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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the Fiscal Year Ended March 31, 2003

OR

For the transition period from                         to                    

Commission File Number: 0-25457

NEON Systems, Inc.

(Exact name of Registrant as specified in its charter)

(281) 491-4200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 per share

(Title of Class)

Indicate by check mark whether 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x     No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ¨     No x

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

The aggregate market value of the voting stock held by non-affiliates of Registrant as of September 30, 2002 was $13,815,328, based on the last sale price of $3.09 for Registrant’s Common Stock on the Nasdaq National Market on September 30, 2002.

As of May 31, 2003, 8,821,385 shares of the Registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Selected portions of the Proxy Statement for the Annual Meeting of Stockholders to be held on September 22, 2003 to be filed with the Securities and Exchange Commission not later than 120 days after the end of Registrant’s fiscal year ended March 31, 2003 are incorporated by reference into Part III of this Form 10-K.

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NEON SYSTEMS, INC.

FORM 10-K

FOR FISCAL YEAR ENDED MARCH 31, 2003

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PART I

The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1993 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, intentions, strategies, and expected operating results and financial condition. Forward-looking statements also include statements regarding events, conditions, and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995. Factors that could cause or contribute to such differences include, but are not limited to, those described in Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the section below titled “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.

Item 1.    Business

OVERVIEW

NEON Systems, Inc. (“NEON”) was incorporated in May 1993 and is a successor by merger to NEON Systems, Inc., an Illinois corporation, which was incorporated in June 1991. NEON is an enterprise software company that develops, markets, and supports computer software products that allow Global 2000 Companies with IBM mainframes to integrate legacy data and applications with distributed or Internet applications. The IBM mainframe is a critical processing platform for major corporations due to the high performance, availability, scalability, and security inherent in the platform. For more than thirty years, there has been ongoing investment in mission critical data and applications that reside on the IBM mainframe platform and it remains today a primary repository for corporate data and applications for large organizations. NEON’s Shadow technology simplifies access to mainframe data and applications and we believe it is emerging as the industry’s choice when integrating application platform suites with IBM zSeries mainframes running IBM’s OS/390 or z/OS operating systems. NEON’s Shadow technology allows our customers to more effectively utilize their investment in IBM mainframe-based database and application systems to implement new applications that leverage legacy data and application assets.

In mid 2001, NEON refocused its product development, sales, and support personnel in three key solution areas based on the following products. These product lines included the “Shadow” branded product line providing access and integration of IBM mainframe data and applications from standard application client environments, the Enterprise Subsystem Management (“ESM”) product line providing enhanced availability, recoverability, and control for the IBM IMS database management system allowing more rapid deployment of CICS applications in the IBM CICSPlex environment, and the “iWave” branded product line integrating disparate helpdesk, network management, database management, and systems management applications across mainframe and distributed systems environments.

During the fiscal year just ended, NEON refocused its operations on its core technology, the Shadow products. In the fiscal years 2003, 2002, and 2001, the Shadow products accounted for 88%, 79% and 75%, respectively, of NEON’s revenues. In the 2003, 2002, and 2001 fiscal years, the ESM products accounted for 5%, 13% and 18%, respectively, of NEON’s revenues in such years. The iWave products have never accounted for more than 8% of NEON’s revenues in any of such years. As a result, during the fiscal year ended March 31, 2003, NEON terminated its distribution agreement with respect to the ESM product line, downsized its iWave product line and related personnel, and concentrated its resources toward enhancing and improving the Shadow product line. In addition, subsequent to the end of the fiscal year, NEON sold its iWave product line. See Note 13 to NEON’s consolidated financial statements.

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Shadow Branded Products—Simplified Access to the Mainframe

Shadow Technology

Shadow enterprise-class mainframe adapter technology reduces integration complexity and simplifies access to the mainframe. Shadow technology is an inherently more robust solution than competing integration technology, utilizing a mainframe software component to enable secure interoperability at the highest level of performance and scalability, while also providing rich monitoring and diagnostics. Shadow’s unified architecture delivers significant operational efficiencies and cost benefits over point integration products, while also providing the flexibility of infrastructure or single adapter implementations.

Shadow Products and Packaging

Shadow Direct—Shadow branded products are packaged to meet the needs of two distinct buyers of access and integration software for the IBM mainframe. Shadow Direct is a mainframe centric product that is targeting the organization that has a mainframe centric view of information technology. Shadow Direct is positioned as the best of breed “IT infrastructure” for all access and integration of mainframe data and transactions and is well suited for direct sales into the traditional mainframe software buyer community.

Shadow Connect—Shadow Connect is a connector packaging of Shadow and targets organizations who view mainframes as one of the many platforms that must be integrated with non-mainframe platforms. These buyers do not have a mainframe-centric view of information technology. Shadow Connect is NEON’s primary offering through its OEM/Reseller indirect channel.

Shadow Web Server—Shadow Web Server is an HTTP browser interface which provides direct HTTP access to mainframe data, applications and programs from Web browsers without the need for an intermediate server or data replication.

Shadow Console—Shadow Console extends the industry-leading diagnostic and management capabilities of Shadow technology to a modern, Windows^™ based, graphical user interface, offering both application developers and production operations personnel a consolidated, end-to-end view of the middleware component from the initial API adapter call in the application platform suite to the backend data or transaction source on the mainframe.

NEON’s Markets

NEON’s Shadow technology addresses market opportunities found in large organizations around the world. The Shadow products support business-critical applications of large companies that use mainframes independently or in conjunction with new systems deployments, especially deployments of application platforms from large and rising vendors, such as IBM’s Websphere Integration Servers and BEA’s WebLogic Integration Servers. NEON’s Shadow products help customers continue to leverage and increase the value of their mainframe and enterprise computing systems, allowing them to create, manage, and maintain high-value applications dependent on the IBM mainframe platform. For financial information attributable to each of NEON’s geographic sales areas, see Note 9 to NEON’s consolidated financial statements.

Industry Background

A critical aspect of all large business operations is the ability to effectively utilize information technology. Organizations are dependent on a variety of applications, information systems, and technology infrastructures, which are used to run the day-to-day operations of the business. Over time, organizations have made huge

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investments in these various applications, information systems, and technology infrastructures that have become known as legacy systems. Ever changing business demands along with the constant introduction of new technology create new challenges for these organizations, as they must implement new solutions in harmony with these legacy systems.

Many organizational initiatives, such as managing information flow across a supply chain, gaining a deeper understanding of customer buying habits or characteristics, or engaging in more targeted marketing, selling, and production depend on the effective delivery of information where it is needed and when it is needed. Organizations today must rapidly integrate existing applications and take advantage of the Internet to deliver new capabilities to suppliers, customers, employees, and trading networks to stay competitive. The demand for flexible integration of legacy systems comes at the same time as there are increasing demands to improve availability of critical legacy database management systems and manage an increasingly complex information technology infrastructure.

The following critical elements of information technology infrastructure are key considerations for organizations meeting the ongoing challenges of successful business operations in an age of ever increasing technology choices:

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NEON Product Advantages

The integration of disparate IT systems is one of the major imperatives for businesses and government in dealing with rapidly changing global issues and competition. Integration is increasingly complex, with packaged applications and application platforms suites now leveraging mainframe resources for modern service oriented development architectures. Integration adapters are part of the foundation required for reducing integration complexity. With NEON’s Shadow adapter technology, it is possible to simplify access to mainframe data, applications and programs, delivering it in a familiar format useable by developers and their development tools in both Java and .NET environments.

NEON’s Shadow products provide organizations with the following benefits in deploying new applications and extending existing applications:

The NEON Strategy

NEON’s goal is to emerge as the “best-of-breed” technology leader in the enterprise-class mainframe adapter market and to continue to grow as a leading provider of software solutions in markets for or related to the IBM mainframe platform. The following are key elements of the NEON strategy:

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Sales Strategy

NEON sells its products through a direct sales channel and indirect channels.

Direct Sales Channel.    NEON utilizes a direct sales model that minimizes the number of remote sales offices and customer site visits and focuses on effective use of the telephone and Internet communications for product demonstrations and sales. The direct sales force for North America is based in Sugar Land, Texas and generates a substantial majority of NEON’s revenues. In January 1997, NEON established its first international direct sales office in Windsor, England. In August 1997, NEON established another international direct sales office in Frankfurt, Germany and in May 2000, NEON established a sales presence in Sydney, Australia.

Indirect Sales Channel.    NEON utilizes indirect sales channels, emphasizing International Distributorship, OEM/Reseller Relationships and Marketing/Referral Relationships with key partners.

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NEON’s marketing activities support revenue generation and sales enablement for the direct sales channel and the indirect sales channel, as well as enhancing NEON’s corporate reputation. Marketing activities include integrated marketing communications, public relations, industry analyst relations, investor relations, trade shows/events, and web-based seminars and advertising.

Customers

NEON’s customer base spans major industries, including energy, manufacturing, financial services, government, and retail. NEON provides its products to customers under non-exclusive, non-transferable licenses. Under NEON’s current standard license agreement, licensed software may be used solely for the customer’s internal operations, and NEON does not sell or transfer title to its products to its customers. During fiscal 2003, NEON did not have any customers that individually accounted for 10% or more of total revenue. NEON had one customer that represented 10% of consolidated revenue in fiscal 2002 and one customer that represented 16% of consolidated revenue in fiscal 2001.

Customer Support

Customer support personnel provide pre-sale, installation, and post-sale technical support by toll-free telephone, E-mail, and facsimile, and through NEON’s Internet site and bulletin boards. Customer support is available on a 24x7 basis. In addition, customer service representatives contact each customer within six months after installation to assess customer satisfaction and obtain feedback. As a result of the “out-of-the-box” functionality of its products, NEON does not require a large customer support organization. At March 31, 2003, NEON had 8 customer support employees.

Product Development

NEON’s research and development efforts are focused on continuing to deliver new capabilities that allow our customers to extend their usage of our products, developing support for new releases of software on which our products are dependent, and providing maintenance for resolution of problems which may be encountered when using our software. All such development effort is funded by NEON. NEON incorporates the recommendations of existing and potential customers when developing its products and believes that continued dialogue with customers is an important element in developing enhancements to existing products and in the development of new products.

NEON has in the past dedicated and expects in the future to dedicate a significant amount of resources to developing new and enhanced products. NEON continues to follow a plan of continuous product improvement and enhancement. At any point in time a number of product development initiatives will be underway. We believe these development efforts will increase Shadow’s technical leadership in the integration market.

Competition

NEON competes in markets that are intensely competitive and characterized by rapidly changing technology and evolving standards. NEON has experienced, and expects to continue to experience, increased competition from current and potential competitors, many of whom have greater name recognition, a larger installed customer base, and significantly greater financial, technical, marketing, and other resources than NEON.

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NEON’s Shadow Direct infrastructure products compete principally with products from established vendors such as IBM, Jacada, and WRQ. NEON’s Shadow Connect adapter products compete principally with products from established vendors such as Attachmate, Attunity, and iWay. Other competitive factors include:

NEON’s competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the development, promotion, and sale of their products than NEON. Increased competition could result in price reductions, fewer customer orders, reduced gross margins, longer sales cycles, and loss of market share, any of which could materially adversely affect NEON’s business, operating results, and financial condition.

Proprietary Rights

NEON relies primarily on a combination of copyright, trademark, and trade secret laws, confidentiality procedures, and contractual provisions to protect its proprietary rights. NEON licenses its products pursuant to software license agreements, which include acknowledgments and agreements by the licensee that are intended to establish and protect NEON’s proprietary rights and confidential information. NEON believes, however, that these measures afford only limited protection. Despite NEON’s efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of NEON’s products or to obtain and use information that NEON regards as proprietary. Policing unauthorized use of NEON’s products is difficult and NEON is unable to determine the extent to which piracy of its software products exists. In addition, the laws of some foreign countries do not protect NEON’s proprietary rights as fully as do the laws of the United States. There can be no assurance that NEON’s means of protecting its proprietary rights will be adequate or that competition will not independently develop similar or superior technology.

NEON is not aware that it is infringing any proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by NEON of their intellectual property rights. NEON expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in NEON’s industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management’s attention and resources, cause product shipment delays, or require NEON to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to NEON, if at all. In the event of a successful claim of product infringement against NEON and failure or inability of NEON to either license the infringed or similar technology or develop alternative technology on a timely basis, NEON’s business, operating results and financial condition could be materially adversely affected.

Human Resources

As of March 31, 2003, NEON and its subsidiaries employed 74 persons, including 29 in sales, marketing and field operations, 31 in research and development and 14 in finance and administration. None of NEON’s employees are represented by a labor union. NEON has experienced no work stoppages and believes its relationship with its employees is good. Competition for qualified personnel in NEON’s industry is intense.

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RISK FACTORS

This report on Form 10-K, 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:

Some Members Of Our Board Of Directors And Management May Have Conflicts Of Interests And/Or Are Interested Parties To Certain Transactions Of NEON

Members of our Board of Directors and our current and former Executive Officers are shareholders, directors and/or officers in other companies, some of which are identified and discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Related Party Transactions” in the section on “Related Party Transactions” herein, including the following:

See Management’s Discussions and Analysis of Financial Condition and Results of Operations—Related Party Transactions and Note 4 to NEON’s consolidated financial statements.

Such relationships may give rise to conflicts of interest resulting from the balancing of such officer/director’s duties to NEON’s stockholders and their corresponding duties to the stockholders of any company in which they also hold positions as directors (or officers), especially in the context of business negotiations between NEON and such other company. In any event where an officer or director has a conflict of interest, the Board of Directors has appointed a Special Committee to review such conflict. Notwithstanding such procedures, NEON may face the threat of shareholder claims based solely on the mere appearance of conflicts of interest in any related party business transaction.

Uncertainty Regarding Our Management After Changes May Adversely Affect Our Business

On March 7, 2003, NEON announced in a press release that we had undergone a corporate-wide reorganization of our business to focus on our core Shadow product line. In connection with this reorganization and in response to the changing economic outlook, NEON undertook a reduction in force of approximately 26% of its overall employee base and announced that Louis R. Woodhill had resigned from his positions as President, Chief Executive Officer, and as a member of the Board of Directors of NEON. Mr. Woodhill had served in such capacities since October 17, 2001. The NEON Board of Directors appointed Mark Cresswell, our Senior Vice President and General Manager of the Shadow product line, to serve as President and Chief Operating Officer of the Company. Mr. Cresswell joins Brian D. Helman, NEON’s Chief Financial Officer since July 2002, as NEON’s key executive officers. Such reduction-in-force and changes in management may have caused or could cause uncertainty about NEON’s future direction and results.

Loss of Key Software Developers Could Adversely Affect Our Business

Our success is dependent upon the continued service and skills of our key software developers. The loss of the services of any of these key software developers could have a negative impact on our business because of their unique skills, years of industry experience and the difficulty of promptly finding qualified replacement personnel. We do not intend to maintain “key-man” life insurance policies covering any of our employees. Significant competition exists for employees with the skills required to develop the software products and perform the maintenance services that we offer, and we may not be able to continue to retain sufficient numbers of highly skilled employees.

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Our Stock Price May Fluctuate And Be Impacted By A Number Of Internal And External Factors

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

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.

Reduced Customer Reliance Upon Mainframe Computers Could Adversely Affect Our Business

We are dependent upon the continued use and acceptance of mainframe computers in a computing environment increasingly based on distributed platforms, including client/server and Internet-based computing networks. Decreased use of the mainframe or in the growth of demand for Web-based and client/server applications accessing mainframe data and transactions could have a material adverse effect on our business, operating results and financial condition. We now derive our revenues solely from our Shadow products. Our continued success depends on a number of factors, including:

We May Lose Market Share And Be Required To Reduce Prices As A Result Of Competition From Our Existing Competitors, Other Vendors And Information Systems Departments Of Customers

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

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Rapid Technological Change Could Render Our Products Obsolete

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

We May Be Unable To Enforce Or Defend Our Ownership And Use Of Proprietary Technology

Our success depends to a significant degree upon our proprietary technology. We rely on a combination of trademark, trade secret and copyright law, and contractual restrictions and passwords to protect our proprietary technology. However, these measures provide only limited protection, and we may not be able to detect unauthorized use or take appropriate steps to enforce our intellectual property rights, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. Companies in the software industry have experienced substantial litigation regarding intellectual property. Any litigation to enforce our intellectual property rights would be expensive and time-consuming, would divert management resources and may not be adequate to protect our business. We could be subject to claims that we have infringed the intellectual property rights of others. In addition, we may be required to indemnify our distribution partners and end-users for similar claims made against them. Any claims against us could require us to spend significant time and money in litigation, pay damages, develop new intellectual property or acquire licenses to intellectual property that is the subject of the infringement claims. These licenses, if required, may not be available on acceptable terms. As a result, intellectual property claims against us could have a material adverse effect on our business, operating results and financial condition.

Our Products May Contain Undetected Software Errors, Which Could Adversely Affect Our Business

Our software products and the software products that we sell for others are complex and may contain undetected errors. These undetected errors could result in adverse publicity, loss of revenues, delay in market acceptance or claims against us by customers, all of which could have a material adverse effect on our business, operating results and financial condition. Despite testing, we cannot be certain that errors will not be found in our products. 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 Officers And Directors Control NEON, And These Officers And Directors Could Control Matters Submitted To Our Stockholders

At present, our executive officers and directors and entities affiliated with them beneficially own more than 50% of our outstanding common stock. As a result, these stockholders, if they act together, could control most matters submitted to our stockholders for a vote, including the election of directors.

Provisions Of Our Charter And Bylaws And Delaware Law Could Deter Takeover Attempts

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.

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Item 2.    Properties

NEON’s principal administrative, product development, marketing and sales facility comprises approximately 51,700 square feet and is located in Sugar Land, Texas. The lease for this facility will expire on March 31, 2005. In addition, NEON leases offices in London, England and Frankfurt, Germany. In March 2003, NEON abandoned approximately 20,000 square feet of its leased facility space, including an entire floor in each of its Sugar Land office and its London, England office. See Note 6 to NEON’s consolidated financial statements. Management believes that its current facilities are adequate to meet its needs through the next 12 months and that, if required, suitable additional space will be available on commercially reasonable terms to accommodate expansion of NEON’s operations.

Item 3.    Legal Proceedings

On January 29, 2003, NEON received notification that it had been sued in Fort Bend County, Texas for alleged tortious interference with contract, tortious interference with prospective business relations and unfair competition in a lawsuit styled Phoenix Network Technologies (Europe) Limited vs. NEON Systems, Inc. and Computer Associates International Inc., 400^th District Court, Ft. Bend County, Richmond, Texas, Cause Number 03-CV-127800. NEON is in the process of defending this action. Aside from this action, NEON is not involved in any current claim or legal action other than those arising in the ordinary course of business.

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

On February 4, 2003, NEON convened its Annual Meeting of Stockholders for the fiscal year ended March 31, 2002. As of the record date of December 11, 2002, there were approximately 8.7 million shares issued and outstanding. At the Annual Meeting, which was held at NEON’s headquarters in Sugar Land, Texas on February 4, the following matters were submitted to the stockholders for a vote and were approved by the vote reflected below each such proposal:

We currently have eight directors holding office. The directors are divided into three classes with staggered terms:

Class I Directors, Charles E. Noell, III, whose terms will expire at the next annual meeting to be held on September 22, 2003. Our other two Class I Directors, Louis R. Woodhill and James R. Woodhill, resigned as directors in March 2003 and June 2003, respectively. These positions on the Board of Directors have not been filled as of the date of this filing.

Class II Directors, Richard Holcomb, George H. Ellis and Norris van den Berg, whose terms will expire at the annual meeting to be held in the third calendar quarter of 2004.

Class III Directors, John J. Moores, David F. Cary, Loretta Cross, and Peter Schaeffer, whose terms expire at the annual meeting to be held in the third calendar quarter of 2005.

At the annual meeting of stockholders held on February 4, 2003, the following three directors were elected as Class III Directors for terms expiring at the annual meeting to be held in 2005: John J. Moores, David F. Cary, Loretta Cross and Peter Schaeffer.

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The voting results were as follows:

(In thousands)

The Audit Committee of the Board of Directors selected KPMG LLP as the Company’s independent public accountants for the fiscal year ending March 31, 2003. KPMG LLP has audited the Company’s financial statements since its initial public offering in fiscal 1999.

At the Annual Meeting of Stockholders on February 4, 2003, the stockholders ratified the Board’s selection of KPMG as NEON’s independent auditors, casting approximately 8.2 million votes in favor of the ratification (94.25%) and 24,000 votes against ratification (0.28%), with 5,000 abstentions (0.06%).

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PART II

Item 5.    Market for Registrant’s Common Equity and Related Stockholder Matters

Market Information

NEON’s Common Stock traded on the Nasdaq Stock Market under the symbol “NESY” from its initial public offering until June 2, 2002. On June 3, 2002, NEON changed the ticker symbol for its shares of common stock trading on the Nasdaq Stock Market from “NESY” to “NEON”. NEON completed its initial public offering in March 1999 and sold 3.0 million shares of its common stock at a price of $15.00 per share. The following table sets forth, for the fiscal periods indicated, the ranges of high and low last reported sale prices for the Common Stock.

During the fiscal year ended March 31, 2003, NEON issued no unregistered shares of its Common Stock.

Holders

On June 25, 2003, the last reported sale price of the common stock on the Nasdaq Stock Market was $3.179 per share. At June 25, 2003, there were 193 registered holders of record of NEON’s common stock (although NEON believes that the number of beneficial owners of its common stock is substantially greater) and approximately 8.8 million shares outstanding.

Dividends

NEON has never declared any cash dividends on its common stock. NEON does not anticipate paying any cash dividends on its common stock in the foreseeable future and intends to retain its earnings, if any, to finance the expansion of its business and for general corporate purposes. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, NEON’s earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions and other factors that NEON’s Board of Directors deems relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

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

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Item 6.    Selected Consolidated Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

(In thousands, except per share data)

The selected consolidated financial data below should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Consolidated Financial Statements and Supplementary Data, included elsewhere herein.