<PAGE>   1

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

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

                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

                                       OR

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

                    FOR THE TRANSITION PERIOD FROM ___ TO ___

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

                         Commission File Number 0-25457

                               NEON SYSTEMS, INC.
             (Exact Name of Registrant as specified in its charter)

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

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

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

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

The number of shares of the registrant's common stock outstanding as of November
10, 2000 was 9,499,913.



<PAGE>   2


                               NEON SYSTEMS, INC.

                                    FORM 10-Q

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2000

                                      INDEX

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

Item 1.  Financial Statements

         Consolidated  Balance Sheets at September 30, 2000 and
         March 31, 2000 ...............................................       3

         Consolidated Statements of Operations for the Three and Six
         Months Ended September 30, 2000 and 1999 .....................       4

         Consolidated Statements of Cash Flows for the Six Months Ended
         September 30, 2000 and 1999 ..................................       5

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

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk ...      14

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings ............................................      14

Item 2.  Changes in Securities and Use of Proceeds ....................      14

Item 3.  Defaults Upon Senior Securities ..............................      14

Item 4.  Submission of Matters to a Vote of Security Holders ..........      15

Item 5.  Other Information ............................................      15

Item 6.  Exhibits and Reports on Form 8-K .............................      20

SIGNATURES ............................................................      22
</TABLE>




                                       2
<PAGE>   3


PART I - FINANCIAL INFORMATION

    ITEM 1. FINANCIAL STATEMENTS

                       NEON SYSTEMS, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                 SEPTEMBER 30, 2000   MARCH 31, 2000
                                                                 ------------------   --------------
                                                                    (UNAUDITED)
<S>                                                              <C>                  <C>
                               ASSETS

         CURRENT ASSETS:
            Cash and cash equivalents                               $ 28,440,625       $ 37,120,342
            Short-term investments                                    11,359,993          1,977,500
            Accounts receivable-trade                                  7,243,795          9,602,979
            Deferred income taxes                                        834,227            712,948
            Other current assets                                       1,297,782            658,326
                                                                    ------------       ------------
               Total current assets                                   49,176,422         50,072,095
                                                                    ------------       ------------

         Furniture and equipment                                       2,023,307          1,612,080
         Purchased software                                            1,441,645          1,114,788
         Less: accumulated depreciation and amortization              (1,223,945)          (832,073)
                                                                    ------------       ------------
               Property and equipment, net                             2,241,007          1,894,795
         Marketable securities                                         1,426,142          2,660,267
         Goodwill, net                                                 1,908,235          2,146,764
         Other assets, net                                             4,325,864          3,726,236
                                                                    ------------       ------------
                Total assets                                        $ 59,077,670       $ 60,500,157
                                                                    ============       ============

                LIABILITIES & STOCKHOLDERS' EQUITY

         CURRENT LIABILITIES:
            Accrued expenses                                        $  2,586,951       $  2,405,571
            Accounts payable                                             397,201            452,450
            Taxes payable                                                     --            318,534
            Deferred maintenance revenue                               5,359,579          5,466,000
                                                                    ------------       ------------
               Total current liabilities                               8,343,731          8,642,555
                                                                    ------------       ------------

         STOCKHOLDERS' EQUITY:
         Preferred stock, $.01 par value. Authorized
           10,000,000 shares; no shares issued and outstanding                --                 --
         Common stock, $.01 par value. Authorized
           30,000,000 shares; 9,453,947 and 9,005,584 shares
           issued and outstanding at September 30, 2000 and
           March 31, 2000, respectively                                   94,539             90,056
         Additional paid-in capital                                   46,901,756         46,697,813
         Accumulated other comprehensive loss                           (578,337)          (155,221)
         Unearned portion of deferred compensation                      (693,847)          (899,377)
         Retained earnings                                             5,009,828          6,124,331
                                                                    ------------       ------------
                Total stockholders' equity                            50,733,939         51,857,602
         Commitments and contingencies (Note 6)
                                                                    ------------       ------------
                Total liabilities and stockholders' equity          $ 59,077,670       $ 60,500,157
                                                                    ============       ============
</TABLE>

     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                       3
<PAGE>   4


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

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED SEPTEMBER 30,       SIX MONTHS ENDED SEPTEMBER 30,
                                                  -------------------------------       -------------------------------
                                                      2000               1999               2000               1999
                                                  ------------       ------------       ------------       ------------
<S>                                               <C>                <C>                <C>                <C>
Revenues:
   License                                        $  3,654,104       $  4,351,484       $  8,937,663       $  8,801,154
   Maintenance                                       2,024,406          1,707,985          4,365,891          3,343,977
                                                  ------------       ------------       ------------       ------------
     Total revenues                                  5,678,510          6,059,469         13,303,554         12,145,131

Cost of revenues:
   Cost of licenses                                    404,184            315,909          1,249,924            410,252
   Cost of maintenance                                 609,889            351,190          1,145,562            623,442
                                                  ------------       ------------       ------------       ------------
     Total cost of revenues                          1,014,073            667,099          2,395,486          1,033,694
                                                  ------------       ------------       ------------       ------------

Gross profit                                         4,664,437          5,392,370         10,908,068         11,111,437

Operating expenses:
  Sales and marketing                                3,676,240          2,357,173          7,280,271          4,811,354
  Research and development                           1,907,030          1,187,571          3,777,957          2,384,434
  General and administrative                         1,304,044            960,133          2,276,684          1,674,467
  Non-cash compensation                                101,296            136,339            205,530            272,677
  Amortization of acquisition-related costs            119,264                 --            238,529                 --
                                                  ------------       ------------       ------------       ------------
   Total operating expenses                          7,107,874          4,641,216         13,778,971          9,142,932
                                                  ------------       ------------       ------------       ------------

Operating income (loss)                             (2,443,437)           751,154         (2,870,903)         1,968,505

Interest income                                        662,010            596,033          1,326,518          1,139,530
Interest expense                                          (826)              (829)            (4,269)            (1,401)
Other, net                                              (2,658)            26,890              6,153            (25,088)
                                                  ------------       ------------       ------------       ------------
   Income (loss) before income taxes                (1,784,911)         1,373,248         (1,542,501)         3,081,546
Benefit (provision) for income taxes                   515,000           (521,834)           428,000         (1,170,987)
                                                  ------------       ------------       ------------       ------------
   Net income (loss)                              $ (1,269,911)      $    851,414       $ (1,114,501)      $  1,910,559
                                                  ============       ============       ============       ============

Earnings (loss) per share:
   Basic                                          $      (0.13)      $       0.10       $      (0.12)      $       0.22
                                                  ============       ============       ============       ============

   Diluted                                        $      (0.13)      $       0.08       $      (0.12)      $       0.18
                                                  ============       ============       ============       ============

Shares used in computing earnings per share:
   Basic                                             9,442,191          8,871,957          9,362,375          8,860,987
                                                  ============       ============       ============       ============
   Diluted                                           9,442,191         10,410,427          9,362,375         10,399,682
                                                  ============       ============       ============       ============
</TABLE>

     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.





                                       4
<PAGE>   5

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

<TABLE>
<CAPTION>
                                                        SIX MONTHS ENDED SEPTEMBER 30,
                                                           2000               1999
                                                       ------------       ------------
<S>                                                    <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                    $ (1,114,501)      $  1,910,559
  Adjustments  to reconcile  net income  (loss)
    to net cash provided by (used in) operating
    activities:
     Depreciation and amortization                          630,401            107,776
     Deferred tax expense                                  (121,279)            27,897
     Non-cash compensation expense                          205,530            272,677
     Increase (decrease) in cash resulting
       from changes in operating assets and
       liabilities:
       Accounts receivable                                2,359,182         (2,796,103)
       Other current assets                                (639,456)          (485,813)
       Other assets                                        (599,628)           (31,470)
       Accrued expenses                                     181,380           (814,229)
       Accounts payable                                     (55,249)          (562,192)
       Taxes payable                                       (318,534)            54,114
       Deferred maintenance revenue                        (106,421)           328,470
                                                       ------------       ------------
Net cash provided by (used in) operating
  Activities                                                421,425         (1,988,314)
                                                       ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable securities                     (8,119,090)       (26,717,953)
  Acquisition                                                    --         (1,870,000)
  Purchases of furniture and equipment                     (411,227)           (76,688)
  Purchases of computer software                           (326,857)           (74,907)
                                                       ------------       ------------
Net cash used in investing activities                    (8,857,174)       (28,739,548)
                                                       ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercises of stock options                  208,426             43,408
  Shares purchased for  treasury                                 --           (141,183)
                                                       ------------       ------------
Net cash provided by (used in) financing
  Activities                                                208,426            (97,775)
                                                       ------------       ------------
Net decrease in cash and cash equivalents                (8,227,323)       (30,825,637)
Effect of exchange rates on cash                           (452,394)           (62,379)
Cash and cash equivalents at beginning of period         37,120,342         45,400,015
                                                       ------------       ------------

Cash and cash equivalents at end of period             $ 28,440,625       $ 14,511,999
                                                       ============       ============

Supplemental disclosure of cash flow information:

Cash paid during the period for income taxes           $     77,005       $  1,111,138
                                                       ============       ============
Cash paid during the period for interest               $      4,269       $         --
                                                       ============       ============
</TABLE>

     SEE ACCOMPANYING CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.





                                       5
<PAGE>   6

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

NOTE 1--BASIS OF PRESENTATION

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

NOTE 2--PER SHARE INFORMATION

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


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

<TABLE>
<CAPTION>
                                             THREE MONTHS ENDED SEPTEMBER 30,      SIX MONTHS ENDED SEPTEMBER 30,
                                             -------------------------------      -------------------------------
                                                  2000              1999               2000              1999
                                             -------------       -----------      -------------       -----------
<S>                                          <C>                 <C>              <C>                 <C>
Net income (loss)                            $  (1,269,911)      $   851,414      $  (1,114,501)      $ 1,910,559
                                             =============       ===========      =============       ===========

Weighted average number of common
  shares outstanding during the period:
Basic                                            9,442,191         8,871,957          9,362,375         8,860,987
Dilutive stock options                                  --         1,538,470                 --         1,538,695
                                             -------------       -----------      -------------       -----------
Diluted                                          9,442,191        10,410,427          9,362,375        10,399,682
                                             =============       ===========      =============       ===========

Income (loss) per common share:
  Basic                                      $       (0.13)      $      0.10      $       (0.12)      $      0.22
                                             =============       ===========      =============       ===========
  Diluted                                    $       (0.13)      $      0.08      $       (0.12)      $      0.18
                                             =============       ===========      =============       ===========
</TABLE>


         In the period April 1, 2000 through September 30, 2000 options to
purchase 448,363 shares of common stock at exercise prices of $0.20 to $13.00
per share were exercised. At September 30, 2000, there were options outstanding
to purchase 2,152,659 shares of common stock with a weighted-average exercise
price of $12.72.





                                       6
<PAGE>   7

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

NOTE 3--MARKETABLE SECURITIES

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

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

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

<TABLE>
<CAPTION>
                                            SEPTEMBER 30, 2000   MARCH 31, 2000
                                            ------------------   --------------
<S>                                         <C>                  <C>
               Debt Securities:
                 Cost                          $ 12,803,193       $  4,684,103
                 Gross unrealized losses            (17,058)           (46,336)
                                               ------------       ------------
                     Estimated fair value      $ 12,786,135       $  4,637,767
                                               ============       ============
</TABLE>

         The amortized cost and estimated fair value based on published closing
prices of securities at September 30, 2000, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to repay obligations without
prepayment penalties.

<TABLE>
<CAPTION>
                                                               AS OF SEPTEMBER 30, 2000
                                                            ------------------------------
                                                                            ESTIMATED FAIR
                                                               COST             VALUE
                                                            -----------     --------------
<S>                                                         <C>             <C>
               Available-for-sale:
                 Due in one year or less                    $11,372,758      $11,359,993
                 Due after one year through five years        1,430,435        1,426,142
</TABLE>

NOTE 4--INCOME TAXES

         The benefit for income taxes for the six months ended September 30,
2000, was $428,000, or 28% of pre-tax losses. 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, 2000.

         The provision for income taxes for the six months ended September 30,
1999, was $1.2 million, or 38% 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 periods ending September 30, 1999 and 2000, NEON had one
customer in each period that represented 17% and 19% of total revenues,
respectively. During the six-month periods ending September 30, 1999 and 2000,
the Company had two customers in each period that represented 26% and 32% of
total revenues, respectively.

         The table below summarizes revenues by geographic region.

<TABLE>
<CAPTION>
                       THREE MONTHS ENDED SEPTEMBER 30,       SIX MONTHS ENDED SEPTEMBER 30,
                       --------------------------------      --------------------------------
                           2000               1999               2000               1999
                       -------------      -------------      -------------      -------------
<S>                    <C>                <C>                <C>                <C>
    Revenues:
    North America      $   4,781,226      $   5,073,823      $  11,656,067      $   9,554,483
    Europe                   897,284            985,646          1,647,487          2,590,648
                       -------------      -------------      -------------      -------------
                       $   5,678,510      $   6,059,469      $  13,303,554      $  12,145,131
                       =============      =============      =============      =============
</TABLE>




                                       7
<PAGE>   8

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

NOTE 6--CONTINGENCIES

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

         On June 23, 1999, NEON sued New Era of Networks in Fort Bend County,
Texas, alleging that New Era of Networks' use of "NEON" was in violation of
Texas law concerning tradenames and trademarks. In this litigation, NEON seeks
to enjoin New Era of Networks from using "NEON" as its "nickname," its Nasdaq
trading symbol, or in any other manner that is likely to result in confusion in
the marketplace, or to dilute the meaning or value of NEON's name. This
litigation in Fort Bend County, Texas is currently set for trial beginning
January 29, 2001. NEON's claims are based upon its prior and continuous use of
"NEON" as its corporate name. NEON believes that it has superior rights to use
"NEON" and that New Era of Networks' use of NEON is causing confusion in the
marketplace. This and any other litigation to enforce NEON's right to use the
NEON name in NEON's business or to prevent others from using the NEON name may
be expensive and time-consuming, may divert management resources and may not be
adequate to protect NEON's business. If NEON should lose any such litigation, it
may have to change its name, which also would be expensive and time-consuming
and could adversely affect NEON's business.

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

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





                                       8
<PAGE>   9

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

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains certain forward-looking statements
based upon current expectations that involve risks and uncertainties, such as
our plans, objectives, expectations and intentions. Our actual results and the
timing of certain events could differ materially from those anticipated in the
forward-looking statements as a result of certain factors, including those set
forth in Part II, Item 5 under "Factors that May Affect Future Results" and
elsewhere in, or incorporated by reference into this report. 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. It is important that the discussion below be read together
with the attached condensed financial statements and the notes thereto.

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.

         In September 1999, NEON acquired various software products 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.

         In December 1999, NEON entered into an agreement with Sterling
Software, which was subsequently acquired by Computer Associates, Inc. (CA),
that granted us the rights to use, reproduce, copy and sell certain products. As
consideration for this agreement, NEON made a nonrefundable advance of $3.5
million for the future royalties to be earned by CA from sales made by NEON of
$14 million of such products. NEON also retained an option to purchase the
intellectual property underlying such products at any time through December 30,
2000 for $1 million. In October 2000, NEON exercised its option.

         NEON derives revenue from software licenses and maintenance services.
Historically, the 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 six 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.

         NEON recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 97-2. NEON sells its products
under perpetual license and recognizes license revenue 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; and no other
significant vendor obligation exists. Maintenance revenue is recognized ratably
over the maintenance service period, which is typically one year. The portion of
maintenance revenue that has not yet been recognized as revenue is reported as
deferred revenue on NEON's balance sheet. 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 in 1993, 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.





                                       9
<PAGE>   10

         In the three months ended September 30, 1999 and 2000, revenue outside
of North America was approximately 16% of our total license revenue. We
anticipate that international revenue will increase as a percentage of total
revenue in the future. If international revenue increases as a percentage of
total revenue, we may experience a corresponding increase in cost of sales,
primarily because of higher personnel costs for overseas locations and agent
commission expenses related to distributors that may impact our operating
results. 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.
Additionally, we do not believe that historical growth rates are necessarily
obtainable or indicative of our future growth potential.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED SEPTEMBER 30,               SIX MONTHS ENDED SEPTEMBER 30,
                                                    --------------------------------               ------------------------------
                                                      2000                   1999                   2000                   1999
                                                      ----                   ----                   ----                   ----
<S>                                                   <C>                    <C>                    <C>                    <C>
Revenues:
   License                                              64%                    72%                    67%                    72%
   Maintenance                                          36                     28                     33                     28
                                                      ----                   ----                   ----                   ----
      Total revenues                                   100                    100                    100                    100
Cost of revenues:
   Cost of licenses                                      7                      5                      9                      4
   Cost of maintenance                                  11                      6                      9                      5
                                                      ----                   ----                   ----                   ----
      Total cost of revenues                            18                     11                     18                      9
                                                      ----                   ----                   ----                   ----
Gross profit                                            82                     89                     82                     91
Operating expenses:
   Sales and marketing                                  65                     39                     55                     39
   Research and development                             33                     19                     28                     20
   General and administrative                           23                     16                     17                     14
   Non-cash compensation                                 2                      2                      1                      2
   Amortization of acquisition related costs             2                     --                      2                     --
                                                      ----                   ----                   ----                   ----
      Total operating expenses                         125                     76                    104                     75
                                                      ----                   ----                   ----                   ----
Operating income (loss)                                (43)                    13                    (21)                    16
Interest and other, net                                 12                     10                     10                      9
                                                      ----                   ----                   ----                   ----
Income (loss) before income taxes                      (31)                    23                    (11)                    25
Benefit (provision) for income taxes                     9                     (9)                     3                     (9)
                                                      ----                   ----                   ----                   ----
Net income (loss)                                      (22)%                   14%                    (8)%                   16%
                                                      ====                   ====                   ====                   ====
</TABLE>


THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999

REVENUES

         Total revenues. NEON's revenues decreased $381,000 or 6% from $6.1
million for the three months ended September 30, 1999 to $5.7 million for the
three months ended September 30, 2000. This reduction in total revenue was due
to an overall weakness in the mainframe software market that resulted in a
decrease in the amount of licenses sold during the three months ended September
30, 2000. During the three-month periods ending September 30, 1999 and 2000,
NEON had one customer in each period that represented 17% and 19% of total
revenues, respectively.

         License. License revenues decreased $697,000 or 16% from $4.4 million
for the three months ended September 30, 1999 to $3.7 million for the three
months ended September 30, 2000. This reduction in total revenue was due to an
overall weakness in the mainframe software market that resulted in a decrease in
the amount of licenses sold during the three months ended September 30, 2000.
License revenues for the three months ended September 30, 2000 include $986,000
attributable to a software distribution agreement with BMC Software entered in
connection with NEON's settlement of a lawsuit originally filed by BMC Software.
As the lawsuit settlement and distribution agreement were entered into in
October 1999, there were no corresponding revenues under the BMC Software
distribution agreement in the three months ended September 30, 1999.





                                       10
<PAGE>   11

         Maintenance. Maintenance revenues increased $316,000 or 19% from $1.7
million for the three months ended September 30, 1999 to $2.0 million for the
three months ended September 30, 2000. This increase resulted primarily from the
increase in NEON's cumulative installed base of customers.

COST OF REVENUES

         Cost of licenses. Cost of license revenues includes costs of product
licenses, such as product manuals, distribution and media costs for NEON's
software products, as well as royalty payments to third parties related to
license revenues. Cost of license revenues increased $88,000 or 28% from
$316,000, or 8% of license revenues, for the three months ended September 30,
1999 to $404,000, or 11% of license revenues, for the three months ended
September 30, 2000. The increase in the cost of license revenues was
attributable to a change in product mix that resulted in additional royalty cost
during the period ended September 30, 2000.

         Cost of maintenance. Cost of maintenance revenues includes personnel
and other costs related to NEON's customer support department. Cost of
maintenance revenues increased $259,000 or 74% from $351,000, or 21% of
maintenance revenues, for the three months ended September 30, 1999 to $610,000,
or 30% of maintenance revenues, for the three months ended September 30, 2000.
The dollar and percentage increases were due principally to an increase in the
number of personnel required to provide maintenance services to NEON's growing
installed customer base.

OPERATING EXPENSES

         Sales and marketing. Sales and marketing expenses 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 $1.3 million or 56% from $2.4
million, or 39% of total revenues, for the three months ended September 30, 1999
to $3.7 million, or 65% of total revenues, for the three months ended September
30, 2000. The dollar increase includes approximately $250,000 in increased cost
to support the United Kingdom sales office, a $539,000 increase in compensation
expenses incurred in the hiring of additional North American sales and marketing
personnel and $235,000 of increased international agent commissions. The
increase in sales and marketing expense as a percentage of revenue is due to the
reduction in total revenue for the period ended September 30, 2000.

         Research and development. Research and development expenses include
salaries, bonuses and benefits for product development and product documentation
personnel and the computer hardware, software and telecommunication expenses
associated with these personnel. Research and development expenses increased
$719,000 or 61% from $1.2 million, or 19% of total revenues, for the three
months ended September 30, 1999 to $1.9 million, or 33% of total revenues, for
the three months ended September 30, 2000. The increase results primarily from
an increase in compensation costs and the computer hardware, software and
telecommunication expenses related to increased staffing and, to a lesser
extent, due to the reduction in the level of revenue generated in the three
months ended September 30, 2000. We expect research and development expenses to
increase in absolute dollar amounts as we continue to expand our existing
product line and develop new products.

         General and administrative. General and administrative expenses include
salaries, personnel and related costs for NEON's executive, financial, legal and
administrative staff. General and administrative expenses increased $344,000 or
36% from $960,000, or 16% of total revenues, for the three months ended
September 30, 1999 to $1.3 million, or 23% of total revenues, for the three
months ended September 30, 2000. The increase results primarily from an increase
in compensation costs and the computer hardware, software and telecommunication
expenses related to increased staffing. NEON anticipates that general and
administrative expenses will continue to increase in absolute dollars as we
continue to upgrade and improve our internal systems.

         Non-cash compensation. During the three months ended September 30,
1999, $136,000 was recognized as non-cash compensation expense, while $101,000
was recognized as non-cash compensation expense during the three months ended
September 30, 2000. The remaining deferred balance of $694,000 will be
recognized over the remaining vesting period of the granted options,
approximately two years.

         Amortization of acquisition related costs. In September 1999 we
acquired various software products and miscellaneous assets from Beyond Software
Inc., a privately held company based in Santa Clara, California, for $1.87
million, plus the assumption of certain liabilities. The transaction resulted in
goodwill of approximately $2.4 million, which is being amortized on a
straight-line basis over five years. Amortization expense related to this
transaction of $119,000 was recognized in the three months ended September 30,
2000.





                                       11
<PAGE>   12

         Interest and other income, net. Interest income, net was flat for the
three months ended September 30, 1999 compared to the three months ended
September 30, 2000.

         Benefit (provision) for income taxes. The benefit for income taxes for
the three-months ended September 30, 2000, was $515,000, or 29% of pre-tax
losses. The difference between the effective and statutory rates 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, 2000.

         The provision for income taxes for the three-months ended September 30,
1999, was $522,000, or 38 % of pre-tax income. The effective and statutory rates
were approximately equivalent.

SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED
SEPTEMBER 30, 1999

REVENUES

         Total revenues. NEON's revenues increased $1.2 million or 10% from
$12.1 million for the six months ended September 30, 1999 to $13.3 million for
the six months ended September 30, 2000. During the six-month periods ending
September 30, 1999 and 2000, NEON had two customers in each period that
represented 26% and 32% of total revenues, respectively.

         License. License revenue was relatively flat at $8.8 million for the
six months ended September 30, 1999 and $8.9 million for the six months ended
September 30, 2000. The lack of increase in license revenue is primarily due to
an overall weakness in the mainframe software market since December 31, 1999.
License revenues for the six months ended September 30, 2000 include $1,972,000
attributable to a software distribution agreement with BMC Software entered in
connection with NEON's settlement of a lawsuit originally filed by BMC Software.
As the lawsuit settlement and distribution agreement were entered into in
October 1999, there were no corresponding revenues under the BMC Software
distribution agreement in the six months ended September 30, 1999.

         Maintenance. Maintenance revenues increased $1.0 million or 31% from
$3.3 million for the six months ended September 30, 1999 to $4.4 million for the
six months ended September 30, 2000. This increase resulted primarily from the
increase in NEON's cumulative installed base of customers.

COST OF REVENUES

         Cost of licenses. Cost of license revenues increased $840,000 or 205%
from $410,000, or 5% of license revenues, for the six months ended September 30,
1999 to $1.2 million, or 14% of license revenues, for the six months ended
September 30, 2000. The increase in the cost of license revenues was
attributable to a change in product mix that resulted in additional royalty cost
during the period ended September 30, 2000 when compared to the prior year.

         Cost of maintenance. Cost of maintenance revenues increased $522,000 or
84% from $623,000, or 19% of maintenance revenues, for the six months ended
September 30, 1999 to $1.1 million, or 26% of maintenance revenues, for the six
months ended September 30, 2000. The dollar and percentage increases were due
principally to the increase in the number of personnel required to provide
maintenance services to NEON's growing installed customer base.

OPERATING EXPENSES

         Sales and marketing. Sales and marketing expenses increased $2.5
million or 51% from $4.8 million, or 39% of total revenues, for the six months
ended September 30, 1999 to $7.3 million, or 55% of total revenues, for the six
months ended September 30, 2000. This dollar increase primarily results from a
$1.2 million increase in compensation expenses incurred in the hiring of
additional North American sales and marketing personnel, a $519,000 increase in
costs associated with NEON's international sales offices and a $476,000 increase
in international agent commissions.

         Research and development. Research and development expenses increased
$1.4 million or 58% from $2.4 million, or 20% of total revenues, for the six
months ended September 30, 1999 to $3.8 million, or 28% of total revenues, for
the six months ended September 30, 2000. The dollar increase results primarily
from an increase in compensation costs and the computer hardware, software and
telecommunication expenses related to increased staffing. Research and
development expenses are expected to increase in absolute dollar amounts from
the level experienced in the six months ended September 30, 2000 as we continue
to expand our existing product line and develop new products.





                                       12
<PAGE>   13

         General and administrative. General and administrative expenses
increased $602,000 or 36% from $1.7 million, or 14% of total revenues, for the
six months ended September 30, 1999 to $2.3 million, or 17% of total revenues,
for the six months ended September 30, 2000. The dollar increase results
primarily from increases in compensation costs and the computer hardware,
software and telecommunication expenses related to increased staffing. NEON
anticipates that general and administrative expenses will continue to increase
in absolute dollars from the level experienced in the six months ended September
30, 2000 as we continue to upgrade and improve our internal systems.

         Non-cash compensation. During the six months ended September 30, 1999,
$273,000 was recognized as non-cash compensation expense, while $206,000 was
recognized as non-cash compensation expense during the six months ended
September 30, 2000. The deferred balance of $694,000 will be recognized over the
remaining vesting period of the granted options, approximately two years.

         Amortization of acquisition related costs. In September 1999, NEON
acquired various software products and miscellaneous assets from Beyond Software
Inc., a privately held company based in Santa Clara, California, for $1.87
million, plus the assumption of certain liabilities. The transaction resulted in
goodwill of approximately $2.4 million, which is being amortized on a
straight-line basis over five years. Amortization expense related to this
transaction of $239,000 was recognized in the six months ended September 30,
2000.

         Interest and other income, net. Interest and other income, net
increased $215,000 from $1.1 million for the six months ended September 30, 1999
to $1.3 million for the six months ended September 30, 2000. The increase is due
primarily to the increase in yield rates for invested cash for the six months
ended September 30, 2000 compared to the prior year period.

         Benefit (provision) for income taxes. The benefit for income taxes for
the six months ended September 30, 2000, was $428,000, or 28% of pre-tax losses.
The difference between the effective and statutory rates is primarily due to the
impact of net operating losses outside the Unites States that were not
recognized for the six months ended September 30, 2000.

         The provision for income taxes for the six months ended September 30,
1999, was $1.2 million, or 38% 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 $28.4 million at
September 30, 2000 from $37.1 million at March 31, 2000. This decrease was due
primarily to the investment of $8.1 million in marketable securities. At March
31, 2000, NEON had invested $4.6 million in highly liquid marketable securities
compared to $12.8 million as of September 30, 2000.

         Net cash provided by operating activities was $421,000 in the six
months ended September 30, 2000, while the net cash used in operating activities
was $2.0 million in the six months ended September 30, 1999. The additional net
cash provided by operating activities during the six months ended September 30,
2000 was primarily the result of decreased balances in NEON's accounts
receivable-trade, offset partially by the period's net loss.

         Net cash used by NEON in investing activities was $8.9 million and
$28.7 million in the six months ended September 30, 2000 and 1999, respectively.
Purchases of marketable securities totaling $8.1 million as well as purchases of
property and equipment, including computer software, 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, 1999 were purchases of
marketable securities totaling $26.7 million and the acquisition of various
software products in September 1999. As of September 30, 2000, NEON had no
material commitment for capital expenditures.

         NEON's net cash provided by (used in) financing activities was $208,000
and ($98,000) in the six months ended September 30, 2000 and 1999, respectively.
Net cash provided by financing activities in the period ending September 30,
2000 was from amounts received from the exercise of employee stock options. For
the six months ended September 30, 1999, amounts received from the exercise of
employee stock options were more than offset by the cost of shares repurchased
by NEON in settlement of payroll tax obligations of employees related to the
exercises of these stock options.

         We intend to invest heavily in the development of new products and
enhancements to our existing products. Our future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of product development efforts and the success of these development
efforts, the costs and timing of expansion of sales and marketing activities,
the extent to which our existing and new products gain market acceptance, market
developments, the costs involved in maintaining and enforcing





                                       13
<PAGE>   14

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 $28.4 million at September 30,
2000, and were invested in different types of money market securities. An
additional $11.4 million was invested in short-term available-for-sale
marketable securities with maturity dates from three months to one year in term,
and $1.4 million was invested in available-for-sale marketable securities with
maturity dates beyond one year. NEON believes that a near-term change in
interest rates would not materially affect its financial position, results of
operations or net cash flows for fiscal year 2001.

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 September 1999 acquisition of the assets of Beyond Software
Inc. An additional $3.5 million was paid to Sterling Software in December 1999
as a nonrefundable advance on future royalties to be earned by Sterling from
NEON's sale of certain Sterling products. The remainder of the proceeds from the
IPO has been invested in interest-bearing, investment-grade securities.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES - Not Applicable.





                                       14
<PAGE>   15
ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS - On August 22,
2000, at NEON's Annual Meeting of Stockholders, the holders of the Common Stock
of NEON elected Joe Backer and Charles E. Noell III as Class I directors of NEON
to serve until the 2003 Annual Meeting of Stockholders. The voting on such
matter is set forth below.

<TABLE>
<CAPTION>
         Nominee                         Votes for Each        Votes Against Each     Votes Withheld from Each
                                            Nominee                 Nominee                    Nominee
<S>                                      <C>                   <C>                    <C>
         Joe Backer                        7,982,927                   -                        12,245
         Charles E. Noell III              7,982,427                   -                        12,745
</TABLE>

         In addition, Norris van den Berg, John S. Reiland, George Ellis, Peter
Schaeffer, Richard Holcomb and John J. Moores continued their terms as directors
of NEON after the Annual Meeting of Stockholders.

         The stockholders also voted to ratify the appointment of KPMG LLP as
the independent certified public accountants of NEON for the 2001 fiscal year.

ITEM 5.  OTHER INFORMATION -

         FACTORS THAT MAY AFFECT FUTURE RESULTS

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

DECREASING DEMAND FOR MAINFRAME PROCESSING CAPACITY COULD ADVERSELY AFFECT
REVENUES.

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

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

         For the three months ended September 30, 2000, we incurred a net loss
of $1,270,000. The loss primarily resulted from a shortfall in license revenue.
Our expense levels are based primarily on our estimates of future revenue and
are largely fixed. We are unable to adjust spending rapidly enough to compensate
for any unexpected revenue shortfall. Accordingly, any significant shortfall in
revenue will have a material adverse effect on operating results and could
adversely impact our stock price.

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

         Our future operating results may vary significantly from quarter to
quarter due to a variety of factors, many of which are outside our control.
Therefore, it is likely that in one or more future quarters our results may fall
below the expectations of securities analysts and investors. We operate with no
order backlog because our products are shipped and revenue is generally
recognized shortly after orders are received. In addition, the amount of revenue
associated with sales of our software can vary significantly. In various
quarters in the past, we have derived a significant portion of our software
license revenues from a small number of relatively large sales. An inability to
close one or more large sales that we had expected to close in a particular
period could materially adversely affect our operating results for that period.
Moreover, we typically realize a majority of our software license revenue in the
last few days of a quarter. As a result, delays in the completion of customer
orders can shift recognition of a sale from its expected completion period to a
future period and cause significant variability in our operating results for any
particular period. Further, we believe that period-to-period comparisons of our
operating results are not necessarily a meaningful indication of future
performance. If our quarterly results do not meet investors' expectations, the
trading price of our common stock would be adversely affected.





                                       15
<PAGE>   16

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

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

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

         Approximately 72% of our revenues for the six months ended September
30, 2000 and approximately 90% of our revenues over fiscal 2000, 1999 and 1998
were derived from our Shadow product group. We anticipate that this product line
will continue to account for a substantial amount of our revenue for the
foreseeable future. Consequently, our future success will depend on continued
market acceptance of the Shadow product line and enhancements thereto.
Competition, technological change or other factors could reduce demand for, or
market acceptance of, these products and could have a material adverse effect on
our business, operating results and financial condition.

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

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

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

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

RISK OF YEAR 2000 RELATED PROBLEMS .

         Subsequent to January 1, 2000, we have not experienced any material
failures related to Year 2000; however, there remains a risk that latent Year
2000 problems could affect us or our products. We have tested the ability of our
software products to process Year 2000 data without interruption or errors and
believe that our products are substantially Year 2000 compliant. Despite these
tests, there can be no assurance that undetected errors or defects do not exist
that could cause these software products to fail to process Year 2000 data
correctly. There is a risk that such undetected errors or defects could surface
at a later date, and that customers may assert claims against us for any losses
resulting from such errors or defects. To date, we are not aware of any material
claims being asserted or made against us related to Year 2000 failures. However,
we cannot predict whether or to what extent any legal claims will be brought, or
whether we will suffer any liability as a result of any adverse consequences to
our customers related to Year 2000 failures.

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





                                       16
<PAGE>   17

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

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

         o        Internal development efforts by corporate information
                  technology departments

         o        New entrants to the middleware or enterprise subsystem
                  management markets

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

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

         o        Expand our sales, marketing and customer support organizations

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

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

         o        Improve our operational processes and management controls

RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE.

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

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

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

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





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<PAGE>   18

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

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

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

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

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

         o        Impact of recessions in economies outside the United States

         o        Difficulty in accounts receivable collection and longer
                  collection periods

         o        Cost of enforcement of contractual obligations

         o        Difficulties and costs of managing foreign operations

         o        Limited protection for intellectual property rights in some
                  countries

         o        Currency exchange rate fluctuations

         o        Political and economic instability

         o        Potentially adverse tax consequences

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

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

         A number of organizations, including New Era of Networks, Inc., are
utilizing the name "Neon," both alone and in combination with other words, as a
trademark, a tradename or both. Any litigation to enforce our right to use the
NEON name in our business or to prevent others from using the NEON name would be
expensive and time-consuming, would divert management resources and may not be
adequate to protect our business. New Era of Networks is also a developer and
distributor of middleware and other software products. New Era of Networks has
used the acronym "NEON" in its business, is listed on the Nasdaq National Market
System under the symbol "NEON" and has sought to obtain federal trademarks for
products and services whose names include the word "NEON." We are currently
opposing, in the U.S. Patent and Trademark Office, New Era of Networks'
application to register "NEONET." New Era of Networks has filed a complaint
against NEON in the United States District Court for the District of Colorado
seeking (1) a declaratory judgment that New Era of Networks' use of certain
trademarks, including "NEONET," does not infringe our





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<PAGE>   19
rights or constitute unfair competition and (2) cancellation of our federal
trademark registration for "NEON." NEON has filed an answer denying the material
allegation of that complaint. On February 11, 2000, the judge in the Colorado
proceeding advised the parties that the court intends to grant summary judgment
for cancellation of the federal trademark registration for the "NEON" mark. If
such judgment is entered, it will not affect NEON's right to use the "NEON"
mark, which NEON believes is superior to that of New Era of Networks. Discovery
related to this litigation has been completed, but no trial date has been set.
On June 23, 1999, NEON sued New Era of Networks in District Court in Fort Bend
County, Texas, seeking to enjoin New Era of Networks' use of "NEON" as its
"nickname," stock symbol or in any manner that does or is likely to cause
confusion in the marketplace or dilute the value of NEON's name. This litigation
in Fort Bend County, Texas is currently set for trial beginning January 29,
2001. If we should lose any such litigation, we may have to change our name,
which also would be expensive and time-consuming and could adversely affect our
business. In addition, NEON believes that New Era of Networks' use of the "NEON"
symbol on the Nasdaq National Market System creates confusion in the marketplace
and may result in variations in our stock price that are attributable to facts
or circumstances relating to New Era of Networks.

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

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

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

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

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

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

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

        From time to time, the stock market experiences significant price and
volume fluctuations, which may affect the market price of our common stock for
reasons unrelated to our performance. Recently, such volatility has particularly
impacted 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:

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

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

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

         o        Announcements of key developments by competitors





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<PAGE>   20

         o        Loss of key personnel

         o        Unfavorable publicity affecting our industry or us

         o        Adverse legal events affecting us

         o        Sales of NEON common stock by stockholders

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

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

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

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

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

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

POSSIBLE ADVERSE IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS.

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

         Exhibit 27 - Financial Data Schedule





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<PAGE>   21

          (b) REPORTS ON FORM 8-K - NEON did not file any reports on Form 8-K
          during the second quarter of its fiscal year 2001, which was the
          quarter for which this report is filed.















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<PAGE>   22

                                   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 14, 2000       /s/ JOE BACKER
      -----------------       -------------------------------------------------
                              Joe Backer
                              Chief Executive Officer
                              (Principal executive officer)

Date  November 14, 2000       /s/ STEPHEN ODOM
      -----------------       -------------------------------------------------
                              Stephen Odom
                              President,  Chief  Operating  Officer  and  Chief
                              Financial Officer
                              (Principal financial and accounting officer)





                                       22
<PAGE>   23

                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
EXHIBIT
  NO.           DESCRIPTION
-------         -----------
<S>         <C>
  27        Financial Data Schedule
</TABLE>