or merger agreement, with HP and Narwhal Acquisition Corporation, the merger sub, pursuant to which HP has agreed to acquire all of the issued and outstanding shares of our common stock for a cash purchase price of $16.25 per share, which will result in a change in control of Neoware. For additional information regarding the pending merger, please see the information under the caption “Overview” within Part I, Item 1, which is incorporated herein by reference.

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Item 13. Certain Relationships and Related Transactions, and Director Independence

Review and Approval of Related Person Transactions

     We review all relationships and transactions in which Neoware and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. All of our Board members and our executive officers must certify on an annual basis in a written questionnaire as to the existence of related person transactions as that term is defined in Item 404 of Regulation S-K. Our Audit Committee, with the advice of our General Counsel and outside counsel, then determines, based on the facts and circumstances, whether Neoware or a related person has a direct or indirect material interest in the transaction. As required under SEC rules, transactions that are determined to be directly or indirectly material to Neoware or a related person are disclosed in our proxy statement. In addition, the Audit Committee reviews and approves or ratifies any related person transaction that is required to be disclosed. In the course of its review and approval or ratification of a disclosable related party transaction, the Committee considers:

• the nature of the related person’s interest in the transaction;

• the material terms of the transaction, including, without limitation, the amount and type of transaction;

• the importance of the transaction to the related person;

• the importance of the transaction to Neoware;

• whether the transaction would impair the judgment of a director or executive officer to act in the best interest of Neoware; and

• any other matters the Committee deems appropriate.

          Since the beginning of the 2007 fiscal year, we have not engaged in any transaction or series of similar transactions, or any currently proposed transaction or series of similar transactions, to which Neoware or any of its subsidiaries was or is to be a participant (1) in which the amount involved exceeds $120,000 and (2) in which any of our directors, executive officers or persons known to us to be beneficial owners of more than 5% of our common stock, or members of the immediate families of those individuals, had or will have, a direct or indirect material interest.

Director Independence

     Please see the disclosure regarding director independence under the caption “Director Independence and Expertise” in Part III, Item 10, which is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Audit and Non-Audit Fees

     The following table shows the fees billed to Neoware by its independent registered public accounting firm for services provided to us during the 2007 and 2006 fiscal years:

	Year Ended June 30,
	2007		2006
Audit Fees	$	594,900	$	614,781
Audit-Related Fees		311,970		—
Tax Fees		45,000		61,232
All Other Fees		—		13,538

• Audit Fees consist of fees billed for professional services rendered for the audit of our annual financial statements, reviews of the financial statements included in our quarterly report on Forms 10-Q and work associated with issuing the independent registered accounting firm’s audit report on our internal controls over financial reporting.

• Audit-Related Fees consist of services that are reasonably related to the performance of the audit of our financial statements and are not reported under “Audit Fees.” In the 2007 fee paid to our independent registered public accounting firm primarily consist of pre-acquisition financial due diligence investigations.

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• Tax Fees consist of professional services rendered by the independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and tax advice.

• All Other Fees in 2006 fiscal years paid to the independent registered public accounting firm primarily consist of work associated with our preliminary prospectus supplement filed with the Securities and Exchange Commission on February 7, 2006.

     The Audit Committee considered whether the services provided above are compatible with maintaining the independence of the independent registered public accounting firm.

Audit Committee Pre-Approval of Services and Fees

     The Audit Committee’s procedure is to review all proposed audit and non-audit services to be provided by the independent registered public accounting firm and, before engaging the independent registered public accounting firm, pre-approve the performance of such services and related fees. Any fee amounts pre-approved for the audit and audit-related services are updated to the extent necessary at the regularly scheduled meetings of the Audit Committee during the year. The independent registered public accounting firm and management must report to the Audit Committee actual fees versus those pre-approved periodically throughout the fiscal year.

     The Audit Committee has considered the above non-audit services and has determined that the provision of such services is compatible with maintaining the independence of the independent registered public accounting firm. All services rendered by KPMG LLP were permissible under applicable laws and regulations, and were pre-approved by the Audit Committee for the 2007 fiscal year.

     In the 2007 fiscal year, there were no fees paid to KPMG LLP under a de minimis exception to the rules that waives pre-approval for certain non-audit services

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PART IV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements

     The following are included in Item 8 and are filed as part of this Annual Report on Form 10-K:

• Consolidated Balance Sheets as of June 30, 2007 and 2006

• Consolidated Statements of Operations for the years ended June 30, 2007, 2006 and 2005.

• Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended June 30, 2007, 2006 and 2005.

• Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005.

• Notes to Consolidated Financial Statements

• Report of Independent Registered Public Accounting Firm

• Management’s Annual Report on Internal Control Over Financial Reporting

Financial Statement Schedule

     The following financial statement schedule is filed as part of this Annual Report on Form 10-K for the years ended June 30, 2007, 2006 and 2005:

• Schedule II — Valuation and Qualifying Accounts

     Schedules other than that listed above have been omitted since they are either not required, not applicable, or because the information required is included in the consolidated financial statements or the notes thereto.

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Exhibits

Exhibit
Number	Description update
2.1**	Agreement and Plan of Merger (the “Agreement”) dated as of October 25, 2005 by and among Neoware Systems, Inc., Rabbit Corporation, Maxspeed Corporation, and with respect to Section 2.3 and Article VIII only, Wei Ching and Chu Nei, and Wei Ching, as Shareholder Representative (Exhibit 2.1)(12)
2.2	Agreement and Plan of Merger made and entered into as of July 23, 2007, by and among Hewlett-Packard Company, Narwhal Acquisition Corporation and Neoware, Inc. (Exhibit 2.1)(20)
3.1	Certificate of Incorporation (Exhibit 3.1)(1)
3.2	Amendment to Certificate of Incorporation (Exhibit 3.2)(2)
3.3	By-laws (Exhibit 3.2)(3)
10.1†	1995 Stock Option Plan (as amended on December 4, 2002). (Exhibit 10.4)(5)
10.2†	Letter Agreement, dated October 18, 2005 from the Registrant. to Michael Kantrowitz. (Exhibit 10.1(4)
10.3†	Employment offer letter dated July 12, 2006 from the Registrant to Klaus P. Besier. (Exhibit 10.1)(15)
10.4†	Letter Agreement, dated December 9, 2002, between the Registrant and Eric R. Rubino. (Exhibit 10.2)(5)
10.5†	Termination and Service Agreement dated October 30, 2006 between the Registrant and Michael Kantrowitz (Exhibit 10.3)(4)
106†	Amended and Restated 2002 Non-Qualified Stock Option Plan (as amended on June 30, 2003) (Exhibit 4.1)(6)
10.7†	Employment letter agreement dated October 30, 2006 from the Registrant to Klaus P. Besier (Exhibit 10.4)(4)
10.8†	Employment Agreement dated December 16, 2005 between the Registrant and Wei Ching (Exhibit 10.1(16)
10.9†	Letter Agreement, dated April 11, 2003, between the Registrant and Keith D. Schneck. (Exhibit 10.18)(7)
10.10†	Form of Incentive Stock Option Agreement under the Registrant’s 1995 Stock Option Plan (as amended on December 4, 2002). (Exhibit 10.15)(11)
10.11†	Form of Non-Qualified Stock Option Agreement under the Registrant’s 1995 Stock Option Plan (as amended on December 4, 2002). (Exhibit 10.16)(11)
10.12†	Form of Non-Qualified Stock Option Agreement (Directors) under the Registrant’s 1995 Stock Option Plan (as amended on December 4, 2002) (Exhibit 10.13)(11)
10.13†	Form of Stock Option Agreement under in Registrant’s Amended and Restated 2002 Non-Qualified Stock Option Plan (as amended on June 30, 2003). (Exhibit 10.18)(11)
10.14†	Amended and Restated 2004 Equity Incentive Plan (Exhibit 10.1)(19)
10.15†	Separation Agreement and Release of all Claims between the Registrant and Roy Zatcoff. (Exhibit 10.2)(4)
10.16†	Form of Annual Director Grant Agreement under the Registrant’s 2004 Equity Incentive Plan (Exhibit 10.3)(8)
10.17†	Form of Incentive Stock Option Award Agreement under the Registrant’s 2004 Equity Incentive Plan (Exhibit 10.4)(8)
10.18†	Form of Non-Qualified Stock Option Award Agreement under the Registrant’s 2004 Equity Incentive Plan (Exhibit 10.6)(8)
10.19	Form of Stock Option Award Agreement for Optionees Residing in France under the Registrant’s 2004 Equity Incentive Plan (Exhibit 4.6)(10)
10.20†	2005 Executive Bonus Plan (Exhibit 10.7)(8)

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Exhibit
Number	Description update
10.21†	Summary of Compensation Arrangement with Peter Bolton, Executive Vice President — Europe, Middle East and Africa and James Kirby, Executive Vice President Sales — Americas and APAC. (Exhibit 10.2)(17)
10.22	Lease Agreement between Liberty Property Limited Partnership and Neoware Systems, Inc. dated as of August 2, 2005 (Exhibit 10.1)(9)
10.23†	2006 Senior Officer Bonus Plan (Exhibit 10.1)(14)
10.24†	Separation Agreement and General Release of All Claims between the Registrant and Wei Ching dated November 17, 2006 (Exhibit 10.3)(17)
10.25†	Summary of Cash Compensation Policy for Non-Employee Directors. Exhibit 10.1 (18)
21.1*	Subsidiaries
23.1*	Consent of KPMG LLP
31.1*	Certification of Klaus P. Besier as President and Chief Executive Officer of Neoware, 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, Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Klaus P. Besier as President and Chief Executive Officer of Neoware, 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, Inc pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Filed herewith.
**	Indicates confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Securities and Exchange Commission pursuant to a Confidential Treatment Request.
†	Management contract or arrangement.
(1)	Filed as an Exhibit to the Registrant’s Registration Statement on Form S-1 (File No. 33-56834) filed with the SEC on January 7, 1993.
(2)	Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1994.
(3)	Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 1999.
(4)	Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
(5)	Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2002.
(6)	Filed as an Exhibit to Registrant’s Registration Statement on Form S-8 (No. 333-107970) filed with the Securities and Exchange Commission on August 14, 2003.
(7)	Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K filed on September 15, 2003.
(8)	Filed as an Exhibit to the Registrant’s Form 10-Q for the quarter ended December 31, 2004.
(9)	Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed on August 8, 2005.
(10)	Filed as an Exhibit to Registrant’s Registration Statement on Form S-8 (No. 333-126533) filed with the Securities and Exchange Commission on July 12, 2005.
(11)	Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2004.
(12)	Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed on November 22, 2005.
(13)	Filed as an Exhibit to the Registrant’s Annual Report on Form 10-K for the year ended June 30, 2005.
(14)	Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed on January 31, 2006.
(15)	Filed as an Exhibit to the Registrant’s Current Report on Form 8-K filed on July 13, 2006.
(16)	Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2005.
(17)	Filed as an Exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2006.
(18)	Filed as an Exhibit to Registrant’s Current Report on Form 8K filed on November 2, 2006.
(19)	Filed as an Exhibit to Registrant’s Current Report on Form 8K filed on December 6, 2006.
(20)	Filed as an Exhibit to Registrant’s Current Report of Form 8K filed on July 23, 2007.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on September 12, 2007.

NEOWARE, INC.
By:	/s/ Klaus P. Besier
	President and Chief Executive Officer
	(Principal Executive Officer)
By:	/s/ Keith D. Schneck
	Financial Officer (Principal Financial Officer and
	Principal Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

Each person in so signing also makes, constitutes and appoints Klaus P. Besier, President and Chief Executive Officer, and Keith D. Schneck, Executive Vice President and Chief Financial Officer, and each of them severally, his or her true and lawful attorney-in-fact, in his or her name, place and stead to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report.

Signature	Title	Date
/s/ Klaus P. Besier Klaus P. Besier	President, Chief Executive Officer and Director	September 12, 2007
Dennis Flanagan	Chairman of the Board and Director
/s/ David D. Gathman David D. Gathman	Director	September 12, 2007
/s/ John P. Kirwin John P. Kirwin	Director	September 12, 2007
/s/ Christopher G. McCann Christopher G. McCann	Director	September 12, 2007
/s/ John M. Ryan John M. Ryan	Director	September 12, 2007
/s/ Leslie Hayman Leslie Hayman	Director	September 12, 2007

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FINANCIAL STATEMENTS

     As required under Item 8. Financial Statements and Supplementary Data, the consolidated financial statements of the Company are provided in this separate section. The consolidated financial statements included in this section are as follows:

	Page
Consolidated Balance Sheets as of June 30, 2007 and 2006		73
Consolidated Statements of Operations for the years ended June 30, 2007, 2006 and 2005		74
Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended June 30, 2007, 2006 and 2005		75
Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005		76
Notes to Consolidated Financial Statements		77
Report of Independent Registered Public Accounting Firm		97
Management’s Annual Report on Internal Control Over Financial Reporting		98

72

NEOWARE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

	June 30,
	2007			2006
ASSETS
Current assets:
Cash and cash equivalents	$	75,983		$	19,328
Restricted cash		389			—
Short-term investments		45,125			94,798
Accounts receivable, net of allowance for doubtful accounts of $651 and $1,854		18,431			16,877
Inventories		7,186			7,734
Prepaid income taxes		2,875			1,544
Prepaid expenses and other		2,851			1,687
Deferred income taxes		1,774			1,866
Total current assets		154,614			143,834
Property and equipment, net		2,655			1,586
Goodwill		37,501			37,761
Intangibles, net		8,670			12,175
Deferred income taxes		4,862			4,156
Other		81			61
	$	208,383		$	199,573
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	8,065		$	8,989
Accrued compensation and benefits		3,842			2,021
Other accrued expenses		4,266			4,159
Restructuring reserve		421			600
Income taxes payable		316			158
Deferred revenue		1,638			973
Total current liabilities		18,548			16,900
Deferred income taxes		1,102			755
Deferred revenue		328			316
Total liabilities		19,978			17,971
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $.001 par value, 1,000,000 shares authorized and none issued and outstanding		—			—
Common stock, $.001 par value, 50,000,000 shares authorized, 20,235,493 and 20,040,891 shares issued and 20,135,493 and 19,940,891 shares outstanding		20			20
Additional paid-in capital		165,715			158,671
Treasury stock, 100,000 shares at cost		(100	)		(100	)
Accumulated other comprehensive income		2,672			556
Retained earnings		20,098			22,455
Total stockholders’ equity		188,405			181,602
	$	208,383		$	199,573

See accompanying notes to consolidated financial statements.

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NEOWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Year Ended June 30,
	2007			2006			2005
Net revenues	$	90,401		$	107,219		$	78,784
Cost of products and services (includes stock-based compensation expense of $102 and $86 in 2007 and 2006)		56,035			61,607			43,833
Amortization of intangibles		1,367			1,260			737
Total cost of revenues		57,402			62,867			44,570
Gross profit		32,999			44,352			34,214
Sales and marketing		19,541			16,920			12,118
Research and development		6,899			6,030			3,850
General and administrative		12,259			10,211			6,866
Amortization of intangibles		2,403			1,965			1,058
Abandoned acquisition costs		874			—			34
Total operating expenses (includes stock-based compensation expense of $4,434 and $3,300 in 2007 and 2006)		41,976			35,126			23,926
Operating income (loss)		(8,977	)		9,226			10,288
Interest income, net		4,158			1,937			859
Foreign exchange loss		(71	)		(59	)		(283	)
Income (loss) before income taxes		(4,890	)		11,104			10,864
Income tax expense (benefit)		(2,533	)		4,007			3,425
Net income (loss)	$	(2,357	)	$	7,097		$	7,439
Earnings (loss) per share:
Basic	$	(0.12	)	$	0.40		$	0.47
Diluted	$	(0.12	)	$	0.39		$	0.46
Weighted average number of common shares outstanding:
Basic		19,990			17,665			15,931
Diluted		19,990			18,105			16,202

See accompanying notes to consolidated financial statements.

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NEOWARE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(in thousands, except per share data)

										Accumulated
					Additional					Other			Retained
	Common Stock				Paid-in		Treasury			Comprehensive			Earnings
	Shares		Amount		Capital		Stock			Income			(Deficit)			Total
BALANCE AT JUNE 30, 2004		15,686,504	$	16	$	71,718	$	(100	)	$	936		$	7,919		$	80,489
Net income		—		—		—		—			—			7,439			7,439
Translation adjustment		—		—		—		—			(818	)		—			(818	)
Total comprehensive income																	6,621
Shares issued for acquisition		153,682		—		1,300		—			—			—			1,300
Exercise of warrants		13,000		—		122		—			—			—			122
Exercise of employee stock options		396,868		—		1,323		—			—			—			1,323
Tax benefits related to stock options		—		—		114		—			—			—			114
BALANCE AT JUNE 30, 2005		16,250,054	$	16	$	74,577	$	(100	)	$	118		$	15,358		$	89,969
Net income		—		—		—		—			—			7,097			7,097
Translation adjustment		—		—		—		—			438			—			438
Total comprehensive income																	7,535
Issuance of common stock, net of expenses		3,000,000		3		71,152		—			—			—			71,155
Share-based payment arrangements		11,290		—		3,386		—			—			—			3,386
Exercise of employee stock options		679,547		1		7,895		—			—			—			7,896
Excess tax benefits from stock option exercises		—		—		1,661		—			—			—			1,661
BALANCE AT JUNE 30, 2006		19,940,891	$	20	$	158,671	$	(100	)	$	556		$	22,455		$	181,602
Net loss		—		—		—		—			—			(2,357	)		(2.357	)
Translation adjustment		—		—		—		—			2,116			—			2,116
Total comprehensive loss																	(241	)
Share-based payment arrangements		—		—		4,536		—			—			—			4,536
Exercise of employee stock options		194,602		—		1,832		—			—			—			1,832
Excess tax benefits from stock option exercises		—		—		676		—			—			—			676
BALANCE AT JUNE 30, 2007		20,135,493	$	20	$	165,715	$	(100	)	$	2,672		$	20,098		$	188,405

See accompanying notes to consolidated financial statements.

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NEOWARE, INC.

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

	Year Ended June 30,
	2007			2006			2005
Cash flows from operating activities:
Net income (loss)	$	(2,357	)	$	7,097		$	7,439
Adjustments to reconcile net income (loss) to net cash provided by operating activities-
Amortization of intangibles		3,770			3,225			1,795
Depreciation		574			421			290
In-process research and development		—			—			300
Non-cash share-based compensation		4,536			3,386			—
Tax benefit related to stock options		—			—			114
Deferred income tax benefit		(601	)		(820	)		(3	)
Changes in operating assets and liabilities, net of effect from acquisitions-
Restricted cash		(390	)		—			—
Accounts receivable		(1,452	)		1,062			(6,156	)
Inventories		549			(1,144	)		(1,596	)
Prepaid expenses and other		(2,435	)		1,033			(753	)
Accounts payable		(937	)		(451	)		2,641
Accrued expenses		1,822			(5,493	)		3,143
Deferred revenue		651			115			33
Net cash provided by operating activities		3,730			8,431			7,247
Cash flows from investing activities:
Purchases of short-term investments		(172,275	)		(95,233	)		(48,829	)
Sales of short-term investments		221,924			36,188			52,177
Purchases of property and equipment		(1,672	)		(1,498	)		(157	)
Acquisition of Maxspeed, net of cash acquired		1,674			(11,982	)		—
Purchase of TeleVideo thin client business		—			(3,520	)		—
Purchase of Visara thin client business		—			(2,107	)		(3,804	)
Purchase of ThinTune thin client business, net of cash acquired		—			—			(10,087	)
Purchase of Qualystem S.A.S. business, net of cash acquired		—			—			(4,232	)
Purchase of Mangrove S.A.S. business, net of cash acquired		—			—			(2,744	)
Net cash provided by (used in) investing activities		49,651			(78,152	)		(17,676	)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of expenses		—			71,155			—
Exercise of stock options and warrants		1,832			7,896			1,445
Excess tax benefit from share-based payment arrangements		676			1,661			—
Repayments of capital leases		—			—			(6	)
Net cash provided by financing activities		2,508			80,712			1,439
Effect of foreign exchange rate changes on cash		766			52			156
Increase (decrease) in cash and cash equivalents		56,655			11,043			(8,834	)
Cash and cash equivalents, beginning of year		19,328			8,285			17,119
Cash and cash equivalents, end of year	$	75,983		$	19,328		$	8,285
Supplemental cash flow disclosures:
Cash paid for income taxes	$	473		$	6,189		$	918
Issuance of common stock for purchase of Mangrove Systems, S.A.S.		—			—			1,300

See accompanying notes to consolidated financial statements.

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NEOWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     Business

     Neoware, Inc. (“we”, “us”, and “our” refer to Neoware, Inc. and all of its subsidiaries) provides thin client computing solutions. Our thin client software and devices enable organizations to enhance security, improve manageability, increase reliability and lower the up-front and ongoing cost of computing. Our software powers, secures and manages thin client devices and traditional personal computers, enabling these devices to run Windows^® and web applications across a network, as well as to connect to mainframes, mid-range, UNIX and Linux systems. We differentiate our thin client computing solutions by using a software-centric approach that is focused on providing standards-based technology that enables our customers to integrate our solutions into their existing IT infrastructure, leveraging their existing investments and lowering the overall cost of deployment and implementation.

     Principles of Consolidation

     The consolidated financial statements include the accounts of Neoware, Inc. and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

     Use of Estimates

     The preparation of the consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include judgments related to revenue recognition; the valuation of intangibles and goodwill; accounting for income taxes; inventory valuation; and stock-based compensation. Actual results could differ from those estimates.

     Reclassification

     The June 30, 2006 consolidated balance sheet has been revised to reflect a reclassification from cash and cash equivalents to short-term investments. This revision did not impact the consolidated statement of operations for the year ended June 30, 2006. However, this revision increased cash flows used in investing activities and decreased the increase in cash and cash equivalents in the consolidated statement of cash flows for the year ended June 30, 2006. The impact of this reclassification and revision on the previously issued consolidated balance sheet and statements of cash flows is as follows (in thousands):

June 30, 2006	As Reported			Adjustment			As Adjusted
Cash and cash equivalents	$	86,223		$	(66,895	)	$	19,328
Short-term investments		27,903			66,895			94,798
Net cash used in investing activities		(11,257	)		(66,895	)		(78,152	)
Increase in cash and cash equivalents		77,938			(66,895	)		11,043

     Cash and Cash Equivalents

     Cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less. Excess cash is invested in diversified instruments maintained primarily in U.S. financial institutions in an effort to preserve principal and to maintain safety and liquidity.

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     Short-Term Investments

     We classify our investments as available-for-sale securities or held-to-maturity securities. Available-for-sale securities are carried at fair value based on quoted market prices, with the unrealized gains and losses, net of tax, reported as a separate component of stockholders’ equity. To date, unrealized gains and losses have been immaterial. Held-to-maturity investments in debt securities classified as held to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts using the effective interest method. Held-to-maturity investments consist of debt securities which we have the ability and the intention to hold these investments to maturity and accordingly, they are not adjusted for temporary declines in their fair value. The contractual maturities of short-term investments are a year or less. The difference between cost and fair value of held-to-maturity investments is not material.

     The following table provides a summary of short-term investments (in thousands):

	June 30,
	2007		2006
Held-to-maturity:
Certificates of deposit	$	—	$	315
Available-for-sale:
Corporate and municipal notes and bonds and asset-backed securities		45,125		94,483
	$	45,125	$	94,798

     Inventories

     Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

     Financial Instruments

     Our financial instruments, primarily cash and cash equivalents, marketable securities, accounts receivable, accounts payable, and accrued expenses are carried at cost which approximates fair value due to the short-term maturity of these instruments.

     Property and Equipment

     Property and equipment are recorded at cost. Depreciation and amortization are calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the remaining lease term, if shorter. The estimated useful life of furniture and equipment and computer equipment is generally three to seven years and the estimated useful life of leasehold improvements is generally the lesser of seven years or the remaining lease term.

     Goodwill and Other Intangibles

     Goodwill represents the excess of the purchase price of net tangible and identifiable intangible assets acquired in business combinations over their estimated fair value. Other intangibles mainly represent acquired technology, customer and distribution relationships, non-compete agreements and tradenames acquired.

     Equity-Based Compensation

     In July 2005, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123R) which was issued in December 2004. SFAS No. 123R revises SFAS No. 123, “Accounting for Stock Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period that the employee is required to perform the services in exchange for the award. SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is included within operating cash flows. We adopted SFAS No. 123R using the modified prospective method. Accordingly, prior period amounts have not been restated. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that were outstanding at the date of adoption.

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Classification of Stock-Based Compensation Expense

     Stock-based compensation is as follows (in thousands):

	Year Ended June 30,
	2007		2006		2005
Cost of revenues	$	102	$	86	$	—
Selling and marketing		1,353		1,238		—
Research and development		376		394		—
General and administrative		2,705		1,668		—
	$	4,536	$	3,386	$	—

Tax Effect related to Stock-Based Compensation Expense

     SFAS No. 123R provides that income tax effects of share-based payments are recognized in the financial statements for those awards that will normally result in tax deductions under existing tax law. Under current U.S. federal tax law, we would receive a compensation expense deduction related to non-qualified stock options only when those options are exercised and vested shares are received. Accordingly, the financial statement recognition of compensation cost for non-qualified stock options creates a deductible temporary difference which results in a deferred tax asset and a corresponding deferred tax benefit in the income statement. We do not recognize a tax benefit for compensation expense related to incentive stock options (ISOs) unless the underlying shares are disposed of in a disqualifying disposition. Accordingly, compensation expense related to ISOs is treated as a permanent difference for income tax purposes.

Fair Value Disclosures — Prior to SFAS No. 123R Adoption

     Before the adoption of SFAS No. 123R we applied APB Opinion No. 25 to account for our stock-based awards. Under APB Opinion No. 25, we were not required to recognize compensation expense for the cost of stock options. Had we adopted SFAS No. 123 at the beginning of fiscal 2005, the impact would have been as follows:

	Year Ended
	June 30, 2005
Net income
As reported	$	7,439
Less:
Stock-based employee compensation expense determined under the fair value based method for all awards, net of tax		(3,410	)
Stock-based employee compensation expense related to acceleration of certain unvested stock options, net of tax		(3,300	)
Pro forma	$	729
Basic earnings per share:
As reported	$	0.47
Pro forma	$	0.05
Diluted earnings per share:
As reported	$	0.46
Pro forma	$	0.05

     The fair value of stock-based awards to employees during fiscal 2005 was estimated at the date of grant using the Black-Scholes closed form option-pricing model (Black-Scholes), assuming no dividends and using the valuation assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life (estimated period of time outstanding) of the stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life, and calculated on a daily basis.

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Expected term	7 years
Expected volatility		113% - 121%
Weighted average volatility		117%
Risk-free rate		3.6% - 4.4%

     The above assumptions were used to determine the weighted average per share fair value of $8.55 for stock options granted during fiscal 2005.

Valuation Assumptions for Options Granted during Fiscal 2007 and 2006

     The fair value of each stock option granted under our equity compensation plan was estimated at the date of grant using Black-Scholes, assuming no dividends and using the following valuation assumptions noted in the following table. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life (estimated period of time outstanding) of the stock options granted was estimated using the historical exercise behavior of employees. Expected volatility was based on historical volatility for a period equal to the stock option’s expected life, and calculated on a daily basis.

	Year Ended June 30,
	2007		2006
Expected term	5.3 years		5.5 years
Expected volatility		64% - 77%		74% - 87%
Weighted average volatility		72%		77%
Risk-free rate		4.5% - 5.1%		3.9% - 5.2%
Weighted average per share fair value		$8.42		$11.22

Equity Compensation Plans

     In December 2004, our stockholders approved the 2004 Equity Incentive Plan (“the 2004 Plan”), and the 1995 Stock Option Plan and the 2002 Non-Qualified Stock Option Plan were terminated as to any shares then available for future grant. On November 30, 2006, our stockholders approved the Amended and Restated 2004 Plan to increase the number of shares available for issuance to our directors, executives and a broad-based category of employees from 1,500,000 to 2,700,000. In addition to the 2,700,000 available for issuance, all outstanding options which terminate, expire or are canceled under the terminated plans on or after December 1, 2004 are available for issuance under the 2004 Plan. Under the terms of the 2004 Plan, the exercise price of options granted cannot be less than the fair market value on the date of grant. Non-employee director options that are automatically granted upon the person first becoming a director vest and become exercisable six months after the date of grant and options granted annually vest and become exercisable for one-half the shares six months from the date of grant and for the balance of the grant one year from the date of grant. All options that have been granted expire ten years from the grant date, although the committee or board may define vesting and expiration dates for all options granted under the 2004 Plan, except for automatic grants of options to non-employee directors and provided that the term does not exceed 10 years, or five years for ISOs granted to optionees who are holders of 10% or more of our stock.

     In May 2005, our Board of Directors approved the acceleration of the vesting of unvested stock options held by employees that had option exercise prices of greater than $14.00 per share. Our stock price had ranged from $6.30 to $12.23 over the previous twelve months. As a result of the acceleration, options to purchase 532,376 shares of our common stock became immediately exercisable. Of these options, approximately seventy percent were scheduled to vest within the next eighteen months. The decision to accelerate vesting of these stock options was made to avoid recognizing compensation cost in the Consolidated Statements of Operations in future financial statements upon our adoption of SFAS No. 123R on July 1, 2005 and because the Board believed that the incentive and retention value of these options was significantly lower than their valuation using the Black-Scholes methodology. We estimate that the accelerated vesting of the stock options reduced stock-based compensation expense on a pre-tax basis by approximately $2.9 million in fiscal 2007, based on valuation calculations using the Black Scholes methodology.

     In October 2006, our former Chief Executive Officer resigned and entered into an agreement to assume the position of Executive Chairman of the Board of Directors. This Agreement was terminated effective January 15, 2007. Under the agreement, he received full vesting of all of his outstanding, unvested stock options and, generally, an additional nine months post vesting exercise period for all outstanding options. In the second quarter of fiscal 2007, we recorded an incremental $1.1 million of stock-based compensation expense as a result of this modification.

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     Currently, our primary type of stock-based compensation consists of stock options, generally vesting over four years. We fund shares issued upon exercise out of available authorized shares.

     A summary of the status of our stock option plans as of June 30, 2007 is presented below:

				Weighted		Remaining		Intrinsic
				Average		Contractual		Value
	Shares			Exercise Price		Term		(in thousands)
Outstanding as of June 30, 2006		1,956,568		$	12.75
Granted		513,000			13.01
Exercised		(200,248	)		9.16
Terminated		(359,125	)		13.38
Outstanding as of June 30, 2007		1,910,195			13.08		6.5	$	3,110
Options exercisable at June 30, 2007		1,027,050		$	13.93		4.7	$	1,458
Options expected to vest at June 30, 2007		609,370		$	12.09		8.6	$	1,652
Options available for future grants at June 30, 2007		1,438,645

     The total intrinsic value of options exercised in fiscal 2007 was $559,000. Upon exercise of stock options, we issue authorized, but unissued shares.

     As of June 30, 2007, there was $5.8 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements related to stock options granted under the Plan. This cost is expected to be recognized over a weighted-average period of 2.6 years.

     The 2004 Plan permits us to grant non-vested awards which may impose conditions, including continued employment or performance conditions. The terms and conditions applicable to a restricted stock issuance, including the vesting periods and conditions, and the form of consideration payable, if any, are determined by the Compensation and Stock Option Committee of the Board of Directors. The plan provides that non-vested awards will not vest in full in less than three years if vesting is based on continued employment or the passage of time, provided that up to 120,000 shares may be granted with vesting based on continued employment or the passage of time over less than one year. Vesting for non-vested awards based on the achievement of performance criteria may not vest in less than one year. Notwithstanding the above, vesting may be otherwise determined by the Committee upon a change in control or upon the participant’s death or termination of service, other than for cause.

     During fiscal 2007 we did not grant any non-vested stock awards. Changes in our non-vested stock awards for fiscal 2007 were as follows:

				Weighted
				Average Grant
	Shares			Date Fair Value
Unvested as of June 30, 2006		11,290		$	13.29
Vested		(5,646	)		13.29
Unvested as of June 30, 2007		5,644			13.29

     As of June 30, 2007, there was $26,000 of total unrecognized compensation cost related to non-vested stock-based compensation arrangements related to restricted stock granted under the Plan. This cost is expected to be recognized over a weighted-average period of 0.5 years.

     Revenue Recognition

     Net revenues include sales of thin client appliance systems, which include the appliance device and related software, and services. 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 systems is more than incidental to the thin client appliance systems as a whole. Revenue is recognized on product sales when persuasive

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evidence of an arrangement exists, delivery of the product has occurred, the fee is fixed or determinable and collectibility is probable. To date, sale of standalone software products and services have not exceeded 10% of our consolidated revenue for any period.

     Beginning in March 2007 changes were introduced to our post-contract support services whereby the cost to provide these services are not expected to be insignificant and unspecified upgrades and enhancements are expected to be more than minimal and infrequent. As a result, in March 2007 we began to defer revenue related to these post services from sales of our products which include one year of post contract support services. Prior to March 2007 revenue related to post-contract support services was generally recognized with the initial product sale when the fee was included with the initial product fee, post-contract services were for one year or less, the estimated cost of providing such services during the arrangement was insignificant, and unspecified upgrades and enhancements offered during the period were expected to continue to be minimal and infrequent. Revenue from extended warranty and stand alone post-contract support service contracts is recorded as deferred revenue and subsequently recognized over the term of the contract. Vendor specific objective evidence of these amounts is determined by the price charged when these elements are sold separately.

     Stock rotation rights and price protection are provided to certain distributors. Stock rotation rights are generally limited to a maximum amount per quarter and require a corresponding order of equal or greater value at the time of the stock rotation. Price protection provides for a rebate in the event we reduce the price of products that our distributors have yet to sell to end-users. We reserve for these arrangements based on a specific review of known issues, historical experience and the level of inventories in the distribution channel and reduce current period revenue accordingly.

     Product warranty costs are accrued at the time the related revenue is recognized. We offer fixed-price support and maintenance contracts, including extended warranties, to customers ranging from one to five years. Revenue from these transactions is recognized over the related term.

     We record sales and value added taxes that are externally imposed on a revenue producing transaction between a seller and a customer on a net basis in the statements of operations.

     Research and Development

     Costs incurred in the development of new software products are charged to expense as incurred until the technological feasibility of the product has been established. After technological feasibility has been established, any additional costs are capitalized. Capitalized software costs are amortized to cost of revenues over the expected life of the product, not to exceed three years. There were no capitalized software costs or related expense during fiscal 2006, 2005 or 2004 because there were no development costs incurred after the establishment of technological feasibility.

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     Concentrations of Credit Risk and Dependence on Supplier

     Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash, short-term investments and accounts receivable. We primarily invest our excess cash in corporate notes, government securities, auction rate securities, certificates of deposit, and other specific money market instruments of similar liquidity and credit quality. We are exposed to credit risks in the event of default by the financial institutions or issuers of investments to the extent recorded on the balance sheet. We generally do not require collateral related to accounts receivable. We maintain allowances for credit losses based on various factors, including changes in customers’ ability to pay due to bankruptcy, cash flow issues or other changes in the customer’s financial condition, significant payment delays and other economic conditions.

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

	Year Ended June 30,
	2007			2006			2005
Net revenues
North American distributor		11	%		*			10	%
Lenovo		*			17	%		5	%
North American customer		*			11	%		*
IBM		*			*			14	%

	June 30,
	2007			2006
Accounts receivable
North American distributor		15	%		*
North American customer		*			17	%
Billing agent for Lenovo		*			11	%

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

     In April 2005, in connection with the sale of IBM’s Personal Computing Division to Lenovo Group Limited, we entered into an agreement with Lenovo, under which Lenovo can purchase our products under the same terms as IBM. Our agreement with IBM remains in effect.

     IBM and Lenovo and our distributors resell our products to individual resellers and/or end-users. The percentage of revenue derived from IBM, Lenovo, individual distributors, resellers or end-users can vary significantly from year to year. In addition to our direct sales to IBM and Lenovo, IBM and Lenovo can purchase our products through individual distributors and/or resellers. Furthermore, IBM can influence an end-user’s decision to purchase our products even though the end-user may not purchase our products through IBM or Lenovo. While it is difficult to quantify the net revenues associated with these purchases, we believe that these sales are significant and can vary significantly from quarter to quarter.

     Net revenues from sales outside of the United States, primarily in Europe, Middle East and Africa (EMEA) represented approximately 41%, 33% and 40% of net revenues, respectively, in fiscal 2007, 2006 and 2005, including net revenue from sales to the United Kingdom of 12% in fiscal 2005. No single country outside of the United States accounted for more than 10% of net revenue in fiscal 2007 and 2006.

     We depend upon a limited number of single source suppliers for the design and manufacture our thin client devices and for several of the components in them. During fiscal 2005, we accommodated one of its suppliers by purchasing products for inventory in advance of our contractual obligations due to the supplier’s cash liquidity constraints, which increased inventory and decreased cash balances. Additionally, a domestic supplier that we added in fiscal 2005 requires payments in advance of our receipt of their product. We had outstanding advances to this supplier of $1.1 million at June 30, 2007, which was recorded as a prepaid expense. 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 revenues would decline and our profitability would be adversely impacted.

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     Earnings Per Share

     Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive common shares consist of employee stock options and warrants using the treasury stock method, if dilutive.

     Income Taxes

     Under the asset-and-liability method, 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. 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. We considered projected income in future periods, prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event we were to determine that we would be able to realize all or a portion of these deferred tax assets, an adjustment to the valuation allowance would increase earnings in the period such determination was made. Likewise, should we determine that we would not be able to realize all or a portion of our remaining deferred tax assets in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination was made.

     Comprehensive Income (Loss)

     We classify items of other comprehensive income (loss) by their nature in the financial statements and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of the consolidated balance sheets. Excluding net income, our source of other comprehensive income (loss) is unrealized income (loss) relating to foreign currency exchange rate fluctuations.

     Translation of Foreign Currencies

     Assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, are translated at year-end exchange rates. Income and expense items are translated at the average rates of exchange prevailing during the year. The adjustment resulting from translating the financial statements of such foreign subsidiaries is reflected in accumulated other comprehensive income within stockholders’ equity. Foreign currency gains and losses are recognized in connection with transactions settled in a foreign currency in the accompanying consolidated statements of operations.

     Impairment of Goodwill

     We review goodwill and intangible assets with indefinite useful lives for impairment at least annually in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangibles Assets". SFAS No. 142 requires that we perform the goodwill impairment test annually or when a change in facts and circumstances indicate that the fair value of the reporting unit may be below its carrying amount. We operate in one reporting unit and perform our annual SFAS No. 142 impairment test as of June 30 of each year. As of June 30, 2007 and 2006 our fair value exceeds our carrying value and, accordingly, goodwill was not impaired. In the fourth quarter of fiscal 2007 we determined that certain tradenames were no longer going to be utilized and we wrote off the remaining net book value by recording additional amortization expense of $250,000.

     Impairment of Long-Lived Assets

     We review long-lived assets, including property and equipment and intangible assets with estimable useful lives, for impairment whenever an event or change in facts and circumstances indicates that their carrying amount may not be recoverable. We assess impairment of its long-lived assets in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In the event of an impairment indicator, we would determine the recoverability of the assets by comparing the carrying amount of the asset to net future undiscounted cash flows that the asset is expected to generate. The impairment recognized would be the amount by which the carrying amount exceeds the fair market value of the asset.

     Recent Accounting Pronouncements

     In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. Statement 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and

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liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to fair value will be recognized in earnings. Statement 159 also establishes additional disclosure requirements. Statement 159 is effective for fiscal years beginning after November 15, 2007, with early adoption permitted provided that the entity also adopts Statement 157 and is required to be adopted by us in the first quarter of fiscal 2009. We are currently evaluating the impact of the adoption of Statement 159 on our consolidated financial statements.

     In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material and therefore must be quantified. SAB 108 is effective for our fiscal year ending June 30, 2007. We adopted SAB 108 during the quarter ended June 30, 2007. The adoption of SAB 108 did not have any impact on our consolidated financial statements.

     In September 2006 the FASB issued Statement No. 157, Fair Value Measurements. Statement 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. Statement 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, Statement 157 does not require any new fair value measurements. Statement 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We will adopt Statement 157 as of July 1, 2008. The adoption of Statement 157 is not expected to have a significant impact on our consolidated financial statements.

     In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109) (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109 and prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006, with early adoption permitted. We are currently evaluating the impact FIN 48 will have on our consolidated financial statements.

     In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation), to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to EITF 06-3 are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006. We adopted EITF 06-3 as of January 1, 2007. The adoption of EITF 06-3 did not have a significant impact on our consolidated financial statements.

Note 1. Business Combinations

     Fiscal 2006 Acquisitions

     Maxspeed Corporation

     In November 2005, we completed the acquisition, pursuant to a merger, of Maxspeed Corporation (“Maxspeed”), a provider of thin client solutions, headquartered in Palo Alto, California, with research, development and sales offices in Shanghai, China. Before taking into account Maxspeed’s cash balance, the initial consideration paid was $19.3 million in cash, including transaction costs, subject to adjustment based on a final determination, to be made at our election, of Maxspeed’s cash and net working capital at closing. Additionally, $1.4 million of the consideration was held back to fund restructuring costs that were identified as of the closing date. A total of $979,000 in restructuring costs have been incurred through June 30, 2007 for termination of employees and lease

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restructuring. The remaining balance will be used to cover agreed upon lease obligations with any residual balance payable to the Maxspeed shareholders after the expiration of the lease.

     The acquisition was accounted for using the purchase method of accounting. The allocation of the purchase price, based on an independent valuation, is as follows (in thousands):

Cash and equivalents	$	7,290
Short-term investments		877
Inventory		3,468
Deferred taxes		4,617
Other assets		1,041
Customer relationships		2,500
Acquired technology		1,100
Non-compete agreements		1,100
Goodwill		620
Accounts payable and accrued expenses		(3,615	)
Restructuring reserve		(1,400	)
		17,598
Less cash acquired		(7,290	)
	$	10,308

     Goodwill decreased in fiscal 2007 due to the collection of $1.7 million related to settlement of a claim against the escrow we held in connection with our acquisition of Maxspeed Corporation. The purchase price is subject to potential adjustment of the valuation allowance related to the Maxspeed deferred tax assets.

     The results of operations of Maxspeed have been included in our statements of operations from the date of the acquisition. The pro forma results of operations disclosed below give effect to the acquisition of Maxspeed’s business as if the acquisition were consummated on July 1, 2005.

     TeleVideo, Inc.

     In October 2005, we completed the acquisition of the thin client business of TeleVideo, Inc. (“TeleVideo”) for $3.5 million in cash, including transaction costs. We acquired substantially all of the assets of TeleVideo’s thin client business, including all thin client assets, a trademark license, product brands, customer lists, customer contracts and non-competition agreements. The acquisition was accounted for using the purchase method of accounting. The allocation of the purchase price, based on an independent valuation, is as follows: $2.3 million to goodwill, $1.1 million to customer relationships, and $100,000 to tradenames.

     The results of operations of the TeleVideo thin client business have been included in our statements of operations from the date of the acquisition. The pro forma results of operations disclosed below give effect to the acquisition of the TeleVideo thin client business as if the acquisition were consummated on July 1, 2005.

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     Fiscal 2005 Acquisitions

     Qualystem Technology S.A.S.

     In April 2005, we acquired all of the outstanding stock of Qualystem Technology S.A.S. (Qualystem), a provider of software that streams Windows® and application components on-demand from a server to other servers, personal computers, and thin clients, for $4.5 million in cash, including transaction costs.

     The acquisition was accounted for using the purchase method of accounting and the purchase price has been allocated, based on an independent valuation, as follows (in thousands):

Cash	$	270
Short-term investments		44
Other assets		173
Liabilities		(316	)
In-process research and development		300
Acquired technology		600
Non-compete agreements		200
Goodwill		3,231
		4,502
Less cash acquired		(270	)
	$	4,232

     The acquired in-process research and development was expensed and the related charge is included in income from operations for the year ended June 30, 2005. The results of operations of the Qualystem business have been included our statements of operations from the date of the acquisition. The pro forma results of operations disclosed below give effect to the acquisition of the Qualystem as if the acquisition was consummated on July 1, 2005.

     ThinTune Thin Client Business

     In March 2005, we acquired the ThinTune thin client business of eSeSIX Computer GmbH (eSeSIX Computer) and on March 4, 2005 acquired all of the outstanding stock of eSeSIX Information-Technologies (eSeSIX Tech), eSeSIX Computer’s development and engineering affiliate. eSeSIX Computer and eSeSIX Tech are collectively referred to as the ThinTune thin client business. The purchase consideration was $10.1 million in cash, including transaction costs.

     The acquisition was accounted for using the purchase method of accounting and the purchase price has been allocated, based on an independent valuation, as follows (in thousands):

Cash	$	28
Inventory		660
Other assets		392
Warranty liability assumed		(448	)
Deferred income tax liability		(400	)
Other liabilities		(141	)
Customer relationships		2,300
Acquired technology		1,500
Non-compete agreements		100
Goodwill		6,124
		10,115
Less cash acquired		(28	)
	$	10,087

     The results of operations of the ThinTune business have been included in our statements of operations from the date of the acquisition. The pro forma results of operations disclosed below give effect to the acquisition of the ThinTune business as if the acquisition was consummated on July 1, 2005.

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     Mangrove Systems S.A.S.

     In January 2005, we acquired all of the outstanding stock of Mangrove Systems S.A.S. (Mangrove), a provider of Linux software solutions, for $2.8 million in cash, including transaction costs, and 153,682 shares of our common stock valued at $1.3 million.

     The acquisition was accounted for using the purchase method of accounting and the purchase price has been allocated, based on an independent valuation, as follows (in thousands):

Cash	$	73
Other assets		153
Deferred income tax liability		(527	)
Other liabilities		(192	)
Customer relationships		300
Acquired technology		1,000
Non-compete agreements		300
Goodwill		3,010
		4,117
Less cash acquired		(73	)
Less stock issued		(1,300	)
	$	2,744

     The results of operations of Mangrove have been included in our statements of operations from the date of the acquisition. The pro forma results of operations disclosed below give effect to the acquisition of Mangrove as if the acquisition was consummated on July 1, 2005.

     Visara International, Inc.

     In September 2004, we acquired the thin client business of Visara International, Inc. (Visara), for $3.8 million in cash, including transaction costs, plus a potential earn-out. In fiscal 2006 $2.1 million related to the earn-out was paid and recorded as additional goodwill.

     We acquired substantially all of the assets of the Visara thin client business, including 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 purchase price has been allocated, based on an independent valuation, as follows: $4.3 million to goodwill, $1.0 million to acquired technology and $650,000 to customer relationships.

     The results of operations of the Visara thin client business have been included in our statements of operations from the date of the acquisition. The pro forma results of operations disclosed below give effect to the acquisition of the Visara thin client business as if the acquisition was consummated on July 1, 2005.

     Pro Forma Results of Operations

     The following unaudited pro forma information presents the results of our operations as though the Maxspeed, TeleVideo, Qualystem, ThinTune, Mangrove and Visara acquisitions had been completed as of July 1, 2005. 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, 2004 or the results that may occur in the future (in thousands, except per share data):

	Year Ended June 30,
	2006		2005
Total net revenue	$	111,326	$	102,842
Net income		5,307		2,901
Basic earnings per share		0.30		0.18
Diluted earnings per share		0.29		0.18

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Note 2. Inventory

     Inventory consists of the following (in thousands):

	Year Ended June 30,
	2007		2006
Purchased components and subassemblies	$	1,545	$	3,243
Finished goods		5,641		4,491
	$	7,186	$	7,734

Note 3. Property and Equipment

     Property and equipment consists of the following (in thousands):

	Year Ended June 30,
	2007			2006
Computer equipment and software	$	3,491		$	2,304
Office furniture and equipment		1,177			1,013
Leasehold improvements		550			503
		5,218			3,820
Less – accumulated depreciation and amortization		(2,563	)		(2,234	)
	$	2,655		$	1,586

     Depreciation and amortization expense was $574,000, $421,000 and $290,000 for the years ended June 30, 2007, 2006 and 2005, respectively.

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Note 4. Goodwill and Intangible Assets

     The carrying amount of goodwill was $37.5 million and $37.8 million at June 30, 2007 and 2006, respectively. Goodwill decreased in fiscal 2007 due to the collection of $1.7 million related to settlement of a claim against the escrow we held in connection with our acquisition of Maxspeed Corporation, offset by the impact of changes in foreign currency exchange rates.

     Intangible assets with finite useful lives are amortized on a straight-line basis over their respective estimated useful lives. The following table provides a summary of our intangible assets (in thousands):

		June 30, 2007
		Gross
	Estimated	Carrying		Accumulated		Net Carrying
	useful life	Amount		Amortization		Amount
Tradenames	Indefinite	$	121	$	—	$	121
Non-compete agreements	2-5 years		1,693		916		777
Customer relationships	2-5 years		7,384		3,499		3,885
Distributor relationships	5 years		2,325		2,294		31
Acquired technology	5-10 years		7,500		3,644		3,856
		$	19,023	$	10,353	$	8,670

		June 30, 2006
		Gross
	Estimated	Carrying		Accumulated		Net Carrying
	useful life	Amount		Amortization		Amount
Tradenames	Indefinite	$	360	$	—	$	360
Non-compete agreements	2-5 years		1,700		448		1,252
Customer relationships	2-5 years		7,350		2,031		5,319
Distributor relationships	5 years		2,325		2,079		246
Acquired technology	5-10 years		7,506		2,508		4,998
		$	19,241	$	7,066	$	12,175

     The weighted average remaining lives of the intangible assets as of June 30, 2007 are as follows:

Non-compete agreements	1.8 years
Customer relationships	2.9 years
Distributor relationships	1.3 years
Acquired technology	2.9 years

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

	Year Ended June 30,
	2007		2006		2005
Tradenames	$	250	$	—	$	—
Non-compete agreements		498		368		50
Customer relationships		1,440		1,192		603
Distributor relationships		215		465		465
Acquired technologies		1,367		1,200		677
	$	3,770	$	3,225	$	1,795

In the fourth quarter of fiscal 2007 we determined that certain tradenames were no longer going to be utilized and we wrote off the remaining net book value by recording additional amortization expense of $250,000.

     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. Amortization expense for

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non-compete agreements is classified depending on the classification of the related employee. Intangible assets held by foreign subsidiaries whose functional currency is not the U.S. dollar fluctuate based on changes in foreign rates.

     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 or changes in foreign currency exchange rates) (in thousands):

	Future
Year Ending June 30,	Amortization
2008	$	3,293
2009		2,857
2010		1,879
2011		496
2012		24
	$	8,549

Note 5. Offering Basis Loan Agreement

     In December 2004, we entered into 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 fiscal years 2007, 2006 and 2005.

Note 6. Commitments and Contingencies

     We lease our principal facilities and furniture and fixtures under noncancelable operating leases. The remaining terms of these leases range from three months to three years. Rent expense under these leases was $910,000, $910,000 and $584,000 in fiscal 2007, 2006 and 2005, respectively.

     The following table provides future minimum lease payments under operating leases at June 30, 2007 (in thousands):

Year Ending June 30,
2008	$	961
2009		694
2010		486
2011		456
2012		424
Thereafter		143
	$	3,164

     We have arrangements with certain officers that provide for certain levels of base compensation, fringe benefits and incentives. Some of the arrangements provides for salary continuance of up to one year if terminated upon certain conditions. In addition, all of the agreements provide for severance payments in the event of a change in control and the officer is not extended a similar position after the change in control. If a change of control had occurred on June 30, 2007, and all of the executive officers had been terminated, the severance obligations would have aggregated approximately $2.2 million and we are further obligated to accelerate the vesting of certain officer’s unvested stock options.

     We also have open purchase obligations totaling $18.3 million as of June 30, 2007.

     In the normal course of business we may be a party to various claims. We believe that the ultimate resolution of any such claims would not have a material impact on our financial position or operating results.

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Note 7. Guarantees

     Indemnifications

     In the ordinary course of business, from time-to-time we enter into contractual arrangements under which we may agree to indemnify our customer or supplier for losses incurred by the customer arising from certain events as defined within the particular contract, which may include, for example, litigation or intellectual property infringement claims.

     Warranty

     We provide for the estimated cost of product warranties at the time it recognizes revenue. We actively monitor 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. Our standard warranty service period ranges from one to three years.

     The changes in our warranty liability are as follows (in thousands):

Accrued warranty cost at June 30, 2006	$	1,177
Settlements made		(689	)
Provisions for warranties		441
Accrued warranty cost at June 30, 2007	$	929

Note 8. Income Taxes

     The provision for income taxes consisted of the following (in thousands):

	Year Ended June 30,
	2007			2006			2005
Current:
Federal	$	(2,553	)	$	3,483		$	2,841
State		(84	)		365			209
International		478			857			414
		(2,159	)		4,705			3,464
Deferred:
Federal		(239	)		(725	)		(164	)
State		(569	)		(67	)		62
International		434			94			63
		(374	)		(698	)		(39	)
	$	(2,533	)	$	4,007		$	3,425

     Pretax income from international operations was $2.9 million, $2.6 million, and $1.1 million in fiscal 2007, 2006 and 2005, respectively. The tax benefits associated with employee stock options exercises reduced taxes currently payable by approximately $676,000, $1.7 million, and $114,000 in fiscal 2007, 2006 and 2005, respectively. This benefit was recorded as an increase in additional paid-in capital.

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     The provision for income taxes differed from the amount computed by applying the federal statutory rate as follows:

	Year Ended June 30,
	2007			2006			2005
Federal tax at statutory rate		(34.0)	%		34.0	%		34.0	%
State taxes		(8.8	)		1.8			1.6
Impact of foreign taxes		(1.4	)		0.5			1.0
Impact of EIE		(2.1	)		(2.1	)		(3.4	)
Statutory stock options – 123R		18.7			6.0			—
Tax exempt interest		(23.1	)		(4.9	)		(1.7	)
Non-deductible expenses and other		(1.1	)		0.8			—
		(51.8)	%		36.1	%		31.5	%

     Significant components of deferred tax assets and liabilities are as follows (in thousands):

	Year Ended June 30,
	2007			2006
Deferred tax assets:
Net operating loss and capital loss carryforwards	$	6,977		$	6,940
Deferred revenue and accruals not currently deductible		2,274			2,283
R&E and other credit carryforwards		782			782
Other		1,497			1,196
Deferred tax assets		11,530			11,201
Valuation allowance		(2,361	)		(2,348	)
		9,169			8,853
Deferred tax liabilities:
Goodwill and intangible assets – difference in basis and amortization periods		(3,635	)		(3,586	)
Net deferred tax assets	$	5,534		$	5,267

     In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods and in the tax jurisdictions in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, limitations on the utilization of tax net operating loss carryforwards and tax planning strategies in making this assessment.

     As of June 30, 2007, we had state tax loss carryforwards in multiple jurisdictions with various expiration dates. We believe that, except for the losses in the states in which pre-acquisition state tax loss carryforwards of Maxspeed exist, it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets.

     As of June 30, 2007, we have, through our acquisition of Maxspeed, U.S. Federal net operating loss carryforwards of approximately $14.1 million which will expire from 2018 to 2023; Federal research and experimentation credits of approximately $523,000 which will expire from 2017 to 2019; state tax net operating loss carryforwards of approximately $6.8 million with various expiration dates; and state tax credit carryforwards of $392,000 with various expiration dates.

     In connection with the fiscal 2006 acquisition of Maxspeed, Maxspeed incurred an ownership change pursuant to Section 382 of the Internal Revenue Code of 1986. As a result, the availability of Maxspeed’s approximate $14.9 million net operating loss carryforwards realized prior to the change in ownership to offset post-acquisition taxable income is limited to approximately $1.3 million annually for the first five years after the date of acquisition and approximately $798,000 thereafter, excluding taxable income generated from the disposition of pre-acquisition assets which have a built-in gain. Approximately $800,000 of this loss was used in fiscal 2006.

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     As of June 30, 2007 and 2006, we had a valuation allowance for certain state and capital loss carryforwards and credits of $2.3 million. To the extent that we realize the benefit from these acquired deferred tax assets, goodwill will be adjusted.

     U.S. federal and state income taxes have not been provided on undistributed earnings of international subsidiaries. Our intention is to reinvest these earnings permanently.

Note 9. Earnings per Share

     The following table sets forth the computation of basic and diluted earning per share (in thousands, except share and per share data):

	Year Ended June 30,
	2007			2006		2005
Net income (loss)	$	(2,357	)	$	7,097	$	7,439
Weighted average shares outstanding:
Basic		19,990			17,665		15,931
Effect of dilutive warrants and employee stock options		—			440		271
Diluted		19,990			18,105		16,202
Earnings (loss) per common share:
Basic	$	(0.12	)	$	0.40	$	0.47
Diluted	$	(0.12	)	$	0.39	$	0.46

     For the years ended June 30, 2007, 2006 and 2005, an aggregate of 967,000, 93,000 and 1,354,000, stock options and warrants, respectively, were excluded from the calculation of dilutive earnings per share because they are out-of –the-money options and their inclusion would have been anti-dilutive.

     In addition, for the year ended June 30, 2007 53,000 common stock equivalents, respectively, were not included in the computation of diluted loss per share because we had a net loss and inclusion of these common stock equivalents would have been anti-dilutive.

Note 10. Benefit Plan

     We sponsor a 401(k) saving plan (the “Plan”) for all of its employees who meet certain age and years of employment requirements. Participants may make voluntary contributions to the Plan and we make a matching contribution of 50% of the first 6% of such contributions up to a maximum of $1,000 per participant per year. Our contributions were $95,000, $85,000 and $71,000 in fiscal 2007, 2006 and 2005, respectively.

Note 11. Related Party Transactions

     For the fiscal year ended June 30, 2007, 2006 and 2005 we had sales of $34,000, $84,000 and $91,000, respectively to a customer of which one of our directors is an executive officer and director. Accounts receivable from this customer was $4,000 and $22,000 at June 30, 2007 and 2006, respectively.

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Note 12. Unaudited Quarterly Results

     The following table sets forth certain unaudited consolidated financial data for each of the quarters within the fiscal years ended June 30, 2006 and 2005. This information has been derived from our Consolidated Financial Statements, and in management’s opinion, reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future periods (in thousands, except per share data).

	Fiscal Year 2007
	First			Second			Third			Fourth
	Quarter			Quarter			Quarter			Quarter
Net revenue	$	21,560		$	23,776		$	22,070		$	22,995
Gross profit		7,186			9,862			8,214			7,737
Operating loss		(2,206	)		(2,950	)		(1,007	)		(2,814	)
Net income (loss)		(1,052	)		595			(1,099	)		(801	)
Earnings (loss) per share:
Basic	$	(0.05	)	$	0.03		$	(0.05	)	$	(0.04	)
Diluted	$	(0.05	)	$	0.03		$	(0.05	)	$	(0.04	)
Weighted average shares outstanding:
Basic		19,943			19,965			20,000			20,053
Diluted		19,943			20,010			20,000			20,053

	Fiscal Year 2006
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
Net revenue	$	26,543	$	29,337	$	27,787	$	23,552
Gross profit		10,701		12,905		12,096		8,650
Operating income		2,635		3,661		3,119		(189	)(a)
Net income		1,841		2,541		2,313		402
Earnings per share:
Basic	$	0.11	$	0.15	$	0.13	$	0.02
Diluted	$	0.11	$	0.15	$	0.12	$	0.02
Weighted average shares outstanding:
Basic		16,271		16,492		18,023		19,874
Diluted		16,434		17,088		18,848		20,408

(a) Includes revenue reserves of $675,000 for amounts invoiced in the fourth quarter of fiscal 2006 and a provision for doubtful accounts of $385,000 related to one of our German distributors.

Note 13. Subsequent Event

     On July 23, 2007, we entered into an Agreement and Plan of Merger, or merger agreement, with Hewlett-Packard Company or HP, pursuant to which HP has agreed to acquire all of the issued and outstanding shares of our common stock for a cash purchase price of $16.25 per share. The closing of the merger is subject to customary closing conditions, including regulatory review and Neoware stockholder approval. Our stock options having an exercise price less than $16.25 per share will become fully vested and converted into the right to receive an amount equal to the product of (x) the aggregate number of shares that were issuable upon exercise of the option immediately prior to the effective time of the merger and (y) the excess, if any, of $16.25 over the per share exercise price. Options having an exercise price per share equal to or greater than $16.25 per share will be cancelled without payment or consideration. Each outstanding award of our restricted stock held by an employee who becomes an employee of HP immediately after the merger that is subject to vesting or other lapse restrictions and has not otherwise been forfeited immediately prior to the merger will (a) be subject to, and will become vested upon, terms and conditions that are substantially similar to those currently applicable to such restricted stock, (b) represent the right to receive the merger consideration as each share vests, subject to applicable withholding requirements, and (c) continue to be subject to the other terms and conditions of the applicable initial documentation for such restricted stock.

95

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

	Year Ended June 30,
	2007			2006			2005
	(in thousands)
Allowance for doubtful accounts:
Balance at beginning of year	$	1,854		$	761		$	526
Provision for doubtful accounts, net (a)		12			1,060			—
Provision assumed in acquisitions		—			84			359
Deductions		(1,215	)		(51	)		(124	)
Balance at end of year	$	651		$	1,854		$	761

(a) Includes revenue reserve of $675,000 for amounts invoiced in the fourth quarter of fiscal 2006.

96

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Neoware, Inc.:

     We have audited the accompanying consolidated balance sheets of Neoware, Inc. and subsidiaries as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2007. In connection with our audits of those consolidated financial statements, we have also audited the related financial statement schedules as listed in the accompanying index in Item 15. We also have audited Neoware, Inc. and subsidiaries’ internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

     We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

     A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Neoware Inc. and subsidiaries as of June 30, 2007 and 2006, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Neoware, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of June 30, 2007, based on criteria established in Internal Control — Integrated Framework issued by COSO.

/s/ KPMG LLP

Philadelphia, Pennsylvania
September 12, 2007

97

MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     We are responsible for establishing and maintaining an adequate internal control structure and procedures over financial reporting as defined in Exchange Act Rule 13A-15(f). We have assessed the effectiveness of our internal control over financial reporting as of June 30, 2007. Our assessment was based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) Internal Control-Integrated Framework.

     Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

     (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;

     (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles;

     (3) provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorizations of our management and board of directors; and

     (4) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

     Internal control over financial reporting includes the controls themselves, monitoring and actions taken to correct deficiencies as identified.

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. We reviewed the results of our assessment with the Audit Committee of the Board of Directors.

     Based on this assessment, we have determined that as of June 30, 2007, Neoware has effective internal control over financial reporting.

98

EX-21.1

EXHIBIT 21.1

SUBSIDIARIES

Neoware Licensing, Inc.	Delaware
Neoware Investments, Inc.	Delaware
Neoware Systems GmbH	Germany
Neoware Systems B.V.	Netherlands
Neoware UK Limited	England
Neoware UK Holdings Limited	England
Neoware Southern Europe S.A.S.	France
Neoware Austria GmbH	Austria
Maxspeed International, Inc.	Cayman Islands
Neoware (Shanghai) Inc.	China

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Neoware, Inc.:

We consent to the incorporation by reference in the registration statements (Nos. 33-93942, 333-20185, 333-56298, 333-107970, 333-102878, 333-107974, and 333-126533) on Form S-8 and in the registration statements (Nos. 333-85490 and 333-107858) on Form S-3 of Neoware, Inc. and subsidiaries of our report dated September 12, 2007, with respect to the consolidated balance sheets of Neoware, Inc. and subsidiaries as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended June 30, 2007, the related financial statement schedule and the effectiveness of internal control over financial reporting as of June 30, 2007, which report appears in the June 30, 2007 annual report on Form 10-K of Neoware, Inc.

Philadelphia, Pennsylvania
September 12, 2007

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Klaus P. Besier, certify that:

1. I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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; and

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: September 12, 2007

/s/ Klaus P. Besier

Klaus P. Besier

President and Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Keith D. Schneck, certify that:

1. I have reviewed this annual report on Form 10-K 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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

d) 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; and

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: September 12, 2007

/s/ Keith D. Schneck

Keith D. Schneck

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

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-K for the year ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Klaus P. Besier, 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/ Klaus P. Besier

Klaus P. Besier

President and Chief Executive Officer

(Principal Executive Officer)

September 12, 2007

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-32.2

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 annual report of Neoware Systems, Inc. (the “Company”) on Form 10-K for the year ended June 30, 2007 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)

September 12, 2007

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.