<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000

                                       OR

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

             FOR THE TRANSITION PERIOD FROM ____________TO_________

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

                         Commission File Number 0-25457

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

         DELAWARE                                           76-0345839
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                          Identification No.)

                       14100 SOUTHWEST FREEWAY, SUITE 500,
                             SUGAR LAND, TEXAS 77478
                     (Address of principal executive office)

       Registrant's telephone number, including area code: (281) 491-4200

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

The number of shares of the registrant's common stock outstanding as of February
10, 2001 was 9,515,404.



<PAGE>   2



                               NEON SYSTEMS, INC.

                                    FORM 10-Q

                     FOR THE QUARTER ENDED DECEMBER 31, 2000

                                      INDEX

<TABLE>
<CAPTION>

                                                                              PAGE
                                                                              ----

<S>                                                                              <C>
PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Balance Sheets at December 31, 2000 and
         March 31, 2000......................................................... 3

         Consolidated Statements of Operations for the Three and Nine
         Months Ended December 31, 2000 and 1999................................ 4

         Consolidated Statements of Cash Flows for the Nine Months Ended
         December 31, 2000 and 1999............................................. 5

         Condensed Notes to Consolidated Financial Statements................... 6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations.............................................. 9

Item 3.  Quantitative and Qualitative Disclosures About Market                  15


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings......................................................16

Item 2.  Changes in Securities and Use of Proceeds..............................16

Item 3.  Defaults Upon Senior Securities........................................16

Item 4.  Submission of Matters to a Vote of Security Holders....................16

Item 5.  Other Information......................................................16

Item 6.  Exhibits and Reports on Form 8-K.......................................22

SIGNATURES......................................................................23
</TABLE>

                                       2

<PAGE>   3
PART I - FINANCIAL INFORMATION

    ITEM 1. FINANCIAL STATEMENTS

                       NEON SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                       DECEMBER 31, 2000     MARCH 31, 2000
                                                       -----------------    ----------------
                                                         (UNAUDITED)


                                         ASSETS

<S>                                                     <C>                 <C>
CURRENT ASSETS:
   Cash and cash equivalents                            $     32,049,688    $     37,120,342
   Short-term investments                                      7,605,861           1,977,500
   Accounts receivable                                         6,250,970           9,602,979
   Taxes receivable                                            1,418,931                  --
   Deferred income taxes                                         627,585             712,948
   Other current assets                                        1,227,061             658,326
                                                        ----------------    ----------------
      Total current assets                                    49,180,096          50,072,095
                                                        ----------------    ----------------

Property and equipment, net                                    2,214,152           1,894,795
Marketable securities                                            683,186           2,660,267
Intangible assets, net                                         6,137,950           2,146,764
Other assets                                                     891,539           3,726,236
                                                        ----------------    ----------------
       Total assets                                     $     59,106,923    $     60,500,157
                                                        ================    ================

 LIABILITIES & STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                     $        841,112    $        452,450
   Accrued expenses                                            3,918,105           2,405,571
   Taxes payable                                                      --             318,534
   Deferred maintenance revenue                                5,284,362           5,466,000
                                                        ----------------    ----------------
      Total current liabilities                               10,043,579           8,642,555
                                                        ----------------    ----------------

STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized
  10,000,000 shares; no shares issued and outstanding                 --                  --
Common stock, $.01 par value. Authorized
  30,000,000 shares; 9,500,982 and 9,005,584 shares
  issued and  outstanding at December 31, 2000 and
  March 31, 2000, respectively                                    95,010              90,056
Additional paid-in capital                                    50,574,026          46,697,813
Accumulative other comprehensive income (loss)                  (383,724)           (155,221)
Unearned portion of deferred compensation                     (1,058,943)           (899,377)
Retained earnings (deficit)                                     (163,025)          6,124,331
                                                        ----------------    ----------------
       Total stockholders' equity                             49,063,344          51,857,602
Commitments and contingencies (Note 6)
       Total liabilities and stockholders' equity       $     59,106,923    $     60,500,157
                                                        ================    ================
</TABLE>


     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.


                                       3
<PAGE>   4




                       NEON SYSTEMS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>


                                                    THREE MONTHS ENDED DECEMBER 31,          NINE MONTHS ENDED DECEMBER 31,
                                                  ------------------------------------    ------------------------------------
                                                        2000                 1999                2000                1999
                                                  ----------------    ----------------    ----------------    ----------------

<S>                                               <C>                 <C>                 <C>                 <C>
Revenues:
   License                                        $      4,230,981    $      7,223,506    $     13,168,644    $     16,024,660
   Maintenance                                           2,156,135           1,695,223           6,522,025           5,039,200
                                                  ----------------    ----------------    ----------------    ----------------
     Total revenues                                      6,387,116           8,918,729          19,690,669          21,063,860

Cost of revenues:
   Cost of licenses                                        839,079             693,856           2,089,003           1,104,108
   Cost of maintenance                                     583,746             556,852           1,739,886           1,192,294
                                                  ----------------    ----------------    ----------------    ----------------
     Total cost of revenues                              1,422,825           1,250,708           3,828,889           2,296,402
                                                  ----------------    ----------------    ----------------    ----------------

Gross profit                                             4,964,291           7,668,021          15,861,780          18,767,458
                                                  ----------------    ----------------    ----------------    ----------------

Operating expenses:
  Sales and marketing                                    3,900,957           3,277,603          11,234,371           8,167,237
  Research and development                               2,193,790           1,599,062           6,064,231           4,116,196
  General and administrative                             5,639,909             975,478           7,965,918           2,699,642
  Amortization of acquisition-related                      119,499             116,765             358,028             116,765
                                                  ----------------    ----------------    ----------------    ----------------
costs
   Total operating expenses                             11,854,155           5,968,908          25,622,548          15,099,840
                                                  ----------------    ----------------    ----------------    ----------------

Operating income (loss)                                 (6,889,864)          1,699,113          (9,760,768)          3,667,618

Interest income                                            621,952             596,995           1,948,471           1,736,525
Interest expense                                            (1,871)               (396)             (6,140)             (1,797)
Other, net                                                      --             (41,476)              6,153             (66,564)
                                                  ----------------    ----------------    ----------------    ----------------
   Income (loss) before income taxes                    (6,269,783)          2,254,236          (7,812,284)          5,335,782

Benefit (provision) for income taxes                     1,096,931            (803,252)          1,524,931          (1,974,239)
                                                  ----------------    ----------------    ----------------    ----------------
   Net income (loss)                              $     (5,172,852)   $      1,450,984    $     (6,287,353)   $      3,361,543
                                                  ================    ================    ================    ================

Earnings (loss) per share:
   Basic                                          $          (0.55)   $           0.16    $          (0.67)   $           0.38
                                                  ================    ================    ================    ================

   Diluted                                        $          (0.55)   $           0.14    $          (0.67)   $           0.32
                                                  ================    ================    ================    ================

Shares used in computing earnings per share:
   Basic                                                 9,490,669           8,949,989           9,405,295           8,890,762
                                                  ================    ================    ================    ================
   Diluted                                               9,490,669          10,403,910           9,405,295          10,481,666
                                                  ================    ================    ================    ================
</TABLE>



     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                       4
<PAGE>   5
                      NEON SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)


<TABLE>
<CAPTION>

                                                   NINE MONTHS ENDED DECEMBER 31,
                                                   ------------------------------
                                                         2000            1999
                                                   -------------    -------------

<S>                                                 <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                 $ (6,287,353)   $  3,361,543
  Adjustments to reconcile net income (loss)
    to net cash provided by (used in) operating
    activities:
     Depreciation and amortization                       963,802         307,544
     Deferred tax benefit (expense)                       85,363        (159,960)
     Non-cash compensation expense                     3,498,434         730,397
     Increase (decrease) in cash resulting
       from changes in operating assets and
       liabilities:
       Accounts receivable                             3,352,009      (2,997,399)
       Other current assets                             (568,735)       (234,644)
       Accrued expenses                                1,512,534      (1,238,375)
       Accounts payable                                  388,662         168,611
       Other non-current assets                         (552,917)     (3,485,242)
       Taxes payable (receivable)                     (1,737,465)        743,726
       Deferred maintenance revenue                     (181,638)      1,383,618
                                                    ------------    ------------
Net cash provided by (used in) operating
  Activities                                             472,696      (1,420,181)
                                                    ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities                  (3,625,056)     (8,189,964)
  Acquisition of intangibles                          (1,000,000)     (1,870,000)
  Purchases of furniture and equipment                  (886,734)       (609,312)
                                                    ------------    ------------

Net cash used in investing activities                 (5,511,790)    (10,669,276)
                                                    ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercises of stock options               223,167          86,282
  Shares purchased for  treasury                              --        (140,486)
                                                    ------------    ------------
Net cash used in financing activities                    223,167         (54,204)
                                                    ------------    ------------

Net decrease in cash and cash equivalents             (4,815,927)    (12,143,661)
Effect of exchange rate changes on cash                 (254,727)        (33,027)
Cash and cash equivalents at beginning of period      37,120,342      45,400,015
                                                    ------------    ------------


Cash and cash equivalents at end of period          $ 32,049,688    $ 33,223,327
                                                    ============    ============

Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes        $     77,005    $  1,395,147
                                                    ============    ============
Cash paid during the period for interest            $      6,140    $         --
                                                    ============    ============
</TABLE>


     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                       5
<PAGE>   6




                       NEON SYSTEMS, INC. AND SUBSIDIARIES
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--BASIS OF PRESENTATION

    The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial reporting and in accordance with Regulation S-X of the Securities and
Exchange Commission. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited consolidated
financial statements contained in this report reflect all adjustments,
consisting of only normal recurring adjustments, considered necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. Operating results for interim periods are not
necessarily indicative of results for the full year. These unaudited
consolidated financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in NEON's audited financial statements for the fiscal year
ended March 31, 2000 which are included in NEON's Form 10-K for the fiscal year
ended March 31, 2000.

NOTE 2--PER SHARE INFORMATION

    In calculating earnings per share information, NEON follows the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Basic net income (loss) per share is computed by dividing net income (loss)
applicable to common stockholders by the weighted average number of shares of
common stock outstanding during the period. Diluted net income (loss) per share
is computed by dividing net income (loss) applicable to common stockholders by
the weighted average number of shares of common stock outstanding, adjusted to
reflect common stock equivalents, such as convertible preferred stock, stock
options and warrants to purchase common stock, to the extent they are dilutive,
less the number of shares that could have been repurchased with the exercise
proceeds using the treasury stock method.

    A reconciliation of the numerators and denominators of the basic and diluted
per share computation is as follows:

<TABLE>
<CAPTION>

                                            THREE MONTHS ENDED DECEMBER 31,      NINE MONTHS ENDED DECEMBER 31,
                                          ----------------------------------   ----------------------------------
                                                2000               1999              2000               1999
                                          ---------------    ---------------   ---------------    ---------------

<S>                                       <C>                <C>               <C>                <C>
Net income (loss)                         $    (5,172,852)   $     1,450,984   $    (6,287,353)   $     3,361,543
                                          ===============    ===============   ===============    ===============
Weighted average number of common
  shares outstanding during the period:
Basic                                           9,490,669          8,949,989         9,405,295          8,890,762
Dilutive stock options                                 --          1,453,921                --          1,590,904
                                          ---------------    ---------------   ---------------    ---------------
Diluted                                         9,490,669         10,403,910         9,405,295         10,481,666
                                          ===============    ===============   ===============    ===============

Income (loss) per common share:
  Basic                                   $         (0.55)   $          0.16   $         (0.67)   $          0.38
                                          ===============    ===============   ===============    ===============
  Diluted                                 $         (0.55)   $          0.14   $         (0.67)   $          0.32
                                          ===============    ===============   ===============    ===============
</TABLE>


    In the period April 1, 2000 through December 31, 2000 options to purchase
495,398 shares of common stock at exercise prices of $0.20 to $13.00 per share
were exercised. At December 31, 2000, there were options outstanding to purchase
2,528,470 shares of common stock with a weighted-average exercise price of $
11.09.



                                       6
<PAGE>   7



NOTE 3--MARKETABLE SECURITIES

    NEON considers all highly liquid investments with a maturity of three months
or less to be cash equivalents.

    NEON has evaluated its investment policies consistent with Financial
Accounting Standards Board Statement No. 115 ("FASB 115"), "Accounting for
Certain Investments in Debt and Equity Securities", and determined that its
investment securities are to be classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in stockholders' equity under the caption "Accumulated
other comprehensive income (loss)." The cost of securities sold is based on the
specific identification method. Interest and dividends on securities classified
as available-for-sale are included in interest income.

    The following is a summary of marketable securities classified as
"available-for-sale" securities as required by FASB 115:

<TABLE>
<CAPTION>

                            DECEMBER 31, 2000    MARCH 31, 2000
                            -----------------   -----------------

<S>                         <C>                 <C>
Debt Securities:
  Cost                      $       8,309,190   $       4,684,103
  Gross unrealized losses              20,143             (46,336)
                            -----------------   -----------------
   Estimated fair value     $       8,289,047   $       4,637,767
                            =================   =================
</TABLE>

    The amortized cost and estimated fair value based on published closing
prices of securities at December 31, 2000, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to repay obligations without
prepayment penalties.

<TABLE>
<CAPTION>

                                                      AS OF DECEMBER 31, 2000
                                                ---------------------------------
                                                                   ESTIMATED FAIR
                                                      COST              VALUE
                                                ---------------   ---------------

Available-for-sale:
<S>                                             <C>               <C>
  Due in one year or less                       $     7,620,898   $     7,605,861
  Due one year through five years                       688,292           683,186
</TABLE>

NOTE 4--INCOME TAXES

    The benefit for income taxes for the nine months ended December 31, 2000,
was $1,525,000, or 20% of pre-tax losses. The difference between the effective
rate and the statutory rate is primarily due to a non-recurring charge for
changes made to options previously granted and the impact of net operating
losses outside the United States. NEON has not recognized a tax benefit for
either of these items in the nine months ended December 31, 2000.

    The provision for income taxes for the nine months ended December 31, 1999,
was $2.0 million, or 37% of pre-tax income. The effective and statutory tax
rates are approximately equivalent.

NOTE 5--SEGMENT REPORTING

    NEON considers its business activities to be in a single segment. During the
three-month period ended December 31, 1999, NEON had two customers that
individually accounted for 10% of total revenue and two additional customers
that individually accounted for 11% of total revenue. During the three-month
period ended December 31, 2000, NEON had two customers that accounted for 17%
and 19%, respectively, of total revenue. During the nine-month period ended
December 31, 1999, no single customer accounted for more than 10% of total
revenues. NEON had two customers in the nine-month period ended December 31,
2000, that represented 11% and 16% of total revenues, respectively.

    The table below summarizes revenues by geographic region.

<TABLE>
<CAPTION>


                      THREE MONTHS ENDED DECEMBER 31,  NINE MONTHS ENDED DECEMBER 31,
                      --------------   -------------   -------------   --------------
                            2000            1999            2000            1999
                      --------------   -------------   -------------   --------------

<S>                    <C>             <C>             <C>             <C>
Revenues:
North America          $   5,769,649   $   7,201,384   $  17,425,714   $  16,755,867
Europe                       617,467       1,717,345       2,264,955       4,307,993
                       -------------   -------------   -------------   -------------
                       $   6,387,116   $   8,918,729   $  19,690,669   $  21,063,860
                       =============   =============   =============   =============
</TABLE>




                                       7
<PAGE>   8

NOTE 6- - NONRECURRING CHARGES

    During the three months ended December 31, 2000, NEON took charges totaling
approximately $3.8 million related to the departure of various employees and
other related personnel costs. A majority of these charges ($3.2 million) is the
result of changes made to options previously granted to the former chief
executive officer and chief financial officer upon their resignations in
December 2000 and October 2000, respectively. These charges were based on the
fair value of those options at the date of the modification and are non-cash in
nature. The remaining portion of these charges consists of severance and other
employee related costs that will be paid out over the next twelve months.

Note 7 - -OTHER ASSETS

    In December 1999, NEON entered into an agreement with Sterling Software,
which was subsequently acquired by Computer Associates, Inc., which granted NEON
the right to use, reproduce, copy and sell certain products. As consideration
for this agreement, NEON made a nonrefundable advance of $3.5 million for the
future royalties to be earned by Computer Associates from sales made by NEON of
$14 million of such products. NEON also acquired an option to purchase the
intellectual property underlying such products at any time through December 30,
2000 for $1 million. In October 2000, NEON exercised its option to purchase the
intellectual property. The purchase was completed on December 21, 2000 and the
total unamortized consideration was recorded as an intangible asset and is being
amortized over 5 years on the straight-line method.

NOTE 8--CONTINGENCIES

    A number of organizations, including New Era of Networks, are utilizing the
name "NEON," alone and in combination with other words, as a trademark, a
tradename or both. New Era of Networks is also a developer and distributor of
middleware and other software products. New Era of Networks has used the acronym
"NEON" in its business, is listed on the Nasdaq National Market under the symbol
"NEON" and has sought to obtain federal trademarks for products and services
whose names include the word "NEON." NEON is currently opposing in the U.S.
Patent and Trademark Office New Era of Networks' application to trademark
"NEONET." On December 24, 1998, New Era of Networks filed a complaint against
NEON in the United States District Court for the District of Colorado seeking
(1) a declaratory judgment that New Era of Networks' use of certain trademarks,
including "NEONET," does not infringe NEON's rights or constitute unfair
competition and (2) cancellation of NEON's federal trademark registration for
NEON. NEON has filed an answer denying the material allegations of that
complaint, and the parties are currently engaged in discovery.

    On June 23, 1999, NEON sued New Era of Networks in Fort Bend County, Texas,
alleging that New Era of Networks' use of "NEON" was in violation of Texas law
concerning tradenames and trademarks. In this litigation, NEON seeks to enjoin
New Era of Networks from using "NEON" as its "nickname," its Nasdaq trading
symbol, or in any other manner that is likely to result in confusion in the
marketplace, or to dilute the meaning or value of NEON's name. This litigation
in Fort Bend County, Texas is currently set for trial beginning May 14, 2001.
NEON's claims are based upon its prior and continuous use of "NEON" as its
corporate name. NEON believes that it has superior rights to use "NEON" and that
New Era of Networks' use of NEON is causing confusion in the marketplace. This
and any other litigation to enforce NEON's right to use the NEON name in NEON's
business or to prevent others from using the NEON name may be expensive and
time-consuming, may divert management resources and may not be adequate to
protect NEON's business. If NEON should lose any such litigation, it may have to
change its name, which also would be expensive and time-consuming and could
adversely affect NEON's business.

    On July 3, 2000 New Era of Networks filed an additional complaint against
NEON seeking a declaration that New Era's recently announced branding initiative
was not unfair competition or violative of any of NEON's proprietary rights.
This new complaint was filed in the United States District Court for Colorado,
and has been assigned to the same court as the prior complaint. NEON expects
this case to be consolidated with the prior complaint filed in Colorado, and
will defend and seek redress against this action as is appropriate. At the date
of this Report, the United States District Court for Colorado has declined to
assign a trial date for either of these actions.

    NEON is involved in various other claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of any of these matters will not have a material adverse effect on
NEON's consolidated financial position, results of operations or liquidity.




                                       8
<PAGE>   9

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

    The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the related notes thereto
included in this report on Form 10-Q. The discussion and analysis contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements are based on our current expectations and entail various risks and
uncertainties such as our plans, objectives, expectations and intentions. Our
actual results could differ materially from those projected in the
forward-looking statements as a result of various factors, including those set
forth below in Part II, Item 5 under "Factors that May Affect Future Results."
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential," "continue," or the negative of these terms
or other comparable terms.

RECENT EVENTS

         During the three months ended December 31, 2000, NEON took charges of
approximately $3.8 million related to the departure of various employees and
other related personnel costs. The majority of this charge, $3.2 million, is the
result of changes made to options previously granted to the former chief
executive officer and chief financial officer upon their resignations in
December and October 2000, respectively. These charges were based on the fair
value of those options at the date of the modification and are non-cash in
nature. The remaining portion of the charges consists of severances and other
related employee costs that will be paid out over the next twelve months.

         In December 1999, NEON entered into an agreement with Sterling
Software, which was subsequently acquired by Computer Associates, Inc., which
grants NEON the rights to use, reproduce, copy and sell certain products. As
consideration for this agreement, NEON made a nonrefundable advance of $3.5
million for the future royalties to be earned by Computer Associates from sales
made by NEON of $14 million of such products. NEON also acquired an option to
purchase the intellectual property underlying such products at any time through
December 30, 2000 for $1 million. In October 2000, NEON exercised its option to
purchase the intellectual property. The purchase was completed on December 21,
2000 and the total unamortized consideration was recorded as an intangible asset
and is being amortized over 5 years on the straight-line method.

OVERVIEW

    NEON develops, markets and supports software products that allow our
customers to rapidly deploy new business capabilities by leveraging existing
applications and data with the Internet, a process known generically as
eBusiness Integration. In addition, we also market and support Enterprise
Subsystem Management software products. NEON was incorporated in May 1993 and is
a successor by merger to NEON Systems, Inc., an Illinois corporation that was
incorporated in June 1991.

    NEON derives revenue from software licenses and maintenance services.
Historically, NEON's Shadow product line has generated substantially all of
NEON's revenue. License fees, which are based upon the number and capacity of
servers as well as the number of client users, are generally due upon license
grant and include a one-year maintenance period. The sales process typically
takes approximately nine months. After the initial year of license, NEON
provides ongoing maintenance services, which include technical support and
product enhancements, for an annual fee. Any factors adversely affecting the
pricing of, demand for or market acceptance of, our products, such as
competition or technological change, could materially adversely affect our
business, operating results and financial condition.

    Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public Accountants
(AICPA) and was amended by Statement of Position 98-4 (SOP 98-4) and Statement
of Position 98-9 (SOP 98-9). NEON adopted SOP 97-2 effective July 1, 1997, SOP
98-4 effective March 31, 1998 and SOP 98-9 effective April 1, 1999. NEON
believes its current revenue recognition policies and practices are consistent
with SOP 97-2, SOP 98-4 and SOP 98-9. Revenues from software license sales are
recognized when all of the following conditions are met: a non-cancelable
license agreement has been signed; the product has been delivered; there are no
material uncertainties regarding customer acceptance; collection of the
receivable is probable; no other significant vendor obligations exist; and
vendor-specific objective evidence exists to allocate the total fee to elements
of the arrangement. Vendor-specific objective evidence is based on the price




                                       9
<PAGE>   10

generally charged when an element is sold separately, or if not yet sold
separately, is established by authorized management. All elements of each order
are valued at the time of revenue recognition. License revenues generally
include software maintenance agreements for the first year following the date of
sale. In such cases, revenues are allocated between licenses fees and
maintenance revenues based on NEON specific evidence. Revenues from first-year
maintenance agreements and separately priced software maintenance agreements for
subsequent years are deferred and recognized ratably on a straight-line basis
over the maintenance period.

    NEON also markets and sells its products through independent foreign
distributors. License and maintenance revenues from these transactions are
recognized when all of the above conditions are met.

    NEON follows SFAS No. 86, "Accounting for the Cost of Computer Software to
be Sold, Leased or Otherwise Marketed." Research and development expenditures in
general have been charged to operations as incurred and any amounts which were
capitalized have been immaterial.

    Since NEON's inception, we have incurred substantial costs to develop our
technology and products, to recruit and train personnel for our engineering,
sales and marketing and technical support departments, and to establish an
administrative organization. We anticipate that our operating expenses will
increase in the future as we increase our sales and marketing operations,
develop new distribution channels, fund greater levels of research and
development, broaden our technical support and improve our operational and
financial systems. Accordingly, we will need to increase our quarterly revenue
to generate operating profits. In addition, a significant portion of our
quarterly revenue is historically recorded at the end of each quarter.
Consequently, it is difficult for us to predict future operating results and,
accordingly, there can be no assurance in future quarters that we will achieve
or sustain revenue growth and/or return to profitability.

    In the nine months ended December 31, 1999 and 2000, revenue outside of
North America was approximately 20% and 12%, respectively, of our total revenue.
We anticipate that international revenue will increase as a percentage of total
revenue in the future as compared to the period ended December 31, 2000. A
majority of NEON's sales are generally denominated in United States dollars and
as a result our current exposure to foreign exchange fluctuations is currently
limited. As our international sales and operations expand, we anticipate that
our exposure to foreign currency fluctuations will increase.



                                       10
<PAGE>   11



    In view of the rapidly changing nature of our business and the current
weakness in the mainframe software market, we believe that period to period
comparisons of our revenue and operating results are not necessarily meaningful
and should not be relied upon as indications of our future performance. Further,
we do not believe that historical growth rates are necessarily representative of
our future growth potential.

RESULTS OF OPERATIONS

    The following table sets forth, for the periods illustrated, certain
statement of operations data expressed as a percentage of total revenues:

<TABLE>
<CAPTION>

                                   THREE MONTHS ENDED DECEMBER 31,  NINE MONTHS ENDED DECEMBER 31,
                                   -------------------------------  ------------------------------
                                       2000               1999           2000           1999
                                   ------------       ------------  -----------    ---------------

<S>                                <C>                <C>            <C>           <C>
Revenues:
   License                               66%               81%            67%           76%
   Maintenance                           34                19             33            24
                                       ----              ----           ----          ----
      Total revenues                    100               100            100           100
Cost of revenues:
   Cost of licenses                      13                 8             10             5
   Cost of maintenance                    9                 6              9             6
                                       ----              ----           ----          ----
      Total cost of revenues             22                14             19            11
                                       ----              ----           ----          ----
Gross profit                             78                86             81            89
Operating expenses:
   Sales and marketing                   61                37             57            39
   Research and development              34                18             31            20
   General and administrative            88                11             40            13
   Amortization of acquisition            2                 1              2             1
                                       ----              ----           ----          ----
related costs
      Total operating expenses          186                67            130            72
                                       ----              ----           ----          ----
Operating income (loss)                (108)               19            (50)           17
Interest and other, net                  10                 6             10             8
                                       ----              ----           ----          ----
Income (loss) before income taxes       (98)               25            (40)           25
Benefit (provision) for income taxes     17                (9)             8            (9)
                                       ----              ----           ----          ----
Net income (loss)                       (81)%              16%           (32)%          16%
                                       ====              ====           ====          ====

</TABLE>

THREE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1999

REVENUES

    Total revenues. NEON's revenues decreased $2.5 million or 28% from $8.9
million for the three months ended December 31, 1999 to $6.4 million for the
three months ended December 31, 2000. This reduction in total revenue was due to
an overall weakness in the mainframe software market that resulted in a decrease
in the amount of licenses sold during the three months ended December 31, 2000.
During the three-month period ended December 31, 1999, NEON had two customers
which individually accounted for 10% and two additional customers which
individually accounted for 11% of total revenue. During the three-month period
ended December 31, 2000, NEON had two customers that accounted for 17% and 19%,
respectively, of total revenue.

    License. License revenues decreased $3 million or 41% from $7.2 million for
the three months ended December 31, 1999 to $4.2 million for the three months
ended December 31, 2000. This reduction in license revenue was due to an overall
weakness in the mainframe software market that resulted in a decrease in the
amount of licenses sold during the three months ended December 31, 2000. License
revenues for the three months ended December 31, 1999 and 2000 include $1
million and $1.2 million, respectively, attributable to a two-year software
distribution agreement with BMC Software entered into in October 1999, in
connection with NEON's settlement of a lawsuit originally filed by BMC Software.

    Maintenance. Maintenance revenues increased $461,000 or 27% from $1.7
million for the three months ended December 31, 1999 to $2.2 million for the
three months ended December 31, 2000. This increase resulted primarily from the
increase in NEON's cumulative installed base of customers.

COST OF REVENUES

    Cost of licenses. Cost of license revenues includes costs of product
licenses, such as product manuals, distribution and





                                       11
<PAGE>   12


media costs for NEON's software products, as well as royalty payments to third
parties related to license revenues. Cost of license revenues increased $145,000
or 21% from $694,000, or 10% of license revenues, for the three months ended
December 31, 1999 to $839,000, or 20% of license revenues, for the three months
ended December 31, 2000. The increase in the cost of license revenue as a
percentage of license revenue was primarily attributable to the overall
reduction in license revenue. The absolute dollar increase in the cost of
license revenue is the result of a larger percentage of the product mix having
associated royalty cost for the period ended December 31, 2000.

    Cost of maintenance. Cost of maintenance revenues includes personnel and
other costs related to NEON's customer support department. Cost of maintenance
revenues was relatively consistent for the three-month periods ending December
31, 1999 and 2000.

OPERATING EXPENSES

    Sales and marketing. Sales and marketing expenses include salaries,
commissions, bonuses, benefits and travel expenses of sales, presales support
and marketing personnel, together with trade show participation and other
promotional expenses. These expenses increased $623,000 or 19% from $3.3
million, or 37% of total revenues, for the three months ended December 31, 1999
to $3.9 million, or 61% of total revenues, for the three months ended December
31, 2000. The dollar increase includes approximately $375,000 in increased cost
of NEON's international sales offices due to the addition of personnel, $500,000
in increased compensation expenses incurred in the hiring of additional North
American sales and marketing personnel, $200,000 in increased marketing program
cost, as well as a $450,000 decrease in international agent commissions. The
increase in sales and marketing expense as a percentage of revenue is due
primarily to the reduction in total revenue for the period ended December 31,
2000.

    Research and development. Research and development expenses include
salaries, bonuses and benefits for product development and product documentation
personnel and the computer hardware, software and telecommunication expenses
associated with these personnel. Research and development expenses increased
$595,000 or 37% from $1.6 million, or 18% of total revenues, for the three
months ended December 31, 1999 to $2.2 million, or 34% of total revenues, for
the three months ended December 31, 2000. The dollar increase includes $295,000
in one-time retention bonuses earned in December 2000 and a $300,000 increase in
compensation costs and the computer hardware, software and telecommunication
expenses related to increased staffing. The increase in percentage of total
revenue is primarily due to the one-time retention bonuses earned in December
2000 and a reduction in total revenue generated in the three months ended
December 31, 2000. We expect research and development expenses to increase in
absolute dollar amounts as we continue to expand our existing product line and
develop new products.

    General and administrative. General and administrative expenses include
salaries, personnel and related costs for NEON's executive, financial, legal and
administrative staff. General and administrative expenses were unchanged for the
three months ended December 31, 2000 compared to the three months ended December
31, 1999, excluding $4.5 million from nonrecurring charges during the three
months ended December 31, 2000. The nonrecurring charges consisted of a $3.8
million charge related to the departure of certain personnel, a $400,000 charge
for the cost of strategic consulting projects and a $250,000 realized foreign
currency loss. NEON anticipates that general and administrative expenses will
increase in absolute dollars as we continue to upgrade and improve our internal
systems.

    Non-cash compensation. During the three months ended December 31, 1999,
$458,000 was recognized as non-cash compensation expense related to NEON's
initial public offering, while $101,000 was recognized as non-cash compensation
expense during the three months ended December 31, 2000. The remaining deferred
balance of $590,000 will be recognized over the remaining vesting period of the
granted options, approximately two years. In December 2000, NEON recorded $3.2
million in non-cash compensation due to changes made to options previously
granted. Additionally, NEON recorded a deferred compensation charge of $509,000
related to a restricted stock grant. This charge will be amortized over the
vesting period of four years.

    Amortization of acquisition related costs. In September 1999 we acquired
various software products and miscellaneous assets from Beyond Software Inc., a
privately held company based in Santa Clara, California, for $1.87 million, plus
the assumption of certain liabilities. The transaction resulted in goodwill of
approximately $2.4 million, which is being amortized on a straight-line basis
over five years. Amortization expense related to this transaction of $117,000
and $119,000 was recognized in the three months ended December 31, 1999 and
2000, respectively.



                                       12
<PAGE>   13

    Interest and other income, net. Interest income, net was flat for the three
months ended December 31, 1999 compared to the three months ended December 31,
2000.

    Benefit (provision) for income taxes. The benefit for income taxes for the
three months ended December 31, 2000, was $1.1 million, or 17% of pre-tax
losses. The difference between the effective and statutory rates is primarily
due to a non-recurring charge for changes made to options previously granted and
the impact of net operating losses outside the United States. NEON has not
recognized the tax benefit for either item in the three months ended December
31, 2000.

    The provision for income taxes for the three-months ended December 31, 1999,
was $803,000, or 36 % of pre-tax income. The effective and statutory rates were
approximately equivalent.

NINE MONTHS ENDED DECEMBER 31, 2000 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1999

REVENUES

    Total revenues. NEON's revenues decreased $1.4 million or 7% from $21.1
million for the nine months ended December 31, 1999 to $19.7 million for the
nine months ended December 31, 2000. During the nine-month period ended December
31, 1999, no single customer accounted for more than 10% of total revenues. NEON
had two customers in the nine-month period ended December 31, 2000, that
represented 11% and 16% of total revenues, respectively.

    License. License revenue decreased $2.9 million or 18% from $16.0 million
for the nine months ended December 31, 1999 to $13.2 million for the nine months
ended December 31, 2000. The decrease in license revenue is primarily due to an
overall weakness in the mainframe software market since December 31, 1999.
License revenues include $1 million and $3.2 million for the nine months ended
December 31, 1999 and 2000, respectively, attributable to a two-year software
distribution agreement with BMC Software entered into in October 1999 in
connection with NEON's settlement of a lawsuit originally filed by BMC Software.

    Maintenance. Maintenance revenues increased $1.5 million or 29% from $5.0
million for the nine months ended December 31, 1999 to $6.5 million for the nine
months ended December 31, 2000. This increase resulted primarily from the
increase in NEON's cumulative installed base of customers.

COST OF REVENUES

    Cost of licenses. Cost of license revenues increased $985,000 or 89% from
$1.1 million, or 7% of license revenues, for the nine months ended December 31,
1999 to $2.1 million, or 16% of license revenues, for the nine months ended
December 31, 2000. The increase in the cost of license revenues was attributable
to a change in product mix that resulted in additional royalty cost during the
period ended December 31, 2000 when compared to the prior year. Cost of license
revenue is expected to decrease over time as license revenue increases and as
ebusiness software solutions become a higher percentage of the product mix.
There are no assurances that NEON will be able to successfully increase the
percentage of its product mix that is made up of its ebusiness software
solutions as the market for such products is highly competitive and some of
those competitors are more established and have greater resources than NEON.

    Cost of maintenance. Cost of maintenance revenues increased $548,000 or 46%
from $1.2 million, or 24% of maintenance revenues, for the nine months ended
December 31, 1999 to $1.7 million, or 27% of maintenance revenues, for the nine
months ended December 31, 2000. The dollar and percentage increases were due
principally to the increase in the number of personnel required to provide
maintenance services to NEON's growing installed customer base.

OPERATING EXPENSES

    Sales and marketing. Sales and marketing expenses increased $3.1 million or
38% from $8.2 million, or 39% of total revenues, for the nine months ended
December 31, 1999 to $11.2 million, or 57% of total revenues, for the nine
months ended December 31, 2000. The dollar increase includes approximately
$900,000 in increased cost of the international sales offices due to the
addition of personnel and marketing programs, $1.6 million in increased
compensation expenses incurred in the hiring of additional North American sales
and marketing personnel, and $600,000 in increased marketing program cost. The
increase in sales and marketing expense as a percentage of revenue is primarily
due to the reduction in total revenue for the period ended December 31, 2000.




                                       13
<PAGE>   14

    Research and development. Research and development expenses increased $1.9
million or 47% from $4.1 million, or 20% of total revenues, for the nine months
ended December 31, 1999 to $6.1 million, or 31% of total revenues, for the nine
months ended December 31, 2000. The dollar increase results primarily from a
$1.4 million increase in compensation costs and the computer hardware, software
and telecommunication expenses related to increased staffing, a $260,000
increase in contract labor cost, and $295,000 in one-time retention bonuses
earned in December 2000. Research and development expenses are expected to
increase in absolute dollar amounts from the level experienced in the nine
months ended December 31, 2000 as we continue to expand our existing product
line and develop new products.

    General and administrative. General and administrative expenses increased
$804,000 or 30% from $2.7 million, or 13% of total revenues, for the nine months
ended December 31, 1999 to $3.5 million, or 18% of total revenues, for the nine
months ended December 31, 2000, excluding $4.5 million from nonrecurring charges
during the nine months ended December 31, 2000. The nonrecurring charges
consisted of $3.8 million for charges related to the departure of certain
personnel, a $400,000 charge for the cost of strategic consulting projects and a
$250,000 realized foreign currency loss. The dollar increase, excluding
nonrecurring charges, results from a $300,000 increase in compensation costs and
the computer hardware, software and telecommunication expenses related to
increased staffing, a $200,000 increase in legal cost associated with
litigation, and $300,000 increase in rent expense due to expansion of office
facilities. NEON anticipates that recurring general and administrative expenses
will continue to increase in absolute dollars from the level experienced in the
nine months ended December 31, 2000 as we continue to upgrade and improve our
internal systems.

    Non-cash compensation. During the nine months ended December 31, 1999,
$730,000 was recognized as non-cash compensation expense related to NEON's
initial public offering, while a $303,000 was recognized as non-cash
compensation expense during the nine months ended December 31, 2000. The
remaining deferred balance of $590,000 will be recognized over the remaining
vesting period of the granted options, approximately two years. In December
2000, NEON recorded $3.2 million in non-cash compensation due to changes made to
options previously granted. Additionally, NEON recorded a deferred compensation
charge of $509,000 related to a restricted stock grant to an executive. This
charge will be amortized over the vesting period of four years.

    Amortization of acquisition related costs. In September 1999, NEON acquired
various software products and miscellaneous assets from Beyond Software Inc., a
privately held company based in Santa Clara, California, for $1.87 million, plus
the assumption of certain liabilities. The transaction resulted in goodwill of
approximately $2.4 million, which is being amortized on a straight-line basis
over five years. Amortization expense related to this transaction of $117,000
and $358,000 was recognized in the nine months ended December 31, 1999 and 2000,
respectively.

    Interest and other income, net. Interest and other income, net increased
$135,000 from $1.7 million for the nine months ended December 31, 1999 to $1.9
million for the nine months ended December 31, 2000. The increase is due
primarily to the increase in yield on invested cash for the nine months ended
December 31, 2000 compared to the prior year period.

    Benefit (provision) for income taxes. The benefit for income taxes for the
nine months ended December 31, 2000, was $1.5 million, or 20% of pre-tax losses.
The difference between the effective and statutory rates is primarily due to a
non-recurring charge for changes made to options previously granted and the
impact of net operating losses outside the United States. NEON has not
recognized the tax benefit for either item in the nine months ended December 31,
2000.

    The provision for income taxes for the nine months ended December 31, 1999,
was $2.0 million, or 37% of pre-tax income. The effective and statutory rates
were approximately equivalent.

LIQUIDITY AND CAPITAL RESOURCES

    NEON's cash and cash equivalent balance decreased to $32.1 million at
December 31, 2000 from $37.1 million at March 31, 2000. This decrease was due
primarily to the investment of $5 million in marketable securities. At March 31,
2000, NEON had invested $4.6 million in highly liquid marketable securities
compared to $8.3 million as of December 31, 2000.

    Net cash provided by operating activities was $473,000 in the nine months
ended December 31, 2000, while the net cash used in operating activities was
$1.4 million in the nine months ended December 31, 1999. The additional net cash
provided by operating activities during the nine months ended December 31, 2000
was primarily the result of decreased balances in NEON's accounts
receivable-trade, increases in accrued liabilities and offset by the period's
net loss.



                                       14
<PAGE>   15

    Net cash used by NEON in investing activities was $5.5 million and $10.7
million in the nine months ended December 31, 2000 and 1999, respectively.
Purchases of marketable securities totaling $3.6 million, $1 million payment to
complete the purchase of certain software products and related intellectual
property from Computer Associates, and $900,000 in purchases of property and
equipment, including computer software, were the principal uses of investing
funds in the nine months ended December 31, 2000. The principal investing uses
in the nine months ended December 31, 1999 were purchases of marketable
securities totaling $8.2 million and the acquisition of various software
products from Beyond Software in September 1999. As of December 31, 2000, NEON
had no material commitment for capital expenditures.

    NEON's net cash provided by (used in) financing activities was $223,000 and
($54,000) in the nine months ended December 31, 2000 and 1999, respectively. Net
cash provided by financing activities in the period ending December 31, 2000 was
from amounts received from the exercise of employee stock options. For the nine
months ended December 31, 1999, amounts received from the exercise of employee
stock options were more than offset by the cost of shares repurchased by NEON in
settlement of payroll tax obligations of employees related to the exercises of
these stock options.

    We intend to invest heavily in the development of new products and
enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of product development efforts and the success of these development
efforts, the costs and timing of expansion of sales and marketing activities,
the extent to which our existing and new products gain market acceptance, market
developments, the costs involved in maintaining and enforcing intellectual
property rights, the level and timing of license revenue, and other factors. We
believe that our current cash and investment balances and any cash generated
from operations will be sufficient to meet our operating and capital
requirements for at least the next 12 months. However, it is possible that we
may require additional financing within this period. We have no current plans,
and we are not currently negotiating, to obtain additional financing. The
factors described in this paragraph will affect our future capital requirements
and the adequacy of our available funds. We may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. We cannot ensure that such funding, if needed, will be available
to us on terms attractive to us, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require us to relinquish our rights to certain of our
technologies or products. If we fail to raise capital when needed, our failure
could have a negative impact on our operating results and financial condition.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    NEON is exposed to a variety of risks, including foreign currency exchange
rate fluctuations and changes in the market value of its investments.

    The majority of NEON's foreign currency transactions are denominated in the
British pound sterling, which is the functional currency of NEON Systems (UK)
Ltd. As sales contracts are denominated and settled in the functional currency,
risks associated with currency fluctuations are minimized to foreign currency
translation adjustments. NEON does not currently hedge against foreign currency
translation risks and believes that foreign currency exchange risk is not
significant to its operations.

    NEON adheres to a conservative investment policy, whereby its principal
concern is the preservation of liquid funds while maximizing its yield on such
assets. Cash and cash equivalents approximated $32 million at December 31, 2000,
and were invested in different types of money market securities. An additional
$7.6 million was invested in short-term available-for-sale marketable securities
with maturity dates from three months to one year in term, and $683,000 was
invested in available-for-sale marketable securities with maturity dates beyond
one year. NEON believes that a near-term change in interest rates would not
materially affect its financial position, results of operations or net cash
flows for fiscal year 2001.

    In December 2000, NEON had a realized foreign currency loss of $250,000. At
December 31, 2000, NEON does not have any cash positions that would result in
foreign currency income or loss.

PART II - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS - Please see the discussion in Part I, Note 8 of
           the "Condensed Notes to Consolidated Financial Statements," which is
           incorporated by reference in this Part II, Item 1.



                                       15
<PAGE>   16


ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS - ITEM 2. CHANGES IN
           SECURITIES AND USE OF PROCEEDS - In March 1999, NEON completed the
           initial public offering of its common stock (the "IPO"). In the IPO,
           NEON issued and sold 3,041,000 shares for an aggregate price to the
           public of $45,615,000, and a sole selling stockholder sold 64,000
           shares of common stock for an aggregate offering price of $960,000.
           The IPO was a firm commitment underwriting, and the managing
           underwriters of the IPO were Donaldson, Lufkin & Jenrette Securities
           Corporation, Hambrecht & Quist LLC and the CIBC Oppenheimer Corp. The
           underwriting discount incurred by NEON relating to the IPO was
           $3,193,050. Net offering proceeds received by NEON from the IPO were
           approximately $41.2 million. Approximately $1.0 million of the
           proceeds received by NEON from the IPO was used to repay existing
           indebtedness and $1.9 million was used in connection with the
           September 1999 acquisition of the assets of Beyond Software Inc. An
           additional $4.5 million was paid to Computer Associates, Inc. through
           December 2000 to pay certain software product royalties and to
           purchase certain software products and intellectual property rights.
           The remainder of the proceeds from the IPO has been invested in
           interest-bearing, investment-grade securities.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES .

ITEM 4.    SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - Not applicable.

ITEM 5.    OTHER INFORMATION - FACTORS THAT MAY AFFECT FUTURE RESULTS This
           report on Form 10-Q, including Management's Discussion and Analysis
           of Financial Condition and Results of Operations, contains
           forward-looking statements and other prospective information relating
           to future events. These forward-looking statements and other
           information are subject to certain risks and uncertainties that could
           cause results to differ materially from historical results or
           anticipated results, including the following:

DECREASING DEMAND FOR MAINFRAME PROCESSING CAPACITY COULD ADVERSELY AFFECT
REVENUES.

    NEON derives revenues exclusively from software licenses and maintenance
services predominately related to mainframe computing systems. Our revenue
growth depends on our customers planning to grow their mainframe capacity and
continuing to perceive an increasing need to use our existing software products
on substantially greater mainframe processing capacity in future periods. In
addition, the continued growth of distributed database management systems may
have an adverse effect on growth rates for mainframe computing systems. Slower
growth in our customers' mainframe processing capacity will adversely affect our
revenues.

BECAUSE OUR EXPENSES ARE LARGELY FIXED, AN UNEXPECTED REVENUE SHORTFALL MAY
ADVERSELY AFFECT OUR BUSINESS.

    For the three months ended December 31, 2000, we incurred a net loss of $5.2
million. The loss primarily resulted from a shortfall in license revenue and
nonrecurring charges. Our expense levels are based primarily on our estimates of
future revenue and are largely fixed. We are unable to adjust spending rapidly
enough to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenue will have a material adverse effect on
operating results and could adversely impact our stock price.

BECAUSE WE CANNOT ACCURATELY PREDICT THE AMOUNT AND TIMING OF INDIVIDUAL SALES,
OUR QUARTERLY OPERATING RESULTS MAY VARY SIGNIFICANTLY. THIS MAY ADVERSELY
IMPACT OUR STOCK PRICE.

    Our future operating results may vary significantly from quarter to quarter
due to a variety of factors, many of which are outside our control. Therefore,
it is likely that in one or more future quarters our results may fall below the
expectations of securities analysts and investors. We operate with no order
backlog because our products are shipped and revenue is generally recognized
shortly after orders are received. In addition, the amount of revenue associated
with sales of our software can vary significantly. In various quarters in the
past, we have derived a significant portion of our software license revenues
from a small number of relatively large sales. An inability to close one or more
large sales that we had expected to close in a particular period could
materially adversely affect our operating results for that period. Moreover, we
typically realize a majority of our software license revenue in the last few
days of a quarter. As a result, delays in the completion of customer orders can
shift recognition of a sale from its expected completion period to a future
period and cause significant variability in our operating





                                       16
<PAGE>   17


results for any particular period. Further, we believe that period-to-period
comparisons of our operating results are not necessarily a meaningful indication
of future performance. If our quarterly results do not meet investors'
expectations, the trading price of our common stock would be adversely affected.

SEASONAL TRENDS IN SALES OF OUR PRODUCTS MAY AFFECT INVESTORS' EXPECTATIONS
REGARDING OUR FINANCIAL PERFORMANCE AND ADVERSELY AFFECT OUR STOCK PRICE.

    Historically, our revenues have generally been stronger in our third and
fourth fiscal quarters with a decrease in our first fiscal quarter. The
expectations of investors who rely on our third or fourth quarter results in a
given year may be adversely impacted if this seasonal trend continues. We
believe that our seasonality is due in part to the calendar year budgeting
cycles as well as other buying patterns of our customers. In future periods, we
expect that this seasonal trend will continue to cause first fiscal quarter
license revenues to decrease from the level achieved in the preceding quarter.

BECAUSE A SIGNIFICANT PERCENTAGE OF OUR REVENUES ARE DERIVED FROM THE SHADOW
PRODUCT GROUP, DECREASED DEMAND FOR THIS PRODUCT GROUP COULD ADVERSELY AFFECT
OUR BUSINESS.

    Approximately 70% of our revenues for the nine months ended December 31,
2000 and approximately 90% of our revenues over fiscal 2000, 1999 and 1998 were
derived from our Shadow product group. We anticipate that this product line will
continue to account for a substantial amount of our revenue for the foreseeable
future. Consequently, our future success will depend on continued market
acceptance of the Shadow product line and enhancements thereto. Competition,
technological change or other factors could reduce demand for, or market
acceptance of, these products and could have a material adverse effect on our
business, operating results and financial condition.

REDUCED CUSTOMER RELIANCE UPON MAINFRAME COMPUTERS COULD ADVERSELY AFFECT OUR
BUSINESS.

    We are dependent upon the continued use and acceptance of mainframe
computers in a computing environment that is increasingly based on distributed
platforms, including client/server and Internet-based computing networks. We
derive our revenue primarily from our Shadow Direct product which facilitates
access to data residing on mainframe computer systems. Decreased use of
mainframe computer systems and decreased demand for access to the data,
applications and transactions residing on mainframe computers could have a
material adverse effect on our business, operating results and financial
condition.

WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL.

    Our future success depends on the continued service of our executive
officers and other key administrative, technical, sales and marketing and
support personnel. There is currently a shortage of personnel possessing the
technical background necessary to develop, sell and support our products
effectively. Competition for skilled personnel is intense, and we may not be
able to attract, assimilate or retain highly qualified personnel in the future.
Qualified sales, marketing, administrative, research and development and
customer support personnel are difficult to hire and retain in our competitive
industry. In addition to our direct competitors, we are competing for qualified
personnel with start-ups and small companies, many of which are offering
significant ownership interests in the form of stock options to attract
employees. In competing with start-ups and other high growth companies, our
recent stock price performance, with our shares trading well below our average
stock price since our initial public offering, has made it more difficult for us
to attract and retain employees. Consequently, our growth rates may be limited
by our ability to attract qualified personnel.

WE MAY LOSE MARKET SHARE AND BE REQUIRED TO REDUCE PRICES AS A RESULT OF
COMPETITION FROM OUR EXISTING COMPETITORS, OTHER VENDORS AND INFORMATION SYSTEMS
DEPARTMENTS OF CUSTOMERS.

    We compete in markets that are intensely competitive and feature rapidly
changing technology and evolving standards. Our competitors may be able to
respond more quickly than we can to new or emerging technologies and changes in
customer requirements. Competitive pressures could reduce our market share or
require us to reduce the price of our products, either of which could have a
material adverse effect on our business, operating results and financial
condition.

    Our potential field of competitors continues to expand as both organizations
and vendors recognize the need for products






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that permit users to access mainframe-based data and applications for
integration with applications on their personal computers that we refer to as
eBusiness Integration products, and Enterprise Subsystem Management products.
Our Shadow product group competes principally with products that provide the
connection between a client application and a server application, database or
transaction processing system, generally known as middleware software products,
from established vendors such as IBM, Oracle, Information Builders, BEA Systems,
IONA Technologies, New Era of Networks and TSI International Software, and our
iWave product group competes with products offered by Webmethods, Vitria
Technologies and Crossworlds. Our Enterprise Subsystem Management products face
significant competition from BMC Software and IBM. We expect to experience
increased competition from current and potential competitors, many of which have
significantly greater financial, technical, marketing and other resources than
we do. We may also face competition from:

     o    Other business application software vendors who may internally
          develop, or attain through acquisitions and partnerships, middleware
          and enterprise subsystem management solutions

     o    Internal development efforts by corporate information technology
          departments

     o    New entrants to the middleware or enterprise subsystem management
          markets

WE MAY NOT HAVE THE RESOURCES TO SUCCESSFULLY MANAGE ADDITIONAL GROWTH.

    If NEON is not able to sustain or manage its growth, such inability could
have a material adverse effect on our business, operating results and financial
condition. In addition, expansion of our existing international operations and
entry into additional international markets will require significant management
attention and financial resources. To sustain and manage growth, we must:

     o    Expand our sales, marketing and customer support organizations

     o    Invest in the development of enhancements to existing products and new
          products that meet changing customer needs

     o    Further develop our technical expertise so that we can influence and
          respond to emerging industry standards

     o    Improve our operational processes and management controls

RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE.

    Our markets are characterized by rapid technological change, frequent new
product introductions and enhancements, uncertain product life cycles, changes
in customer requirements and evolving industry standards. The introduction of
new products embodying new technologies and the emergence of new industry
standards could render our existing products obsolete,which would have a
material adverse effect on our business, operating results and financial
condition. Our future success will depend upon our ability to continue to
develop and introduce a variety of new products and product enhancements to
address the increasingly sophisticated needs of our customers. We may experience
delays in releasing new products and product enhancements in the future.
Material delays in introducing new products or product enhancements may cause
customers to forego purchases of our products and purchase those of our
competitors.

WE MAY BE UNABLE TO ENFORCE OR DEFEND OUR OWNERSHIP AND USE OF PROPRIETARY
TECHNOLOGY.

    Our success depends to a significant degree upon our proprietary technology.
We rely on a combination of trademark, trade secret and copyright law, and
contractual restrictions and passwords to protect our proprietary technology.
However, these measures provide only limited protection, and we may not be able
to detect unauthorized use or take appropriate steps to enforce our intellectual
property rights, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as in the United States. Companies in
the software industry have experienced substantial litigation regarding
intellectual property. Any litigation to enforce our intellectual property
rights would be expensive and time-consuming, would divert management resources
and may not be adequate to protect our business.

    We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be







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required to indemnify our distribution partners and end-users for similar claims
made against them. Any claims against us could require us to spend significant
time and money in litigation, pay damages, develop new intellectual property or
acquire licenses to intellectual property that is the subject of the
infringement claims. These licenses, if required, may not be available on
acceptable terms. As a result, intellectual property claims against us could
have a material adverse effect on our business, operating results and financial
condition.

LOSS OF CODE-SHARING OR DISTRIBUTOR RIGHTS COULD DIVERT OUR RESOURCES FROM NEW
PRODUCT DEVELOPMENT.

    We have code-sharing arrangements with third parties under which we have
obtained and used some source code in the development of some of our software
products. If any of these agreements are terminated, we could be required to
discontinue our use of the acquired code, and we would have to spend time and
software development resources to replace that code. Any diversion of these
resources could delay our development of new products or product enhancements.
In addition, we license our Enterprise Subsystem Management products from
Peregrine/Bridge Transfer Corporation pursuant to a distributor agreement with
an initial term through March 31, 2004. The license may be terminated by either
party in the event of default. The departure of the distributor agreement could
have a material adverse effect on our business, operating results and financial
condition.

OUR INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE TO GLOBAL ECONOMIC FACTORS,
FOREIGN TAX LAW ISSUES AND BUSINESS PRACTICES AND CURRENCY FLUCTUATIONS.

    We currently have limited experience in developing local versions of our
products and marketing and distributing our products internationally. We have
established direct telesales subsidiary offices in Germany and the United
Kingdom to market and sell our products in Europe, and a telesales subsidiary
office in Australia to market and sell our products in that region. We have
distributors in Europe, Latin America and the Pacific Rim to market and sell our
products in those regions. Our international operations are subject to
particular risks, including:

     o    Impact of recessions in economies outside the United States

     o    Difficulty in accounts receivable collection and longer collection
          periods

     o    Cost of enforcement of contractual obligations

     o    Difficulties and costs of managing foreign operations

     o    Limited protection for intellectual property rights in some countries

     o    Currency exchange rate fluctuations

     o    Political and economic instability

     o    Potentially adverse tax consequences

    Our international revenues are generally denominated in local currencies. We
do not currently engage in currency hedging activities; however, we may
implement a program to mitigate foreign currency transaction risk in the future.
Future fluctuations in currency exchange rates may adversely affect our revenues
from international sales.

USE OF OUR NAME BY OTHERS MAY CAUSE CONFUSION IN THE MARKET.

    A number of organizations, including New Era of Networks, Inc., are
utilizing the name "Neon," both alone and in combination with other words, as a
trademark, a tradename or both. Any litigation to enforce our right to use the
NEON name in our business or to prevent others from using the NEON name would be
expensive and time-consuming, would divert management resources and may not be
adequate to protect our business. New Era of Networks is also a developer and
distributor of middleware and other software products. New Era of Networks has
used the acronym "NEON" in its business, is listed on the Nasdaq National Market
System under the symbol "NEON" and has sought to obtain federal trademarks for




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<PAGE>   20

products and services whose names include the word "NEON." We are currently
opposing, in the U.S. Patent and Trademark Office, New Era of Networks'
application to register "NEONET." New Era of Networks has filed a complaint
against NEON in the United States District Court for the District of Colorado
seeking (1) a declaratory judgment that New Era of Networks' use of certain
trademarks, including "NEONET," does not infringe our rights or constitute
unfair competition and (2) cancellation of our federal trademark registration
for "NEON." NEON has filed an answer denying the material allegation of that
complaint. On February 11, 2000, the judge in the Colorado proceeding advised
the parties that the court intends to grant summary judgment for cancellation of
the federal trademark registration for the "NEON" mark. If such judgment is
entered, it will not affect NEON's right to use the "NEON" mark, which NEON
believes is superior to that of New Era of Networks. Discovery related to this
litigation has been completed, but no trial date has been set. On June 23, 1999,
NEON sued New Era of Networks in District Court in Fort Bend County, Texas,
seeking to enjoin New Era of Networks' use of "NEON" as its "nickname," stock
symbol or in any manner that does or is likely to cause confusion in the
marketplace or dilute the value of NEON's name. This litigation in Fort Bend
County, Texas is currently set for trial beginning May 14, 2001. If we should
lose any such litigation, we may have to change our name, which also would be
expensive and time-consuming and could adversely affect our business. In
addition, NEON believes that New Era of Networks' use of the "NEON" symbol on
the Nasdaq National Market System creates confusion in the marketplace and may
result in variations in our stock price that are attributable to facts or
circumstances relating to New Era of Networks.

OUR PRODUCTS MAY CONTAIN UNDETECTED SOFTWARE ERRORS, WHICH COULD ADVERSELY
AFFECT OUR BUSINESS.

    Our software products and the software products that we sell for others are
complex and may contain undetected errors. These undetected errors could result
in adverse publicity, loss of revenues, delay in market acceptance or claims
against us by customers, all of which could seriously damage our business,
operating results and financial condition. We have previously discovered
software errors in certain of the products that we have developed or sold.
Despite testing, we cannot be certain that errors will not be found in current
versions, new versions or enhancements of our products after commencement of
commercial shipments.

WE MAY NOT BE ABLE TO EXPAND OUR BUSINESS IF WE DO NOT SUCCESSFULLY UTILIZE
SYSTEMS INTEGRATORS OR CONSULTING SERVICE PROVIDERS IN OUR SELLING EFFORTS.

    To date, we have not yet significantly utilized systems integrators or
consulting service providers in our selling efforts for our software products.
We intend to explore relationships with systems integrators but have little or
no experience negotiating agreements with systems integrators and consulting
service providers, engaging in joint selling activities with systems integrators
and consulting service providers, or providing support to their end-user
customers. Our business and sales may be adversely impacted if we fail to enter
into agreements with systems integrators and/or consulting service providers or
if we fail to successfully and profitably perform our obligations under those
agreements. In addition, our revenue could decline if selling our products
through systems integrators or consulting service providers results in lower
margins per license and those sales replace a substantial portion of our direct
sales.

THE COMPLEX TECHNOLOGY OF OUR PRODUCTS SUBJECTS US TO LIABILITY CLAIMS.

    Because our products provide critical database access, integration and
management functions, we may face significant liability claims if our customers
believe that our products have failed to perform their intended functions.
Liability claims could require us to spend significant time and money in
litigation or to pay significant damages. As a result, any such claims, whether
or not successful, could have a material adverse effect on our reputation and
business, operating results and financial condition. Our agreements with
customers typically contain provisions intended to limit our exposure to
liability claims. However, these contract provisions may not preclude all
potential claims.

AS A TECHNOLOGY COMPANY, OUR COMMON STOCK MAY BE SUBJECT TO ERRATIC PRICE
FLUCTUATIONS.

    From time to time, the stock market experiences significant price and volume
fluctuations, which may affect the market price of our common stock for reasons
unrelated to our performance. Recently, such volatility has particularly
impacted our stock price and the stock prices of other publicly-traded
technology companies. In the past, securities class action litigation has been
instituted against a company following periods of volatility in the market price
of a company's securities. If similar litigation were instituted against us, it
could result in substantial costs and a diversion of our management's attention
and




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resources, which could have a material adverse effect on our business. In
addition, the market price of our common stock may be subject to significant
fluctuations in response to numerous factors, including:

     o    Variations in our annual or quarterly financial results or those of
          our competitors

     o    Changes by financial research analysts in their estimates of our
          earnings or our failure to meet such estimates

     o    Conditions in the economy in general or in the software and other
          technology industries

     o    Announcements of key developments by competitors

     o    Loss of key personnel

     o    Unfavorable publicity affecting our industry or us

     o    Adverse legal events affecting us

     o    Sales of NEON common stock by stockholders

THE AVAILABILITY OF SIGNIFICANT AMOUNTS OF OUR COMMON STOCK FOR SALE COULD
ADVERSELY AFFECT ITS MARKET PRICE.

    If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. A substantial
number of sales, or the perception that such sales might occur, also might make
it more difficult for us to sell equity or equity-related securities in the
future at a time and price that we deem appropriate. We granted registration
rights to two of our stockholders, Peter Schaeffer and JMI Equity Fund, L.P.
Those rights enabled these stockholders to require that we register, at our
expense, resales of their shares of common stock. Mr. Schaeffer and the
individuals and entities to which JMI Equity Fund, L.P. recently distributed its
shares of our common stock beneficially own in the aggregate approximately 3.8
million shares of our common stock. If they sell a large portion of their shares
on the open market and at one time, our market price per share may decline.

OUR OFFICERS AND DIRECTORS CONTROL NEON, AND THESE OFFICERS AND DIRECTORS COULD
EFFECTIVELY CONTROL MATTERS SUBMITTED TO OUR STOCKHOLDERS.

    At present, our executive officers and directors and entities affiliated
with them beneficially own approximately 46% of our outstanding common stock. As
a result, these stockholders, if they act together and obtain the assent of
another 5% of our outstanding common stockholders, could control the resolution
of all matters submitted to our stockholders for a vote, including the election
of directors and the approval of mergers and other business combination
transactions.

PROVISIONS OF OUR CHARTER AND BYLAWS AND DELAWARE LAW COULD DETER TAKEOVER
ATTEMPTS.

    Provisions of our Certificate of Incorporation and Bylaws as well as
Delaware law could make it more difficult for a third party to acquire us, even
if doing so would be beneficial to our stockholders. We are subject to the
provisions of Delaware law which restrict certain business combinations with
interested stockholders, which may have the effect of inhibiting a
non-negotiated merger or other business combinations.

POSSIBLE ADVERSE IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS.

    On April 1, 1998 and 1999 we adopted AICPA SOP 97-2, "Software Revenue
Recognition," and SOP 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions," respectively. The adoption
of these standards did not have a material impact on our financial position or
results of operations. Based on our reading and interpretation of these SOPs, we
believe that our current sales contract terms and business arrangements have
been properly reported. However, the American Institute of Certified Public
Accountants and its Software Revenue Recognition Task Force continue to issue
interpretations and guidance for applying the relevant standards to a wide range
of sales contract terms and business arrangements that are prevalent in the
software industry. Also, the Securities and Exchange Commission has issued




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Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," which provides guidance related to revenue recognition based on
interpretations and practices followed by the Securities and Exchange
Commission. Future interpretations of existing accounting standards or changes
in our business practices could result in future changes in our revenue
accounting policies that could have a material adverse effect on our business,
financial condition and results of operations.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K - Not Applicable

             (a)    EXHIBITS

             (b)     REPORTS ON FORM 8-K



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                                   SIGNATURES

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

                                            NEON SYSTEMS, INC.

Date: February 14, 2001                     /s/ STEPHEN E. ODOM
      -----------------                     ------------------------------------
                                            Stephen E. Odom
                                            Chief Executive Officer and Chief
                                             Financial Officer
                                            (Principal executive and financial
                                              officer)




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