<PAGE>

                                 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 September 30, 2001

                                       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
November 13, 2001 was 9,569,073.
<PAGE>
                               NEON SYSTEMS, INC.

                                   FORM 10-Q

                    FOR THE QUARTER ENDED September 30, 2001

                                     INDEX

                                                                           PAGE
                                                                          ------
PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated  Balance Sheets at September 30, 2001 and
         March 31, 2001....................................................  3

         Consolidated Statements of Operations for the Three and Six
         Months Ended September 30, 2001 and 2000..........................  4

         Consolidated Statements of Cash Flows for the Six Months Ended
         September 30, 2001 and 2000.......................................  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 Risk........ 15

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings................................................. 15

Item 2.  Changes in Securities and Use of Proceeds......................... 15

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

                                       2

<PAGE>

PART I - FINANCIAL INFORMATION

  ITEM 1. FINANCIAL STATEMENTS

                      NEON SYSTEMS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                         SEPTEMBER 30, 2001    MARCH 31, 2001
                                                                         -------------------   ---------------
                                                                             (UNAUDITED)
<S>                                                                          <C>                 <C>
                ASSETS

         CURRENT ASSETS:
            Cash and cash equivalents                                           $43,834,097       $42,773,856
            Short-term investments                                                       --           514,828
            Accounts receivable, net                                              3,710,934         6,072,332
            Current note receivable                                               2,000,000                --
            Taxes receivable                                                      1,062,734         2,392,311
            Deferred income taxes                                                   750,644           607,566
            Other current assets                                                  2,863,882         2,050,586
                                                                                -----------       -----------
               Total current assets                                              54,222,291        54,411,479
                                                                                -----------       -----------
         Property and equipment, net                                              2,254,357         2,103,764
         Note receivable                                                          2,000,000                --
         Long-Term Investments                                                           --           319,613
         Intangible assets, net                                                   4,682,903         5,652,857
         Other assets                                                                64,335           890,630
                                                                                -----------       -----------
               Total assets                                                     $63,223,886       $63,378,343
                                                                                ===========       ===========
                LIABILITIES & STOCKHOLDERS' EQUITY

         CURRENT LIABILITIES:
            Accounts payable                                                    $   262,414       $ 1,385,541
            Accrued expenses                                                      3,720,725         5,197,674
            Deferred maintenance revenue                                          6,141,724         7,481,593
                                                                                -----------       -----------
               Total current liabilities                                         10,124,863        14,064,808
                                                                                -----------       -----------
         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; 9,570,923 and 9,516,804 shares
         issued and outstanding at September 30, 2001 and
         March 31, 2001, respectively                                                95,709            95,167
         Additional paid-in capital                                              51,231,466        51,550,518
         Accumulative other comprehensive income (loss)                            (457,482)         (423,574)
         Unearned portion of deferred compensation                                 (197,561)         (787,705)
         Retained earnings (deficit)                                              2,426,891        (1,120,871)
                                                                                -----------       -----------
               Total stockholders' equity                                        53,099,023        49,313,535
         Commitments and contingencies (Note 6)
               Total liabilities and stockholders' equity                       $63,223,886       $63,378,343
                                                                                ===========       ===========
</TABLE>

     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED SEPTEMBER 30,     SIX MONTHS ENDED SEPTEMBER 30,
                                               --------------------------------     ------------------------------
                                                    2001               2000             2001              2000
                                                   ------             ------           ------            ------
<S>                                            <C>               <C>                <C>              <C>
Revenues:
   License                                      $ 2,474,965        $ 3,654,104      $ 6,374,196       $ 8,937,663
   Maintenance                                    2,376,869          2,024,406        4,674,738         4,365,891
                                                -----------        -----------      -----------       -----------
     Total revenues                               4,851,834          5,678,510       11,048,934        13,303,554

Cost of revenues:
   Cost of licenses                                 615,647            404,184        1,114,591         1,249,924
   Cost of maintenance                              469,004            609,889        1,045,335         1,145,562
                                                -----------        -----------      -----------       -----------
     Total cost of revenues                       1,084,651          1,014,073        2,159,926         2,395,486
                                                -----------        -----------      -----------       -----------
Gross profit                                      3,767,183          4,664,437        8,889,008        10,908,068
                                                -----------        -----------      -----------       -----------
Operating expenses:
  Sales and marketing                             3,206,468          3,676,240        7,315,365         7,280,271
  Research and development                        1,466,354          2,008,326        3,249,051         3,983,487
  General and administrative                        959,209          1,304,044        2,889,621         2,276,684
  Restructuring costs                               908,000                 --          908,000                --
  Asset write-down charges                          887,000                 --          887,000                --
  Amortization of acquisition-related               119,499            119,264          238,998           238,529
   costs                                        -----------        -----------      -----------       -----------
   Total operating expenses                       7,546,530          7,107,874       15,488,035        13,778,971
                                                -----------        -----------      -----------       -----------
Operating income (loss)                          (3,779,347)        (2,443,437)      (6,599,027)       (2,870,903)

Interest income                                     328,574            662,010          738,379         1,326,518
Interest expense                                       (379)              (826)            (406)           (4,269)
Gain from settlement of litigation                9,259,815                 --        9,259,815                --
Other, net                                            5,923             (2,658)           5,923             6,153
                                                -----------        -----------      -----------       -----------
   Income (loss) before income taxes              5,814,586         (1,784,911)       3,404,684        (1,542,501)
                                                -----------        -----------      -----------       -----------
Benefit (provision) for income taxes                143,078            515,000          143,078           428,000
                                                -----------        -----------      -----------       -----------
   Net income (loss)                            $ 5,957,664        $(1,269,911)       3,547,762       $(1,114,501)
                                                ===========        ===========      ===========       ===========
Earnings (loss) per share:
   Basic                                              $0.62             $(0.13)           $0.37            $(0.12)
                                                ===========        ===========      ===========       ===========
   Diluted                                            $0.59             $(0.13)           $0.35            $(0.12)
                                                ===========        ===========      ===========       ===========
Shares used in computing earnings
   per share:
   Basic                                          9,562,305          9,442,191        9,543,925         9,362,375
                                                ===========        ===========      ===========       ===========
   Diluted                                       10,116,474          9,442,191       10,112,824         9,362,375
                                                ===========        ===========      ===========       ===========
</TABLE>

     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>

                      NEON SYSTEMS, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                     SIX MONTHS ENDED SEPTEMBER 30,
                                                                                     ------------------------------
                                                                                          2001             2000
                                                                                         ------           ------
<S>                                                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                           $ 3,547,762      $(1,114,501)
  Adjustments to reconcile net income to net
    cash provided by (used in) operating
    activities:
     Depreciation and amortization                                                       1,313,022          630,401
     Deferred tax benefit                                                                 (143,078)        (121,279)
     Non-cash compensation expense                                                         176,284          205,530
     Asset write-down charges                                                              887,000               --
     Increase (decrease) in cash resulting from changes in
       operating assets and liabilities:
       Accounts receivable                                                               2,229,866        2,359,182
       Taxes receivable                                                                  1,329,577               --
       Other current assets                                                               (823,808)        (639,456)
       Other assets                                                                             --         (599,628)
       Accrued expenses                                                                 (1,490,364)         181,380
       Accounts payable                                                                 (1,127,104)         (55,249)
       Other non-current assets                                                             26,292
       Taxes payable                                                                            --         (318,534)
       Deferred maintenance revenue                                                     (1,339,869)        (106,421)
                                                                                       -----------      -----------
Net cash provided by operating activities                                                4,585,580          421,425
                                                                                       -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Maturity of marketable securities                                                        819,711       (8,119,090)
  Notes receivable                                                                      (4,000,000)              --
  Purchases of furniture and equipment                                                    (493,660)        (738,084)
                                                                                       -----------      -----------
Net cash used in investing activities                                                   (3,673,949)      (8,857,174)
                                                                                       -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercises of stock options                                                  95,350          208,426
                                                                                       -----------      -----------
Net cash provided by (used in) financing activities                                         95,350          208,426
                                                                                       -----------      -----------
Net increase (decrease) in cash and cash equivalents                                     1,006,981       (8,227,323)
Effect of exchange rates on cash                                                            53,260         (452,394)
Cash and cash equivalents at beginning of period                                        42,773,856       37,120,342
                                                                                       -----------      -----------
Cash and cash equivalents at end of period                                             $43,834,097      $28,440,625
                                                                                       ===========      ===========
Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes                                           $        --      $    77,005
                                                                                       ===========      ===========
Cash paid during the period for interest                                               $       406      $     4,269
                                                                                       ===========      ===========
</TABLE>

     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       5
<PAGE>

                      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 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, 2001 which are included in NEON's Form 10-K for the fiscal
year ended March 31, 2001.

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 SEPTEMBER 30,    SIX MONTHS ENDED SEPTEMBER 30,
                                            --------------------------------    ------------------------------
                                                   2001              2000             2001             2000
                                                  ------            ------           ------           ------
<S>                                          <C>              <C>                <C>             <C>
Net income (loss)                             $ 5,957,664       $(1,269,911)     $ 3,547,762      $(1,114,501)
                                              ===========       ===========      ===========      ===========
Weighted average number of common
  shares outstanding during the period:
Basic                                           9,562,305         9,442,191        9,543,925        9,362,375
Dilutive stock options                            554,169                --          568,899               --
                                              -----------       -----------      -----------      -----------
Diluted                                        10,116,474         9,442,191       10,112,824        9,362,375
                                              ===========       ===========      ===========      ===========
Income (loss) per common share:
  Basic                                       $      0.62       $     (0.13)     $      0.37      $     (0.12)
                                              ===========       ===========      ===========      ===========
  Diluted                                     $      0.59       $     (0.13)     $      0.35      $     (0.12)
                                              ===========       ===========      ===========      ===========
</TABLE>

  In the period April 1, 2001 through September 30, 2001 options to purchase
54,119 shares of common stock at exercise prices of $0.20 to $4.45 per share
were exercised. At September 30, 2001, there were options outstanding to
purchase 2,126,192 shares of common stock with a weighted-average exercise price
of $9.80.

                                       6
<PAGE>

NOTE 3--MARKETABLE SECURITIES

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

  NEON's investment policies are consistent with Financial Accounting Standards
Board Statement No. 115 ("FASB 115"), "Accounting for Certain Investments in
Debt and Equity Securities", and NEON has 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:

                                      SEPTEMBER 30, 2001  MARCH 31, 2001
                                      ------------------  --------------
Debt Securities:
  Cost                                    $     --           $819,711
  Gross unrealized losses                       --             14,730
                                          --------           --------
      Estimated fair value                $     --           $834,441
                                          --------           --------

NOTE 4--INCOME TAXES

  At September 30, 2001, NEON had a net operating loss carry-forward for income
tax purposes of approximately $3.2 million that is available to offset future
taxable income, if any. The net operating loss carry-forwards in the United
Kingdom, Germany and Australia carry forward indefinitely. The Net operating
loss carry-forward for the United States begins expiring in 2020. Given the
recent tax losses experienced by NEON, there can be no assurance that the
operations will generate taxable income in the future to utilize these losses.
Therefore, as of September 30, 2001, NEON has recorded a full valuation
allowance for the deferred tax assets related to the future benefits, if any,
for these losses.

  The benefit for income taxes for the six months ended September 30, 2001 and
2000, was $143,078, or 4.2% of pre-tax income and $428,000, or 28% of pre-tax
loss, respectively. As the Company does not anticipate creating income for the
year ended March 31, 2002, no tax provision is recorded in the interim financial
statements. The difference between the effective rate and the statutory rate is
primarily due to the impact of net operating losses outside the United States
that were not recognized for the six months ended September 30, 2001 and 2000.

NOTE 5--SEGMENT REPORTING

  NEON considers its business activities to be in a single segment.  During the
three-month period ended September 30, 2001, NEON had one customer that
individually accounted for 22% of total revenues.  During the six-month period
ended September 30, 2001, NEON had one customer that accounted for 20% of total
revenue.

  The table below summarizes revenues by geographic region.

<TABLE>
<CAPTION>
                                           THREE MONTHS ENDED SEPTEMBER 30,     SIX MONTHS ENDED SEPTEMBER 30,
                                           --------------------------------     ------------------------------
                                                2001              2000              2001             2000
                                               ------            ------            ------           ------
<S>                                         <C>                <C>               <C>               <C>
    Revenues:
      United States                          $ 4,217,498       $ 4,781,226       $ 9,758,083      $11,656,067
      United Kingdom                             508,688           668,234           960,758        1,293,129
      Other                                      125,648           229,050           330,093          354,358
                                             -----------       -----------       -----------      -----------
                                             $ 4,851,834       $ 5,678,510       $11,048,934      $13,303,554
                                             ===========       ===========       ===========      ===========
     Operating Loss:
       United States                         $(3,721,221)      $(2,374,155)      $(5,783,001)     $(1,987,766)
       United Kingdom                              1,850          (129,837)         (589,750)        (399,237)
       Other                                     (59,976)           60,555          (226,276)        (483,900)
                                             -----------       -----------       -----------      -----------
                                             $(3,779,347)      $(2,443,437)      $(6,599,027)     $(2,870,903)
                                             ===========       ===========       ===========      ===========

                                                   AS OF SEPTEMBER 30,
                                           --------------------------------
                                                 2001              2000
                                                ------           -------
     Identifiable Assets:
        United States                        $61,001,030       $55,694,662
        United Kingdom                         1,724,232         2,811,701
        Other                                    498,624           571,307
                                             -----------       -----------
                                             $63,223,886       $59,077,670
                                             ===========       ===========
</TABLE>

                                       7
<PAGE>

NOTE 6--CONTINGENCIES

  NEON has resolved its litigation with New Era of Networks in a confidential
settlement that resolved all pending litigation between the parties.  NEON
received a cash payment of approximately $9.3 million, net of attorney fees, in
the fiscal quarter ending September 30, 2001, as a result of this settlement,
and is reporting such payment as a non-recurring item.   The litigation arose
from the fact that a number of organizations, including New Era of Networks,
Inc., were utilizing the name "Neon," alone and in combination with other words,
as a trademark, a tradename or both. New Era of Networks, which was recently
acquired by Sybase, Inc., is also a developer and distributor of middleware and
other software products. New Era of Networks had used the acronym "NEON" in its
business, was listed on the Nasdaq National Market under the symbol "NEON" and
had sought to obtain federal trademarks for products and services whose names
include the word "NEON." 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 (a) 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 (b) cancellation of NEON's federal trademark
registration for NEON. NEON filed an Answer denying the material allegations of
that complaint. On February 11, 2000, the judge in the Colorado proceeding
advised the parties that the court intended to grant summary judgment for
cancellation of the federal trademark registration for the "NEON" mark.  On June
23, 1999, NEON sued New Era of Networks in District Court in Fort Bend County,
Texas, alleging that New Era of Networks' use of "NEON" was in violation of
Texas law concerning misappropriation of trade names. In this litigation, NEON
sought 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.
NEON's claims were based upon its prior and continuous use of "NEON" as its
corporate name.  On June 1, 2001, the jury in the Fort Bend County, Texas suit
returned a verdict in NEON's favor awarding NEON $14,000,000 in actual damages
and $25,000,000 in punitive damages. On June 26, 2001, the Judge issued a final
judgment confirming the award of actual and punitive damages, and granted a
permanent injunction prohibiting New Era from referring to itself as "NEON" in
advertising, marketing or other public disclosures; from distributing software
that includes one or more occurrences of the "NEON" mark, and within specified
time periods to replace documentation, installed code, and advertising materials
that include any use of the mark "NEON".

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

NOTE 7--RESTRUCTURING CHARGES AND ASSET WRITE-DOWN CHARGES

  During the six month period ended September 30, 2001, the Company recorded a
restructuring charge of $908,000. These charges related to reductions in the
Company's cost structure and corporate reorganization, including reductions in
force, and abandonment of leased facilities. These restructuring costs included
severance costs of $570,000 and losses from lease commitments of $338,000. Cash
paid for severance costs and leasing expenses during the six months ended
September 30, 2001 totaled $178,000 and nil, respectively. As of September 30,
2001, the Company has included in accrued liabilities $730,000 related to
restructuring costs.

  The Company has recorded non-cash charges of $887,000 during the six months
ended September 30, 2001 related to the write-down of pre-paid royalties and
other assets.

NOTE 8--NOTES RECEIVABLE

  During the quarter ended September 30, 2001, the Company announced that it had
entered into a non-binding term sheet to acquire Scalable Software, Inc., a
privately held company.  The term sheet provides that each of the approximately
19,400,000 outstanding shares of common stock of Scalable Software will be
converted into approximately 0.135 of a share of the Company's common stock and
outstanding options and warrants to purchase approximately 2,800,000 shares of
common stock of Scalable Software will become options and warrants to purchase
common stock of the Company on the same conversion basis.

In connection with the transaction, the Company has provided Scalable Software
with bridge financing of up to $3,000,000 and is guaranteed by Louis Woodhill,
Chief Executive Officer, Jim Woodhill and John Moores, Chairman of the Board. As
of September 30, 2001, $2,000,000 of the bridge

                                       8
<PAGE>

financing had been drawn upon by Scalable Software, and is reflected as a
current note receivable. The Company made and advance on a note receivable to
Enterworks Software, Inc. of $2 million . The Enterworks Software loan is a
Demand 10% Convertible Promissory Note and was issued under a Convertible
Promissory Note and Warrant Agreement dated March 1, 2001 in a second round of
financing for Enterworks, Inc. The loan accrues interest at 10% per annum and
matures on demand made by the Holders representing at least 50% of the
outstanding principal amount of the Demand Notes.

NOTE 9--IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

  In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets".  SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated or completed after June 30, 2001, and
specifies criteria for the recognition and reporting of intangible assets apart
from goodwill.  Under SFAS No. 142, beginning April 1, 2002, the Company will no
longer amortize goodwill and intangible assets with indefinite useful lives, but
instead will test those assets for impairment at least annually.  SFAS No. 142
will also require that intangible assets with definite useful lives be amortized
over such lives to their estimated residual values.

  The Company is required to adopt SFAS No. 141 immediately and SFAS No. 142
effective April 1, 2002.  Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired in a purchase
business combination completed after June 30, 2001 will not be amortized, but
will continue to be evaluated for impairment in accordance with the appropriate
pre-SFAS No. 142 accounting literature.  Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 will continue to be
amortized through March 31, 2002.  SFAS No. 142 will require the Company to
perform a transitional goodwill impairment evaluation as of the date of
adoption.  To accomplish this the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption.  The Company will then have up to
six months from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount.  To the
extent a reporting unit's carrying amount exceeds its fair value, an indication
exists that the reporting unit's goodwill may be impaired and the Company must
perform the second step of the transitional impairment test.  In the second
step, the Company must compare the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to all of its
assets (recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with SFAS No. 141, to its carrying
amount, both of which would be measured as of the date of adoption.  This second
step is required to be completed as soon as possible, but no later than the end
of the year of adoption.  Any transitional impairment loss will be recognized as
the cumulative effect of a change in accounting principle in the Company's
statement of earnings.

  As of the date of adoption, the Company expects to have unamortized goodwill
in the amount of $1,193,000 which will be subject to transition provisions of
Statements 141 and 142.  Amortization expense related to goodwill was $238,000
and $477,000 for the six months ended September 30, 2001 and the year ended
March 31, 2001, respectively.  Management has completed an evaluation of the
effects of Statements 141 and 142 and believes that it will not have a material
effect on the Company's consolidated financial statements.

  In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS
144"), SFAS 144 supersedes Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of ("SFAS 121"), but retains many of its fundamental provisions.
SFAS 144 also clarifies certain measurement and classification issued from SFAS
121. In addition, SFAS 144 supersedes the accounting and reporting provisions
for the disposal of a business segment as found in Accounting Principles Board
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions ("APB 30"). However, SFAS 144 retains the
requirement in APB 30 to separately report discontinued operations, and broadens
the scope of such requirement to include more types of disposal transactions.
The scope of SFAS 144 excludes goodwill and other intangible assets that are not
to be amortized, as the accounting for such items is prescribed by SFAS 142. The
provisions of SFAS 144 are effective for fiscal years beginning after December
15, 2001, and are to be applied prospectively. The Company will adopt the
requirements of SFAS 144 as of April 1, 2002.

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.

                                       9
<PAGE>

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 net 30 days
from 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
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 six months ended September 30, 2001 and 2000, revenue outside of North
America was approximately 12% of our total revenue. We expect international
revenue to increase as a percentage of total revenue in the future as compared
to the period ended September 30, 2001. 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.

  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.

                                       10
<PAGE>

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 SEPTEMBER 30,     SIX MONTHS ENDED SEPTEMBER 30,
                                          ----------------------------------   --------------------------------
<S>                                          <C>                <C>               <C>               <C>
                                                   2001              2000              2001             2000
                                                  ------            ------            ------           ------
     Revenues:
        License                                      51%               64%               58%              67%
        Maintenance                                  49                36                42               33
                                                   ----              ----              ----             ----
           Total revenues                           100               100               100              100
     Cost of revenues:
        Cost of licenses                             13                 7                10                9
        Cost of maintenance                          10                11                 9                9
                                                   ----              ----              ----             ----
           Total cost of revenues                    23                18                19               18
                                                   ----              ----              ----             ----
     Gross profit                                    77                82                81               82
     Operating expenses:
        Sales and marketing                          66                65                66               55
        Research and development                     30                35                29               30
        General and administrative                   20                23                26               17
        Restructuring costs                          19                --                 8               --
        Asset write down charges                     18                --                 8               --
        Amortization of acquisition                   2                 2                 2                2
         related costs                             ----              ----              ----             ----
           Total operating expenses                 155               125               139              104
                                                   ----              ----              ----             ----
     Operating income                               (78)              (43)              (58)             (22)
     Interest and other, net                          7                12                 6               10
     Gain from settlement of lawsuit                191                --                83               --
                                                   ----              ----              ----             ----
     Income before income taxes                     120               (31)               31              (12)
     Benefit for income taxes                         3                 9                 1                3
                                                   ----              ----              ----             ----
     Net income                                     123%             (22)%               32%             (8)%
                                                   ====              ====              ====             ====
</TABLE>


THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2000

REVENUES

  Total revenues. NEON's revenues decreased $827,000 thousand or 15% from $5.7
million for the three months ended September 30, 2000 to $4.9 million for the
three months ended September 30, 2001. 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 September
30, 2001. During the three-month period ended September 30, 2000, NEON had one
customer that individually accounted for 19% of total revenue.  During the
three-month period ended September 30, 2001, NEON had one customer that
accounted for 22% of total revenue.

  License. License revenues decreased $1.2 million or 32% from $3.7 million for
the three months ended September 30, 2000 to $2.5 million for the three months
ended September 30, 2001. 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 September 30, 2001.
License revenues for each of the three-month periods ended September 30, 2000
and 2001 include $1.1 million 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 $352,000 or 17% from $2.0 million
for the three months ended September 30, 2000 to $2.4 million for the three
months ended September 30, 2001. 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 media costs for NEON's software
products, as well as royalty payments to third parties related to license
revenues. Cost of license revenues increased $211,000 or 52% from $404,000, or
11% of license revenues, for the three months ended September 30, 2000 to
$616,000, or 25% of license revenues, for the three months ended September 30,
2001. 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 and percentage increases in the cost of license revenue is
the result of a higher percentage of the product mix having associated royalty
cost for the period ended September 30, 2001 offset by $365,000 in amortization
cost of the iWave intellectual property.

                                       11
<PAGE>

  Cost of maintenance. Cost of maintenance revenues includes personnel and other
costs related to NEON's customer support department. Cost of maintenance
revenues decreased $141,000 or 23% from $610,000, or 30% of maintenance
revenues, for the three months ended September 30, 2000 to $469,000, or 20% of
maintenance revenues, for the three months ended September 30, 2001. The dollar
decrease in the cost of maintenance revenue as a percentage of maintenance
revenue was due primarily to the decrease in the purchase of computer supplies
and software.

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 decreased $470,000 or 13% from $3.7
million, or 65% of total revenues, for the three months ended September 30, 2000
to $3.2 million, or 66% of total revenues, for the three months ended September
30, 2001. The dollar decrease includes a reduction in commissions and marketing
program costs due to the reduction in revenue.

  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 decreased $542,000 or
27% from $2 million, or 35% of total revenues, for the three months ended
September 30, 2000 to $1.5 million, or 30% of total revenues, for the three
months ended September 30, 2001. The dollar decrease includes a decrease in
compensation costs due to improved efficiency in utilization of personnel and a
decrease in the related computer hardware and software expenses related to
research and development staffing.  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 decreased $345,000 or
26% from $1.3 million, or 23% of total revenues, for the three months ended
September 30, 2000 to $959,000, or 20% of total revenues, for the three months
ended September 30, 2001. NEON anticipates that general and administrative
expenses will increase in absolute dollars as we continue to upgrade and improve
our internal systems.

  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 was $119,000
and was recognized in both the three months ended September 30, 2000 and 2001.

  Interest and other income, net. Interest income decreased for the three months
ended September 30, 2001 compared to the three months ended September 30, 2000
by $333,000 due to lower interest rates and available investable cash balances
during the three months ended September 30, 2001.

  Benefit (provision) for income taxes. At September 30, 2001, NEON has a net
operating loss carry-forward for income tax purposes of approximately $3.2
million that is available to offset future taxable income, if any. The net
operating loss carry-forwards in the United Kingdom, Germany and Australia carry
forward indefinitely.  The Net operating loss carry-forward for the United
States begins expiring in 2020.  Given the recent tax losses experienced by
NEON, there can be no assurance that the operations will generate taxable income
in the future to utilize these losses, therefore, as of September 30, 2001, NEON
has recorded a full valuation allowance for the deferred tax assets related to
the future benefits, if any, for these losses.

  The benefit for income taxes for the three-months ended September 30, 2001 and
2000, was $143,078, or 2.5% of pre-tax income and $515,000 or 29% of pre-tax
loss, respectively. As the Company does not anticipate creating income for the
year ended March 31, 2002, no tax provision is recorded in the interim financial
statements. The difference between the effective rate and the statutory rate is
primarily due to the impact of net operating losses outside the United States
that were not recognized for the three months ended September 30, 2001 and 2000.

                                       12
<PAGE>

SIX MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 2000

REVENUES

  Total revenues. NEON's revenues decreased $2.3 million or 17% from $13.3
million for the six months ended September 30, 2000 to $11.0 million for the six
months ended September 30, 2001. 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 six months ended September 30, 2001.
During the six-month period ended September 30, 2000, NEON had two customers
that individually accounted for 32% of total revenues.  During the six-month
period ended September 30, 2001, NEON had one customer that accounted for 20% of
total revenue.

  License. License revenues decreased $2.5 million or 29% from $8.9 million for
the six months ended September 30, 2000 to $6.4 million for the six months ended
September 30, 2001. 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 six months ended September 30, 2001. License
revenues for the six-months ended September 30, 2000 and 2001 include $2.2
million 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 $309,000 or 7% from $4.4 million
for the six months ended September 30, 2000 to $4.7 million for the six months
ended September 30, 2001. 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 media costs for NEON's software
products, as well as royalty payments to third parties related to license
revenues. Cost of license revenues decreased $135,000 or 11% from $1.2 million,
or 14% of license revenues, for the six months ended September 30, 2000 to $1.1
million, or 17% of license revenues, as compared to the six months ended
September 30, 2001. The decrease 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 and percentage decreases in the cost of
license revenue is the result of a lower percentage of the product mix having
associated royalty cost for the period ended September 30, 2001 offset by
$732,000 in amortization cost of the iWave intellectual property.

  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 six-month periods ending September
30, 2001 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. Sales and Marketing expenses were relatively consistent
for the six-month periods ending September 30, 2001 and 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 decreased $734,000 or
18% from $4 million, or 30% of total revenues, for the six months ended
September 30, 2000 to $3.2 million, or 29% of total revenues, for the six months
ended September 30, 2001. The dollar decrease includes a decrease in
compensation costs due to improved efficiency in utilization of personnel and
the related computer hardware, software and telecommunication expenses related
to research and development staffing.  The increase in percentage of total
revenue is primarily due to a reduction in total revenue generated in the six
months ended September 30, 2001. 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.

                                       13
<PAGE>

  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 increased $613,000 or
27% from $2.3 million, or 17% of total revenues, for the six months ended
September 30, 2000 to $2.9 million, or 26% of total revenues, for the six months
ended September 30, 2001. NEON anticipates that general and administrative
expenses will increase in absolute dollars as we continue to upgrade and improve
our internal systems.

  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 $239,000
was recognized in both the six months ended September 30, 2000 and 2001.

  Interest and other income, net. Interest income decreased for the three months
ended September 30, 2001 compared to the three months ended September 30, 2000
by $588,000 due to lower interest rates and lower available investable cash
balances during the three months ended September 30, 2001.

  Benefit (provision) for income taxes. At September 30, 2001, NEON has a net
operating loss carry-forward for income tax purposes of approximately $3.2
million that is available to offset future taxable income, if any. The net
operating loss carry-forwards in the United Kingdom, Germany and Australia carry
forward indefinitely.  The Net operating loss carry-forward for the United
States begins expiring in 2020.  Given the recent tax losses experienced by
NEON, there can be no assurance that the operations will generate taxable income
in the future to utilize these losses, therefore, as of September 30, 2001, NEON
has recorded a full valuation allowance for the deferred tax assets related to
the future benefits, if any, for these losses.

  The benefit for income taxes for the six-months ended September 30, 2001 and
2000, was $143,078, or 4.2% of pre-tax income and $428,000, or 28% of pre-tax
loss, respectively. The effective and statutory rates were approximately
equivalent. As the Company does not anticipate creating income for the year
ended March 31, 2002, no tax provision is recorded in the interim financial
statements. The difference between the effective rate and the statutory rate is
primarily due to the impact of net operating losses outside the United States
that were not recognized for the six months ended September 30, 2001 and 2000.

LIQUIDITY AND CAPITAL RESOURCES

  NEON's cash and cash equivalent balance increased to $43.8 million at
September 30, 2001 from $42.8 million at March 31, 2001. This increase was due
primarily to the $9.3 million settlement, net of attorney fees, of the New Era
law suit offset by an operating loss of $6.6 million for the six months ended
September 30, 2001, an advance on a note receivable to Enterworks Software, Inc.
of $2 million and an advance on a note receivable to Scalable Software, Inc. of
$2 million. The Enterworks Software loan is a Demand 10% Convertible Promissory
Note and was issued under a Convertible Promissory Note and Warrant Agreement
dated March 1, 2001 in a second round of financing for Enterworks, Inc. The loan
accrues interest at 10% per annum and matures on demand made by the Holders
representing at least 50% of the outstanding principal amount of the Demand
Notes.  The Scalable Software Promissory Note dated July 17, 2001 permits
advances up to an aggregate principal amount of $3 million dollars and is
guaranteed by Louis Woodhill, Jim Woodhill and John Moores. The Scalable
Software Promissory Note accrues interest at 7% per annum, paid quarterly, and
matures on December 31, 2001.

  Net cash provided by operating activities was $4.6 million in the six months
ended September 30, 2001, while the net cash provided by operating activities
was $421,000 in the six months ended September 30, 2000. The net cash provided
by operating activities during the six months ended September 30, 2001 was due
primarily to the $9.3 million settlement, net of attorney fees, of the New Era
lawsuit, partially offset by an operating loss of $6.6 million for the six
months ended September  30, 2001.

  Net cash used by NEON in investing activities was $3.7 million and $8.9
million in the six months ended September 30, 2001 and 2000, respectively.
Purchases of marketable securities totaling $8.1 million and $738,000 in
purchases of property

                                       14
<PAGE>

and equipment were the principal uses of investing funds in the six months ended
September 30, 2000. The principal investing uses in the six months ended
September 30, 2001 were an advance on a note receivable to Enterworks Software,
Inc. of $2 million, an advance on a note receivable to Scalable Software, Inc.
of $2 million, $494,000 in purchases of property and equipment partially offset
by the maturity of $800,000 in marketable securities. As of September 30, 2001,
NEON had no material commitment for capital expenditures.

  NEON's net cash provided by financing activities was $95,000 and $208,000 in
the six months ended September 30, 2001 and 2000, respectively. The net cash
provided by financing activities in both periods are proceeds from the exercise
of employee stock options.

  We intend to invest strategically 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 $43.8 million at September 30,
2001, and $29.9 million was invested in different types of highly liquid
commercial paper with maturity dates ranging from 28 days to 45 days.  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
2002.

PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS - Please see the discussion in Part I, Note 6 of the
"Condensed Notes to Consolidated Financial Statements," which is incorporated by
reference in this Part II, Item 1.

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

                                       15
<PAGE>

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. Additionally, $2.0 million was loaned to
Enterworks Software, Inc. as bridge financing in June 2001. In connection with
NEON's entering into a Letter of Intent on July 17, 2001, to acquire Scalable
Software, Inc., Scalable executed a promissory note that permits them to borrow
up to $3,000,000 from NEON. As of September 30, 2001, $2,000,000 had been
advanced to Scalable under such promissory note. The remainder of the proceeds
from the IPO have been invested in interest-bearing, investment-grade
securities.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES - Not Applicable.

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:

OUR MANAGEMENT IS IN TRANSITION, WHICH COULD ADVERSELY AFFECT OUR BUSINESS

  In June 2001, Steve Odom, our President, Chief Operating Officer and Chief
Financial Officer, resigned. Immediately after Mr. Odom's resignation, John
Moores, Chairman of our Board of Directors, became our interim Chief Executive
Officer and Wayne Webb, our vice president and general counsel, became our
interim President. On June 28, 2001, James Bradford Poynter was hired by NEON as
its Chief Financial Officer.  On October 8, 2001, NEON announced that the Board
of Directors had hired Louis R. Woodhill as NEON's Chief Executive Officer and
President. Until we were able to hire a permanent Chief Executive Officer and
President, our business was disrupted, and our management resources were
diverted from the development of our business. In addition, since Mr. Woodhill
is still the Chief Executive Officer and President of Scalable Software, Inc.,
the failure to close the proposed acquisition by NEON of Scalable Software, Inc.
may result in additional uncertainty with respect to the continued management of
NEON, which events could materially adversely affect our business, operating
results and financial condition.

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

  Our expense levels are based primarily on our estimates of future revenues and
are largely fixed. We also intend to hire additional personnel to support
additional growth of our business. We may be unable to adjust spending rapidly
enough to compensate for any unexpected revenue shortfall. Accordingly, any
significant shortfall in revenues in relation to our planned expenditures would
reduce, and possibly eliminate, any operating income or increase our operating
loss, and could materially adversely affect our business, operating results and
financial condition.

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 virtually no
order backlog because our products are shipped and revenues are recognized
shortly after orders are received. In addition, the amount of revenues
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 targeted 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 revenues in
the last month of a quarter. As a result, minor delays in the timing of customer
orders can shift a sale from its contemplated quarter of completion to a
subsequent quarter and cause significant variability in our operating 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 likely decline.

                                       16
<PAGE>

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 tended to be strongest in the third and fourth
quarters of our fiscal year and to decrease slightly 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 of many of our customers, our employee recognition policies
which tend to reward our sales personnel for achieving fiscal year-end rather
than quarterly revenue quotas, and the timing of our hiring of sales force
personnel. 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 OUR SHADOW
PRODUCT LINE, DECREASED DEMAND FOR THESE PRODUCTS COULD ADVERSELY AFFECT OUR
BUSINESS

  Shadow Direct, Shadow Web Server and Shadow Enterprise Direct represent 89%,
88%, and 75% of our revenues in fiscal 1999, 2000 and 2001, respectively. We
anticipate that these products will account for a substantial amount of our
revenues for the foreseeable future. Consequently, our future success will
depend on continued market acceptance of Shadow Direct, Shadow Web Server and
Shadow Enterprise Direct and enhancements to these products. 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 increasingly based on distributed platforms,
including client/server and Internet-based computing networks. Decreased use of
the mainframe or in the growth of demand for Web-based and client/ server
applications accessing mainframe data and transactions could have a material
adverse effect on our business, operating results and financial condition. We
derive our revenues primarily from our Shadow products, and, to a lesser extent,
from our suite of Enterprise Subsystem Management software products that support
the growing performance demands on mainframe computers as they support new users
and applications and our new Enterprise Security Management Products that help
to protect corporate assets in common application processing environments. Our
continued success depends on a number of factors, including:

  - Continued use of the mainframe as a central repository of mission-critical
    data and transactions; and

  - Growth in business demands for access to the data, applications and
    transactions residing on mainframe computers from Web-based and
    client/server applications

LOSS OF AN EXECUTIVE OFFICER OR OUR PRODUCT AUTHORS COULD ADVERSELY AFFECT OUR
BUSINESS

  Our success is dependent upon the continued service and skills of our
executive officers and our product authors, none of which is bound by an
employment agreement. If we lose the services of any of these key personnel, it
could have a negative impact on our business because of their unique skills,
years of industry experience and the difficulty of promptly finding qualified
replacement personnel. We do not intend to maintain "key-man" life insurance
policies covering any of our employees. Significant competition exists for
employees with the skills required to author the products and perform the
maintenance services that we offer, and we may not be able to continue to retain
sufficient numbers of highly skilled employees.

                                       17
<PAGE>

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 such as our eBusiness Integration
and Enterprise Subsystem Management products, that permit users to access
mainframe-based data and applications for integration with PC-applications. Our
Shadow products compete principally with products, known as middleware software,
that provide the connection between a client application and a server
application, a database or a transaction processing system.  Currently
middleware software products are also provided by established vendors such as
IBM, Oracle and Information Builders, and to a lesser extent by BEA Systems,
IONA Technologies, New Era of Networks/Sybase and TSI International Software.
Our Enterprise Subsystem Management products face significant competition from
BMC Software. 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:

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

  - Internal development efforts by corporate information technology
    departments.

  - New entrants to the middleware or enterprise subsystem management markets.

WE MAY NOT HAVE THE RESOURCES TO SUCCESSFULLY MANAGE ADDITIONAL GROWTH

  Any prospective growth will place significant demands on management as well as
on our administrative, operational and financial resources. Our inability to
sustain or manage any additional growth 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 manage any additional growth, we must:

  - Expand our sales, marketing and customer support organizations.

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

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

  - 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

                                       18
<PAGE>

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 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 several of 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 termination of the distributor
agreement could have a material adverse effect on our business, operating
results and financial condition.

OUR PLANNED EXPANSION OF OUR INTERNATIONAL OPERATIONS MAY MAKE US MORE
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 plan to
expand our current international operations and to establish additional
facilities and marketing relationships in additional regions. We have
established direct telesales subsidiary offices in Germany, Australia and the
United Kingdom to market and sell our products in Europe and Australia. We have
distributors in Europe, Latin America and the Pacific Rim to market and sell our
products in those regions. We plan to expand our current international
operations and to establish additional facilities and marketing relationships in
additional regions. Our international operations are subject to particular
risks, including:

  - Impact of recessions in economies outside the United States

  - Difficulty in accounts receivable collection and longer collection periods

  - Cost of enforcement of contractual obligations

  - Difficulties and costs of managing foreign operations

  - Limited protection for intellectual property rights in some countries

  - Currency exchange rate fluctuations

  - Political and economic instability

  - 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.

                                       19
<PAGE>

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

  NEON had resolved its litigation with New Era of Networks in a confidential
settlement that resolved all pending litigation between the parties.  NEON
received a cash payment of approximately $9.3 million, net of attorney fees, in
the fiscal quarter ending September 30, 2001, as a result of this settlement,
and is reporting such payment as a non-recurring extraordinary item.   The
litigation arose from the fact that a number of organizations, including New Era
of Networks, Inc., were utilizing the name "Neon," alone and in combination with
other words, as a trademark, a tradename or both. New Era of Networks, which was
recently acquired by Sybase, Inc., is also a developer and distributor of
middleware and other software products. New Era of Networks had used the acronym
"NEON" in its business, was listed on the Nasdaq National Market under the
symbol "NEON" and had sought to obtain federal trademarks for products and
services whose names include the word "NEON." 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 (a) 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 (b) cancellation of NEON's
federal trademark registration for NEON. NEON filed an Answer denying the
material allegations of that complaint. On February 11, 2000, the judge in the
Colorado proceeding advised the parties that the court intended to grant summary
judgment for cancellation of the federal trademark registration for the "NEON"
mark.  On June 23, 1999, NEON sued New Era of Networks in District Court in Fort
Bend County, Texas, alleging that New Era of Networks' use of "NEON" was in
violation of Texas law concerning misappropriation of trade names. In this
litigation, NEON sought 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. NEON's claims were based upon its prior and continuous use of
"NEON" as its corporate name.  On June 1, 2001, the jury in the Fort Bend
County, Texas suit returned a verdict in NEON's favor awarding NEON $14,000,000
in actual damages and $25,000,000 in punitive damages. On June 26, 2001, the
Judge issued a final judgment confirming the award of actual and punitive
damages, and granted a permanent injunction prohibiting New Era from referring
to itself as "NEON" in advertising, marketing or other public disclosures; from
distributing software that includes one or more occurrences of the "NEON" mark,
and within specified time periods to replace documentation, installed code, and
advertising materials that include any use of the mark "NEON".

Notwithstanding the settlement of this litigation, there are no guarantees that
other organizations may not use or continue to use the name "Neon" alone and in
combination with other words, as a trademark, a tradename or both.  In such
event, such use may be confusing or misleading and may result in confusion of
NEON's goods and services in the marketplace and may also result in further
litigation, which may cause NEON to incur additional legal expenses as well as
cause executive management t be distracted from the business operations of NEON.

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 have a material adverse effect on
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.

                                       20
<PAGE>

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.

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 the stock prices of 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 resources, which could
have an 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:

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

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

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

  - Announcements of key developments by competitors

  - Loss of key personnel

  - Unfavorable publicity affecting our industry or us

  - Adverse legal events affecting us

  - 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. have distributed its shares of our common stock
beneficially own in the aggregate approximately 4.1 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
CONTROL MATTERS SUBMITTED TO OUR STOCKHOLDERS

  At present, our executive officers and directors and entities affiliated with
them beneficially own approximately 48.1% of our outstanding Common Stock. As a
result, these stockholders, if they act together, could control most matters
submitted to our stockholders for a vote, including the election of directors.

                                       21
<PAGE>

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 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.

RECENT TERRORIST ACTIVITIES HAVE AFFECTED THE U.S. ECONOMY AND MAY ALSO AFFECT
THE TIMING AND PREDICTABILITY OF OUR SOFTWARE LICENSING ACTIVITIES

The terrorist attacks on the World Trade Center on September 11, 2001, and the
current environment of fear and uncertainty due to the anthrax scare and the war
against terror in Afghanistan has added to the uncertainty of the timing and
predictability of software licensing activities.  Although we have not
identified any direct impact to our revenue in the quarter ended September 30,
2001 due to the recent terrorist activities, terrorist events in the future may
cause delays in licensing activities and/or in collection of license and
maintenance fees and significantly affect our ability to realize our projected
license and maintenance revenue numbers in future quarters.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

       (a) EXHIBITS - Letter of Intent dated July 17, 2001 by and between NEON
           and Scalable Software, Inc. proposing the acquisition of Scalable
           Software, Inc. by NEON

(b)  REPORTS ON FORM 8-K - None

                                       22
<PAGE>

                                   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:  November 13, 2001           /s/ JAMES BRADFORD POYNTER
                                   -------------------------------------
                                   Chief Financial Officer
                                   (Principal financial officer)

                                       23