<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 June 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 July 13,
2001, was 9,561,674.
<PAGE>

                              NEON SYSTEMS, INC.

                                   FORM 10-Q

                      FOR THE QUARTER ENDED June 30, 2001

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                                          PAGE
                                                                                                                          ----
<S>                                                                                                                       <C>
PART I  FINANCIAL INFORMATION

Item 1.   Financial Statements

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

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

          Consolidated Statements of Cash Flows for the Three Months Ended June 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...........................   8

Item 3.   Quantitative and Qualitative Disclosures About Market Risk......................................................  12

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings...............................................................................................  13

Item 2.   Changes in Securities and Use of Proceeds.......................................................................  13

Item 3.   Defaults Upon Senior Securities.................................................................................  13

Item 4.   Submission of Matters to a Vote of Security Holders.............................................................  13

Item 5.   Other Information...............................................................................................  13

Item 6.   Exhibits and Reports on Form 8-K................................................................................  19

SIGNATURES................................................................................................................  20
</TABLE>

                                       2
<PAGE>

PART I - FINANCIAL INFORMATION

  ITEM 1. FINANCIAL STATEMENTS

                      NEON SYSTEMS, INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS

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

         CURRENT ASSETS:
            Cash and cash equivalents                                                       $38,633,417      $42,773,856
            Short-term investments                                                                   --          514,828
            Accounts receivable                                                               4,724,355        6,072,332
            Taxes receivable                                                                  2,302,025        2,392,311
            Deferred income taxes                                                               607,566          607,566
            Other current assets                                                              2,268,632        2,050,586
                                                                                            -----------      -----------
               Total current assets                                                          48,535,995       54,411,479
                                                                                            -----------      -----------

         Property and equipment, net                                                          2,190,858        2,103,764
         Note receivable                                                                      2,000,000               --
         Long-term investments                                                                       --          319,613
         Intangible assets, net                                                               5,167,919        5,652,857
         Other assets                                                                           864,047          890,630
                                                                                            -----------      -----------
                Total assets                                                                $58,758,819      $63,378,343
                                                                                            ===========      ===========

            LIABILITIES & STOCKHOLDERS' EQUITY

         CURRENT LIABILITIES:
            Accounts payable                                                                $   768,155      $ 1,385,541
            Accrued expenses                                                                  3,674,293        5,197,674
            Deferred maintenance revenue                                                      7,342,520        7,481,593
                                                                                            -----------      -----------
               Total current liabilities                                                     11,784,968       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; 9,534,632 and 9,516,804 shares
           issued and outstanding at June 30, 2001 and
           March 31, 2001, respectively                                                          95,346           95,167
         Additional paid-in capital                                                          51,163,218       51,550,518
         Accumulative other comprehensive income (loss)                                        (478,841)        (423,574)
         Unearned portion of deferred compensation                                             (275,099)        (787,705)
         Accumulated deficit                                                                 (3,530,773)      (1,120,871)
                                                                                            -----------      -----------
                Total stockholders' equity                                                   46,973,851       49,313,535
         Commitments and contingencies (Note 6)
                                                                                            -----------      -----------
                Total liabilities and stockholders' equity                                  $58,758,819      $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 JUNE 30,
                                                                ---------------------------
                                                                2001                   2000
                                                                ---------------------------
<S>                                                             <C>             <C>
Revenues:
   License                                                       $ 3,774,232    $ 5,283,559
   Maintenance                                                     2,422,868      2,341,485
                                                                 -----------    -----------
     Total revenues                                                6,197,100      7,625,044

Cost of revenues:
   Cost of licenses                                                  498,944        845,740
   Cost of maintenance                                               576,331        540,965
                                                                 -----------    -----------
     Total cost of revenues                                        1,075,275      1,386,705
                                                                 -----------    -----------

Gross profit                                                       5,121,825      6,238,339
                                                                 -----------    -----------

Operating expenses:
  Sales and marketing                                              4,108,897      3,630,608
  Research and development                                         1,782,697      1,919,619
  General and administrative                                       1,930,413        996,313
  Amortization of acquisition-related costs                          119,499        119,265
                                                                 -----------    -----------
   Total operating expenses                                        7,941,506      6,665,805
                                                                 -----------    -----------

Operating income (loss)                                           (2,819,681)      (427,466)

Interest income                                                      409,805        664,508
Interest expense                                                         (26)        (3,443)
Other, net                                                                --          8,811
                                                                 -----------    -----------
   Income (loss) before income taxes                              (2,409,902)       242,410

Benefit (provision) for income taxes                                      --        (87,000)
                                                                 -----------    -----------
   Net income (loss)                                             $(2,409,902)   $   155,410
                                                                 ===========    ===========

Earnings (loss) per share:
   Basic                                                         $     (0.25)   $      0.02
                                                                 ===========    ===========

   Diluted                                                       $     (0.25)   $      0.02
                                                                 ===========    ===========

Shares used in computing earnings per share:
   Basic                                                           9,525,147      9,281,681
                                                                 ===========    ===========
   Diluted                                                         9,525,147     10,278,577
                                                                 ===========    ===========
</TABLE>

     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

                                       4
<PAGE>

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

<TABLE>
                                                                                 THREE MONTHS ENDED JUNE 30,
                                                                                     2001         2000
                                                                                 -----------   ------------
<S>                                                                              <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                              $(2,409,902)  $    155,410
  Adjustments  to reconcile  net income  (loss)
    to net cash provided by (used in) operating
    activities:
     Depreciation and amortization                                                   538,735        164,159
     Deferred tax benefit (expense)                                                       --       (121,279)
     Non-cash compensation expense                                                    98,746        104,234
     Amortization of acquisition related costs                                       119,499        119,265
     Increase (decrease) in cash resulting from
       changes in operating assets and liabilities:
      Accounts receivable                                                          1,347,977         12,657
       Other current assets                                                         (218,046)      (257,008)
       Other assets                                                                   26,581         47,392
       Accrued expenses                                                           (1,523,383)       445,640
       Accounts payable                                                             (617,386)      (632,415)
       Taxes payable (receivable)                                                     90,286        138,203
       Deferred maintenance revenue                                                 (139,069)       109,740
                                                                                 -----------   ------------
Net cash provided by (used in) operating activities                               (2,685,962)       285,998
                                                                                 -----------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase (maturity) of marketable securities                                       819,711    (11,306,744)
  Note receivable                                                                 (2,000,000)            --
  Purchases of furniture and equipment                                              (260,390)      (578,203)
                                                                                 -----------   ------------

Net cash used in investing activities                                             (1,440,679)   (11,884,947)
                                                                                 -----------   ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercises of stock options                                            26,739        185,691
                                                                                 -----------   ------------
Net cash used in financing activities                                                 26,739        185,691
                                                                                 -----------   ------------

Net decrease in cash and cash equivalents                                         (4,099,902)   (11,413,258)
Effect of exchange rate changes on cash                                              (40,537)      (243,860)
Cash and cash equivalents at beginning of period                                  42,773,856     37,120,342
                                                                                 -----------   ------------

Cash and cash equivalents at end of period                                       $38,633,417   $ 25,463,224
                                                                                 ===========   ============

Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes                                     $        --   $     62,655
                                                                                 ===========   ============
Cash paid during the period for interest                                         $        --   $      3,445
                                                                                 ===========   ============
</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,
consisting of only normal recurring adjustments, considered necessary for a fair
presentation of the financial position and the results of operations for the
interim periods presented. Operating results for interim periods are not
necessarily indicative of results for the full year. These unaudited
consolidated financial statements, footnote disclosures and other information
should be read in conjunction with the financial statements and the notes
thereto included in NEON's audited financial statements for the fiscal year
ended March 31, 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 JUNE 30,
                                                     ---------------------------
                                                    2001                     2000
                                             ------------------------------------------
<S>                                          <C>                           <C>
Net income (loss)                                $(2,409,902)              $   155,410
                                                 ===========               ===========

Weighted average number of common
  shares outstanding during the period:
Basic                                              9,525,147                 9,281,681
Dilutive stock options                                    --                   996,896
                                                 -----------               -----------
Diluted                                            9,525,147                10,278,577
                                                 ===========               ===========

Income (loss) per common share:
  Basic                                          $     (0.25)              $      0.02
                                                 ===========               ===========
  Diluted                                        $     (0.25)              $      0.02
                                                 ===========               ===========
</TABLE>

  In the period April 1, 2001 through June 30, 2001 options to purchase 17,828
shares of common stock at exercise prices of $0.20 to $4.31 per share were
exercised. At June 30, 2001, there were options outstanding to purchase
2,351,781 shares of common stock with a weighted-average exercise price of
$9.88.

                                       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 determined that its investment securities are
to be classified as available-for-sale.  Available-for-sale securities are
carried at fair value, with the unrealized gains and losses reported in
stockholders' equity under the caption "Accumulated other comprehensive income
(loss)."  The cost of securities sold is based on the specific identification
method.  Interest and dividends on securities classified as available-for-sale
are included in interest income.

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

<TABLE>
<CAPTION>
                                            JUNE 30, 2001  MARCH 31, 2001
                                            -------------  --------------
           <S>                              <C>            <C>
           Debt Securities:
             Cost                           $          --   $    819,711
             Gross unrealized losses                   --         14,730
                                            -------------   ------------
               Estimated fair value         $          --   $    834,441
                                            =============   ============
</TABLE>

  The amortized cost and estimated fair value based on published closing prices
of securities at June 30, 2001, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because the issuers
of the securities may have the right to repay obligations without prepayment
penalties.

<TABLE>
<CAPTION>
                                                        AS OF JUNE 30, 2001
                                                    --------------------------
                                                               ESTIMATED FAIR
                                                      COST         VALUE
                                                    --------  ----------------
               <S>                                  <C>       <C>
               Available-for-sale:
                 Due in one year or less            $     --   $   7,605,861
                 Due one year through five years          --         683,186
</TABLE>

NOTE 4--INCOME TAXES

  NEON has a net operating loss carry-forward for income tax purposes of
approximately $10 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 June 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 provision for income taxes for the three months ended June 30, 2000, was
$87,000, or 36% of pre-tax income. The effective and statutory tax rates are
approximately equivalent.

NOTE 5--SEGMENT REPORTING

  NEON considers its business activities to be in a single segment.  During the
three-month period ended June 30, 2000, NEON had two customers that individually
accounted for 27% and 14%, respectively, of total revenue.  During the three-
month period ended June 30, 2001, NEON had one customer that accounted for 17%
of total revenue.

  The table below summarizes revenues by geographic region.

<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED June 30,
                                ---------------------------------
                                   2001                   2000
                                ----------             ----------
           <S>                  <C>                    <C>
           Revenues:
           North America        $5,540,585             $6,874,841
           Europe                  452,070                624,895
           Other                   204,445                125,308
                                ----------             ----------
                                $6,197,100             $7,625,044
                                ==========             ==========
</TABLE>

                                       7
<PAGE>

NOTE 6--CONTINGENCIES

  A number of organizations, including New Era of Networks, Inc., are utilizing
the name "Neon," alone and in combination with other words, as a trademark, a
tradename or both. New Era of Networks is also a developer and distributor of
middleware and other software products. New Era of Networks has used the acronym
"NEON" in its business, was listed on the Nasdaq National Market under the
symbol "NEON" and has sought to obtain federal trademarks for products and
services whose names include the word "NEON." 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 has 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 intends to grant summary
judgment for cancellation of the federal trademark registration for the "NEON"
mark.  If such judgment is entered, it will not affect NEON's right to use the
"NEON" mark, which NEON believes to be superior to those of New Era of Networks.
Discovery related to this litigation has been completed but no trial date has
been set. On June 23, 1999, NEON sued New Era of Networks in District Court in
Fort Bend County, Texas, alleging that New Era of Networks' use of "NEON" is 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 are 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 expects this final
judgment to be appealed, which could result in a reversal or new trial being
ordered on all or a portion of the judgment. Alternatively, the parties may
reach a settlement in satisfaction of the judgment that reduces the dollar
amount from that awarded by the court. Therefore, NEON is not guaranteed that it
will receive any or all of the $39,000,000 in damages.

  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.


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.

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.

                                       8
<PAGE>

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

  Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public Accountants
(AICPA) and was amended by Statement of Position 98-4 (SOP 98-4) and Statement
of Position 98-9 (SOP 98-9). NEON adopted SOP 97-2 effective July 1, 1997, SOP
98-4 effective March 31, 1998 and SOP 98-9 effective April 1, 1999. NEON
believes its current revenue recognition policies and practices are consistent
with SOP 97-2, SOP 98-4 and SOP 98-9.  Revenues from software license sales are
recognized when all of the following conditions are met: a non-cancelable
license agreement has been signed; the product has been delivered; there are no
material uncertainties regarding customer acceptance; collection of the
receivable is probable; no other significant vendor obligations exist; and
vendor-specific objective evidence exists to allocate the total fee to elements
of the arrangement.  Vendor-specific objective evidence is based on the price
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 three months ended June 30, 2000 and 2001, revenue outside of North
America was approximately 7% and 10%, respectively, 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 June 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.

                                       9
<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 JUNE 30,
                                                  ---------------------------
                                                  2001                   2000
                                                  ----                   ----
<S>                                               <C>                    <C>
Revenues:
   License                                          61%                    69%
   Maintenance                                      39                     31
                                                  ----                   ----
      Total revenues                               100                    100
Cost of revenues:
   Cost of licenses                                  8                     11
   Cost of maintenance                               9                      7
                                                  ----                   ----
      Total cost of revenues                        17                     18
                                                  ----                   ----
Gross profit                                        83                     82
Operating expenses:
   Sales and marketing                              66                     47
   Research and development                         29                     25
   General and administrative                       31                     13
   Amortization of acquisition related costs         2                      2
                                                  ----                   ----
      Total operating expenses                     128                     87
                                                  ----                   ----
Operating income (loss)                            (46)                    (6)
Interest and other, net                              7                      9
                                                  ----                   ----
Income before income taxes                         (39)                     3
Benefit (provision) for income taxes                --                      1
                                                  ----                   ----
Net income                                        (39)%                     2%
                                                                         ====
</TABLE>


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

REVENUES

  Total revenues. NEON's revenues decreased $1.4 million or 19% from $7.6
million for the three months ended June 30, 2000 to $6.2 million for the three
months ended June 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 June 30, 2001. During
the three-month period ended June 30, 2000, NEON had two customers that
individually accounted for 27% and for 14% of total revenues.  During the three-
month period ended June 30, 2001, NEON had one customer that accounted for 17%
of total revenue.

  License. License revenues decreased $1.5 million or 29% from $5.3 million for
the three months ended June 30, 2000 to $3.8 million for the three months ended
June 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 June 30, 2001. License revenues for
each of the three-month periods ended June 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 $81,000 or 3% from $2.3 million
for the three months ended June 30, 2000 to $2.4 million for the three months
ended June 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 $350,000 or 41% from $846,000, or
11% of license revenues, for the three months ended June 30, 2000 to $500,000,
or 8% of license revenues, for the three months ended June 30, 2001. 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 June 30, 2001 offset by $365,000 in amortization cost from
the iWave intellectual property acquired in December 2000.

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  Cost of maintenance. Cost of maintenance revenues includes personnel and other
costs related to NEON's customer support department. Cost of maintenance
revenues was relatively consistent for the three-month periods ending June 30,
2000 and 2001.

OPERATING EXPENSES

  Sales and marketing. Sales and marketing expenses include salaries,
commissions, bonuses, benefits and travel expenses of sales, presales support
and marketing personnel, together with trade show participation and other
promotional expenses. These expenses increased $478,000 or 13% from $3.6
million, or 48% of total revenues, for the three months ended June 30, 2000 to
$4.1 million, or 66% of total revenues, for the three months ended June 30,
2001. The dollar increase includes approximately $605,000 in increased cost of
NEON's international sales offices, $235,000 in increased compensation expenses
incurred for North American sales and marketing personnel, $225,000 in increased
marketing program cost, offset by a $570,000 decrease in commissions and
international agents commissions as a result of lower revenue and a change in
product mix towards products without associated third party royalties in the
three months ended June 30, 2001. The increase in sales and marketing expense as
a percentage of revenue is due primarily to the reduction in total revenue for
the period ended June 30, 2001.

  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 $137,000 or 7%
from $1.9 million, or 25% of total revenues, for the three months ended June 30,
2000 to $1.8 million, or 29% of total revenues, for the three months ended June
30, 2001. The dollar decrease includes approximately $130,000 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 three
months ended June 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.

  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 $181,000 or
18% from $1.0 million, or 13% of total revenues, for the three months ended June
30, 2000 to $815,000, or 13% of total revenues, for the three months ended June
30, 2001, excluding $1.1 million in severance cost related to the departure of
certain personnel during the three months ended June 30, 2001.  NEON anticipates
that general and administrative expenses will increase in absolute dollars as we
continue to upgrade and improve our internal systems.

  Non-cash compensation. During the three months ended June 30, 2000, $104,000
was recognized as non-cash compensation expense related to NEON's initial public
offering, while $78,000 was recognized as non-cash compensation expense during
the three months ended June 30, 2001. The remaining deferred balance of $213,000
will be recognized over the remaining vesting period of the granted options,
approximately two years.  Additionally, NEON recorded $21,000 in deferred
compensation cost associated with restricted stock granted to an executive in
December 2000.  The unamortized balance related to the restricted stock grant
was reversed in June 2001 as the executive resigned and the restricted stock was
forfeited.

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

  Interest and other income, net. Interest income decreased for the three months
ended June 30, 2001 compared to the three months ended June 30, 2000 by $250,000
primarily due to lower interest rates and to a lesser extent lower available
investable cash balances during the three months ended June 30, 2001.

  Benefit (provision) for income taxes. No provision for income taxes was
recorded for the three months ended June 30, 2001 as NEON had a pre-tax loss for
the period of $2.4 million.  At June 30, 2001, NEON has a net operating loss
carry-forward for income tax purposes of approximately $10 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 June 30, 2001,

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NEON has recorded a full valuation allowance for the deferred tax assets related
to the future benefits, if any, for these losses.

  The provision for income taxes for the three-months ended June 30, 2000, was
$87,000, or 36 % of pre-tax income. The effective and statutory rates were
approximately equivalent.

LIQUIDITY AND CAPITAL RESOURCES

  NEON's cash and cash equivalent balance decreased to $38.6 million at June 30,
2001 from $42.8 million at March 31, 2001. This decrease was due primarily to a
net loss of $2.4 million for the three months ended June 30, 2001, and an
advance on a note receivable to Enterworks Software, Inc. of $2 million on May
23, 2001. This loan is secured by Enterworks Software, Inc.'s intellectual
property and is convertible into common stock at NEON's discretion. The loan
pays interest at 10% and matures on demand.

  Net cash used by operating activities was $2.7 million in the three months
ended June 30, 2001, while the net cash provided by operating activities was
$285,000 in the three months ended June 30, 2000. The net cash used by operating
activities during the three months ended June 30, 2001 was primarily the result
of $2.4 million in net losses and a decrease in liabilities partially offset by
the reduction in accounts receivables at June 30, 2001.

  Net cash used by NEON in investing activities was $1.4 million and $11.9
million in the three months ended June 30, 2001 and 2000, respectively.
Purchases of marketable securities totaling $11.3 million and $600,000 in
purchases of property and equipment were the principal uses of investing funds
in the three months ended June 30, 2000. The principal investing uses in the
three months ended June 30, 2001 were an advance on a note receivable to
Enterworks Software, Inc. of $2 million, $260,000 in purchases of property and
equipment partially offset by the maturity of $800,000 in marketable securities.
As of June 30, 2001, NEON had no material commitment for capital expenditures.

  NEON's net cash provided by financing activities was $26,000 and $185,000 in
the three months ended June 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 heavily in the development of new products and
enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of product development efforts and the success of these development
efforts, the costs and timing of expansion of sales and marketing activities,
the extent to which our existing and new products gain market acceptance, market
developments, the costs involved in maintaining and enforcing intellectual
property rights, the level and timing of license revenue, and other factors. We
believe that our current cash and investment balances and any cash generated
from operations will be sufficient to meet our operating and capital
requirements for at least the next 12 months. However, it is possible that we
may require additional financing within this period. We have no current plans,
and we are not currently negotiating, to obtain additional financing. The
factors described in this paragraph will affect our future capital requirements
and the adequacy of our available funds. We may be required to raise additional
funds through public or private financing, strategic relationships or other
arrangements. We cannot ensure that such funding, if needed, will be available
to us on terms attractive to us, or at all. Furthermore, any additional equity
financing may be dilutive to stockholders, and debt financing, if available, may
involve restrictive covenants. Strategic arrangements, if necessary to raise
additional funds, may require us to relinquish our rights to certain of our
technologies or products. If we fail to raise capital when needed, our failure
could have a negative impact on our operating results and financial condition.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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     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 $38.6 million at June 30, 2001,
and were invested in short-term bonds.

PART II - OTHER INFORMATION

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

ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS - In March 1999, NEON
          completed the initial public offering of its common stock (the "IPO").
          In the IPO, NEON issued and sold 3,041,000 shares for an aggregate
          price to the public of $45,615,000, and a sole selling stockholder
          sold 64,000 shares of common stock for an aggregate offering price of
          $960,000. The IPO was a firm commitment underwriting, and the managing
          underwriters of the IPO were Donaldson, Lufkin & Jenrette Securities
          Corporation, Hambrecht & Quist LLC and the CIBC Oppenheimer Corp. The
          underwriting discount incurred by NEON relating to the IPO was
          $3,193,050. Net offering proceeds received by NEON from the IPO were
          approximately $41.2 million. Approximately $1.0 million of the
          proceeds received by NEON from the IPO was used to repay existing
          indebtedness and $1.9 million was used in connection with the
          September 1999 acquisition of the assets of Beyond Software Inc. An
          additional $4.5 million was paid to Computer Associates, Inc. through
          December 2000 to pay certain software product royalties and to
          purchase certain software products and intellectual property rights.
          Additionally, $2.0 million was loaned to Enterworks Software, Inc. as
          bridge financing in June 2001 and $2.4 million was used to fund
          operations for the three months ended June 30, 2001. 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. Until we are able to hire a permanent Chief Executive Officer
and a permanent President, our business may be disrupted, and our management
resources may be diverted from the development of our business. In addition, we
may not be able to identify and hire a permanent Chief Executive Officer and/or
President, which 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.

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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.

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

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

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<PAGE>

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. 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.

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

     Our recent growth has placed 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.

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<PAGE>

RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE

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

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

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

     We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be 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 and the United
Kingdom to market and sell our products in Europe, and have recently established
a telesales subsidiary office in 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

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<PAGE>

     - 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.

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

     A number of organizations, including New Era of Networks, Inc., are
utilizing the name "Neon," alone and in combination with other words, as a
trademark, a tradename or both. New Era of Networks is also a developer and
distributor of middleware and other software products. New Era of Networks has
used the acronym "NEON" in its business, was listed on the Nasdaq National
Market under the symbol "NEON" and has sought to obtain federal trademarks for
products and services whose names include the word "NEON." 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 has 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 intends to grant
summary judgment for cancellation of the federal trademark registration for the
"NEON" mark. If such judgment is entered, it will not affect NEON's right to use
the "NEON" mark, which NEON believes to be superior to those of New Era of
Networks. Discovery related to this litigation has been completed but no trial
date has been set. On June 23, 1999, NEON sued New Era of Networks in District
Court in Fort Bend County, Texas, alleging that New Era of Networks' use of
"NEON" is 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 are 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 expects this
final judgment to be appealed, which could result in a reversal or new trial
being ordered on all or a portion of the judgment. Alternatively, the parties
may reach a settlement in satisfaction of the judgment that reduces the dollar
amount from that awarded by the court. Therefore, NEON is not guaranteed that it
will receive any or all of the $39,000,000 in damages.

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

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

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<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.

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

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          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.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  EXHIBITS

          (b)  REPORTS ON FORM 8-K

               A Current Report on Form 8-K was filed on June 12, 2001 that
               included a copy of a press release announcing a jury verdict.

               A Current Report on Form 8-K was filed on June 12, 2001 which
               included a copy of a press release announcing that two members of
               NEON's Board of Directors, including its President and CFO, has
               resigned from its Board of Directors due to a disagreement with
               the Board of Directors over the strategic direction of the
               Company. Neither Board member who resigned requested that such
               disagreement be disclosed

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                                  SIGNATURES

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

                                        NEON SYSTEMS, INC.

Date:  July 26, 2001                    /s/ JAMES BRADFORD POYNTER
       -------------                    -------------------------------------
                                        Chief Financial Officer
                                        (Principal financial officer)

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