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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

COMMISSION FILE NUMBER: 000-22043
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NEW ERA OF NETWORKS, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 84-1234845
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

ONE GREENWOOD PLAZA
6550 GREENWOOD PLAZA BOULEVARD
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices) (zip code)

Registrant's telephone number, including area code: (303) 694-3933
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Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE PER SHARE
(TITLE OF CLASS)

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 [ ]

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. [ ]

As of February 28, 2001, there were 36,839,240 shares of the Registrant's
common stock outstanding and the aggregate market value of such shares held by
nonaffiliates of the Registrant (based upon the closing sale price of such
shares on the Nasdaq National Market on February 28, 2001) was approximately
$243,147,401. Shares of the Registrant's common stock held by each executive
officer and director of the Registrant have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Certain sections of the Registrant's definitive Proxy Statement for the
2001 Annual Meeting of Stockholders are incorporated by reference in Part III of
this Annual Report on Form 10-K to the extent stated herein.
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NEW ERA OF NETWORKS, INC.

ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2000

TABLE OF CONTENTS

PAGE
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PART I

Item 1. Business.................................................... 1
Factors That May Affect Future Results...................... 13
Item 2. Properties.................................................. 22
Item 3. Legal Proceedings........................................... 22
Item 4. Submission of Matters to a Vote of Security
Holders/Executive Officers of Registrant.................. 23

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 26
Item 6. Selected Consolidated Financial Data........................ 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 29
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 38
Item 8. Financial Statements and Supplementary Data................. 38
Item 9 Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure........................................ 38

PART III

Item 10. Directors and Executive Officers of the Company............. 39
Item 11. Executive Compensation...................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 39
Item 13. Certain Relationships and Related Transactions.............. 39

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 39
Signatures.................................................. 42
Consolidated Financial Statements........................... 43

New Era of Networks, the NEON logotype, e-ADK, e-Biz Integrator, e-Biz 2000,
e-Fulfillment, e-Procurement, NEONadapter, NEON e+1 Trading, NEON FastTrack,
NEON Impact, NEON MedMerge, NEON MedPortal, NEON MedSecure, NEONet,
NEONFormatter, NEONPortal Server, NEONProcess Server, NEONRules, NEONsecure,
NEONSoft, NEONstart, NEONtrack, and Open Business Interchange are trademarks and
service marks of New Era of Networks, Inc., and its subsidiaries. CL/7,
Convoy/DM, Copernicus, New Era of Networks, MicroScript, Rapport, and
Transaction Distribution Manager TDM are registered trademarks of New Era of
Networks, Inc., and its subsidiaries. MQSeries is a registered trademark of
International Business Machines Corp. All other trademarks, registered
trademarks, and trade names contained in this Form 10-K are the property of the
respective trademark owners.

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PART I

This Annual Report on Form 10-K ("Form 10-K") contains forward-looking
statements made within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," and similar expressions
identify such forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks and uncertainties that could
cause actual results to differ materially from those expressed or forecasted.
Factors that might cause such a difference include, but are not limited to,
those discussed in the section entitled "Factors That May Affect Future Results"
on pages 14 through 22 in this Form 10-K. Readers should not unduly rely on
forward-looking statements, which reflect only the opinion of NEON as of the
date hereof. Unless required by law, NEON undertakes no obligation to revise
forward-looking statements. Readers should also carefully review the risk
factors set forth in other reports or documents NEON files from time to time
with the Securities and Exchange Commission, particularly the Quarterly Reports
on Form 10-Q and any Current Reports on Form 8-K.

ITEM 1. BUSINESS.

OVERVIEW

New Era of Networks, Inc. ("NEON" or the "Company") is a leading supplier
of Internet infrastructure software and services. Specifically, NEON helps
automate e-Business by providing a range of products and services, which
integrate Internet-facing applications with core operational systems for goods
and services providers, and which facilitate the creation of Net markets. By
enabling information sharing between systems, businesses can automate end-to-end
processes, such as fulfilling an order, at the speed and volume required in the
e-Business environment. NEON products enable e-markets by routing messages and
transforming information at the needed speed and volume. NEON's software
solutions support integration of leading Internet and core business packaged
applications, application server platforms, industry standard protocols, and
proprietary systems. In addition, NEON's products help companies establish
direct, electronic links with customers, suppliers and partners; build and
participate in Net markets; and distribute and access information using wireless
technology. Additionally, the Company provides design, development and
implementation services through its Professional Services organization.

To date, over 3,000 customers worldwide, spanning all major industries
including financial services, healthcare, insurance, manufacturing, and
telecommunications, use NEON products. Various customers of the Company include
the Australian Stock Exchange, Bear Stearns, Blue Cross and Blue Shield of
Illinois, Blue Cross and Blue Shield of Texas, Bosch Siemens Home Appliances Pte
Ltd, Capital One, Cigna, Delta Airlines, Deluxe Corporation, DePuy/Johnson &
Johnson, First Union Corporation, H.J. Heinz, Lucent, Nabisco, New York Life,
Pacific Stock Exchange, Scottish National Health Services, Shell, Singapore
Stock Exchange, ThinkXML, Thomas & Betts, UPS Ventures, Vital Processing
Services (Visa), and Wachovia Operational Services. As part of its strategy,
NEON has established reseller and joint marketing relationships with
complementary e-Business entities such as BEA Systems, BroadVision, Commerce
One, IBM and Microsoft. During 2000, 27.4% of our total revenue was generated
from our international operations, and the net assets of our foreign
subsidiaries totaled 12% of consolidated net assets as of December 31, 2000. See
the Consolidated Financial Statements and Notes thereto for financial
information about segments or geographic areas.

RECENT DEVELOPMENTS

Merger Agreement with Sybase, Inc. On February 20, 2001 we entered into an
Agreement and Plan of Reorganization with Sybase, Inc. for Sybase to acquire all
of the outstanding shares of our common stock. Through Neel Acquisition Corp.,
Sybase's wholly owned subsidiary, Sybase is offering to exchange .3878 shares of
Sybase common stock for each outstanding share of NEON common stock that is
validly tendered and not properly withdrawn. Sybase intends, promptly after
completion of this exchange offer, to merge Neel Acquisition Corp. with and into
NEON. Each share of NEON common stock which has not been exchanged or accepted
for exchange in the offer would be converted in the merger into the same number
of Sybase shares being paid in the offer. Sybase seeks to acquire ownership of
100% of the NEON stock through the offer and the merger. NEON's
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board of directors approved the reorganization agreement. Sybase's common stock
is quoted on the Nasdaq National Market under the symbol "SYBS."

We urge investors and security holders to read the following documents,
when they become available, because they will contain important information
about Sybase, NEON, the proposed acquisition and related matters:

- Sybase's preliminary prospectus, prospectus supplements, final prospectus
and tender offer materials;

- Sybase's Registration Statement on Form S-4 and Schedule TO containing or
incorporating by reference such documents and other information; and

- Our Solicitation/Recommendation Statement on Schedule 14D-9.

These documents and amendments to these documents will be filed with the
U.S. Securities and Exchange Commission and delivered to our stockholders.

Business Combinations. In April 2000, we acquired all of the outstanding
capital stock of Software-Engineering, Computing and Consulting GmbH ("Secco"),
a German corporation. Secco is a provider of enterprise application integration
and e-Business professional services in Germany. The aggregate consideration
paid by the Company was approximately $15,000,000, of which $12,000,000 was paid
in cash and approximately $3,000,000 was paid through the issuance of 86,925
shares of our common stock. The fees and expenses related to the acquisition
were approximately $445,000. In August 2000, 13,000 additional shares of our
common stock were issued and approximately $182,000 in cash was paid to the
former shareholders of Secco based on the market price of our stock at a certain
measurement date subsequent to closing. As of December 31, 2000 all contingent
consideration had been paid to the former Secco shareholders.

In March 2000, we acquired all of the outstanding capital stock of
PaperFree Systems, Inc. ("PaperFree"), a Delaware corporation. PaperFree is a
provider of integration solutions concentrating on the payor-side of the
healthcare market. The aggregate consideration paid by the Company was
approximately $39,867,000, of which $20,000,000 was paid in cash and
approximately $19,867,000 was paid through the issuance of 265,751 shares of our
common stock. The fees and expenses related to the acquisition were
approximately $245,000. In June and August 2000, an aggregate of 425,301
additional shares of our common stock were issued to the former shareholders of
PaperFree based on the market price of our common stock at certain measurement
dates pursuant to share price guarantees included in the purchase agreement.

All of our acquisitions have been accounted for under the purchase method
and their results of operations have been included in our financial statements
since the dates of acquisitions. Additional information with respect to these
acquisitions is included in Note 3 of Notes to Consolidated Financial
Statements.

Equity Investments. In 2000, we established several strategic
relationships through private equity investments and other similar transactions.
As of December 31, 2000, we invested approximately $8.9 million in early-stage,
e-Business companies with technologies or products complementary to our own, and
we may continue making such investments in the future. No public market existed
for these securities at the time of our investment and there is no assurance
that such a public market will ever exist. See Note 5 of Notes to Consolidated
Financial Statements.

INDUSTRY BACKGROUND

Utilizing the Internet to do business, christened e-Business, is
dramatically altering business-to-business (B2B), business-to-consumer (B2C),
and business-to-employee interactions. Companies are actively
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pursuing innovative business models to take advantage of this e-Business
opportunity. e-Business participants include traditional companies moving to new
Internet-enabled business models, new companies chartered especially to deliver
products and services via the Internet, and e-market makers that facilitate
e-Business through online trading communities. e-Business organizations operate
in an environment distinguished by constant change and complex business
interactions that stretch across an extended, virtual enterprise of
Internet-enabled customers, suppliers and partners.

In this new realm, speed, agility and accuracy are the tools required to
achieve competitive advantage. Companies must conduct business in real-time,
providing immediate communication with customers, vendors and other partners via
clearly defined business processes. In turn, these processes must be constantly
monitored and modified to maximize efficiency. Automating business processes is
fundamental to success in the e-Business environment. From procurement to order
fulfillment, the benefits of automating business processes across the enterprise
are substantial. For example, a company that automates procurement processes
with their suppliers can shorten cycle times and reduce inventory while locating
the best price, all of which lower costs and increase profits. Similarly, an
organization that allows customers to place and check order status via a Web
site and e-mail improves customer satisfaction and increases market opportunity
while decreasing the costs of customer service and order processing.

The e-Business revolution is still in its infancy and has substantial
growth potential. Literally every business is moving to establish and enhance
its e-Business capabilities. We see the e-Business world as categorized into two
fundamental groups: Goods and services providers on the one hand and the newly
spawned online trading communities on the other. Goods and services providers
include both established companies and the new Internet-based virtual
businesses. Online trading communities facilitate e-markets for goods and
services. These e-market makers bring together multiple suppliers and consumers
in an electronic marketplace far more efficiently than anything in the physical
world. Ultimately, both types of e-Businesses will need integration services,
but in different ways and for different reasons.

The growth and sheer volume of e-Business is noteworthy. The Yankee Group
estimates the integration market at approximately $1.3 billion in 2000 with
forecasted growth to $5.4 billion by 2004. Yankee attributes the increase in
demand for integration and integration services to the emergence of the Internet
and the increase in application functionality.

Goods & Services Providers

Goods and services providers are both traditional "brick and mortar"
companies moving to embrace the Internet and new "dot.com" businesses created as
Web-based entities. Both employ e-Business for two basic functions: buying from
suppliers and selling/supporting their customers. They make purchases either
directly from other companies or indirectly through an online trading community.
Likewise, they sell directly to companies (B2B) or consumers (B2C), or
indirectly via an online trading community.

To accomplish the buying, selling and customer support, companies deploy
e-Business applications designed specifically for these purposes. Companies can
either buy packaged applications or build their own. Software vendors including
Ariba, BroadVision, and Commerce One offer pre-packaged solutions for specific
functions such as procurement and ordering. Alternatively, businesses can build
custom applications on top of application servers such as BEA WebLogic, IBM
WebSphere, and others. Application servers can also be built using industry
standard protocols such as EDI, XML, FIX and S.W.I.F.T.

While these applications perform essential e-Business functions, they are
not the total solution. They handle only the first step in the process: Internet
activity. Once initiated, the transaction must be completed. For example, a
customer places an order via a BroadVision application. Once it has been placed,
that order must be processed: products sent, invoices generated, and service
contacts activated. These business processes are completed by operational
systems running core business functions such as order entry, distribution, and
accounting. Most companies already have such operational systems in place. Many
businesses have a combination of packaged Enterprise Resource Planning (ERP)
solutions from vendors such as Oracle, PeopleSoft and SAP in addition to legacy
applications.

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The new e-Business applications must work together with existing
operational systems for a business to successfully conduct e-Business. Goods and
services e-Businesses have three basic requirements. First, their systems must
share critical information on customers, products, prices, orders, and
inventory. Second, systems must work together to complete end-to-end processes
such as fulfilling an order. Finally, the entire process must be completed at
speeds sufficient to meet the demands and customer expectations of
Internet-based performance, throughput and volume. Neither Internet applications
nor existing operational systems provide the required integration capabilities.
Companies need additional software to integrate their e-Business applications
with the back-office and ERP systems that run the business.

Online Trading Communities

Online trading communities constitute a new and rapidly expanding market
created to capitalize on the rapidly expanding e-Business marketplace. Formerly
known as portals, online trading communities create Internet-based global
marketplaces coordinating buyers and sellers with common interests. The Society
for Worldwide Interbank Financial Telecommunication ("S.W.I.F.T.") is a long
established business-to-business trading community, and new B2B trading
communities are forming at a record pace.

Providers of online trading communities face different issues than goods
and services providers, and unique technical challenges. First, they must
attract and retain a high volume of trading partners because the greater the
number of buyers and sellers the more valuable the community becomes. But, each
buyer or seller is interested only in a subset of what is traded in the
community, and they want to see only the offers in which they may have an
interest. For example, if a company only sells disk drives, it does not want to
see offers to purchase components like memory chips. Therefore, online trading
communities must provide mass customization.

Further, actual transactions in an online trading community are complex.
They require coordinating activities between multiple parties. In a securities
trading and settlement process, for example, up to four parties are involved:
the buyer and seller, a trading exchange securities custodian and a depository.
Equally complex are the partners' heterogeneous computing environment of
platforms, protocols and applications which must be supported to ensure
transactions are successfully completed.

In addition to transactions, online trading communities traffic in
information. Data such as purchasing trends, price histories and transaction
volumes travel through the community. Being able to leverage this data is a key
benefit for the trading partners using the community, so online trading
communities need the capacity to handle large volumes of information.

Finally, if a community does not have a critical mass of functionality
available it will not attract enough partners to survive, let alone prosper. For
example, if the trading community offers a marketplace to purchase insurance and
fails to have functional, reliable direct links to the insurance companies, it
provides no value to its users. This means trading communities must have a
plethora of capabilities available, and the ability to quickly add more.

NEON SOLUTIONS

NEON is a leading provider of e-Business Integration software. Its products
enable companies to automate business processes across the extended enterprise
and integrate the underlying applications that must work together to support
these processes.

NEON combines in a single offering four elements we believe are essential
for e-Business Integration software:

(1) Integration Servers -- enable multiple applications to share
information by moving data between systems, determines which information
needs to be routed to which application, and transforms information to meet
the requirements of the receiving application

(2) Process Automation -- maps out multi-step, multi-process business
processes, manages the runtime execution of the process including
interaction with participating applications, monitors key performance and

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operational metrics of running processes to locate performance bottlenecks,
and enables modification of processes over time to maximize business
results

(3) Predefined Adapters -- extend NEON offerings to support leading
e-Business packages such as BroadVision and Commerce One and operational
systems such as SAP R/3, PeopleSoft, Oracle and J.D. Edwards. In addition,
NEON offers a wide range of technology adapters for interfacing with custom
and legacy systems.

(4) Internet Communications -- provide tight integration with leading
application servers from vendors such as BEA, IBM, and others. In addition,
NEON provides native support for e-Business and business-to-business
standards including XML, EDI, HTTP, FTP, HTML, FIX and S.W.I.F.T.

Goods and services providers wanting to buy or sell online use products to
integrate their Internet and partner-facing e-Business applications with their
operational systems. NEON supports packaged e-Business applications as well as
custom systems built on leading application servers. We also support companies
working directly with their suppliers and customers as well as those transacting
via net markets.

NEON allows e-Business and operational applications to share critical
information on customers, products, orders, inventory, etc. NEON also combines
activities performed by individual e-Business and operational applications into
completely automated business processes. For example, when a customer places an
order over the Web using BroadVision, NEON would route the order to PeopleSoft
for fulfillment and to a legacy financials application for invoicing.

Net market providers use NEON's products at the heart of their
architectures. NEON's ability to route hundreds of messages per second based on
the content of the message, as well as its ability to transform information from
any format to any other format, allows Net markets to support thousands to
millions of active users.

In addition, Net market participants use NEON products to integrate their
existing operational applications with the Net market. For instance, a financial
institution might use NEON's S.W.I.F.T. products to connect to the global
S.W.I.F.T. network.

We believe NEON's e-Business integration platform provides the following
benefits to customers:

Reduces time to market. We enable customers to get their e-Business
applications and Net markets online faster by providing proven, working
integration functionality they would otherwise need to implement on their
own.

Provides a comprehensive solution. NEON combines the four elements of
an e-Business integration software product into a single, comprehensive
offering. This eliminates the need for our customers to purchase and
integrate separate solution components from multiple vendors.

Scales to support high transaction throughput. NEON's technology has
been proven in extremely high-volume applications such as securities
trading and cellular phone call mediation.

Provides high reliability. NEON's products use reliable queuing
techniques and other architectural techniques to ensure no transactions are
ever lost, even when applications or systems crash.

Allows rapid response to change. NEON designed its products so
customers can configure them at any time to keep up with changing business
requirements.

PRODUCTS AND SERVICES

NEON's e-Business integration products are Internet infrastructure software
designed to provide customers with a comprehensive platform for rapidly
capitalizing on their e-Business capabilities.

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e-Business Integration Platforms

NEON e-Biz Integrator. e-Biz Integrator is NEON's flagship e-Business
integration product. It includes comprehensive integration server capabilities
with process automation and Internet communications to meet the needs of both
goods and services providers moving into e-Business, as well as Net market
providers. It is designed for the highest levels of throughput and reliability.

e-Biz 2000. e-Biz 2000 is NEON's Microsoft-centric e-Business integration
product. Built on the Microsoft DNA architecture, e-Biz 2000 offers ease of use
that makes it an ideal choice for customers seeking to deploy large numbers of
integration servers in highly distributed configurations. It is also well suited
for organizations with limited technical capabilities.

NEONPortal Server. NEONPortal Server is a content management solution for
personalizing products and services to meet customer requirements; controlling
access by customers, partners, and suppliers; managing and aggregating data;
monitoring and auditing e-Business transactions; and simplifying security system
deployment.

NEONProcess Server. NEONProcess Server is an XML-based business process
tool and execution server for designing and implementing business processes
quickly and easily, executing business process flows at Internet speeds,
monitoring business processes real-time, and auditing business processes.

NEON Open Business Interchange. NEON Open Business Interchange (Open Biz)
is a hosted service which allows companies and trading exchanges to quickly
conduct e-Business using their own standards, simplifying electronic business
transactions between an ever-increasing number of organizations, partners, and
trading exchanges.

IBM MQSeries Integrator. MQSI is a joint product with IBM that carries an
IBM logo, and is sold by both IBM and NEON. It includes NEON's rules and
formatter modules, as well as IBM's MQSeries messaging middleware.

OEM Products. NEON makes components of its products available to software
vendors for such vendors to embed the NEON products into their own product
offerings on an OEM basis. For instance, both IBM and BEA have licensed
NEONRules(TM) and NEONFormatter(TM).

e-Business Integration Total Solution Products

Adapters -- NEON adapters extend its integration platforms to work with
specific applications or technologies. NEON currently offers adapters for the
following systems:

e-Business Applications: BroadVision, Commerce One

Operational Applications: J.D. Edwards, Oracle, PeopleSoft, SAP, Siebel

B2B and Industry Standards: EDI, FIX, S.W.I.F.T., XML

Technologies: COBOL, Flat Files, ODBC, Protocols, Screens

In addition, NEON offers an e-Adapter Development Kit that lets customers
and partners build adapters for NEON integration servers.

Accelerators -- NEON Accelerators are prepackaged solutions to speed
time-to-market of integration projects by streamlining the required analysis,
design, development, and testing facets of end-to-end solutions.

Utilities -- NEON offers a variety of utilities including NEONtrack for
message tracking and repair, NEON Convoy/DM for data conversion, and NEONsecure
for single sign-on security.

Services

Consulting. We provide NEON software installations and consulting
services, as well as generalized consulting on the design and development of
e-Business integration and enterprise-wide application integration utilizing our
expertise in client/server, Internet/intranet and database management
technologies. In addition to our

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technology background, NEON provides industry-specific consulting in insurance,
healthcare, financial services and manufacturing. We also have experience in
PeopleSoft, J.D. Edwards and SAP implementation services. We offer these
professional services often in conjunction with other professional service
organizations and system integrators.

Education. We offer our customers, for a fee, comprehensive technical
skills training and training in our software products. These courses are
conducted at our principal corporate facilities in Englewood (Colorado), New
York City, Pacheco (California), Danvers (Massachusetts), and London, and at
customer locations on request. In addition, some of our partners provide
fee-based training services for which we receive a royalty. NEON has partnered
with a leading eLearning company, SmartForce, to provide both internal and
external fee-based technical training courses on the Web. See Note 11 of Notes
to Consolidated Financial Statements for a discussion of "Other Commitments."

Technical Support. We offer an array of support services that focus on
reporting and tracking work requests from customers. Our maintenance and support
service offers a 24 hours a day, seven days a week customer hotline.

SALES AND MARKETING

We currently market our software and services primarily through our direct
sales organization, complemented by indirect sales channels. As of December 31,
2000, our direct sales force included 94 commissioned sales representatives
located in the U.S., Europe, Australia, Singapore, Hong Kong and Japan. In
addition, our multi-tiered channel program provides additional sales channels
for jointly marketed products. As part of this strategy, we have established
distribution relationships with strategic hardware vendors, database providers,
software and toolset developers, systems integrators and implementation
consultants, including companies designing software, database packages, and
hardware integration and consulting services. We have also developed alliances
with key solution providers to targeted vertical industry sectors, including
financial services, healthcare, telecommunications, and manufacturing.

STRATEGIC RELATIONSHIPS

Our strategy has been to expand our indirect channel relationships with
strategic partners including marketing and/or development partners, third-party
distributors, systems integrators and resellers. Examples of certain of these
relationships include:

IBM. We entered into a multi-year joint development, marketing and
reselling arrangement with IBM in the fourth quarter of 1997. IBM embeds
NEONRules and NEONFormatter components into IBM-branded products including
MQSeries Integrator and Commerce Integrator, among others. MQSeries
Integrator is sold as a standard product offering by IBM and is resold by
NEON. IBM pays a royalty to NEON for IBM's sales of MQSeries Integrator. In
October 2000, NEON and IBM announced an agreement under which IBM can
resell NEON Adapters. The adapters enhance the functionality of MQSeries
Integrator by providing the ability to integrate directly with many popular
Enterprise Resource Planning ("ERP") and Customer Relationship Management
("CRM") packages, as well as most web application servers. NEON continues
to maintain and upgrade these products.

Microsoft. In November 1999, we announced a strategic relationship
with Microsoft to jointly enhance and market e-commerce integration
solutions based on Microsoft(R) platforms and NEON's e-commerce integration
products such as e-Biz 2000. NEON is endorsing the Microsoft BizTalk(TM)
Framework and BizTalk products and tools. In addition, NEON is a member of
the BizTalk steering committee as a leading e-commerce integration vendor.

Commerce One. In November 1999, we announced an agreement with
Commerce One, a leader in global B2B electronic procurement solutions that
will enable customers to integrate the Commerce One Solution(TM) with
legacy and ERP applications. NEON's e-Business Integration products,
including NEON e-Biz Integrator and NEON e-Business Adapter Development Kit
(e-ADK), will be integrated with

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Commerce One's BuySite(TM) Solution to deliver a fully interactive,
multi-enterprise e-commerce solution for Commerce One customers.

BroadVision. In November 1999, we announced the formation of a
strategic alliance with BroadVision to enable businesses to integrate
existing systems with Internet applications to perform B2B and B2C
e-Business. BroadVision will use NEON's e-Biz Integrator to integrate their
Web-based One-to-One(TM) Commerce solutions with customers' applications
such as Oracle(R), SAP, PeopleSoft(R), Siebel(R) and legacy systems.

BEA Systems. In September 1999, we entered into an agreement with BEA
Systems to incorporate NEON technology into their eLink(TM) e-commerce
integration suite. BEA has licensed NEONRules and NEONFormatter software to
deliver on BEA's continuing commitment to provide customers with the
best-of-breed solutions that extend BEA's E-Commerce Transaction
Platform(TM).

TANTAU Software. In February 2000, we announced a partnership with
TANTAU, a leading provider of mobile e-commerce solutions that will allow
customers to extend existing Internet systems to include a new mobile
business channel. Using TANTAU's Wireless Internet Platform and NEON's
e-Business infrastructure platform, banks, brokerages and retailers will be
able to offer new wireless services that will extend well beyond the
informational applications available today. The partnership between NEON
and TANTAU addresses the growing demand for transaction-based wireless
capabilities, including bill payments, account transfers, stock trades and
online purchases.

NTT Data Corporation. In March 2000, we formed a partnership with NTT
Data Corporation, Japan's leading provider of information systems and
computer networking, to provide our technology as the platform for NTT's
new e-Business integration solution. Under the agreement, NTT Data will
market, resell, implement and support our software for clients who want to
conduct business via the Internet. NEON technology will be resold through
all of NTT Data's Japanese subsidiaries.

Fatwire Corporation. In June 2000, we announced an alliance with
FatWire, a leading provider of dynamic content management and Enterprise
Portal software, to deliver FatWire's UpdateEngine technology as a fully
integrated component of NEONPortal Server. With the inclusion of
UpdateEngine, our NEONPortal Server now enables companies to deliver
dynamic content from their back-end systems to their partners and suppliers
(B2B), and to customers (B2C) through any Web-based interface quickly and
easily.

HandySoft. In July 2000, we announced a strategic relationship with
HandySoft to integrate their Biz-Flow 2000(TM) software with NEON's e-Biz
Integrator software. By combining technologies, we will enable users to
obtain business critical information at various stages of the business
process. HandySoft will market our products in Korea and we anticipate that
they will ultimately do so throughout Asia. We will support the marketing
of HandySoft's products globally.

Peregrine Information Management Group (IMG). In July 2000, we
announced an alliance with Peregrine Systems, a leader in software
solutions for infrastructure management, to develop a packaged integration
solution between Peregrine Systems Infrastructure Management and the
leading ERP and CRM applications. The solution allows customers to leverage
their investments more effectively by providing business process
integration between Peregrine's infrastructure management solutions and
outward-facing applications. The first product, NEON e-Procurement for
Peregrine and SAP R/3, became available in December 2000. In December 2000,
we entered into an expanded agreement to provide a complete e-Business
integration solution to customers. Under the agreement, NEON and Peregrine
will provide customers with a complete e-Business infrastructure that
includes Peregrine's B2B integration products Get2Connect(TM) and Power
Enterprise!(TM), and NEON's e-Biz Integrator, NEONProcess Server and NEON
adapters.

B2B-ERP. In August 2000, we entered into a strategic relationship
with B2B-ERP to develop a set of B2B-ERP adapters that enable real time
ERP-based business processes and transactions for buy and sell side sales
order management, inventory management, and auctions. B2B-ERP delivers
business-to-business eCommerce products for organizations currently using
ERP applications such as SAP, Oracle, PeopleSoft, J.D. Edwards and BAAN.
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Mobilize. In October 2000, we entered into a reciprocal solution
partner agreement with Mobilize that will provide mission-critical business
solutions to mobile customers. Mobilize has our software to enable its
enterprise clients to implement their services with existing corporate
information systems. The NEON/ Mobilize solutions will provide customers
with the ability to book sales orders, browse product catalogs and access
portable intranets and extranets from any mobile device, with or without an
Internet connection.

tapX. In October 2000, we announced a strategic partnership with tapX
Ltd., a provider of a Straight-Through-Processing ("STP") B2B settlement
and cash management solution, to use NEON's technology to deliver
integration solutions that allow businesses to rapidly link their systems
to tapX's secure, STP environment. tapX will use NEON's e-Biz Integrator
software to integrate its service with companies' eProcurement and ERP
systems, and to ensure seamless connectivity and data accuracy across the
life cycle of a procurement transaction.

In addition, we have reseller and joint marketing relationships with
approximately 80 technology companies worldwide.

We believe that future growth also will depend upon our success in
developing and maintaining strategic relationships with distributors, resellers,
and systems integrators. Our strategy is to continue to increase the proportion
of customers served through these indirect channels. We are currently investing,
and plan to continue to invest, significant resources to develop our indirect
channels, which could adversely affect our operating results if our efforts do
not generate license and service revenues necessary to offset such investment.
Our inability to recruit and retain qualified distributors, resellers and
systems integrators could adversely affect our results of operations. Our
success in selling into these indirect distribution channels could also
adversely affect our average selling prices and result in lower gross margins,
because lower unit prices are typically charged on sales through indirect
channels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".

TECHNOLOGY

Our product suite and services are primarily targeted at enabling and
facilitating the cooperation and inter-operation of multiple applications of
widely differing design and developmental generations. Our e-Business and EAI
products operate on a heterogeneous mix of hardware and underlying software
platforms, utilizing existing transaction management capabilities found in the
underlying operating environments.

Our core technologies have been integrated into an enterprise level
integration server architecture that leverages the benefits of individual
modules to deliver the following additional features.

- employs dynamic formatting and guaranteed delivery to abstract the
translation and delivery of information across applications;

- simplifies the intrusion into new or legacy programs needed for such
programs to inter-operate;

- uses a nonprogrammatic and declarative rather than procedural definition
toolset, allowing configuration and maintenance workloads to scale
comfortably by describing formats for input and output as the number of
interfaces increases;

- maintains transaction level reliability and state matching for the
transmission of critical data;

- provides independent scalability across all modules to service
information-intensive enterprises;

- combines implicitly asynchronous architecture and high reliability to
permit all nodes of a network to operate at enhanced efficiency; and

- operates transparently over the wide range of computing hardware, network
and operating software often found in today's information technology
environments.

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PROPRIETARY TECHNOLOGIES

Rules Engine, NEONRules. The Rules Engine combines the ability to support
the high degree of expressiveness and flexibility of a Boolean logic model with
predictable performance, previously available only in significantly less
functional single field evaluation models. In addition, the Rules Engine is
capable of supporting a high number of rules without suffering performance
degradation. The Rules Engine examines the value of any field, or group of
fields found in or derivable from the message using Boolean operators to
determine subsequent actions. Using either the NEON Graphical User Interface
("GUI") panels, or Application Program Interfaces ("APIs") provided by the Rules
Engine for programmatic rules updates, subscribers can assert rules that will
cause the Rules Engine to select only those instances of messages that meet
their particular needs and specify their format and delivery instructions.

Formatter, NEONFormatter. Applications exchanging data rarely use the same
format even though the data may have consistent semantic meaning. Existing
commercial reformatter tools, whether script or GUI-based, are typically
procedural in nature, requiring that each conversion from one format to another
be individually coded into the tool. This is particularly true when such
applications are a mix of legacy, purchased, and newly developed applications.
Accomplishing reformatting in the delivery layer frees programmers from having
to manually code all of the transformations. The Formatter uses a declarative
architecture, meaning that format structures and rules themselves are described
during configuration and stored in a format repository. The Formatter derives
conversion of one format to another at execution time. The Formatter can
interpret and build a wide range of fixed, variable, and recursive formats
including proprietary and standard, and can derive as well as transform data
using calculations, tables and exits.

Extended Messaging and Queuing. NEON's Extended Messaging and Queuing
technology provides a fast, simple and portable cross-platform guaranteed
delivery messaging and queuing mechanism without the need to poll queues. A
program sends a message to another by simply naming the target and sending it to
the subscribing application. The sending program no longer needs to be concerned
about the recipient's characteristics or even if it is currently available. The
message is queued locally and is a recoverable component of the sender's
transaction, which is then able to continue processing. A receiving program
obtains one or more messages from the subscribing application as the messages
become available or when the receiving program becomes available. The receipt of
the message then becomes a recoverable component of the receiver's transaction,
and the delivery of messages is guaranteed as to uniqueness and order.

RESEARCH AND DEVELOPMENT

We have made substantial investments since inception in research and
development. We first introduced NEONet in January 1996, and released new
versions periodically through 2000. Each new version of NEONet consisted of
rewritten code providing greater functionality, higher performance and greater
integration capabilities. A version of NEONet incorporating IBM's MQSeries was
introduced in May 1998 and named MQIntegrator. Subsequently, an IBM-branded
version was released, called MQSeries Integrator. In 1999, we introduced e-Biz
Integrator which added process automation and Internet connectivity to the
original NEONet capability.

Our research and development efforts are focused primarily on the extension
of the capabilities of our e-Business integration platforms and adapters,
operating system and network platform support, and quality assurance and
testing. Our research and development staff is also engaged in advanced
development efforts to exploit our core technology and expand the markets for
our products. These areas include, for example, internationalization and
localization of our products, dynamic generation of interfaces between existing
technology layers, and event-driven workflow dispatching and routing. In
addition, we have substantially increased the number and robustness of adapters
for connecting to ERP, Supply Chain Management, and CRM application packages as
well as to our customers' internal systems. As of December 31, 2000, our
research and development staff consisted of 298 persons. Our research and
development expenditures in 2000, 1999 and 1998 were approximately $42.5
million, $34.9 million and $15.8 million, respectively, and represented 23%, 28%
and 24% of total revenues, respectively, during such periods.

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To extend the interoperability of our products, we are currently developing
NEON Open Business Interchange, a hosted service which allows companies and
trading exchanges to quickly conduct e-Business using their own standards; a
Java 2 Enterprise Edition ("J2EE") solution suite, for integrating J2EE
applications servers with a total e-Business environment; and a variety of other
products and architectures.

The markets for our products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. Our future success will depend to a substantial
degree upon our ability to enhance our existing products and to develop and
introduce, on a timely and cost-effective basis, new products and features that
meet changing customer requirements and emerging and evolving industry
standards. We budget for research and development based on planned product
introductions and enhancements. Actual expenditures, however, may significantly
differ from budgeted expenditures. Inherent in the product development process
are a number of risks. The development of new, technologically advanced software
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. The
introduction of new or enhanced products also requires that we manage the
transition from older products in order to minimize disruption in customer
ordering patterns, as well as ensure that adequate supplies of new products can
be delivered to meet customer demand.

There can be no assurance that we will successfully develop, introduce or
manage the transition to new products. We have in the past, and may in the
future, experience delays in the introduction of our products, due to internal
and external factors. Any future delays in the introduction or shipment of our
new or enhanced products, the inability of such products to gain market
acceptance or problems associated with new product transitions, could adversely
affect our results of operations, particularly on a quarterly basis.

COMPETITION

We compete in markets that are intensely competitive and are expected to
become more competitive as current competitors expand their product offerings
and new competitors enter the market. Our current competitors include a number
of companies offering one or more solutions to the application integration
problem, some of which are directly competitive with our products. We have faced
competition for product sales with the following entities:

Internal Information Technology Departments.

"In-house" information technology departments of potential customers have
developed or may develop systems that substitute for some or all of the
functionality offered by our products. We expect that internally developed
application integration systems will continue to be a source of competition for
the foreseeable future. In particular, it can be difficult to sell our products
to a potential customer whose internal development group has already made large
investments in and progress towards completion of systems that our products are
intended to replace.

Software Vendors.

We face competition from a variety of software vendors offering e-Business
and EAI capabilities, including Mercator Software, webMethods, TIBCO, SeeBeyond
(Software Technologies Corporation) and Vitria Technology, Inc. Other software
companies target the e-Business and EAI market through various alternative
technological solutions, such as data synchronization, transaction monitoring,
and subject-based publish/subscribe messaging systems. Some of these vendors are
also NEON marketing partners and sell software that competes with only one of
our products, but they could expand or enhance their product offerings. For
example, IBM, Microsoft, and BEA Systems provide messaging and queuing solutions
that compete with the NEON Messaging and Queuing module, but in the future these
vendors could elect to provide a more complete integration solution that would
also compete with NEON's dynamic formatting and rules-based engine modules. We
also face competition from other industry specific focused software vendors such
as Sungard Systems, GEIS, Candle, Javelin Technologies, Optio Software, and
Sterling.

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System Integrators and Professional Service Organizations.

System integrators and professional service organizations design and
develop custom systems and perform custom integration of systems and
applications. Certain of these firms may possess industry specific expertise or
reputations among potential customers. These systems integrators and
professional service organizations can resell our products and may engage in
joint marketing and sales efforts with us. We rely upon these firms for
recommendations of our products during the evaluation stage of the purchase
process, as well as for implementation and customer support services. These
systems integrators and professional service organizations may have similar, and
often more established, relationships with our competitors, and there can be no
assurance that these firms will not market or recommend software products that
are competitive with our products.

Many of our competitors have longer operating histories, significantly
greater financial, technical, marketing and other resources, significantly
greater name recognition, and a larger installed base of customers than we may
have. Many of our competitors may also have well-established relationships with
our current and potential customers. In addition, many of these competitors have
extensive knowledge of the application integration industry, and are capable of
offering a single-vendor solution. As a result, our competitors may be in a
better position than we are to devote significant resources toward the
development, promotion and sale of their products. They may also respond more
quickly to new or emerging technologies and changes in customer requirements.
Current and potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address customer needs. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. We also expect that the competition will increase as a
result of software industry consolidations. Increased competition is likely to
result in price reductions, reduced gross margins and loss of market share, any
of which could materially adversely affect our business, financial condition and
results of operations. There can be no assurance that we will be able to compete
successfully against current and future competitors, or that competitive
pressure we face will not materially adversely affect our business, financial
condition and results of operations.

INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES

We rely on a combination of copyright, trademark and trade secret laws, as
well as confidentiality agreements and licensing arrangements, to establish and
protect our proprietary rights. We presently have four patents.

Despite our efforts to protect our proprietary rights, existing copyright,
trademark and trade secret laws afford only limited protection. Moreover, the
laws of certain countries do not protect proprietary rights to the same extent
as do the laws of the United States. In addition, attempts may be made to copy
or reverse engineer aspects of our products or to obtain and use information
that we regard as proprietary. Accordingly, there can be no assurance that we
will be able to protect our proprietary rights against unauthorized third-party
copying or use, which could harm our business, financial condition and results
of operations. Moreover, there can be no assurance that others will not develop
products that infringe on our proprietary rights, or that are similar or
superior to those developed by us. Policing the unauthorized use of our products
is difficult. Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could have a harmful
effect on our business, financial condition and results of operations.

We also rely on certain technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products to perform certain functions.

There can be no assurance that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. If we lose or
are unable to maintain any of these technology licenses, it could result in
delays or reductions in product shipments until equivalent technology could be
identified, licensed and integrated. Any such delays or reductions in product
shipments would harm our business, financial condition and results of
operations.

As is common in the software industry, we from time to time receive notices
from third parties claiming infringement by our products of such third parties'
proprietary rights. There can be no assurance that third parties

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will not claim infringement by us with respect to current or future products. We
expect that application integration software developers will increasingly be
subject to infringement claims as the number of products in different industry
segments overlap. Any claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require us to
enter into royalty or licensing agreements, any of which could have a material
adverse effect upon our business, financial condition and operating results.
There can be no assurance that such royalty or licensing agreements, if
required, would be available on terms acceptable to us, or at all. Moreover, the
cost of defending patent litigation could be substantial, regardless of the
outcome. There can be no assurance that legal action claiming patent
infringement will not be commenced against us, or that we would necessarily
prevail in such litigation given the complex technical issues and inherent
uncertainties in patent litigation. In the event a patent claim against us was
successful and we could not obtain a license on acceptable terms or license a
substitute technology or redesign to avoid infringement; our business, financial
condition and results of operations would be harmed.

We are aware that a number of organizations are utilizing the names Neon
and New Era as either a trademark or tradename or both. In December 1998, we
filed a Declaratory Judgment Action in the Federal District Court for Colorado
to resolve the use of the trademarks "NEON," New Era of Networks, Inc., NEONet
and NEONSOFT. The opposing party in this case has filed suit in the Federal
District Court in Texas seeking to enjoin us from further use of the trademark
"NEON." Such claims or any additional claims against us alleging trademark or
tradename infringement could be time consuming and result in costly litigation.
A successful claim regarding the infringement of a trademark and/or tradename
could result in substantial monetary damages against us or an injunction
prohibiting our use of the particular trademark or tradename. Any such
injunction could harm our corporate or product name recognition and marketing
efforts. Accordingly, any monetary damages or injunction could have a harmful
effect upon our business, financial condition and results of operations.

EMPLOYEES

As of December 31, 2000, we employed 1,110 persons, including 545 in sales,
marketing and field operations, 298 in research and development, 169 in finance,
legal, information systems and administration and 98 in client services. Of
these, 137 are located in the United Kingdom, 71 are located in Switzerland, 22
are located in Australia, 63 are located in the Germany, 7 are located in
France, 62 are located in the Pacific Rim and the remainder are located in the
United States. None of our employees is represented by a labor union. We have
experienced no work stoppages and believe our relationship with our employees is
good. During the fourth quarter of 2000, the Company's management approved
restructuring plans that resulted in a reduction to our work force of
approximately 130 employees worldwide (see Note 6 of Notes to Consolidated
Financial Statements). At February 23, 2001 we employed 1,009 persons.

Our future success will depend in large part upon the continued service of
our key technical, sales and senior management personnel, none of whom is bound
by an employment agreement. The loss of any of our senior management or other
key research, development, sales and marketing personnel, particularly if lost
to competitors, could have a harmful effect on our business, operating results
and financial condition. In particular, the services of George F. (Rick) Adam,
Jr., Chief Executive Officer, would be difficult to replace. There is
significant competition for employees with the skills required to perform the
services offered by us and there can be no assurance that we will be able to
continue to attract and retain sufficient numbers of highly skilled employees.
We have in the past experienced, and expect in the future to experience, a
significant time lag between the date on which technical and sales personnel are
hired and the time at which these persons become fully productive. If we are
unable to manage the post-sales process effectively, our ability to attract
repeat sales or establish strong account references could be affected, which may
harm our business, financial condition and results of operations.

FACTORS THAT MAY AFFECT FUTURE RESULTS

As described by the following factors, past financial performance should
not be considered a reliable indicator of future performance and investors
should not use historical trends to anticipate results or trends in future
periods.

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RISKS RELATED TO THE PROPOSED OFFER AND MERGER WITH SYBASE

We urge you to read Sybase's Registration Statement on Form S-4 and
Schedule TO containing or incorporating by reference such documents and other
information, when they become available, because they will contain important
information about Sybase, NEON, the proposed acquisition and related matters,
including a discussion of the risks related to the proposed offer and merger
with Sybase including the following:

- the susceptibility to fluctuations in the market price of Sybase common
stock to be received by NEON stockholders in the offer and merger in
exchange for NEON common stock;

- the risk that Sybase may not successfully integrate Sybase and NEON and
realize the expected benefits of the merger;

- the risk that receipt of Sybase shares in the offer and the merger may be
taxable to you under certain circumstances; and

- the risk that our partners and customers will respond negatively to the
proposed combination.

These documents and amendments to these documents will be filed with the
U.S. Securities and Exchange Commission and delivered to our stockholders.

Failure to complete the merger could negatively impact NEON stock price and
future business and operations.

If the merger is not completed for any reason, we may be subject to a
number of material risks, including the following:

- we may be required under limited circumstances to pay Sybase a
termination fee of up to $15 million;

- the price of our common stock may decline to the extent that the current
market price of our common stock reflects a market assumption that the
merger will be completed; and

- costs incurred by us related to the merger such as legal and accounting
fees, as well as a portion of the financial advisor fees that would be
payable upon completion of the merger, must be paid by us even if the
merger is not completed.

RISKS RELATED TO OUR BUSINESS

Our operating results fluctuate significantly and we may not be able to
maintain our historical growth rates.

Although we have had significant revenue growth in the past, such growth
rates may not be sustainable, and you should not use these past results to
predict future operating margins and results. Our quarterly operating results
have fluctuated significantly in the past and may vary significantly in the
future. Our future operating results will depend on many factors, including the
following.

- the continued growth of the e-Business Integration and EAI software
markets;

- the size of the orders for our products, and the timing of such orders;

- potential delays in our implementations at customer sites;

- continued development of indirect distribution channels;

- increased demand for our products;

- the timing of our product releases;

- competition; and

- the effects of global economic uncertainty on capital expenditures for
software.

Quarterly revenues and operating results depend upon the volume and timing
of customer contracts received during a given quarter, and the percentage of
each contract which we are able to recognize as revenue during each

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quarter, each of which is difficult to forecast. In addition, as is common in
the software industry, a substantial portion of our revenues in a given quarter
historically has been recorded in the third month of that quarter, with a
concentration of such revenues in the last two weeks of the third month. If this
trend continues, any failure or delay in the closing of orders during the last
part of a quarter will have a material adverse effect on our business.

As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance. If our future operating results are below the
expectations of stock market analysts, our stock price may decline.

Our industry is highly competitive.

The software industry is highly competitive. We may encounter competition
from new competitors, including established software companies with substantial
resources. Some of our competitors may have financial, technical, marketing or
other capabilities more extensive than ours and may be able to respond more
quickly to new or emerging technologies and other competitive pressures. We may
not be able to compete successfully against our present or future competitors,
and competition may adversely affect our businesses, financial condition or
operating results.

Software license revenue growth is dependent on our relationship with IBM and
other partners.

Our revenue growth since 1998 has reflected strong sales of the
MQIntegrator and MQSeries Integrator through IBM's distribution and reseller
channel. In 2000, 1999 and 1998, royalty revenue from IBM sales of MQIntegrator
and MQSeries Integrator accounted for 17%, 8% and 8%, respectively, of our total
revenues. We expect that IBM and our other partners will account for a material
percentage of our software license revenue in 2001. Any delay or shortfall in
such revenues from our partners could have a material adverse effect on our
business and operating results.

If our sales cycle is longer than we anticipate, our operating results may
suffer.

Historically our customers typically have taken a long time to evaluate our
products. Therefore the timing of license revenue is difficult to predict. A
sale of our products to a customer typically involves a significant technical
evaluation and a commitment of capital and other resources by the customer. This
evaluation process frequently results in a sales cycle that lasts several
months. Additional delays are caused by customers' internal procedures to
approve large capital expenditures and to test, implement and accept new
technologies that affect key operations within their organization. Our operating
expense levels are relatively fixed in the short-term and are based in part on
expectations of future revenues. Consequently, any delay in the recognition of
revenue due to a longer sales cycle caused by these factors could result in
operating losses.

We have a short operating history and a history of operating losses.

An investor in our common stock must evaluate the risks, uncertainties,
expenses and difficulties frequently encountered by early stage companies in
rapidly evolving markets. We have had only a limited operating history upon
which an evaluation of our Company and its prospects can be based. Prior to
1996, we recorded only nominal product revenue and, including
acquisition-related charges, we have not been profitable on an annual basis. At
December 31, 2000, our Company had an accumulated deficit of approximately
$128.7 million (which includes acquisition-related, restructuring and
stock-based compensation charges). To address these risks and uncertainties, we
must do the following.

- successfully implement our sales and marketing strategy;

- further develop our indirect distribution channels;

- respond to competition;

- continue to attract and retain qualified personnel;

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- continue to develop and upgrade our products and technology more rapidly
than competitors; and

- commercialize our products and services with future technologies.

We may not successfully implement any of our strategies or successfully
address these risks and uncertainties. Even if we accomplish these objectives we
may not be profitable in the future.

Inability to integrate acquired companies may increase the costs of recent
acquisitions.

We may from time to time acquire companies with complementary products and
services in the application integration or other related software markets.
Between September 1997 and April 2000, we acquired ten companies. These
acquisitions will expose us to increased risks and costs, including the
following:

- assimilating new operations, systems, technology and personnel; and

- diverting financial and management resources from existing operations.

We may not be able to generate sufficient revenues from any of these
acquisitions to offset the associated acquisition costs. We will also be
required to maintain uniform standards of quality and service, controls,
procedures and policies. Our failure to achieve any of these standards may hurt
relationships with customers, employees, and new management personnel. In
addition, our future acquisitions may result in additional stock issuances,
which could be dilutive to our stockholders.

We may also evaluate joint venture relationships with complementary
businesses. Any joint venture we enter into would involve many of the same risks
posed by acquisitions, particularly those risks associated with the diversion of
resources, the inability to generate sufficient revenues, the management of
relationships with third parties, and potential additional expenses, any of
which could have a harmful effect on our business, financial condition and
results of operations.

Our investment strategy could cause financial or operational problems.

As of December 31, 2000 we had invested approximately $8.9 million in
early-stage, e-Business companies with technologies or products complementary to
our own, and we may continue making such investments in the future. No public
market existed for these securities at the time of our investment and there is
no assurance that such a public market will ever exist. These investments may
not result in any meaningful commercial benefit to us, and our investments could
lose all or a significant part of their value.

Our failure to manage growth of operations may adversely affect us.

We must plan and manage effectively in order to successfully offer products
and services and implement our business plan in a rapidly evolving market. We
continue to increase the scope of our operations domestically and
internationally and have grown our headcount substantially. For example, at
January 1, 1996, we had a total of 35 employees and at December 31, 2000 we had
a total of 1,110 employees. We may further expand domestically or
internationally through internal growth or through acquisitions of related
companies and technologies. This growth will continue to place a significant
strain on our management systems and resources.

For us to effectively manage our growth, we must continue to enact the
following measures:

- improve our operational, financial and management controls;

- improve our reporting systems and procedures;

- install new management and information control systems; and

- expand, train and motivate our workforce.

We have completed the migration of our legacy accounting system in the U.S.
to an ERP suite that allows greater flexibility in reporting and tracking
results. We are in the process of integrating an additional ERP package in
Europe and Asia with our U.S. system. If we fail to integrate this ERP package
in an efficient and
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timely manner, or if the new systems fail to adequately support our level of
operations, we could incur substantial additional expenses to remedy such
failure.

Our operating results are substantially dependent on our suite of e-Business
and EAI products.

A substantial majority of our revenues come from the NEON e-Business and
EAI suite of products and related services, and we expect this pattern to
continue. Accordingly, our future operating results will depend on the demand
for our suite of e-Business and EAI products and related services by future
customers, including new and enhanced releases that are subsequently introduced.
There can be no assurance that the market will continue to demand our current
products or that we will be successful in marketing any new or enhanced
products. If our competitors release new products that are superior to our
products in performance or price, demand for our products may decline. A decline
in demand for our products and services as a result of competition,
technological change or other factors would have a harmful effect on our
business, financial condition and results of operations.

Failure to add customers or expand into new markets may be harmful to our
business.

A significant portion of our revenue has come from a small number of large
purchasers. For example, in 2000 and 1999, excluding royalties from IBM and
other indirect channel partners, our top ten customers accounted for 21% and 38%
of total revenues, respectively. Historically, our revenues have been derived
primarily from sales to large banks and financial institutions. Recently a
growing portion of our total revenues has been derived from sales of our
products and services to commercial customers seeking further e-Business
enabling of their information systems and operations. These customers or other
customers may not continue to purchase our products. Our failure to add new
customers that make significant purchases of our products and services would
have a harmful effect on our business, financial condition and results of
operations.

While we have developed experience marketing our products to financial
institutions, we have less experience with other vertical market segments. New
market segments that we are currently targeting are likely to have significantly
different characteristics than the financial institutions segment. As a result,
we may change our pricing structures, sales methods, sales personnel, consulting
services and customer support. We may not be successful in selling our products
and services to the additional segments targeted. Our inability to expand sales
of our products and services into these additional markets would have a harmful
effect on our business, financial condition and results of operations.

Our growth is dependent upon the successful development of our direct and
indirect sales channels.

We sell our products primarily through our direct sales force and we
support our customers with our internal technical and customer support staff. We
will continue to rely on our ability to recruit and train additional sales
people and qualified technical support personnel. Our ability to achieve
significant revenue growth in the future will greatly depend on our ability to
recruit and train sufficient technical, customer and direct sales personnel,
particularly additional sales personnel focusing on the new vertical market
segments that we target. We have in the past and may in the future experience
difficulty in recruiting qualified sales, technical and support personnel. Our
inability to rapidly and effectively expand our direct sales force and our
technical and support staff could harm our business, financial condition and
results of operations.

We believe that future growth also will depend on developing and
maintaining successful strategic relationships with distributors, resellers, and
systems integrators. Our strategy is to continue to increase the proportion of
customers served through these indirect channels. We are currently investing,
and plan to continue to invest, significant resources to develop these indirect
channels. This could harm our operating results if these efforts do not generate
license and service revenues necessary to offset such investment. Also, our
inability to recruit and retain qualified distributors, resellers and systems
integrators could harm our results of operations. Another risk is that because
lower unit prices are typically charged on sales made through indirect channels,
increased indirect sales could harm our average selling prices and result in
lower gross margins.

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There are many risks associated with international operations.

We continue to expand our international operations, and these efforts
require significant management attention and financial resources. Each version
of our product also has to be localized within each country. We have committed
resources to the opening and integration of additional international sales
offices and the expansion of international sales and support channels. Our
efforts to develop and expand international sales and support channels may not
be successful. International sales are subject to a number of risks, including
the following:

- longer payment cycles;

- unexpected changes in regulatory requirements;

- difficulties and expenses associated with complying with a variety of
foreign laws;

- import and export restrictions and tariffs;

- difficulties in staffing and managing foreign operations;

- difficulty in accounts receivable collection and potentially adverse tax
consequences;

- currency fluctuations;

- currency exchange or price controls; and

- political and economic instability abroad.

Additionally, intellectual property may be more difficult to protect
outside of the United States. International sales can also be affected to a
greater extent by seasonal fluctuations resulting from the lower sales that
typically occur during the summer months in Europe and other parts of the world.
In addition, the market for our products are not as developed outside of North
America. We may not be able to successfully penetrate international markets or
if we do, there can be no assurance that we will grow these markets at the same
rate as in North America.

We must keep pace with technological change to remain competitive.

The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, changes in customer demands
and evolving industry standards. Our existing products could be rendered
obsolete if we fail to keep up in any of these ways. We have also found that the
technological life cycles of our products are difficult to estimate, partially
because they may vary according to the particular application or vertical market
segment. We believe that our future success will depend upon our ability to
continue to enhance our current product line while we concurrently develop and
introduce new products that keep pace with competitive and technological
developments. These developments require us to continue to make substantial
product development investments.

Existing Products. We currently serve a customer base with a wide variety
of hardware, software, database, and networking platforms. To gain broad market
acceptance, we believe that we will have to support our products on a variety of
platforms. Our success will depend, among others, on the following factors:

- our ability to integrate our products with multiple platforms, especially
relative to our competition;

- the portability of our products, particularly the number of hardware
platforms, operating systems and databases that our products can source
or target;

- the integration of additional software modules under development with
existing products; and

- our management of software development being performed by third-party
developers.

Future Products. There can be no assurance that we will be successful in
developing and marketing future product enhancements or new products that
respond to technological changes, shifting customer preferences, or evolving
industry standards. We may experience difficulties that could delay these
products. If we are unable to
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develop and introduce new products or enhancements of existing products in a
timely manner or if we experience delays in the commencement of commercial
shipments of new products and enhancements, then customers may forego purchases
of our products and purchase those of our competitors.

Our introduction of new or enhanced products could reduce revenues from
existing products.

We periodically announce the release of a variety of new products. These
announcements are generally intended to enhance the ability of our partners and
direct sales force to market and sell more complete solutions to customers and
to improve productivity, revenues and profitability. These new products,
however, may compete against our existing products and could, therefore, have an
adverse effect on our other license fees and professional service revenue.

Our growth is in part dependent upon a robust Internet industry.

Because global commerce and online exchange of information on the Internet
and other similar open wide area networks are new and evolving, it is difficult
to predict with any assurance whether the Internet will prove to be and remain a
viable commercial marketplace for our products. Our ability to derive revenues
from Internet products and services will depend in part upon a robust Internet
industry and our ability to respond to the software development challenges it
presents. Moreover, critical issues concerning the commercial use of the
Internet, including security, reliability, cost, ease of use and access, and
quality of service, remain unresolved and may impact the growth of Internet use
and our products. If the Internet does not continue to grow as a commercial
marketplace, our business could be materially and adversely affected.

Our failure to maintain close relationships with key software vendors will
adversely affect our product offering.

We believe that in order to provide competitive solutions for
heterogeneous, open computing environments, it is necessary to develop, maintain
and enhance close relationships with a wide range of vendors, including
database, enterprise resource planning, supply chain and electronic data
interchange software vendors, as well as hardware and operating system vendors.
There can be no assurance that we will be able to maintain our existing
relationships or develop additional relationships with such vendors. Our failure
to do so could adversely affect the portability of our products to existing and
new platforms and databases and the timing of the release of new and enhanced
products.

Our failure to adequately protect our proprietary rights may adversely affect
us.

Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, trademark and
trade secret laws, as well as confidentiality agreements and licensing
arrangements, to establish and protect our proprietary rights. We presently have
four patents. Despite our efforts to protect our proprietary rights, existing
copyright, trademark and trade secret laws afford only limited protection. In
addition, the laws of certain foreign countries do not protect our rights to the
same extent as do the laws of the United States. Attempts may be made to copy or
reverse engineer aspects of our products or to obtain and use information that
we regard as proprietary. Accordingly, there can be no assurance that we will be
able to protect our proprietary rights against unauthorized third-party copying
or use. Any infringement of our proprietary rights could materially adversely
affect our future operating results. Furthermore, policing the unauthorized use
of our products is difficult and litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our future operating results.

Our stock price has been highly volatile.

The trading price of our common stock has fluctuated significantly since
our initial public offering in June 1997. In addition, the trading price of our
common stock could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by us or our competitors, developments with respect to patents or
proprietary rights, changes in financial estimates by

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securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated or disproportionate to the operating performance of such companies.
These broad market fluctuations may adversely affect the market price of our
common stock.

We could be harmed by costly litigation.

We are a defendant in multiple class action lawsuits that allege violations
of federal and state securities laws by us and our officers and directors in
1999 and 2000. An adverse judgment or settlement in any of these lawsuits could
have a material adverse effect on the Company's financial condition or results
of operations. No provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements because the ultimate outcome of these actions
was unknown as of the date of the financial statements. These actions may be
settled or decided in a manner adverse to us. The cost of such settlements or
adverse decisions could exceed our maximum aggregate director and officers
liability insurance coverage. If this occurs, we may incur additional expense in
order to satisfy our outstanding obligations to indemnify our officers and
directors against such claims.

We are also a party to various legal disputes and proceedings arising from
the ordinary course of business. In the opinion of management, resolution of
these matters is not expected to have a material adverse effect on our
consolidated financial position. However, depending on the amount and timing, an
unfavorable resolution of some or all of these matters could materially affect
our future results of operations or cash flows in a particular period. See Note
15 of Notes to Consolidated Financial Statements for additional information
regarding these claims.

Our inability to attract and retain personnel may adversely affect us.

Our success depends on the continued service of our key technical, sales
and senior management personnel. None of these persons are bound by an
employment agreement. The loss of any of our senior management or other key
research, development, sales and marketing personnel, particularly if lost to
competitors, could have a harmful effect on our future operating results. In
particular George F. (Rick) Adam, our Chief Executive Officer, would be
difficult to replace. Our future success will depend in large part upon our
ability to attract, retain and motivate highly skilled employees. We face
significant competition for individuals with the skills required to perform the
services we offer. We cannot assure that we will be able to retain sufficient
numbers of these highly skilled employees. Because of the complexity of the
e-Business and EAI software and Internet integration markets, we have in the
past experienced a significant time lag between the date on which technical and
sales personnel are hired and the time at which such persons become fully
productive, and we expect this pattern to continue.

There is substantial risk that future regulations could be enacted that either
directly restrict our business or indirectly Impact our business by limiting
the growth of Internet commerce.

As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt regulations covering issues such as user privacy, pricing,
content and quality of products and services. If enacted, these laws, rules or
regulations could limit the market for our products and services, which could
materially adversely affect our business, financial condition and operating
results. Although many of these regulations may not apply to our business
directly, we expect that laws regulating the solicitation, collection or
processing of personal/consumer information could indirectly affect our
business. The Telecommunications Act of 1996 prohibits certain types of
information and content from being transmitted over the Internet. The
prohibition's scope and the liability associated with a Telecommunications Act
violation are currently unsettled. In addition, although substantial portions of
the Communications Decency Act were held to be unconstitutional, we cannot be
certain that similar legislation will not be enacted and upheld in the future.
It is possible that this type of legislation could expose companies involved in
Internet commerce to liability, which could limit the growth of Internet
commerce generally. Legislation like the Telecommunications Act and the
Communications Decency Act could dampen the growth in Web usage and decrease its
acceptance as a communications and commercial medium.

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The United States government also regulates the export of encryption
technology, which some of our products may incorporate. If our export authority
is revoked or modified, if our software is unlawfully exported or if the United
States government adopts new legislation or regulation restricting export of
software and encryption technology, our business, operating results and
financial condition could be materially adversely affected. Current or future
export regulations may limit our ability to distribute our software outside the
United States. Although we take precautions against unlawful export of our
software, we cannot effectively control the unauthorized distribution of
software across the Internet.

Intellectual property claims can be costly and result in the loss of
significant rights.

Third parties have, and may again in the future claim that we have
infringed their current or future products. We currently have pending against us
a trademark infringement suit seeking to enjoin us from further use of the
trademark "NEON." We expect that e-Business and EAI software developers will
increasingly be subject to infringement claims as the number of products in
different industry segments overlap. Any claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays, or
require us to enter into royalty or licensing agreements, any of which could
have a harmful effect upon our operating results. There can also be no assurance
that such royalty or licensing agreements, if required, would be available on
terms acceptable to us, if at all. There can be no assurance that legal action
claiming patent infringement will not be commenced against us, or that we would
prevail in such litigation given the complex technical issues and inherent
uncertainties in patent litigation. In the event a patent claim against us was
successful and we could not obtain a license on acceptable terms or license a
substitute technology or redesign to avoid infringement, our business, financial
condition and results of operations would be harmed.

Global economic uncertainty may affect the capital expenditures of our
customers.

The e-Business and EAI software and Internet integration markets have been
negatively impacted by certain generic factors, including global economic
difficulties and uncertainty, declines in the stock market on which our common
stock trades, reductions in capital expenditures by large customers, and
increasing competition. These factors could in turn give rise to longer sales
cycles, deferral or delay of customer purchasing decisions, and increased price
competition. The presence of such factors in the e-Business and EAI software
market could harm our operating results.

Foreign currency exchange rates can affect our profitability.

Although the pricing strategy for our international operations takes into
account changes in exchange rates over time, we face exposure to adverse
movements in foreign currency exchange rates. These exposures may change
overtime as business practices evolve and could have a material adverse impact
on our financial position and results of operations. Historically, our primary
exposures have related to non-U.S.-dollar denominated sales and expenses in
Europe and Asia Pacific.

Adoption of the Euro presents uncertainties for our company.

In the first part of 1999, the new "Euro" currency was introduced in
certain European countries that are part of the European Monetary Union, or EMU.
By 2002, all EMU countries are expected to be operating with the Euro as their
single currency. A significant amount of uncertainty exists as to the effect the
Euro will have on the marketplace generally and, additionally, all of the final
rules and regulations have not yet been defined and finalized by the European
Commission with regard to the Euro currency. We are currently assessing the
effect the introduction of the Euro will have on our internal accounting systems
and the sales of our products. We are not aware of any material operational
issues or costs associated with preparing our internal systems for the Euro.
However, we do utilize third-party vendor equipment and software products that
may or may not be EMU compliant. Although we are currently taking steps to
address the impact, if any, of EMU compliance for such third party products, the
failure of any critical components to operate properly post-Euro could have a
harmful effect on the business, financial condition and results of operations of
our Company or require us to incur expenses to remedy such problems.

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ITEM 2. PROPERTIES.

We lease two office buildings in Englewood, Colorado. Building I is
approximately 64,000 square feet and contains our principal executive,
administrative, engineering, sales, marketing, customer support and research and
development functions. Building II is approximately 134,600 square feet and
contains our training facilities. Nearly all of Building II is subleased by NEON
to other organizations. The Englewood lease expires in June 2009. We also lease
the following office space in the U.S.: approximately 18,000 square feet in
Manhattan, New York; approximately 4,900 square feet in Chicago, Illinois;
approximately 57,000 square feet in Pacheco, California; approximately 17,000
square feet in Danvers, Massachusetts; approximately 10,000 square feet in
Vienna, Virginia; and approximately 7,300 square feet in Alpharetta, Georgia.
Internationally, we lease the following office space: approximately 11,000
square feet in London, England; approximately 1,600 square feet in Switzerland;
approximately 900 square feet in Paris, France; approximately 5,400 square feet
in Hong Kong; approximately 2,400 square feet in Singapore; approximately 2,200
square feet in Kuala Lumpur, Malaysia; approximately 200 square feet in Tokyo,
Japan; approximately 1,400 square feet in Germany; and approximately 400 square
feet in Sydney, Australia. We believe that our existing facilities, together
with such additional space we have committed to lease, will be adequate for the
next 12 months and that sufficient additional space will be available as needed
thereafter.

In addition, we maintain secure Web servers, which contain our customers'
and our confidential information. NEON's operations are dependent in part upon
our ability to protect our internal network infrastructure against damage from
physical break-ins, natural disasters, operational disruptions and other events.
Physical break-ins could result in the theft or loss of our customers' and our
confidential or critical business information. Any such break-in or damage or
failure that causes interruptions in our operations could harm our business,
financial condition and results of operations.

ITEM 3. LEGAL PROCEEDINGS.

The Company and certain of its executive officers are defendants in a
consolidated class action lawsuit alleging violation of the federal securities
laws. This action was filed in federal court in Colorado in July 1999. The
complaint asserts claims on behalf of purchasers of the Company's securities
from April 21, 1999 through July 6, 1999. The complaint alleges that the Company
and the other defendants made material misrepresentations and omissions
regarding the Company's business and prospects, causing harm to purchasers of
the Company's securities. The complaint does not specify the amount of damages
sought. The Company believes this class action lawsuit is without merit. The
Company intends to deny all material allegations and to defend itself
vigorously. An adverse judgment or settlement in this lawsuit could have a
material adverse effect on the Company's financial condition or results of
operations. The ultimate outcome of this action cannot be presently determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.

In January 2000, the Company and VIE Systems, Inc. were named as defendants
in a lawsuit filed by New Paradigm Software Corp. ("New Paradigm") in U.S.
District Court for the Southern District of New York. The complaint alleges
breach of contract, interference with contract and unjust enrichment, and seeks
compensatory and punitive damages as well as rescission. In July 2000, the Court
granted the Company's motion to dismiss the Plaintiff's claims of unjust
enrichment and for rescission. The Company believes the lawsuit is without
merit. The Company intends to deny all material allegations and to defend itself
vigorously. An adverse judgment or settlement in the lawsuit could have a
material adverse effect on the Company's financial condition or results of
operations. The ultimate outcome of the action cannot be presently determined.
Accordingly, no provision for any liability or loss that may result from
adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.

The Company is involved in a declaratory judgment action in Federal
District Court for the State of Colorado and a trademark dilution case in Texas
District Court for Bend County against NEON Systems, Inc. over the use of the
trademark NEON. An adverse judgment or settlement, particularly in the Texas
action, may result in increased costs and expenses, could result in us being
enjoined from further use of the trademark "NEON," and may have an adverse
effect on our business. The Texas damage action was filed in June 1999.

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In January 2001 the Company was named as a defendant in a number of class
action lawsuits filed in Federal District Court for the State of Colorado
alleging violation of the federal securities laws. Certain executive officers of
the Company also are named as defendants. Most of the complaints in these
lawsuits assert claims on behalf of purchasers of the Company's securities
between October and December 2000. The complaints allege that the Company and
the other defendants made material misrepresentations and omissions regarding
the Company's business and prospects, causing harm to purchasers of the
Company's securities. The complaints do not specify the amount of damages
sought. These cases are in the early stages and the Company has not yet formally
responded to the complaints. The Company believes this class action lawsuit is
without merit. The Company intends to deny all material allegations and to
defend itself vigorously. An adverse judgment or settlement in this lawsuit
could have a material adverse effect on the Company's financial condition or
results of operations. The ultimate outcome of these actions cannot be presently
determined. Accordingly, no provision for any liability or loss that may result
from adjudication or settlement thereof has been made in the accompanying
consolidated financial statements.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth
quarter of 2000.

EXECUTIVE OFFICERS OF REGISTRANT

Our executive officers and their ages as of March 1, 2001 are as follows:

NAME AGE POSITION(S)
- ---- --- -----------

George F. (Rick) Adam, Jr. ........... 54 Chairman of the Board and Chief
Executive Officer
Patrick J. Fortune.................... 53 Director, President and Chief
Operating Officer
Stephen E. Webb....................... 52 Senior Vice President, Chief Financial
Officer
Frederick T. Horn..................... 47 Executive Vice President, Operations
Leonard M. Goldstein.................. 53 Senior Vice President, Senior Counsel
Peter Hoversten....................... 45 Chief Technology Officer
Brian Duff............................ 46 Vice President, Corporate Controller
Larry Thede........................... 49 Vice President, Investor Relations
Franz Koepper......................... 43 President, NEON Europe
John Valencia......................... 45 Senior Vice President Sales & Service,
Americas
Scott Powell.......................... 39 Group President, Product Development
Steven Lazarus........................ 69 Director
Mark L. Gordon........................ 50 Director
Joseph E. Kasputys.................... 64 Director
Mel Bergstein......................... 58 Director
Robert I. Theis....................... 39 Director

Mr. Adam has served as Chairman of the Board, Chief Executive Officer,
President and a Director of the Company since founding the Company in June 1993.
From 1987 to 1993, Mr. Adam was General Partner of Goldman, Sachs & Co. and
served as the Chief Information Technology Officer. From 1980 to 1987, Mr. Adam
was Chief Information Officer and Vice President of Personnel for Baxter Health
Care Corporation. Mr. Adam received a B.S. degree from the U.S. Military
Academy, West Point, New York.

Dr. Fortune has served as a Director of the Company since February 1998 and
President and Chief Operating Officer since January 1999. From October 1995 to
December 1998, Dr. Fortune was Vice President, Information Technology and Chief
Information Officer for Monsanto Company. From September 1994 to September 1995,
Dr. Fortune served as President and Chief Operating Officer of Coram Healthcare
Corporation in Colorado. From

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December 1991 to August 1994, Dr. Fortune was Vice President, Information
Management at Bristol-Myers Squibb. Dr. Fortune holds a B.A. degree from the
University of Wisconsin, an M.B.A. from Northwestern University and a Ph.D. in
physical chemistry from the University of Wisconsin.

Mr. Webb has served as Senior Vice President and Chief Financial Officer of
the Company since joining the Company in December 1996. Prior to December 1996,
Mr. Webb served as the Executive Vice President and Chief Financial Officer of
Telectronics Pacing Systems, Inc., an international manufacturer and distributor
of implantable electronic cardiac devices, from April 1994 to December 1996.
Prior to working at Telectronics Pacing Systems, Inc., Mr. Webb spent seventeen
years with Hewlett-Packard Company, most recently as Controller of the HP
Software Business Unit. Mr. Webb holds a B.A. degree from Stanford University
and an M.B.A. degree from the Harvard Graduate School of Business.

Mr. Horn has served as Executive Vice President, Operations since July 2000
and President of the Commercial Business Unit and Senior Vice President of
Product Development and Client Services since joining the Company in July 1996.
From January 1994 to July 1996, Mr. Horn was a partner with Ernst & Young, LLP
in the Management Consulting Group, where he specialized in financial industry
consulting. From February 1992 through December 1993, Mr. Horn served as a
Managing Director of SHL Systemhouse, a software services firm. Prior to joining
SHL Systemhouse, Mr. Horn served as a Vice President of Goldman, Sachs & Co. Mr.
Horn received his B.A. degree from Northwestern University.

Mr. Goldstein has served as Senior Vice President, Senior Counsel and
Secretary since joining the Company in July 1996. From 1976 to July 1996, Mr.
Goldstein practiced law privately with the firm of Feder, Morris, Tamblyn and
Goldstein, for which firm he served as Managing Partner and President. Mr.
Goldstein holds a B.A. degree from American University and a J.D. degree from
the State University of New York at Buffalo School of Law.

Mr. Hoversten has served as Chief Technology Officer since January 2000 and
Senior Vice President, Product Strategy since August 1998. From May 1, 1997 to
August 1998, he served as Senior Vice President, Application Development and
Field Operations. From January 1989 to March 1997, Mr. Hoversten served as a
Vice President of Technology at Goldman, Sachs & Co. Mr. Hoversten holds a B.S.
degree from the University of Pennsylvania.

Mr. Duff has served as Vice President, Corporate Controller since August
2000. From 1982 to 2000, Mr. Duff was with Storage Technology Corporation,
serving most recently as Vice President of Finance and Administration. From 1975
to 1982, Mr. Duff held various finance and accounting positions at Nokia,
Revlon, and AKZO/Nobel. Mr. Duff holds an M.B.A. from Emory University.

Mr. Thede has served as Vice President, Investor Relations since August
2000. Prior to NEON, Mr. Thede, a 26-year veteran of U.S. West, was their Vice
President of Investor Relations. Mr. Thede is a past president and current board
member of the Rocky Mountain Chapter of the National Investor Relations
Institute (NIRI). He holds a Master of Science degree in Management from Purdue
University.

Mr. Koepper serves as President, NEON Europe and joined NEON in April 1999.
Prior to NEON, Mr. Koepper was the CEO of SLI International AG. Before SLI, Mr.
Koepper was a consultant, handling logistic and manufacturing management systems
for Heyde & Partner GmbH. He later became managing director. Mr. Koepper holds a
doctorate in economics from Bergische Universitat Wuppertal, Germany.

Mr. Valencia serves as Senior Vice President Sales & Service, Americas and
joined NEON in June 1999. Prior to NEON, Mr. Valencia was President and CEO of
Convoy Corporation. Mr. Valencia also held various positions at DP Applications,
Sequent Computer Systems, and the ASK Group. Mr. Valencia has a BS degree in
mathematics from California State University, Hayward. He also holds a
Certificate in Data Processing.

Mr. Powell has served as Group President, Product Development and joined
NEON in 1997. Prior to joining NEON, Mr. Powell was vice president of Open
Horizon. Prior to Open Horizon, Mr. Powell spent 10 years developing and
managing software products for Silicon Valley companies. Mr. Powell holds a BS
degree in computer engineering from the University of California, Los Angeles.

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Mr. Lazarus has served as a Director of the Company since April 1995. Since
1986, Mr. Lazarus has served as a senior principal of various venture capital
funds associated with ARCH Venture, including President and Chief Executive
Officer of ARCH Development Corporation and Managing Director of ARCH Venture
Partners. From 1986 to 1994, Mr. Lazarus served as the Associate Dean of the
Graduate School of Business of the University of Chicago. He currently serves as
a director of Amgen, Primark and Illinois Superconductor. Mr. Lazarus holds a
B.A. degree from Dartmouth College and an M.B.A. degree from the Harvard
Graduate School of Business.

Mr. Gordon has served as a Director of the Company since the Company's
inception. Since 1980, Mr. Gordon has been a partner in the law firm of Gordon &
Glickson PC, directing the firm's information technology practice. Mr. Gordon
holds a B.A. degree from the University of Michigan and a J.D. degree from the
Northwestern University School of Law.

Mr. Kasputys has served as a Director of the Company since July 1998. Mr.
Kasputys has served as Chairman, President and Chief Executive Officer of
Primark Corporation. He currently serves as a Director of Lifeline Systems. Mr.
Kasputys holds a B.A. degree from Brooklyn College and masters and doctorate
degrees in business administration from the Harvard Graduate School of Business
where he was a Baker Scholar and a Warren G. Harding Aerospace Fellow.

Mr. Bergstein has served as a Director of the Company since August 1999.
Since 1994, Mr. Bergstein has been Chairman of the Board and Chief Executive
Officer of Diamond Technology Partners. From 1977 to 1989, Mr. Bergstein was a
partner with Andersen Consulting. Mr. Bergstein holds a B.S. degree in Economics
from the Wharton School of the University of Pennsylvania.

Mr. Theis has served as a Director of the Company since July 2000. Since
July 2000, Mr. Theis has been a General Partner of Doll Capital Partners. Mr.
Theis has served as Executive Vice President and Chief Marketing Officer for
NEON from October 1996 until July 2000. Prior to joining the Company, Mr. Theis
served as Managing Director of the Worldwide Financial Services Industry Group
of Sun Microsystems, Inc. from April 1986 to October 1996. Prior to joining Sun
Microsystems, Mr. Theis served as the workstation program manager for Silicon
Graphics. Mr. Theis received a B.S. degree from the University of Pittsburgh,
Pennsylvania.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The common stock of our Company has been traded on the Nasdaq National
Market under the symbol "NEON" since our initial public offering on June 18,
1997. The following table sets forth the high and low sale prices per share of
our common stock for the periods indicated. All prices have been restated to
reflect a two-for-one stock split that was effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.

HIGH LOW
------ ------

1998
First Quarter............................................. $12.44 $ 4.75
Second Quarter............................................ $16.50 $11.50
Third Quarter............................................. $23.44 $14.31
Fourth Quarter............................................ $45.19 $14.06
1999
First Quarter............................................. $74.75 $41.50
Second Quarter............................................ $73.38 $34.94
Third Quarter............................................. $44.06 $13.00
Fourth Quarter............................................ $59.00 $20.50
2000
First Quarter............................................. $91.63 $39.00
Second Quarter............................................ $42.50 $19.81
Third Quarter............................................. $45.38 $21.00
Fourth Quarter............................................ $21.44 $ 4.47

As of February 23, 2001, there were 787 holders of record of our common
stock. Because many of our shares of common stock are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these record holders. We have never
declared or paid any cash dividends on our common stock. Because we currently
intend to retain all future earnings to finance future growth, we do not
anticipate paying any cash dividends in the foreseeable future.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software licenses.................. $ 104,664 $ 59,564 $ 40,976 $ 15,970 $ 3,383
Software maintenance............... 21,663 16,178 4,912 755 24
Professional services.............. 62,021 50,482 19,926 5,921 3,738
----------- ----------- ----------- ----------- ----------
Total revenues......................... 188,348 126,224 65,814 22,646 7,145
Cost of revenues....................... 55,081 40,301 14,607 5,343 3,328
Gross profit........................... 133,267 85,923 51,207 17,303 3,817
----------- ----------- ----------- ----------- ----------
Operating expenses:
Sales and marketing.................. 89,755 54,862 21,942 8,824 4,425
Research and development............. 42,505 34,873 15,839 7,730 3,658
General and administrative........... 16,942 15,620 6,571 2,334 1,467
Loss from operations................... (64,376) (71,426) (12,521) (4,251) (5,733)
Net loss...................... $ (60,870) $ (46,312) $ (8,499) $ (3,507) $ (5,672)
=========== =========== =========== =========== ==========
Net loss per common share,
basic and diluted........... $ (1.71) $ (1.44) $ (0.38) $ (0.32) $ (2.10)
=========== =========== =========== =========== ==========
Weighted average shares of common stock
outstanding(2)....................... 35,691,295 32,247,552 22,277,472 10,958,302 2,706,552
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, short-term
and long-term investments.......... $ 51,195 $ 94,815 $ 196,091 $ 22,724 $ 3,387
Working capital...................... 43,990 86,368 195,856 25,928 2,586
Total assets......................... 349,484 359,520 298,678 40,229 7,073
Long-term obligations................ -- -- -- -- 442
Stockholders' equity................. 295,971 320,641 275,615 34,731 3,515
Cash dividends declared per common
share.............................. -- -- -- -- --
CONSOLIDATED CASH FLOW DATA:
Net cash flows from operating
activities......................... $ (11,597) $ (36,164) $ (1,527) $ (8,651) $ (5,433)
Net cash flows from investing
activities......................... (34,969) (96,922) (36,779) (19,685) (1,523)
Net cash flows from financing
activities......................... 10,454 7,872 205,399 32,599 8,708
ANALYSIS OF OPERATING RESULTS:
Loss from operations................. $ (64,376) $ (71,426) $ (12,521) $ (4,251) $ (5,733)
Noncash and nonrecurring charges:
Stock-based compensation........... 2,342 -- -- -- --
Acquisition charges................ 548 25,148 17,597 2,600 --
Asset impairment charges........... 4,954 -- -- -- --
Restructuring charges.............. 4,848 7,450 -- -- --
Amortization of intangibles........ 35,749 19,397 1,778 66 --
----------- ----------- ----------- ----------- ----------
Income (loss) from operations,
exclusive of above charges........... (15,935) (19,431) 6,854 (1,585) (5,733)
Other income, net...................... 4,297 7,132 2,743 745 61
----------- ----------- ----------- ----------- ----------
Adjusted pretax income (loss).......... (11,638) (12,299) 9,597 (840) (5,672)
Pro forma tax effect at 35%............ 4,073 4,305 (3,359) 294 1,985
----------- ----------- ----------- ----------- ----------
Adjusted income (loss), net of pro
forma tax effect(1).................. $ (7,565) $ (7,994) $ 6,238 $ (546) $ (3,687)
=========== =========== =========== =========== ==========

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

(1) The adjusted income (loss) amounts are intended to segregate and separately
consider charges reflected in our statements of operations that are noncash
or nonrecurring in nature. Some investment analysts track our operating
results exclusive of those items. However, adjusted income (loss) is not
intended to be a substitute for income (loss) or other measures of
performance determined and prepared in accordance with generally accepted
accounting principles. Stock-based compensation is a noncash expense, except
for approximately $398,000 of related payroll taxes that are based on
amounts taxable to our employees, vs. the amounts recognized as expense
under generally accepted accounting principles. These payroll taxes are
recognized as expenses on an irregular basis determined by when that income
becomes taxable to our employees. Acquisition charges arise from specific,
nonrecurring events described in the accompanying discussion and analysis.
Asset impairments and amortization of intangibles are noncash charges. The
costs of restructuring plans effected in 1999 and 2000 are considered to be
nonrecurring. A pro forma tax effect has been calculated at an effective
rate of 35%.

(2) All share and per share information has been adjusted to reflect a
two-for-one stock split that was effected in the form of a 100% stock
dividend to stockholders of record as of November 23, 1998.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The discussion in this Report on Form 10-K contains certain trend analysis
and other forward-looking statements. Words such as "anticipate," "believe,"
"plan," "estimate," "expect," "seek," and "intend," and words of similar import
are intended to identify such forward-looking statements. These statements are
not guarantees of future performance and are subject to business and economic
risks and uncertainties that are difficult to predict. Therefore, our actual
results of operations may differ materially from those expressed or forecasted
in the forward-looking statements as a result of a number of factors, including,
but not limited to, those set forth in this discussion under "Factors That May
Affect Future Results" and other risks detailed from time to time in reports
filed with the Securities and Exchange Commission.

On February 20, 2001 we entered into an Agreement and Plan of
Reorganization with Sybase, Inc. providing for Sybase to acquire all of the
outstanding shares of our common stock. It is expected that Sybase will offer,
through its wholly owned subsidiary, to exchange .3878 shares of Sybase common
stock for each outstanding share of our common stock that is validly tendered.
Consummation of the offer and subsequent merger is subject to a number of
conditions, but is scheduled to occur during the second quarter of 2001, or soon
thereafter. If the merger occurs as planned, we will become a wholly owned
subsidiary of Sybase and our common stock will no longer be separately traded.
The common stock of Sybase is quoted on the Nasdaq National Market under the
symbol "SYBS."

The Sybase shares to be offered to our shareholders will be registered with
the Securities and Exchange Commission on Form S-4. A prospectus and exchange
offer is under preparation that will be delivered to holders of our common stock
in the near future. Details of the proposed merger transaction will be included
in the prospectus and exchange offer documents.

The following discussion reflects the present intentions of our management
without regard to whether or not the merger occurs.

OVERVIEW

We began operations in January 1994 to develop, market and support
enterprise software for application integration. In 1994 and 1995 our Company
was in the development stage and was principally focused on product development
and assembling its management team and infrastructure. Software license revenues
were not significant until the commercial release of our NEONet software in
January 1996. Since that time, a substantial portion of our revenues has been
attributable to licenses of NEONet and follow-on products such as MQIntegrator
and e-Biz Integrator and related services. In December 1997, we entered into a
license agreement with IBM for the joint development of a product designed to
integrate IBM's MQSeries product with certain of our products. Both NEON and IBM
began selling the resulting MQIntegrator or MQSeries Integrator products in
1998. In 2000 an additional amendment to the agreement granted IBM the right to
sell NEON's suite of Adapter products.

In June 1997, we completed our initial public offering and issued 6,348,000
shares of common stock, and received net proceeds of approximately $34.3
million. In May and December 1998, we completed follow-on offerings and issued
4,757,000 and 4,780,000 shares of our common stock, respectively, and received
net proceeds of approximately $50.6 million and $153.7 million, respectively.

RECENT BUSINESS COMBINATIONS AND INVESTMENTS

In April 2000, we acquired all of the outstanding capital stock of
Software-Engineering, Computer and Consulting GmbH ("Secco"). Secco is a
provider of enterprise application integration ("EAI") and e-Business
professional services in Germany. The aggregate purchase price of Secco was
approximately $15.0 million, of which $12.0 million was paid in cash and
approximately $3.0 million was paid through the issuance of 86,925 shares of our
common stock. In August 2000, 13,000 additional shares of our common stock were
issued and approximately $182,000 in cash was paid to the former shareholders of
Secco based on the market price of our stock at a certain measurement date
subsequent to closing. The acquisition was accounted for under the purchase
method of accounting.

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32

In March 2000, we acquired all of the outstanding capital stock of
PaperFree Systems, Inc. ("PaperFree"). PaperFree is a provider of integration
solutions concentrating on the payor-side of the healthcare market. The
aggregate purchase price of PaperFree was approximately $39.9 million, of which,
$20.0 million was paid in cash and approximately $19.9 million was paid through
the issuance of 265,751 shares of common stock. In June and August 2000, an
aggregate of 425,301 additional shares of our common stock were issued to the
former shareholders of PaperFree based on the market price of our common stock
at certain measurement dates subsequent to closing. The acquisition was
accounted for under the purchase method of accounting.

In June 1999, we acquired Microscript, Inc. ("Microscript") for
approximately $33.1 million and Convoy Corporation ("Convoy") for $42.8 million.
In July and August 1999, we paid additional consideration related to these two
acquisitions valued at approximately $24.9 million to more closely reflect the
value agreed upon in the original purchase negotiations. We acquired SLI
International AG ("SLI") in May 1999 for $22.7 million, VIE Systems, Inc.
("VIE") in April 1999 for $12.0 million, and D&M Ltd. ("D&M") in February 1999
for approximately $6.0 million. These 1999 acquisitions were accounted for under
the purchase method of accounting and their results of operations have been
included in our financial statements since the dates of acquisitions. Additional
information with respect to all our acquisitions is included in Note 3 of Notes
to Consolidated Financial Statements.

As described more fully in Note 5 of Notes to Consolidated Financial
Statements, during the third quarter of 2000, we invested a total of
approximately $8.9 million in five early-stage e-Business companies. These
nonmarketable investment securities are accounted for under the cost method, as
our ownership is less than 20% and we do not have the ability to exercise
significant influence over the operating and financial policies of the
investees. These arrangements and other strategic partnerships formed in 2000
are part of our strategy to broaden the scope and uses of our products and to
access additional vertical markets and customers. We may make similar,
additional investments in the future. Management believes the early-stage nature
of these investees may create opportunities for us to benefit from future
appreciation in the value of our investments; however, there is significant risk
that the investees may not be successful in executing their business plans and
all or part of our investments may become impaired.

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33

RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

The following table sets forth the percentages that selected items in the
Consolidated Statements of Operations bear to total revenues:

YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
----- ----- -----

Revenues:
Software licenses......................................... 56% 47% 62%
Software maintenance...................................... 11% 13% 8%
Professional services..................................... 33% 40% 30%
--- --- ---
Total revenues.................................... 100% 100% 100%
Cost of revenues:
Cost of software licenses*................................ 3% 2% 4%
Cost of professional services and maintenance*............ 62% 60% 52%
--- --- ---
Total cost of revenues............................ 29% 32% 22%
Operating expenses:
Sales and marketing....................................... 48% 44% 33%
Research and development.................................. 23% 28% 24%
General and administrative................................ 9% 12% 10%
Stock based compensation.................................. 1% -- --
Asset impairment charges.................................. 3% -- --
Restructuring costs....................................... 2% 6% --
Acquisition-related charges and amortization.............. 19% 35% 30%
--- --- ---
Total operating expenses.......................... 105% 125% 97%
--- --- ---
Loss from operations........................................ (34)% (57)% (19)%
Other income, net........................................... 2% 6% 4%
--- --- ---
Loss before provision for income taxes...................... (32)% (51)% (15)%
Income tax benefit.......................................... -- 14% 2%
--- --- ---
Net loss.......................................... (32)% (37)% (13)%
=== === ===
Net income (loss), excluding stock-based
compensation, acquisition, asset impairment and
restructuring related charges as adjusted for
their respective tax effects.................... (4)% (6)% 14%
=== === ===

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

* As a percentage of software licenses and professional services and software
maintenance revenues, respectively.

REVENUES

Our total revenues grew from $65.8 million in 1998 to $126.2 million in
1999 resulting primarily from increased professional services and maintenance
revenues associated with the expansion of our professional services,
organization through both internal growth and acquisitions, as well as continued
growth in software license sales. Total revenues increased 49% from $126.2
million for the year ended December 31, 1999 to $188.3 million for the year
ended December 31, 2000. The increase in total revenues resulted from a 76%, 34%
and 23% growth in software license, software maintenance and professional
service revenues, respectively, in 2000 over 1999.

Software license revenues grew from $41.0 million in 1998 to $59.6 million
or 47% of total revenues in 1999 and to $104.7 million or 56% of total revenues
in 2000. The increase in software license revenue sales reflected growth in our
indirect channel revenues, expansion of our direct sales force and new product
offerings. While our indirect channel revenues remained relatively constant as a
percentage of total license revenues the revenue increased substantially in
absolute dollars. The growth in license revenue is also due to sales of new

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products such as e-Biz Integrator, e-Biz 2000 and adapters sold by both our
direct sales force and indirect channel partners. We expect an increasing amount
of software license revenue will be generated from the future sales of the NEON
e-Biz portal and process servers, our business interchange software and new
products both internally developed and acquired.

Since mid-1999, royalties due us from IBM for sales of MQSeries Integrator
have been recognized on a one-quarter lag basis because reliable information to
accrue this revenue is not available by the time our quarterly financial
statements must be filed with the SEC. Beginning in 2000, the amount recognized
on a lag basis is the amount of royalties earned in excess of contractual
quarterly minimums. Revenue from IBM represented 8% of total revenues in 1998
and 1999 and 17% in 2000. Starting in the second quarter of 1999, the MQSeries
Integrator product was sold through an IBM reseller program known as Passport
Advantage. We act as an agent under this arrangement and, in accordance with SEC
Staff Accounting Bulletin No. 101, "Revenue Recognition," only our share of
proceeds from each transaction is recorded as license revenue.

License revenues for the year ended December 31, 2000, include
approximately $15.2 million from arrangements that involve nonmonetary
consideration. These arrangements included the effective exchange of our
software and services for equity securities of five early-stage e-Business
companies and for software and services of other vendors, plus cash
consideration. The accounting for these transactions and the impact on our
financial statements as of and for the year ended December 31, 2000, is
summarized in Note 10 of our Notes to Consolidated Financial Statements.

Software maintenance revenues grew from $4.9 million or 8% of total
revenues in 1998 to $16.2 million or 13% in 1999, to $21.7 million or 11% of
total revenues in 2000. The increase in software maintenance revenues was
primarily due to the increase in our license software sales to new customers,
the renewal of maintenance contracts to our growing installed base of customers
and the impact of acquisitions.

Professional service revenue consists of revenue for consulting and
training services, which are generally contracted for on a time and materials
basis. These revenues grew from $19.9 million or 30% of total revenues in 1998
to $50.5 million or 40% of total revenue in 1999 to $62.0 million or 33% of
total revenues in 2000. The growth from 1999 to 2000 was due primarily to our
acquisition of Secco, a professional service organization in Germany in the
first half of 2000 and continued growth in revenues from the professional
service organizations acquired in 1999. The growth from 1998 to 1999 was
reflected the acquisition of two professional service organizations, SLI and D&M
during the first half of 1999. We expect near-term growth in professional
service revenues to moderate due primarily to completion of significant funded
development projects, chiefly for financial services industry customers.

COST OF REVENUES

Cost of revenues consists of costs of software licenses and costs of
software maintenance and professional services. As a percentage of total
revenues, total cost of revenues increased from 22% in 1998 to 32% in 1999, and
then declined to 29% in 2000.

Cost of software licenses includes royalty payments to third parties for
jointly developed products, software purchased from third parties for resale,
software documentation, software replication and delivery expenses. As a
percentage of license revenue, cost of software licenses decreased from 4% in
1998 to 2% and 3% in 1999 and 2000, respectively. The total dollar amount
incurred, for the cost of license fees increased 132% to $3.3 million for the
year ended December 31, 2000 from $1.4 million for the year ended December 31,
1999. The major cause for the increase was an increase in royalty payments to
third parties. We expect that royalty payments to third parties will continue to
increase in the future and cause a corresponding increase in the cost of
software licenses.

Cost of software maintenance and professional services includes the
personnel and related overhead costs of providing services, including
consulting, training and customer support, as well as fees paid to third parties
for subcontracted services. As a percent of services and maintenance revenues,
cost of services and maintenance was 52%, 60% and 62% in 1998, 1999 and 2000,
respectively. The increase in cost reflects a transition from higher margin
funded development projects in the Financial Services area to projects which
produce lower margins in our European and Asian services operations, which were
acquired in 1999 and 2000.

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OPERATING EXPENSES

Sales and Marketing

Sales and marketing expenses consist of salaries and commissions for sales
and marketing personnel, related overhead, advertising and promotional costs as
well as provisions for uncollectible receivables. Sales and marketing expenses
were $21.9 million, $54.9 million and $89.8 million, representing 33%, 44% and
48% of total revenues in 1998, 1999 and 2000, respectively. This increase was
primarily due to an expansion of our sales and marketing organization; cost
incurred in connection with a re-branding campaign launched in early 2000, and a
significant increase in our allowance for uncollectible accounts. Our
commissioned sales force grew from 54 in 1998, to 76 in 1999 and to 100 in 2000.
In addition we have expanded the sales team responsible for supporting and
developing our indirect channels. We intend to continue the expansion in our
direct sales force in particular increasing our international presence, and
continue to develop our indirect sales channels and increase promotional
activity. However, due to the one-time nature of the re-branding campaign and
other cost control measures, we do not anticipate sales and marketing expense to
grow in absolute dollars or as a percent of total revenues in 2001.

The increase in the provision for uncollectible receivables relates
principally to service invoices that we have either settled for lesser amounts
or have otherwise concluded may not be collectible. We believe significant
deterioration in the aging of our receivables during the latter part of 2000
reflects, in part, a general economic downturn in the high-technology sector, as
well as some business failures in our customer base. Collection issues also
influenced our decision to de-emphasize certain product lines and market sectors
previously served in adopting the restructuring plans described below.

Research and Development

Research and development expenses include personnel and related overhead
costs for product development, enhancements, upgrades, quality assurance and
testing. We have not capitalized internally generated software development costs
and have expensed all of these costs as incurred in accordance with Statement of
Financial Accounting Standards No. 86. Research and development expenses were
$15.8 million, $34.9 million and $42.5 million, representing 24%, 28% and 23% of
total revenues in 1998, 1999 and 2000, respectively. The dollar increase was
primarily due to the use of third-party contract services in a number of
research and development projects. Due to the completion of the projects which
required the use of third-party consultants and the conclusion of development
work on application products targeted at the healthcare and financial services
markets, we anticipate research and development expenditures, in absolute
dollars, to remain flat or decline for 2001.

General and Administrative

General and administrative expenses consist primarily of personnel and
related overhead costs, outside professional fees, and software and equipment
costs for the finance, legal, human resources, and administrative functions.
General and administrative expenses were $6.6 million, $15.6 million and $16.9
million, representing 10%, 12% and 9% of total revenues in 1998, 1999 and 2000,
respectively. The total dollar amount of expense increased primarily due to
normal increases in annual compensation costs and through the addition of
personnel from acquisitions. General and administrative expenses as a percentage
of total revenues decreased from 1999 to 2000 primarily due our 1999
restructuring which began eliminating redundant personnel and facility costs in
the third quarter of 1999.

Restructuring Charges

During the fourth quarter of 2000, the Company's management approved
restructuring plans that included additional initiatives to consolidate
duplicate facilities, organize the Company into geographically focused business
units and place nonproducing product lines into a maintenance-only mode.
Management expects the restructuring effort to be finalized during the second
quarter of 2001.

Accrued charges for the 2000 restructuring effort include $3.5 million
representing the cost of involuntary employee separation benefits related to
approximately 130 employees worldwide. Employee separation benefits

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36

include severance, medical and other benefits. Employee terminations were made
in the majority of business functions, job classes and geographies, with the
majority of reductions in North America and the United Kingdom. The 2000
restructuring plans also include estimated costs of $1.5 million associated with
the closure and consolidation of office space, principally in North America and
the United Kingdom.

In July 1999, the Company's management and board of directors approved
restructuring plans that included initiatives to integrate the operations of
recently acquired companies, consolidate duplicate facilities, and reduce
overhead. Total restructuring costs of $7.5 million were recorded in the third
quarter of 1999 related to these initiatives. Restructuring efforts related to
staff terminations have been completed. The remaining accrual relates to future
benefits payable to terminated employees. Facilities related restructuring
efforts, which are dependent on our ability to sublet a corporate office, remain
outstanding as of December 31, 2000. The Company has vacated this facility and
monthly rental payments are being charged to the 1999 restructuring reserve.

The 1999 restructuring charges included $3.3 million of involuntary
employee termination benefits related to approximately 150 employees worldwide.
Employee separations affected the majority of business functions, job classes
and geographies, with a majority of the reductions occurring in North America
and Europe. The restructuring plan also included costs totaling $4.1 million
associated with the closure and consolidation of office space, principally in
North America and Europe. The activity in the Company's restructuring reserves
for 1999 and 2000 is summarized as follows:

TOTAL TOTAL
1999 ACCRUED AT 2000 ACCRUED AT
RESTRUCTURING 1999 DECEMBER 31, RESTRUCTURING 2000 DECEMBER 31,
CHARGES PAYMENTS 1999 CHARGES PAYMENTS 2000
------------- -------- ------------ ------------- -------- ------------
(AMOUNTS IN THOUSANDS)

2000 Restructuring:
Employee separations...... $ -- $ -- $ -- $3,523 $ (643) $2,880
Facility closure costs.... -- -- -- 1,543 -- 1,543
1999 Restructuring:
Employee separations...... 3,301 (2,641) 660 (218) (303) 139
Facility closure costs.... 4,149 (1,521) 2,628 -- (1,757) 871
------ ------- ------ ------ ------- ------
Total accrued
restructuring
costs........... $7,450 $(4,162) $3,288 $4,848 $(2,703) $5,433
====== ======= ====== ====== ======= ======

Stock-based Compensation and Related Payroll Taxes

Stock-based compensation and related payroll taxes reflect the noncash
compensation expense associated with restricted stock grants, our stock option
bonus program, our 401(k) match made in our common stock, and payroll taxes
associated with the exercise of taxable employee option grants. See Note 8 of
Notes to Consolidated Financial Statements for descriptions of our stock option
bonus program and 401(k) match.

For clarity of presentation, we have shown all stock-based compensation and
related payroll taxes as a separate line item in our consolidated statement of
operations. If this compensation were allocated to the same expense categories
as the base compensation of the individual employees, expense categories would
have been reflected as follows:

TWELVE MONTHS ENDED
DECEMBER 31, 2000
-----------------------------
AS REPORTED AS REALLOCATED
------------ --------------

Cost of professional services and maintenance............ $ 51,820,096 $ 51,848,464
Sales and marketing...................................... 89,755,149 90,269,267
Research and development................................. 42,504,501 42,525,007
General and administrative............................... 16,941,889 18,720,550
Stock-based compensation and related payroll taxes....... 2,341,653 --
------------ ------------
Totals......................................... $203,363,288 $203,363,288
============ ============

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As described in Note 8 of Notes to Consolidated Financial Statements, on
December 7, 2000, employee options for approximately 4.6 million shares were
repriced to reduce the exercise price to $7.00 per share. These options will be
accounted for prospectively as variable awards until the options are exercised,
forfeited or expire. This accounting treatment is likely to create significant
volatility in reported earnings because increases in the market price of the
Company's common stock in excess of the exercise price will require significant
compensation charges. However, any subsequent decreases in the market price will
result in the reversal of some or all of the compensation expense previously
recognized.

At December 31, 2000, the market price of the Company's stock was less than
the new strike price of $7.00. Consequently, these options had no intrinsic
value and no compensation expense was required to be recognized.

Amortization of Intangibles and Other Acquisition-related Charges

For 2001, amortization of intangibles of $35.7 million includes
amortization of goodwill and other intangible assets related to our acquisition
activities. The allocation of purchase price has been determined by independent
appraisals of net assets acquired. These assets are being amortized over
estimated useful lives, which range from three to 10 years. We also incurred,
during 2000, $548,000 of acquisition-related expenses evaluating several
significant acquisitive transactions that we did not complete. In July and
August 1999, we agreed with the former equity holders of Microscript and Convoy,
respectively, to provide additional consideration to more closely reflect the
value agreed upon in the original purchase negotiations. Accordingly,
approximately $16.6 million in cash was paid to the former equity holders of
Microscript and 618,225 shares of our common stock, valued at $8.3 million were
issued to the former Convoy equity holders. These acquisition charges were
reflected in our consolidated financial statements for the third quarter of 1999
as a one-time charge to operations.

In August 2000, we issued 75,519 shares of common stock to the former
shareholders of SLI upon achievement of certain performance targets. These
shares were recorded as additional purchase price of $3.0 million based on the
fair value of these shares at the time they were earned and that amount was
added to goodwill.

In connection with evaluations performed at December 31, 2000, the Company
identified approximately $5.0 million of long-lived assets that were determined
to be impaired and were written down to zero. The write-off included $4.1
million of goodwill from the February 1999, acquisition of D&M. D&M's principal
operations were discontinued during the fourth quarter of 2000. The impairment
charge also included an additional $861,000 for the unamortized cost of software
products acquired in business combinations that the Company has determined it
will no longer support.

Other Income, Net

Other income, net includes interest income earned on cash, cash
equivalents, short-term and long-term marketable securities, interest expense,
foreign currency gains and losses, and other nonoperating income and expenses.
We recorded net other income of $4.3 million in 2000. This compares to net other
income of $7.1 million in 1999 and $2.7 million in 1998. The decrease from 1999
to 2000 was primarily due to the reduction in invested cash balances resulting
from cash used for acquisitions, in operations, and purchases of other
noncurrent assets. The increase from 1998 to 1999 resulted primarily from the
interest earned on cash invested from the proceeds of our public offerings in
June 1997 and in May and December 1998. We anticipate other income, net will
decline in 2001 as we expect average cash balances to be lower in 2001 than in
2000.

Income Tax Provision (Benefit)

We recognized income tax benefits of $1.3 million in 1998 and $18.0 million
in 1999. We reported income tax expense in 2000 of $791,000. The expense for
2000 represents estimated state and foreign taxes payable for the year. The
increase in net deferred tax assets of $16.5 million related to operating
losses, increased credit carryforwards and other temporary differences was fully
offset by an increase to the valuation allowance. During 1998 our deferred tax
assets increased by $5.6 million to approximately $9.0 million primarily due to
intangibles we acquired from CAI that were expensed, but which we amortize over
15 years for tax purposes, and additions to our tax credit carryovers. We
concluded in 1998 that it was more likely than not that we would recognize
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38

$5.0 million of our deferred tax assets, and we adjusted the valuation allowance
to $4.0 million. During 1999 our deferred tax assets, net of deferred tax
liabilities, increased by $10.6 million to $19.6 million. The increase was
primarily from operating loss carryforwards, including tax deductions arising
from the exercise of stock options, shorter amortization lives for purchased
intangibles than allowed for tax purposes, acquired operating loss carryovers,
and increased tax credit carryforwards. Deferred tax liabilities of $14.5
million were recognized for purchased intangibles, other than goodwill, that has
no basis for tax, and other miscellaneous items.

During 2000 our deferred tax assets, net of deferred tax liabilities,
increased by approximately $21.6 million to $41.2 million. The increase was
primarily from operating loss carryforwards, including tax deductions arising
from the exercise of stock options, shorter amortization lives for purchased
intangibles than allowed for tax purposes, acquired operating loss carryovers as
reflected on final returns of acquired companies, and increased tax credit
carryforwards. Deferred tax liabilities of approximately $5.5 million were also
recognized for purchased intangibles, other than goodwill, that have no tax
basis, and for other miscellaneous items.

We increased the valuation allowance against our deferred tax assets from
$11.9 million at December 31, 1999, to approximately $38.9 million at December
31, 2000. A portion of the valuation allowance, $4.5 million relates to tax loss
carryforwards of purchased businesses. If these deferred tax assets are
realized, the benefit will reduce goodwill arising from the Convoy and
Microscript acquisitions. An additional portion of the allowance, $18 million,
relates to stock option compensation deductions included in our net operating
loss carryforwards. If and when we determine to reverse that portion of the
valuation allowance, the benefit will be added to additional paid-in capital,
rather than being shown as a reduction of future income tax expense. The
remaining $16.4 million of the valuation allowance relates to operating loss
carryforwards, and credit carryforwards that, based on a judgmental assessment
of present circumstances using a more likely than not standard, management
believes will not result in a reduction of future taxes payable.

Net Loss

We reported a net loss of $60.9 million, or $1.71 per share, for the year
ended December 31, 2000. Our net loss for 1999 was $46.3 million, or $1.44 per
share. Our net loss for 1998 was $8.5 million, or $0.38 per share. These losses
include acquisition-related and restructuring costs as well as other non-cash
and non-recurring charges as set forth in Item 6, "Selected Consolidated
Financial Data." Our pre-tax losses, exclusive of those charges, were
approximately $11.6 million for 2000 and $12.3 million for 1999. For 1998,
exclusive of those charges, our pretax income was $9.6 million.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2000, our principal sources of liquidity consisted of
$58.2 million of cash, cash equivalents, and short-term and long-term
investments in marketable securities, compared with $94.8 million at December
31, 1999. This decrease was primarily due to cash paid for acquisitions, cash
paid for private equity investments, and cash used for operations, including
restructuring expenses. No amounts were outstanding under the line of credit
during the years ended December 31, 2000 or 1999. We had working capital of
$44.0 million and $86.2 million at December 31, 2000 and 1999, respectively.
Included in determining such amounts are short-term deferred revenue and
customer deposits of $19.2 million and $13.6 million for the years ended
December 31, 2000 and 1999, respectively. The majority of short-term deferred
revenue represents annual maintenance fees charged to customers, which are
recognized ratably as revenue over the support service contract period.

We used $11.6 million in cash for operating activities during the year
ended December 31, 2000 compared to $36.2 million in cash during the year ended
December 31, 1999. The decrease in cash used in operations was due primarily to
improved operating results and the absence of significant cash expenditures in
2000 for acquisition and restructuring charges. Acquisition and restructuring
charges reduced cash by $3.5 million in 2000 compared to $20.1 million in 1999.

Our accounts receivable, net, increased to $41.4 million at December 31,
2000 compared to $38.5 million at December 31, 1999. The relationship of our net
receivables to fourth quarter revenues is comparable between the periods.
However, as previously noted, our receivable agings deteriorated significantly
in the second half of 2000
36
39

and we made an additional provision for uncollectible accounts of approximately
$9.9 million in the fourth quarter of 2000.

We used $35.0 million in cash for investing activities for the year ended
December 31, 2000 compared to $96.9 million for the year ended December 31,
1999. In 1999, one of the primary investing activities was the net purchase of
short-term and long-term marketable securities. The increase from the prior year
was primarily due to the investment of the remaining proceeds from the 1998
follow-on offerings during the first two quarters of 1999. During both periods
we continued to invest cash in business combinations. During 2000 we made net
cash investments in the PaperFree and Secco acquisitions of $17.7 million and
$11.3 million, respectively. During 1999 the most significant cash outlays for
acquisitions resulted from the VIE, SLI and Microscript acquisitions with net
cash investments of $11.9 million, $16.2 million and $6.7 million, respectively.
We also used net cash of $4.0 to fund private equity investments in 2000. During
both 2000 and 1999, we funded leasehold improvements and purchased furniture,
fixtures and equipment necessary to support our expanding operations. These
expenditures totaled $16.2 million in 2000 and $10.8 million in 1999. During
1999, we funded approximately $19.7 million in a short-term construction loan to
Greenwood Plaza Partners, LLP ("GPP") for construction of two buildings and a
parking structure. The Company's Chief Executive Officer and Chairman of the
Board principally owns GPP. During the third quarter of 1999, the Company began
leasing the completed portion of the buildings from GPP for use as its principal
corporate headquarters. We replaced an existing lender for the first phase of
construction, and committed to fund up to $31.4 million for one year at a
floating interest rate of 90-day LIBOR plus 2.05%. The terms of the construction
financing were consistent with those that were in place with GPP's previous
lender and were approved by our board of directors.

During 2000 we advanced an additional $5.7 million in construction
financing to GPP, increasing the amount owed due us to $25.4 million. In May
2000, GPP received interim financing from a third-party lender and GPP repaid
the amount due to us in full, $25.4 million, with proceeds from the financing.
Terms of the interim financing required us to maintain up to $8.3 million in
cash with the lender. Of that amount, $1.3 million was set aside and has been
spent for leasehold improvements and leasing commissions, reducing the
restricted cash balance to $7.0 million at December 31, 2000. The restricted
cash represents one form of collateral to the lender in recognition that we have
a long-term master lease for the entire facility.

Financing activities provided $10.5 million in cash during 2000 compared to
$7.9 million during 1999. We received $14.9 in 2000 and $8.1 million in 1999
from the exercise of stock options granted under our stock option plans and
Employee Stock Purchase Plan. In August 1999, the Company's board of directors
authorized the repurchase of up to 10% of NEON's outstanding shares of common
stock over a 12-month period. The board of directors extended the authorization
in 2000. During 1999 we purchased 20,000 shares at a total cost of approximately
$347,000. During 2000 we purchased an additional 258,000 shares at a total cost
of $4.5 million. The Company may purchase additional shares from time to time on
the open market.

In July 1999, we agreed with the former equityholders of Microscript to pay
additional purchase consideration to more closely reflect the purchase value
agreed upon in the purchase negotiations. This required additional cash
expenditures of $16.6 million in the third quarter of 1999.

We believe our existing balances of cash, cash equivalents and short-term
and long-term investments in marketable securities will be sufficient to meet
our anticipated working capital and capital expenditure needs for at least the
next 12 months. Thereafter, we may require additional sources of funds to
continue to support our business. There can be no assurance that such capital,
if needed, will be available or will be available on terms acceptable to us.

FOREIGN CURRENCY RISK

We operate wholly owned subsidiaries located in England, France,
Switzerland, Germany, Australia, Japan, Malaysia, Hong Kong and Singapore. Sales
and expenses from these operations are typically denominated in local currency,
thereby creating exposure to changes in exchange rates. The changes in foreign
exchange rates may positively or negatively affect our sales, gross margins and
retained earnings. We do not believe that reasonably possible near-term changes
in exchange rates will result in a material effect on our future earnings, fair
values or cash flows and, therefore, have chosen not to enter into foreign
currency hedging instruments. There
37
40

can be no assurance that this approach will be successful, especially in the
event of a significant and sudden decline in the value of foreign exchange rates
relative to the United States dollar. See Item 7A, "Quantitative and Qualitative
Disclosures about Market Risk."

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the ordinary course of operations, our financial position and cash flows
are subject to a variety of risks, which include market risks associated with
changes in foreign currency exchange rates and movement in interest rates. We do
not, in the normal course of business, use derivative financial instruments for
trading or speculative purposes. Uncertainties that are either nonfinancial or
nonquantifiable, such as political, economic, tax, other regulatory or credit
risks are not included in the following assessment of our market risks.

FOREIGN CURRENCY EXCHANGE RATES

Operations outside of the U.S. expose us to foreign currency exchange rate
changes and could impact translations of foreign denominated assets and
liabilities into U.S. dollars and future earnings and cash flows from
transactions denominated in different currencies. During 2000, 27.4% of our
total revenue was generated from our international operations, and the net
assets of our foreign subsidiaries totaled 12% of consolidated net assets as of
December 31, 2000. Our exposure to currency exchange rate changes is diversified
due to the number of different countries in which we conduct business. We
operate outside the U.S. primarily through wholly owned subsidiaries in England,
France, Switzerland, Germany, Australia, Japan, Malaysia, Hong Kong and
Singapore. These foreign subsidiaries use local currencies as their functional
currency, as sales are generated and expenses are incurred in such currencies.
Foreign currency gains and losses will continue to result from fluctuations in
the value of the currencies in which we conduct our operations as compared to
the U.S. dollar, and future operating results will be affected to some extent by
gains and losses from foreign currency exposure. We do not believe that possible
near-term changes in exchange rates will result in a material effect on our
future earnings or cash flows and, therefore, have chosen not to enter into
foreign currency hedging instruments. There can be no assurance that this
approach will be successful, especially in the event of a sudden and significant
decline in the value of foreign currencies relative to the United States dollar.

INTEREST RATES

Our exposure to market risk associated with changes in interest rates
relates primarily to our investments in marketable securities as our
related-party note receivable was repaid in full during 2000. Our investments,
including cash equivalents, consist of U.S., federal, state and municipal bonds,
as well as domestic corporate bonds, with maturities of greater than 12 months.
All investments are classified as available-for-sale as defined in SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and
accordingly are carried at market value. Our short-term investment objectives
are safety, liquidity and yield. Additionally, interest income on our related
party receivable was based on a floating interest rate of 90-day LIBOR plus
2.05%. Changes in interest rates could impact our anticipated interest income or
could impact the fair market value of our investments. However, we believe these
changes in interest rates will not cause a material impact on our financial
position, results of operations or cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our financial statements and the report of the independent public
accountants appear on pages 42 through 74 of this Report.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.

Not applicable.

38
41

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

The information required by this item concerning the Company's directors is
incorporated by reference to the information set forth in the sections entitled
"Proposal No. 1: Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 2001 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of the Company's fiscal year ended December 31, 2000 (the "2001 Proxy
Statement"), except that the information required by this item concerning the
executive officers of the Company is incorporated by reference to the
information set forth in the section entitled "Executive Officers of the
Registrant" at the end of Part I of this Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item regarding executive compensation is
incorporated by reference to the information set forth in the sections entitled
"Proposal No. 1: Election of Directors -- Compensation of Directors" and
"Executive Officer Compensation" in the Company's 2001 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information set forth in the section entitled "Beneficial Share Ownership by
Principal Stockholders and Management" in the Company's 2001 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information set forth
in the section entitled "Certain Transactions" in the Company's 2001 Proxy
Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

1. Consolidated Financial Statements. The following consolidated financial
statements of the Registrant and subsidiaries are filed as part of this Report:

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

Report of Independent Public Accountants.................... 44
Consolidated Balance Sheets................................. 45
Consolidated Statements of Operations....................... 46
Consolidated Statements of Stockholders' Equity and Other
Comprehensive Income (Loss)............................... 47
Consolidated Statements of Cash Flows....................... 48
Notes to Consolidated Financial Statements.................. 49

2. Financial Statement Schedules.

All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or rules thereto.

39
42

3. Exhibits.

EXHIBIT
NUMBER DESCRIPTION
------- -----------

2.1 -- Share Purchase Agreement dated June 12, 1998 by and among
Registrant, MSB Consultants Limited and the shareholders
of MSB (which is incorporated herein by reference to
Exhibit 2 to the Registrant's Current Report on Form 8-K
filed June 26, 1998).
2.2 -- Share Acquisition Agreement dated September 30, 1998 by
and among Registrant and the shareholders of Century
Analysis Incorporated (which is incorporated herein by
reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K filed October 14, 1998).
3.1 -- Amended and Restated Certificate of Incorporation, as
amended through May 21, 1997 (which is incorporated
herein by reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-1, Registration No.
333-20189 ("Registrant's 1997 S-1")).
3.2 -- Amended and Restated Bylaws of Registrant, as amended
through February 2, 1998 (which is incorporated herein by
reference to Exhibit 3.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997).
3.3 -- Certificate of Determination of Rights, Preferences and
Privileges of Series A Preferred Stock (included in
Exhibit 4.1).
4.1 -- Form of Registrant's Common Stock Certificate (which is
incorporated herein by reference to Exhibit 4.1 to the
Registrant's 1997 S-1).
4.2 -- Preferred Shares Right Agreement, dated as of August 5,
1998 between the Registrant and Bank Boston N.A.,
including the Certificate of Designator, the Form of
Rights Certificate and the Summary of Rights attached
thereto as Exhibits A, B and C, respectively (which is
incorporated herein by reference to Exhibit 1 to the
Registrant's Registration Statement on Form 8-K/A
Amendment No. 1 filed August 17, 1998).
4.3 -- Amendment No. 1 to Preferred Shares Rights Agreement,
dated as of February 20, 2001 between the Registrant and
American Stock Transfer & Trust Company.
10.1* -- Form of Indemnification Agreement entered into by
Registrant with each of its directors and executive
officers (which is incorporated herein by reference to
Exhibit 10.1 to the Registrant's 1997 S-1).
10.2* -- 1995 Stock Option Plan, (amended and restated as of
January 3, 1997) and related agreements (which is
incorporated herein by reference to Exhibit 10.2 to the
Registrant's 1997 S-1).
10.3* -- 1997 Director Option Plan and related agreements (which
is incorporated herein by reference to Exhibit 10.3 to
the Registrant's 1997 S-1).
10.4* -- 1997 Employee Stock Purchase Plan and related agreements
(which is incorporated herein by reference to Exhibit
10.4 to the Registrant's 1997 S-1).
10.5* -- 1998 Nonstatutory Stock Option Plan and related
agreements (which is incorporated herein by reference to
Exhibit 10.5 to the Registrant's 1998 10-K).
10.6 -- Warrant to Purchase Stock issued to Silicon Valley Bank
dated April 12, 1996 (which is incorporated herein by
reference to Exhibit 10.5 to the Registrant's 1997 S-1).
10.7 -- Registration Rights Agreement between the Registrant and
certain parties named therein dated May 9, 1995 (which is
incorporated herein by reference to Exhibit 10.9 to the
Registrant's 1997 S-1).
10.8 -- Amendment No. 1 to Registration Rights Agreement between
the Registrant and certain parties named therein dated
September 20, 1995 (which is incorporated herein by
reference to Exhibit 10.10 to the Registrant's 1997 S-1).
10.9 -- Amendment No. 2 to Registration Rights Agreement between
the Registrant and certain parties named therein dated
June 3, 1996 (which is incorporated herein by reference
to Exhibit 10.11 to the Registrant's 1997 S-1).

40
43

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.10 -- Standard Commercial Lease between Greenwood Plaza
Partners, LLC and the Registrant dated July 22, 1999
(which is incorporated herein by reference to Exhibit
10.10 to the Registrant's Annual Report on Form 10-K for
1999 dated March 29, 2000).
10.11 -- First Amendment to Standard Commercial Lease between
Greenwood Plaza Partners, LLC and the Registrant with
ancillary agreements dated May 2000 (which is
incorporated herein by reference to Exhibit 10.11 to the
Registrant's Quarterly Report on Form 10-Q dated August
14, 2000).
10.12 -- Agreement and Plan of Reorganization by and among Sybase,
Inc., Neel Acquisition Corp. and the Registrant dated
February 20, 2001 (which is incorporated herein by
reference to Exhibit 2.1 of the Registrant's Report on
Form 8-K dated February 28, 2001).
10.13 -- Form of Change of Control Severance Agreement as entered
into between the Registrant and each of George F. (Rick)
Adam, Jr., Patrick J. Fortune, Stephen E. Webb and
Frederick T. Horn.
10.14* -- Amended Change of Control Severance Agreement between
George F. (Rick) Adam, Jr. and the Registrant dated
February 16, 2001.
10.15* -- Amended Change of Control Severance Agreement between
Patrick J. Fortune and the Registrant dated February 16,
2001.
10.16* -- Amended Change of Control Severance Agreement between
Stephen E. Webb and the Registrant dated February 16,
2001.
10.17* -- Amended Change of Control Severance Agreement between
Frederick T. Horn and the Registrant dated February 16,
2001.
10.18* -- Change of Control Severance Agreement between Dr. Franz
Koepper and the Registrant dated January 30, 2001.
10.19* -- Employment Agreement between Dr. Franz Koepper and SLI
Consulting AG dated January 1, 1998.
10.20* -- Amendment 2000/2001 to the Employment Agreement between
Dr. Franz Koepper and SLI Consulting AG dated December
24, 2000.
23.1 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (which is included on page 41 herein).

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

* Indicates management compensatory plan, contract or arrangement.

(b) Reports on Form 8-K.

A Form 8-K was filed February 28, 2001 with respect to the execution of the
Agreement and Plan or Reorganization, dated as of February 20, 2001, by and
among Sybase, Inc., Neel Acquisition Corp. and New Era of Networks, Inc.

41
44

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized on this 2nd day of
March 2001.

NEW ERA OF NETWORKS, INC.

By: /s/ STEPHEN E. WEBB
----------------------------------
Stephen E. Webb,
Senior Vice President and
Chief Financial Officer

POWER OF ATTORNEY

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints George F. (Rick) Adam and Leonard M.
Goldstein, his or her attorneys-in-fact, with full power of substitution, for
him or her in any and all capacities, to sign any and all amendments to this
Form 10-K, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitute or
substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Form 10-K has been signed below by the following persons on behalf of the
Registrant on March 2, 2001 and in the capacities indicated:

SIGNATURE TITLE
--------- -----

/s/ GEORGE F. (RICK) ADAM, JR. Chairman of the Board and Chief Executive
- ----------------------------------------------------- Officer and Director (principal executive
George F. (Rick) Adam, Jr. officer)

/s/ PATRICK J. FORTUNE Director, President and Chief Operating
- ----------------------------------------------------- Officer
Patrick J. Fortune

/s/ STEPHEN E. WEBB Senior Vice President and Chief Financial
- ----------------------------------------------------- Officer (principal financial officer)
Stephen E. Webb

/s/ BRIAN P. DUFF Vice President and Corporate Controller
- ----------------------------------------------------- (principal accounting officer)
Brian P. Duff

/s/ STEVEN LAZARUS Director
- -----------------------------------------------------
Steven Lazarus

/s/ MARK L. GORDON Director
- -----------------------------------------------------
Mark L. Gordon

/s/ JOSEPH E. KASPUTYS Director
- -----------------------------------------------------
Joseph E. Kasputys

/s/ MEL BERGSTEIN Director
- -----------------------------------------------------
Mel Bergstein

/s/ ROBERT I. THEIS Director
- -----------------------------------------------------
Robert I. Theis

42
45

NEW ERA OF NETWORKS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PAGE
----

43
46

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To New Era of Networks, Inc.:

We have audited the accompanying consolidated balance sheets of NEW ERA OF
NETWORKS, INC. (a Delaware corporation) AND SUBSIDIARIES as of December 31, 2000
and 1999, and the related consolidated statements of operations, stockholders'
equity and comprehensive income (loss) and cash flows for each of the three
years in the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
New Era of Networks, Inc. and subsidiaries, as of December 31, 2000 and 1999,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Denver, Colorado,
February 16, 2001.

44
47

NEW ERA OF NETWORKS, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31,
----------------------------
2000 1999
------------- ------------

ASSETS

Current assets:
Cash and cash equivalents................................. $ 12,521,383 $ 49,796,989
Short-term investments in marketable securities........... 28,114,872 7,682,786
Accounts receivable, net of allowance for uncollectible
accounts of $8,741,000 and $1,885,000, respectively.... 41,355,879 38,492,822
Unbilled revenue.......................................... 1,531,478 3,251,144
Prepaid expenses and other................................ 13,614,518 6,131,194
Note receivable, related party............................ -- 19,666,135
------------- ------------
Total current assets.............................. 97,138,130 125,021,070
------------- ------------
Property and equipment:
Computer equipment and software........................... 27,579,357 17,023,054
Furniture, fixtures and equipment......................... 6,632,175 4,345,324
Leasehold improvements.................................... 6,921,185 3,273,280
------------- ------------
41,132,717 24,641,658
Less-accumulated depreciation............................. (15,213,956) (7,126,379)
------------- ------------
Property and equipment, net............................... 25,918,761 17,515,279
Long-term investments in marketable securities.............. 10,558,712 37,335,205
Restricted long-term cash and investments in marketable
securities................................................ 7,000,000 --
Intangibles, net............................................ 195,884,328 170,565,822
Deferred income taxes, net.................................. 2,226,422 7,700,765
Other assets, net........................................... 10,757,976 1,382,354
------------- ------------
Total assets...................................... $ 349,484,329 $359,520,495
============= ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.......................................... $ 9,254,252 $ 6,118,010
Accrued liabilities....................................... 24,686,731 19,111,975
Deferred revenue.......................................... 19,207,229 13,570,715
------------- ------------
Total current liabilities......................... 53,148,212 38,800,700
Deferred revenue -- long-term............................... 364,755 78,437
------------- ------------
Total liabilities................................. 53,512,967 38,879,137
------------- ------------
Commitments and contingencies (Note 11)
Stockholders' equity (Note 8):
Common stock, $.0001 par value, 200,000,000 shares
authorized, 36,722,944 and 34,051,573 shares issued and
36,575,382 and 34,031,573 shares outstanding as of
December 31, 2000 and 1999, respectively............... 3,671 3,405
Additional paid-in capital................................ 432,421,610 389,199,732
Treasury stock (147,562 and 20,000 shares of common stock
as of December 31, 2000 and 1999, respectively, at
cost).................................................. (2,549,712) (347,375)
Accumulated deficit....................................... (128,687,936) (66,329,148)
Deferred stock-based compensation......................... (1,242,707) --
Cumulative other comprehensive loss....................... (3,973,564) (1,885,256)
------------- ------------
Total stockholders' equity........................ 295,971,362 320,641,358
------------- ------------
Total liabilities and stockholders' equity........ $ 349,484,329 $359,520,495
============= ============

The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.

45
48

NEW ERA OF NETWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

Revenues:
Software licenses................................ $104,663,700 $ 59,564,445 $ 40,975,703
Software maintenance............................. 21,662,968 16,177,439 4,912,447
Professional services............................ 62,021,598 50,482,268 19,925,923
------------ ------------ ------------
Total revenues........................... 188,348,266 126,224,152 65,814,073
------------ ------------ ------------
Cost of revenues:
Cost of software licenses........................ 3,261,223 1,405,289 1,701,458
Cost of professional services and maintenance.... 51,820,096 38,895,808 12,906,012
------------ ------------ ------------
Total cost of revenues................... 55,081,319 40,301,097 14,607,470
------------ ------------ ------------
Gross profit....................................... 133,266,947 85,923,055 51,206,603
------------ ------------ ------------
Operating expenses:
Sales and marketing.............................. 89,755,149 54,861,589 21,941,568
Research and development......................... 42,504,501 34,872,684 15,839,483
General and administrative....................... 16,941,889 15,620,060 6,571,100
Stock-based compensation, including related
payroll taxes of $398,247..................... 2,341,653 -- --
Acquisition charges.............................. 548,298 25,148,349 17,597,000
Asset impairment charges......................... 4,954,576 -- --
Restructuring charges............................ 4,847,776 7,449,621 --
Amortization of intangibles...................... 35,748,926 19,396,837 1,778,410
------------ ------------ ------------
Total operating expenses................. 197,642,768 157,349,140 63,727,561
------------ ------------ ------------
Loss from operations............................... (64,375,821) (71,426,085) (12,520,958)
Other income, net.................................. 4,296,642 7,132,347 2,743,746
------------ ------------ ------------
Loss before income taxes........................... (60,079,179) (64,293,738) (9,777,212)
Income tax provision (benefit)..................... 791,147 (17,981,380) (1,278,400)
------------ ------------ ------------
Net loss........................................... $(60,870,326) $(46,312,358) $ (8,498,812)
============ ============ ============
Net loss per common share, basic and diluted....... $ (1.71) $ (1.44) $ (0.38)
============ ============ ============
Weighted average shares of common stock
outstanding, basic and diluted (Note 2).......... 35,691,295 32,247,552 22,277,472
============ ============ ============

The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.

46
49

NEW ERA OF NETWORKS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
OTHER COMPREHENSIVE INCOME (LOSS)

COMMON STOCK ADDITIONAL DEFERRED
------------------- PAID-IN TREASURY ACCUMULATED STOCK-BASED
SHARES AMOUNT CAPITAL STOCK DEFICIT COMPENSATION
---------- ------ ------------ ----------- ------------- ------------

BALANCES, December 31, 1997............. 18,212,314 $1,822 $ 46,190,279 $ -- $ (11,517,978) $ --
Issuance of common stock in public
offerings, net of issuance costs of
$12,308,142......................... 9,537,000 954 204,321,780 -- -- --
Issuance of common stock upon exercise
of stock options and warrants....... 862,064 85 2,774,215 -- -- --
Issuance of common stock in business
combinations........................ 1,548,124 155 38,151,812 -- -- --
Tax benefit related to the exercise of
stock options....................... -- -- 3,225,488 -- -- --
Issuance of common stock in connection
with Employee Stock Purchase Plan... 174,276 17 907,195 -- -- --
---------- ------ ------------ ----------- ------------- -----------
Cumulative translation adjustment..... -- -- -- -- -- --
Net loss.............................. -- -- -- -- (8,498,812) --
-------------
Total comprehensive loss........ -- -- -- -- (8,498,812)
---------- ------ ------------ ----------- ------------- -----------
BALANCES, December 31, 1998............. 30,333,778 $3,033 $295,570,769 $ -- $ (20,016,790) $ --
Issuance of common stock upon exercise
of stock options and warrants....... 1,443,217 144 6,346,094 -- -- --
Issuance of common stock in business
combinations........................ 1,524,516 153 76,486,190 -- -- --
Issuance of common stock for
acquisition charges................. 618,225 62 8,268,697 -- -- --
Reverse excess accrual for issuance
costs related to the December 1998
public offering..................... -- -- 107,458 -- -- --
Restructuring charges -- due to option
remeasurement....................... -- -- 650,454 -- -- --
Issuance of common stock in connection
with Employee Stock Purchase Plan... 131,837 13 1,770,070 -- -- --
Purchase of shares for treasury
(20,000 shares)..................... -- -- -- (347,375) -- --
---------- ------ ------------ ----------- ------------- -----------
Cumulative translation adjustment..... -- -- -- -- -- --
Unrealized loss on marketable
securities.......................... -- -- -- -- -- --
Net loss.............................. -- -- -- -- (46,312,358) --
-------------
Total comprehensive loss........ -- -- -- -- (46,312,358)
---------- ------ ------------ ----------- ------------- -----------
BALANCES, December 31, 1999............. 34,051,573 $3,405 $389,199,732 $ (347,375) $ (66,329,148) $ --
Issuance of common stock upon exercise
of stock options.................... 1,423,572 142 10,526,981 -- -- --
Issuance of common stock in business
combinations........................ 884,601 87 25,668,222 -- -- --
Compensation charge due to Employee
Stock Option Bonus Program.......... -- -- 735,670 -- -- --
Compensation charge due to option
remeasurement....................... -- -- 340,046 -- -- --
Purchase of shares for treasury
(258,130 shares).................... -- -- -- (4,458,411) -- --
401(k) match (130,568 treasury
shares)............................. -- -- 2,256,074 (1,488,462) --
Issuance of common stock in connection
with Employee Stock Purchase Plan... 293,198 30 4,406,026 -- -- --
Issuance of restricted stock grants... 70,000 7 1,544,933 -- -- (1,544,940)
Amortization of deferred stock-based
compensation........................ -- -- -- -- -- 302,233
---------- ------ ------------ ----------- ------------- -----------
Cumulative translation adjustment..... -- -- -- -- -- --
Unrealized loss on marketable
securities.......................... -- -- -- -- -- --
Reclassification adjustment for
realized losses included in net loss
for the period...................... -- -- -- -- -- --
Net loss.............................. -- -- -- -- (60,870,326) --
-------------
Total comprehensive loss........ -- -- -- -- (60,870,326)
---------- ------ ------------ ----------- ------------- -----------
BALANCES, December 31, 2000............. 36,722,944 $3,671 $432,421,610 $(2,549,712) $(128,687,936) $(1,242,707)
========== ====== ============ =========== ============= ===========

OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- ------------

BALANCES, December 31, 1997............. $ 57,146 $ 34,731,269
Issuance of common stock in public
offerings, net of issuance costs of
$12,308,142......................... -- 204,322,734
Issuance of common stock upon exercise
of stock options and warrants....... -- 2,774,300
Issuance of common stock in business
combinations........................ -- 38,151,967
Tax benefit related to the exercise of
stock options....................... -- 3,225,488
Issuance of common stock in connection
with Employee Stock Purchase Plan... -- 907,212
----------- ------------
Cumulative translation adjustment..... 783
Net loss.............................. --
----------- ------------
Total comprehensive loss........ 783 (8,498,029)
----------- ------------
BALANCES, December 31, 1998............. $ 57,929 $275,614,941
Issuance of common stock upon exercise
of stock options and warrants....... -- 6,346,238
Issuance of common stock in business
combinations........................ -- 76,486,343
Issuance of common stock for
acquisition charges................. -- 8,268,759
Reverse excess accrual for issuance
costs related to the December 1998
public offering..................... -- 107,458
Restructuring charges -- due to option
remeasurement....................... -- 650,454
Issuance of common stock in connection
with Employee Stock Purchase Plan... -- 1,770,083
Purchase of shares for treasury
(20,000 shares)..................... -- (347,375)
----------- ------------
Cumulative translation adjustment..... (1,177,322)
Unrealized loss on marketable
securities.......................... (765,863)
Net loss.............................. --
-----------
Total comprehensive loss........ (1,943,185) (48,255,543)
----------- ------------
BALANCES, December 31, 1999............. $(1,885,256) $320,641,358
Issuance of common stock upon exercise
of stock options.................... -- 10,527,123
Issuance of common stock in business
combinations........................ -- 25,668,309
Compensation charge due to Employee
Stock Option Bonus Program.......... -- 735,670
Compensation charge due to option
remeasurement....................... -- 340,046
Purchase of shares for treasury
(258,130 shares).................... -- (4,458,411)
401(k) match (130,568 treasury
shares)............................. -- 767,612
Issuance of common stock in connection
with Employee Stock Purchase Plan... -- 4,406,056
Issuance of restricted stock grants... -- --
Amortization of deferred stock-based
compensation........................ -- 302,233
----------- ------------
Cumulative translation adjustment..... (1,466,921)
Unrealized loss on marketable
securities.......................... (547,218)
Reclassification adjustment for
realized losses included in net loss
for the period...................... (74,169)
Net loss.............................. --
-----------
Total comprehensive loss........ (2,088,308) (62,958,634)
----------- ------------
BALANCES, December 31, 2000............. $(3,973,564) $295,971,362
=========== ============

The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
47
50

NEW ERA OF NETWORKS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
------------ ------------- ------------

Cash flows from operating activities:
Net loss.................................................. $(60,870,326) $ (46,312,358) $ (8,498,812)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization........................... 43,902,818 23,428,770 3,459,187
Asset impairment charges................................ 4,954,576 -- --
Minority interest share of losses....................... -- (12,720) --
Charge for acquired in-process research and
development........................................... -- -- 17,597,000
Acquisition charges paid with common stock.............. -- 8,268,759 --
Amortization of deferred stock-based compensation....... 302,233 -- --
Option remeasurement noncash charges.................... 340,046 650,453 --
Noncash compensation charge for Employee Stock Option
Bonus Program......................................... 735,670 -- --
Noncash compensation charge for Employer 401(k) match... 767,612 -- --
Pro vision for deferred income taxes.................... -- (18,550,680) (4,992,800)
Imputed interest on purchase consideration.............. -- -- 90,000
Loss on sale of property and equipment.................. 40,910 350,498 --
Changes in assets and liabilities --
Accounts receivable, net.............................. (5,245,255) (2,440,767) (12,948,845)
Unbilled revenue...................................... 757,931 503,634 (918,453)
Prepaid expenses and other assets..................... (7,703,951) (2,157,880) (1,408,657)
Accounts payable...................................... 686,447 (2,881,145) 1,228,156
Accrued liabilities................................... 1,661,778 (2,017,367) 1,794,786
Accrued restructuring charges......................... 2,149,864 3,288,582 --
Deferred revenue...................................... 5,922,832 1,718,647 3,071,143
------------ ------------- ------------
Net cash used in operating activities............... (11,596,815) (36,163,574) (1,527,295)
------------ ------------- ------------
Cash flows from investing activities:
Purchases of investments in marketable securities......... (53,951,313) (52,093,401) (18,361,641)
Proceeds from sales and maturities of investments......... 52,674,333 28,159,788 12,016,871
Business combinations, net of cash acquired............... (29,030,211) (38,374,902) (22,160,671)
Purchases of private equity investments................... (3,985,401) -- (400,000)
Purchases of property and equipment....................... (16,185,996) (10,752,785) (7,273,860)
Investment in note receivable -- related party............ (5,744,550) (19,666,135) --
Proceeds from repayment of note receivable -- related
party................................................... 25,410,685 -- --
Purchase of developed software and trademarks............. (4,156,551) (4,194,842) (600,000)
------------ ------------- ------------
Net cash used in investing activities............... (34,969,004) (96,922,277) (36,779,301)
------------ ------------- ------------
Cash flows from financing activities:
Proceeds from issuances of common stock................... 14,933,179 8,111,522 220,312,388
Purchase of treasury stock................................ (4,458,411) (347,375) --
Common stock issuance costs............................... (20,631) 107,458 (12,308,142)
Tax benefit related to the exercise of stock options...... -- -- 3,225,488
Principal payments on notes payable to banks.............. -- -- (5,830,772)
------------ ------------- ------------
Net cash provided by financing activities........... 10,454,137 7,871,605 205,398,962
------------ ------------- ------------
Effect of exchange rate changes on cash..................... (1,163,924) 838,227 (69,720)
------------ ------------- ------------
Net (decrease) increase in cash and cash equivalents........ (37,275,606) (124,376,019) 167,092,366
Cash and cash equivalents, beginning of period.............. 49,796,989 174,173,008 7,150,362
------------ ------------- ------------
Cash and cash equivalents, end of period.................... $ 12,521,383 $ 49,796,989 $174,173,008
============ ============= ============
Supplemental cash flow information:
Cash paid during the year for --
Interest................................................ $ 14,144 $ 34,720 $ 46,675
============ ============= ============
Taxes................................................... $ 1,225,043 $ 974,797 $ 370,085
============ ============= ============
Supplemental disclosure of noncash information:
Common stock issued for business combinations............. $ 25,668,309 $ 76,486,343 $ 38,151,967
============ ============= ============
Common stock issued for acquisition charges............... $ -- $ 8,268,759 $ --
============ ============= ============
Accrued business combination costs........................ $ 9,127 $ 251,957 $ 496,511
============ ============= ============
Nonmonetary cost of private equity investments............ $ 4,914,599 $ -- $ --
============ ============= ============
Stock-based compensation and 401(k) match credited to
stockholders' equity.................................... $ 1,843,328 $ -- --
============ ============= ============
Restricted stock grants................................... $ 1,545,000 $ -- $ --
============ ============= ============
Restructuring cost -- option remeasurement................ $ -- $ 650,454 $ --
============ ============= ============
Restructuring cost -- loss on asset disposition........... $ -- $ 350,498 $ --
============ ============= ============
Accrued deferred offering costs........................... $ -- $ -- $ 484,665
============ ============= ============

The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.

48
51

NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000

(1) DESCRIPTION OF BUSINESS

New Era of Networks, Inc. and its consolidated subsidiaries (collectively
referred to herein as "NEON" or the "Company") develop, market and support
e-Business and Enterprise Application Integration ("EAI") software and services.
Specifically, NEON helps automate e-Business by providing a range of products
and services that integrate Internet-facing applications with core operational
systems for goods and services providers, and also facilitate the creation of
Net markets. The Company provides organizations with a structured software
platform for the rapid and efficient integration and ongoing maintenance of
disparate systems and applications across the enterprise. The Company's packaged
software solutions support EAI across popular hardware platforms, operating
systems, and database types. NEON combines in a single offering the five
elements we believe are essential for e-Business integration software:
integration servers, process automation, predefined adapters, Internet
communications, and packaged e-Business integration applications. Additionally,
the Company provides design, development and implementation services through its
professional services organization.

The Company markets its software and related services primarily through its
direct sales organization, complemented by other indirect sales channels
including VARs, OEMs and international distributors.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.

Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is their
local currency. Assets and liabilities of international subsidiaries are
translated to U.S. dollars at year-end exchange rates, and income statement
items are translated at average exchange rates during the year. Resulting
translation adjustments are recorded as a separate component of equity. Gains
and losses resulting from foreign currency transactions are included in income.

Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in foreign currency transaction gains and
losses which are reflected in income as unrealized (based on period-end
translation) or realized (upon settlement of the transactions). Unrealized
transaction gains and losses applicable to permanent investments by the Company
in its foreign subsidiaries are included as cumulative translation adjustments,
and unrealized translation gains or losses applicable to short-term intercompany
receivables from or payables to the Company and its foreign subsidiaries are
included in income.

Revenue Recognition

The Company generates revenue from sales of software licenses, various
reseller arrangements and professional service arrangements. The Company
recognizes revenue in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition," as amended and interpreted by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain
Transactions," as well as Technical Practice Aids issued from time to time by
the American Institute of Certified Public Accountants.

The Securities and Exchange Commission ("SEC") issued Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," in
December 1999. SAB 101, as amended, provides further interpretive guidance for
publicly traded companies on the recognition, presentation, and

49
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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

disclosure of revenue in the accompanying financial statements. In June 2000,
the SEC issued SAB No. 101B, delaying the implementation of SAB 101 until the
fourth quarter of 2000. The provisions of SAB 101 had no material impact on the
Company's revenue recognition policies and presentation as reflected in the
accompanying consolidated financial statements.

The Company recognizes license fee revenue when the licensed software has
been delivered, customer acceptance has occurred, all significant Company
obligations have been satisfied, payment is due within twelve months, and the
fee is fixed, determinable and deemed collectible. Software maintenance revenue
related to software licenses is recognized ratably over the term of each
maintenance arrangement. Revenue from professional service arrangements is
recognized on either a time and materials or progress-to-completion basis as the
services are performed and amounts due from customers are deemed collectible and
contractually nonrefundable. To date, all progress-to-completion projects have
generally been performed over periods of less than one year. At each reporting
date, the Company evaluates each project and determines whether an accrual for
estimated losses is required. Revenues recognized under the
progress-to-completion basis, which have not yet been invoiced, are recorded as
unbilled revenues in the accompanying consolidated balance sheets.

For software arrangements with multiple elements, the Company applies the
residual method prescribed by SOP 98-9. Revenue applicable to undelivered
elements, principally software maintenance, training, and limited implementation
services, is deferred based on vendor specific objective evidence ("VSOE") of
the fair value of those elements. VSOE is established by the price of the
element when it is sold separately (i.e., the renewal rate for software
maintenance and normal prices charged for training and professional services).
Revenue applicable to the delivered elements is deemed equal to the
remainder/residual amount of the fixed contract price. Assuming none of the
undelivered elements are essential to the functionality of any of the delivered
elements, the Company recognizes the residual revenue attributed to the
delivered elements when all other criteria for revenue recognition for those
elements have been met.

For multiple element arrangements that involve significant customization or
modification of software, the entire price of the arrangement is recognized as
revenue based on the progress-to-completion methodology used for fixed price
service arrangements.

The Company grants resale rights to its software products to other vendors.
These arrangements typically require the reseller to make a nonrefundable
purchase of a limited quantity of the Company's products. Additional royalties
are due from the resellers for sales made in excess of the amount provided for
in the initial arrangements. Assuming all the revenue recognition criteria
described above are satisfied, the Company recognizes the initial fee on the
same basis as sales to end-users described above. Since mid-1999, royalties
earned with respect to MQSeries Integrator have been recognized on a one-quarter
lag basis because reliable information with respect to royalties due from sales
of this product are not available at the time the Company is required to prepare
and file its quarterly financial statements. Beginning in 2000, the amount
recognized on a lag basis is the amount of royalties earned in excess of
contractual quarterly minimums.

The Company acts as a reseller under an arrangement for a product
jointly-developed with another software vendor. The Company is entitled to
specified percentages of sales made and remits the remainder to its business
partner on receipt. Under the guidance of SAB 101 and EITF 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent," the Company has concluded
it is an agent in this arrangement and reports as revenue only its share of the
transaction proceeds. With respect to other reseller rights to third-party
software, the Company recognizes the gross amount of license revenues if it acts
as principal or the net amount if it is an agent.

Amounts collected or billed prior to satisfying the above revenue
recognition criteria are reflected as deferred revenue in the accompanying
consolidated balance sheets. As of December 31, 2000 and 1999, the total
deferred revenue was $19,571,984 and $13,649,152, respectively.

50
53
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Cost of Services and Maintenance

Cost of services related to professional service arrangements and
maintenance include the direct labor costs incurred plus a related overhead
allocation. Significant service contracts are generally performed on a time and
materials basis. Service contracts performed on a fixed-fee basis are generally
completed in less than 90 days or are routine in nature.

Research and Development

Research and development costs are expensed as incurred and include
salaries, overhead, supplies and other direct costs.

Cash Equivalents and Investments in Marketable Securities

The Company invests certain of its excess cash in government and corporate
debt instruments. All highly liquid investments with original maturities of
three months or less are considered to be cash equivalents. The recorded amounts
for cash equivalents approximate fair market value due to the short-term nature
of these financial instruments. Under the criteria set forth in Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"), debt and marketable equity securities
are required to be classified in one of three categories: trading,
available-for-sale, or held-to-maturity. The Company's investments in debt
securities at December 31, 2000 are classified under SFAS 115 as available-
for-sale. Such securities are recorded at fair value and unrealized holding
gains and losses, net of the related tax effect, if any, are not reflected in
earnings but are reported as a separate component of other comprehensive income
(loss) until realized.

At each reporting date, the Company considers whether market value declines
below the cost of available for sale or held to maturity securities are "other
than temporary." If deemed "other than temporary" such declines would be
recognized as realized losses. At December 31, 2000 and 1999, the Company
concluded that such declines were "temporary" because the Company has the intent
and ability to hold the securities until their maturity, which is less than two
years from the balance sheet date. In addition, the decline in market value of
the principal loss security has not existed for an extended period of time and
at the date of preparing these financial statements had partially recovered its
value since year end. The Company also evaluated the financial condition and
near-term prospects of the issuer. The change in net unrealized gains and
(losses) for the years ended December 31, 2000 and 1999 was approximately
($547,000) and ($766,000), respectively (see Note 4).

Realized gains and losses are determined on the specific identification
method and are reflected in income. Interest on corporate bonds is accrued
through the balance sheet date.

Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," the Company evaluates the carrying value of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. In performing this evaluation, the
Company estimates the future undiscounted cash flows of the operations to which
the long-lived assets relate to ensure that the carrying value has not been
impaired.

In connection with evaluations performed at December 31, 2000, the Company
identified approximately $5.0 million of long-lived assets that were determined
to be impaired and were written down to zero. The write-off included $4.1
million of goodwill from the February 1999 acquisition of D&M (see Note 3).
D&M's principal operations were discontinued during the fourth quarter of 2000.
The impairment charge also included an additional $861,000 for the unamortized
cost of software products acquired in business combinations that the Company has
determined it will no longer support.

51
54
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and Equipment, net

Depreciation of property and equipment is computed on a straight-line basis
over the following estimated useful lives:

Computer equipment and software.......................... 3 years
Furniture, fixtures and equipment........................ 5-7 years
Leasehold improvements................................... 2-10 years

Depreciation expense was approximately $8,094,000, $4,342,000 and
$1,665,000 in 2000, 1999 and 1998, respectively.

Costs of internal use software, whether purchased or developed internally,
are capitalized and amortized over the estimated useful life of the software in
accordance with SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."

Software Development Costs and Purchased Software Products

Under the criteria set forth in Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," capitalization of software development costs begins upon
the establishment of technological feasibility of the product and ends when the
product is ready for general release. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Capitalized costs will be amortized based on current and future
revenue for each product with an annual minimum equal to the straight-line
amortization over the remaining estimated economic life of each product, ranging
from three to five years. As of December 31, 2000, the Company had not
capitalized any costs in accordance with this pronouncement.

Intangibles, net in the accompanying consolidated balance sheets include
amounts allocated to software products acquired in business combinations and
purchased rights to software technology embedded in integrated products
developed by the Company. These costs are being amortized over periods of two to
five years. Amortization expense recorded in 2000, 1999 and 1998 was
approximately $7,131,000, $3,203,000 and $562,000, respectively. Remaining
unamortized costs were $22,469,000 and $21,275,000 at December 31, 2000 and
1999, respectively.

Goodwill

The Company recorded goodwill in connection with the purchase business
combinations described in Note 3 in the aggregate amount of approximately
$222,960,000 that is being amortized on a straight-line basis over five-to
ten-year periods. Amortization recognized for 2000, 1999 and 1998 was
approximately $28,590,000, $15,816,000 and $1,216,000, respectively. Unamortized
costs of approximately $173,222,000 and $149,108,000 are included in
Intangibles, net in the accompanying consolidated balance sheets as of December
31, 2000 and 1999, respectively.

Income Taxes

The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each year.
Deferred tax assets and liabilities are recorded for the estimated future tax
effects of temporary differences between the tax basis of assets and liabilities
and amounts reported in the consolidated balance sheets. Deferred tax assets are
also recognized for net operating loss and tax credit carryforwards. The overall
change in deferred tax assets and liabilities for the period, exclusive of
deferred tax assets and liabilities recorded in purchase accounting for
businesses acquired, measures the deferred tax expense
52
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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

or benefit for the period. Effects of changes in enacted tax laws on deferred
tax assets and liabilities are reflected as adjustments to tax expense in the
period of enactment. Deferred tax assets are reduced by a valuation allowance
based on an assessment of available evidence if deemed more likely than not that
some or all of the deferred tax assets will not be realized (see Note 7).

Restructuring and Other Related Costs

Restructuring and related charges include the costs associated with the
Company's strategic restructurings during the fourth quarter of 2000 and the
third quarter of 1999. In accordance with SAB 100, "Restructuring and Impairment
Charges," restructuring charges were recorded at the time decisions were made to
restructure operations and the Company's management formally adopted the
restructuring plans (see Note 6). The charges primarily consisted of costs that
were incremental to the Company's ongoing operations and were incurred to exit
an activity or cancel an existing contractual obligation, employee termination
related charges, and the buyout of operating leases.

Cumulative Other Comprehensive Income (Loss)

Comprehensive income (loss) includes net earnings (loss) and other changes
to stockholders' equity not reflected in net income (loss). The components of
other comprehensive income (loss) that have impacted the Company through
December 31, 2000 are currency translation adjustments for foreign subsidiaries
and unrealized gains (losses) on marketable securities.

Net Loss Per Common Share

Basic earnings (loss) per share is determined by dividing net income (loss)
from continuing operations available to common shareholders by the weighted
average number of common shares outstanding during each period. Diluted earnings
per share includes the effects of potentially issuable common stock, but only if
dilutive. The treasury stock method, using the average price of the Company's
common stock for the period, is applied to determine dilution from options and
warrants. The if-converted method is used for convertible securities. Because of
reported losses, there are no differences between basic and diluted per share
amounts for the Company for any of the years presented.

Potentially dilutive securities excluded from the calculation, as the
effect of their inclusion would be antidilutive, are as follows:

DECEMBER 31,
---------------------------------
2000 1999 1998
--------- --------- ---------

Number of common shares issuable upon -- exercise of
outstanding stock options (see Note 8)............ 6,680,255 6,594,364 5,369,512

Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable, cash
equivalents and investments. The Company performs ongoing credit evaluations of
its customers' financial condition and generally requires no collateral from its
customers. The Company has a cash investment policy which restricts investments
to ensure preservation of principal and maintenance of liquidity.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the

53
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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

New Accounting Pronouncements

SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities" ("SFAS 133") establishes accounting and reporting standards for
derivative instruments and for hedging activities. Among other things, the
statement requires that an entity recognize all derivative instruments on the
balance sheet as either assets or liabilities, and to account for those
instruments at fair value. In July 1999, SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137") was issued. SFAS 137 deferred the
effective date of SFAS 133 until the first fiscal quarter of fiscal years
beginning after June 15, 2000. In June 2000, SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities" ("SFAS 138"), was
issued to provide additional implementation guidance related to SFAS 133. The
Company will adopt SFAS 133 effective January 1, 2001, which is not expected to
have a material impact on the Company's financial position or results of
operations.

In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and, among other issues
clarifies the following: the definition of an employee for purposes of applying
APB Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. To the extent
the Company's stock-based compensation awards are or become subject to "variable
accounting" because of FIN 44, significant periodic fluctuations in the price of
the Company's common stock may cause the application of FIN 44 to have a
material impact on stock-based compensation reported in future results of
operations.

Reclassifications

Certain reclassifications have been made in prior years' financial
statements to conform to the current year's presentation.

(3) BUSINESS COMBINATIONS

PaperFree Systems, Inc.

In March 2000, the Company acquired all of the outstanding capital stock of
PaperFree Systems, Inc. ("PaperFree"), a Delaware corporation. PaperFree is a
provider of integration solutions concentrating on the payor-side of the
healthcare market.

The aggregate consideration paid by the Company was approximately
$39,867,000, of which $20,000,000 was paid in cash and approximately $19,867,000
was paid through the issuance of 265,751 shares of our common stock. The fees
and expenses related to the acquisition were approximately $245,000. In June and
August 2000, an aggregate of 425,301 additional shares of our common stock were
issued to the former shareholders of PaperFree based on the market price of the
Company's common stock at certain measurement dates pursuant to share price
guarantees included in the purchase agreement. As of December 31, 2000, all
contingent consideration had been paid to the former PaperFree shareholders. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities and operating results of PaperFree have
been included in the accompanying consolidated financial statements from March
24, 2000.

An independent valuation of PaperFree net assets was performed to assist in
the allocation of the purchase price. Approximately $5,800,000 of the purchase
price was allocated to marketable software products and is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

being amortized over three years. Goodwill of $32,875,000 is being amortized on
a straight-line basis over seven years. PaperFree's other assets were valued at
$4,558,000 and its liabilities assumed totaled $3,366,000. After finalization of
the purchase price allocation in the fourth quarter of 2000, a deferred tax
liability and corresponding increase to goodwill of $4,824,000 was recorded as
the value assigned to the software and other intangibles is not amortizable for
tax purposes. An additional $850,000 tax liability and corresponding increase to
goodwill was also recorded for historic PaperFree tax obligations paid by the
Company prior to December 31, 2000.

Software-Engineering, Computing and Consulting GmbH

In April 2000, the Company acquired all of the outstanding capital stock of
Software-Engineering, Computing and Consulting GmbH ("Secco"), a German
corporation. Secco is a provider of enterprise application integration and
e-Business professional services in Germany.

The aggregate consideration paid by the Company was approximately
$15,000,000, of which $12,000,000 was paid in cash and approximately $3,000,000
was paid through the issuance of 86,925 shares of the Company's common stock.
The fees and expenses related to the acquisition were approximately $445,000. In
August 2000, 13,000 additional shares of the Company's common stock were issued
and approximately $182,000 in cash was paid to the former shareholders of Secco
based on the market price of the stock at a certain measurement date subsequent
to closing. As of December 31, 2000, all contingent consideration had been paid
to the former Secco shareholders. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the assets, liabilities and
operating results of Secco have been included in the accompanying consolidated
financial statements from April 1, 2000.

The purchase price was allocated to goodwill in the amount of $15,233,000
and is being amortized on a straight-line basis over seven years. Secco's other
assets were valued at $2,276,000 and its liabilities assumed totaled $2,043,000.
In addition, $650,000 was added to deferred tax liabilities and goodwill upon
finalization of the Secco purchase price allocation.

Pro Forma Results

The following unaudited tabulations present the pro forma effect of the
PaperFree and Secco business combinations on the Company's results of operations
for the years ended December 31, 2000 and 1999, as if the transactions occurred
on January 1 of each year presented. Adjustments are reflected for additional
amortization of intangibles and a pro forma reduction to interest income for the
cash portion of the purchase prices.

FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------
HISTORICAL
UNAUDITED
RESULTS OF PRO FORMA
AS REPORTED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------

Revenues........................ $188,348,266 $3,725,978 $ -- $192,074,244
Loss from operations............ $(64,375,821) $ (112,039) $(1,724,619) $(66,212,479)
Net loss........................ $(60,870,326) $ (107,782) $(2,217,085) $(63,195,193)
Net loss per share, basic and
diluted....................... $ (1.71) $ (1.76)
Historical and pro forma
weighted average shares of
common stock outstanding,
basic and diluted............. 35,691,295 35,985,863

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FOR THE YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------
HISTORICAL
UNAUDITED
RESULTS OF PRO FORMA
AS REPORTED ACQUISITIONS ADJUSTMENTS PRO FORMA
------------ ------------ ----------- ------------

Revenues....................... $126,224,152 $14,945,746 $ -- $141,169,898
Income (loss) from
operations................... $(71,426,085) $ 1,179,945 $(7,380,265) $(77,626,405)
Net income (loss).............. $(46,312,358) $ 3,509,332 $(9,467,220) $(52,270,246)
Net income (loss) per share,
basic and diluted............ $ (1.44) $ (1.58)
Historical and pro forma
weighted average shares of
common stock outstanding,
basic and diluted............ 32,247,552 33,038,529

Microscript, Inc.

In June 1999, the Company acquired all of the outstanding capital stock of
Microscript, Inc. ("Microscript"), a Massachusetts corporation. Microscript is a
supplier of application integration software on the Windows NT platform.

The aggregate consideration paid by the Company was approximately
$33,085,000, of which $8,741,000 was paid in cash and approximately $19,000,000
was paid through the issuance of 423,700 shares of the Company's common stock.
The Company also issued stock options valued at approximately $5,000,000 and
exercisable for 110,428 shares of the Company's common stock in exchange for all
outstanding Microscript stock options. The fees and expenses related to the
acquisition were approximately $345,000. An additional 22,255 shares of the
Company's common stock valued at $467,000 were issued as additional purchase
consideration upon the completion of the Microscript audited financial
statements for the year ended December 31, 1998. The acquisition was accounted
for under the purchase method of accounting and, accordingly, the assets,
liabilities and operating results of Microscript have been included in the
accompanying consolidated financial statements from June 28, 1999.

An independent valuation of Microscript's net assets was performed to
assist in the allocation of the purchase price. Approximately $5,800,000 of the
purchase price was assigned to marketable software products and is being
amortized over three years. Other intangibles of $16,373,000 and goodwill of
$9,911,000 are being amortized on a straight-line basis over seven years.
Microscript's other assets were valued at $3,462,000 and its liabilities assumed
totaled $1,994,000. Upon the finalization of the purchase price allocation in
the third quarter of 1999, we recorded a deferred tax liability and
corresponding increase to goodwill of $8,538,000 as the value assigned to the
software products and other intangibles is not amortizable for tax purposes.

In July 1999, in response to a post-closing decline in the market price of
the Company's common stock, the Company paid the former equityholders of
Microscript additional cash of $16,600,000 to more closely reflect the value
agreed upon in the original purchase negotiations. This adjustment to the
purchase consideration was reflected in the Company's financial statements for
the third quarter of 1999 as a one-time charge to operations.

Convoy Corporation

In June 1999, the Company acquired all of the outstanding capital stock of
Convoy Corporation, a Delaware corporation ("Convoy"). Convoy is a worldwide
provider of application integration software for PeopleSoft applications.

The aggregate consideration paid by the Company was $42,809,000. At closing
the Company issued 807,115 shares of its common stock valued at $36,267,000. The
Company also issued 105,333 stock options, valued at approximately $4,733,000
and exercisable for shares of the Company's common stock in exchange for

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

all outstanding Convoy stock options and warrants. Fees and expenses related to
the acquisition were approximately $1,809,000. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the assets,
liabilities and operating results of Convoy have been included in the
accompanying consolidated financial statements from June 1, 1999.

An independent valuation of Convoy's net assets was performed to assist in
the allocation of the purchase price. A portion of the purchase price was
assigned to marketable software products ($8,500,000), which is being amortized
over three years. Other intangibles ($5,344,000) and goodwill ($30,559,000)
acquired are being amortized on a straight-line basis over seven years. Convoy's
other assets were valued at approximately $2,129,000 and its liabilities assumed
totaled approximately $3,723,000. Upon the finalization of the purchase price
allocation in the third quarter of 1999, a deferred tax liability and
corresponding increase to goodwill of $5,330,000 was recorded as the value
assigned to the software products and other intangibles is not amortizable for
tax purposes.

In August 1999, in response to a post-closing decline in the market price
of the Company's common stock, the Company agreed with the former equityholders
of Convoy to provide additional consideration to more closely reflect the value
agreed upon in the original purchase negotiations. Accordingly, 618,225 shares
of the Company's common stock were issued to the prior Convoy equityholders.
This adjustment to the purchase consideration was reflected in the Company's
financial statements for the third quarter of 1999 as a one-time charge to
operations of approximately $8,269,000.

SLI International AG

In May 1999, the Company acquired all of the outstanding capital stock of
SLI International AG, a Swiss corporation ("SLI"), a worldwide provider of SAP
R/3 software implementation, training support and other related
change-management services. The aggregate consideration paid by the Company was
$22,700,000, of which $16,500,000 was paid in cash and $5,500,000 was paid with
138,452 shares of the Company's common stock. Fees and expenses related to this
transaction were approximately $700,000. An additional 75,519 shares of the
Company's common stock valued at $3,000,000 were issued to the shareholders of
SLI during the third quarter of 2000 upon the achievement of certain performance
targets. These shares were recorded as additional purchase price. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities and operating results have been included in
the Company's consolidated financial statements from May 1, 1999.

An independent valuation of SLI's net assets was performed to assist in the
allocation of the purchase price. A portion of the purchase price was allocated
to other intangibles ($9,360,000) and goodwill ($12,296,000) and is being
amortized on a straight-line basis over a seven-year period. Upon finalization
of the purchase price allocation in the third quarter of 1999, a deferred tax
liability and corresponding increase to goodwill of $2,031,000 was recorded as
the value assigned to other intangibles is not amortizable for tax purposes. An
additional $3,000,000 of goodwill was recorded for the earn-out shares issued in
2000. SLI's other assets were valued at approximately $4,813,000 and its
liabilities assumed totaled approximately $3,769,000.

VIE Systems, Inc.

In April 1999, the Company acquired all of the outstanding capital stock of
VIE Systems, Inc., a Delaware corporation ("VIE"), a provider of EAI software
with a strong presence in travel, transportation, financial services, and retail
markets. Assets acquired by the Company included VIE's products, including its
Copernicus EAI product and formatter patent. The acquisition was accounted for
under the purchase method of accounting and, accordingly, the assets,
liabilities and operating results have been included in the Company's
consolidated financial statements from April 1, 1999.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The aggregate consideration paid by the Company was $12,000,000 in cash and
$50,000 of fees and expenses related to this transaction. In addition, up to
$3,000,000 of contingent cash consideration may be paid to the shareholders of
VIE upon the achievement of certain performance targets. This contingent
consideration arrangement expires on April 5, 2002, the third anniversary of the
closing. Payments will be made to the respective VIE shareholders to the extent
these performance targets are met, beginning in the fourth quarter of 1999 and
continuing every six months until the second quarter of 2002. Contingent
consideration of $19,000 was earned in 1999 and added to goodwill related to
this acquisition.

The portion of the purchase price in excess of the fair value of the net
tangible assets of VIE was allocated to goodwill ($11,949,000) and is being
amortized on a straight-line basis over a five-year period. VIE's other assets
were valued at approximately $670,000 and its liabilities assumed totaled
approximately $569,000.

D&M (Asia) Ltd. and Database & Management (S) Pte. Ltd.

In February 1999, the Company acquired all of the outstanding capital stock
of D&M (Asia) Ltd., a Hong Kong corporation and Database & Management (S) Pte.
Ltd., a Singapore corporation (collectively "D&M"). D&M provides professional
integration services to customers in the Pacific Rim.

The aggregate consideration paid by the Company was $6,050,000, payable as
follows: $3,000,000 in cash and approximately $2,900,000 through the issuance of
48,940 shares of the Company's common stock. Fees and expenses related to this
transaction were approximately $150,000. The acquisition was accounted for under
the purchase method of accounting and, accordingly, the assets, liabilities and
operating results of D&M have been included in the accompanying consolidated
financial statements from March 1, 1999.

An independent valuation of D&M's net assets was performed to assist in the
allocation of the purchase price. The portion of the purchase price in excess of
the fair value of the net tangible assets of D&M was allocated to goodwill
($5,336,000) and is being amortized on a straight-line basis over a seven-year
period. D&M's other assets were valued at approximately $1,098,000 and its
liabilities assumed totaled approximately $384,000.

During the year ended December 31, 2000, the business activities of D&M had
significantly dissipated and only a few of the professional staff personnel
acquired remained employed by the Company. Consequently, the intangibles
acquired were deemed to be impaired and were written off during the fourth
quarter of the year ended December 31, 2000 (see Note 2).

Century Analysis Incorporated

In September 1998, the Company acquired all of the outstanding capital
stock of Century Analysis Inc., a California corporation ("CAI"), by means of a
Share Acquisition Agreement by and among CAI, the shareholders of CAI and the
Company.

The aggregate consideration paid by the Company was approximately
$42,500,000, payable as follows: $21,000,000 in cash, $2,018,000 in short-term
notes payable to CAI shareholders, $18,000,000 through the issuance of 880,062
shares of the Company's common stock and $1,500,000 of fees and expenses related
to this transaction. The Company also issued stock options exercisable for
shares of the Company's common stock to assume all outstanding CAI stock options
valued at approximately $1,000,000. An additional 391,138 shares of the
Company's common stock, valued at approximately $15,600,000, were issued in
December 1998 upon the achievement of certain performance criteria by CAI. The
acquisition was accounted for under the purchase method of accounting and,
accordingly, the assets, liabilities and operating results of CAI have been
included in the accompanying consolidated financial statements from the
effective date of the acquisition.

An independent valuation of CAI's net assets was performed to assist in the
allocation of the purchase price. Approximately $13,857,000 of the purchase
price represented the intangible value of in-process research and

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

development projects that had not yet reached technological feasibility. The
related technology had no alternative future use and required substantial
additional development by the Company. This amount was charged to operations in
the quarter ended September 30, 1998. Approximately $5,814,000 and $44,930,000
of the purchase price was assigned to marketable software products and goodwill,
which are being amortized on a straight-line basis over five- and ten-year
periods, respectively. CAI's other assets were valued at approximately
$6,800,000 and its liabilities assumed totaled approximately $12,500,000.

MSB Consultants Limited

In June 1998, the Company acquired all of the outstanding capital stock of
MSB Consultants Limited ("MSB"), a corporation organized under the laws of the
United Kingdom, by means of a Share Purchase Agreement by and among the
shareholders of MSB and the Company.

The aggregate consideration paid by the Company was $5,175,000, of which
$1,200,000 was paid in cash and approximately $3,600,000 was paid through the
issuance of 276,924 shares of common stock of the Company. The fees and expenses
related to the acquisition were approximately $375,000. Shares valued at
$1,785,000 and $1,215,000 were issued in 1999 and 1998 upon achievement of
certain performance targets during the two-year period following closing. These
amounts were added to goodwill relating to this acquisition. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
assets, liabilities and operating results of MSB have been included in the
accompanying consolidated financial statements from the effective date of the
acquisition.

An independent valuation of MSB's net assets was performed to assist in the
allocation of the purchase price. Approximately $3,740,000 of the purchase price
represented the intangible value of in-process research and development projects
that had not yet reached technological feasibility. The related technology had
no alternative future use and required substantial additional development by the
Company. This amount was charged to operations in the quarter ended June 30,
1998. Approximately $770,000 and $3,698,000 (as adjusted) of the purchase price
was assigned to marketable software products and goodwill for amortization on a
straight-line basis over three- and seven-year periods, respectively. The
remaining unamortized balance of the software was written off in the quarter
ended December 31, 2000. MSB's other assets were valued at $963,000 and its
liabilities assumed totaled $996,000.

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) CASH, CASH EQUIVALENTS AND INVESTMENTS IN MARKETABLE SECURITIES

A summary of cash, cash equivalents and amortized cost of investments in
marketable securities and their approximate fair values is as follows:

AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS (LOSSES) VALUE
----------- ---------- ----------- -----------

December 31, 2000:
Cash................................ $12,460,400 $ -- $ -- $12,460,400
Commercial paper.................... 1,000,000 -- -- 1,000,000
Certificates of deposit............. 4,061,646 189 -- 4,061,835
U.S. Treasury obligations........... 3,750,042 18,803 (4,248) 3,764,597
U.S. government agencies............ 467,674 22,241 -- 489,915
Corporate bonds..................... 37,842,455 115,825 (1,540,060) 36,418,220
----------- -------- ----------- -----------
$59,582,217 $157,058 $(1,544,308) $58,194,967
=========== ======== =========== ===========
December 31, 1999:
Cash................................ $19,807,875 $ -- $ -- $19,807,875
Commercial paper.................... 36,659,990 11,490 -- 36,671,480
U.S. Treasury obligations........... 2,745,030 -- (36,934) 2,708,096
U.S. government agencies............ 5,000,000 -- (66,750) 4,933,250
Corporate bonds..................... 31,367,948 -- (673,669) 30,694,279
----------- -------- ----------- -----------
$95,580,843 $ 11,490 $ (777,353) $94,814,980
=========== ======== =========== ===========

See Note 2 for discussion of the Company's consideration of "other than
temporary" declines in market value of available-for-sale securities.

At December 31, 2000 and 1999, cash, cash equivalents and investments in
marketable securities are summarized as follows:

2000 1999
----------- -----------

Cash and cash equivalents.................................. $12,521,383 $49,796,989
Short-term investments in marketable securities............ 28,114,872 7,682,786
Long-term investments in marketable securities............. 10,558,712 37,335,205
Restricted long-term cash and investments.................. 7,000,000 --
----------- -----------
$58,194,967 $94,814,980
=========== ===========

Short-term investments in marketable securities include all investments
that will mature within one year of the balance sheet date.

(5) INVESTMENTS IN NONMARKETABLE SECURITIES

During 2000, the Company invested $8.9 million in equity securities of five
companies with technologies or products that are complementary to those of the
Company. As described in Note 10, these investee companies also purchased
software from the Company for their internal use or for resale, as well as
software support and other professional services. The investee companies are in
early stages of development and are focused on various e-Business applications
and solutions. These arrangements are a part of the Company's strategy to
broaden the scope and uses of its products and to access additional vertical
markets and customers. The early-stage nature of the investees may also create
opportunities for the Company to benefit from future appreciation in the value
of its investments; however, there can be no assurance the Company will realize
any gains from these investments or that subsequent impairments in the values of
these securities will not occur.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No public market existed for any securities of these investees at the time
of the Company's investment or commitment to invest, nor is there any assurance
that a public market will ever exist. Consequently, these investments will be
accounted for under the cost method because the Company's ownership interests
are less than 20% and it does not have the ability to exercise significant
influence over their operations. The Company's initial cost is equal to the
estimated fair value of the securities at the time of purchase, as evidenced by
concurrent independent third-party investments in such companies. The Company
intends to closely monitor the success of these investees in executing their
business plans. Future impairments, if any, will be recognized as they become
apparent and the carrying amount of these securities will be adjusted to fair
value at the end of each period. If and when any of these investments become
publicly traded and meet the criteria for "available-for-sale" securities
pursuant to SFAS 115, they will be accounted for accordingly. Otherwise, future
appreciation will be recognized only upon sale or other disposition of the
securities. As of December 31, 2000, based on the Company's evaluations of the
status of each investee, no impairments to these investments were recognized
and, accordingly, these investments were carried at their original cost basis
and included as part of other assets, net in the accompanying balance sheet.

(6) RESTRUCTURING CHARGES

During the fourth quarter of 2000, the Company's management approved
restructuring plans that included additional initiatives to consolidate
duplicate facilities, change to geographically focused business units and place
nonproducing product lines into a maintenance-only mode. Management expects the
restructuring effort to be finalized during the second quarter of 2001.

Accrued restructuring charges for the 2000 restructuring effort include
$3,523,000 representing the cost of involuntary employee separation benefits
related to approximately 130 employees worldwide. Employee separation benefits
include severance, medical and other benefits. Employee terminations were made
in the majority of business functions, job classes and geographies, with the
majority of reductions in North America and the United Kingdom. The 2000
restructuring plans also include estimated costs of $1,543,000 associated with
the closure and consolidation of office space, principally in North America and
the United Kingdom.

In July 1999, the Company's management and board of directors approved
restructuring plans that included initiatives to integrate the operations of the
recently acquired companies, consolidate duplicate facilities, and reduce
overhead. Total restructuring costs of.$7,450,000 were recorded in the third
quarter of 1999 related to these initiatives. Restructuring efforts related to
staff terminations has been completed. The remaining accrual relates to future
benefits payable to terminated employees. Facilities related restructuring
efforts, which are dependent on our ability to sublet a corporate office remains
outstanding as of December 31, 2000. This facility has been vacated by the
Company and monthly rental payments are being charged to the 1999 restructuring
reserve.

The 1999 restructuring charges included $3,301,000 of involuntary employee
termination benefits related to approximately 150 employees worldwide. Employee
separation benefits included severance, medical, other benefits and related
employment taxes. Employee separations affected the majority of business
functions, job classes and geographies, with a majority of the reductions in
North America and Europe. The restructuring plan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

also included costs totaling $4,149,000 associated with the closure and
consolidation of office space, principally in North America and Europe.

2000 Restructuring:
Employee separations....... $ -- $ -- $ -- $3,523 $ (643) $2,880
Facility closure costs..... -- -- -- 1,543 -- 1,543
1999 Restructuring:
Employee separations....... 3,301 (2,641) 660 (218) (303) 139
Facility closure costs..... 4,149 (1,521) 2,628 -- (1,757) 871
------ ------- ------ ------ ------- ------
Total accrued
restructuring
costs............ $7,450 $ 4,162 $3,288 $4,848 $(2,703) $5,433
====== ======= ====== ====== ======= ======

(7) INCOME TAX PROVISION (BENEFIT)

The provision (benefit) for income taxes is comprised of the following for
the years ended December 31, 2000, 1999 and 1998:

2000 1999 1998
------------ ------------ -----------

Current --
Federal.................................... $ -- $ -- $ 2,958,100
State...................................... 599,147 500,000 697,300
Foreign.................................... 192,000 69,300 59,000
------------ ------------ -----------
Total current provision............ 791,147 569,300 3,714,400
Deferred --
Federal.................................... (11,931,980) (11,054,242) (4,763,900)
State...................................... (1,940,320) (1,797,438) (874,000)
Foreign.................................... (2,595,969) (1,699,000) --
Increase (decrease) in valuation allowance... 16,468,269 (4,000,000) 645,100
------------ ------------ -----------
Total deferred benefit............. -- (18,550,680) (4,992,800)
------------ ------------ -----------
Total income tax provision
(benefit)........................ $ 791,147 $(17,981,380) $(1,278,400)
============ ============ ===========

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The components of the Company's deferred tax assets and liabilities are as
follows:

DECEMBER 31, PURCHASE STOCK-BASED 2000 DECEMBER 31,
1999 ACCOUNTING COMPENSATION PROVISION 2000
------------ ----------- ------------ ------------ ------------

Deferred tax assets:
Allowance for bad
debts................ $ 725,100 $ $ $ 2,640,100 $ 3,365,200
Restructuring accrual... -- 2,353,900 2,353,900
Accrued vacation........ 285,965 288,900 574,865
Tax credits
carryforward......... 2,689,600 1,619,800 4,309,400
Net operating loss:
Ordinary
carryforward....... 12,003,600 4,429,369 16,432,969
Stock-based
compensation
carryforward....... 9,182,000 8,787,700 17,969,700
Loss carryforwards
acquired............. 2,695,000 1,801,100 4,496,100
Purchased intangibles... 6,300,200 741,300 7,041,500
Depreciation............ -- 573,600 573,600
Other................... 207,900 (207,900) --
------------ ----------- ----------- ------------ ------------
Total deferred
tax assets.... 34,089,365 1,801,100 8,787,700 12,439,069 57,117,234
------------ ----------- ----------- ------------ ------------
Deferred tax liabilities:
Depreciation............ (158,000) 158,000 --
Developed software...... (385,000) 4,200 (380,800)
Other................... -- (291,100) (291,100)
Purchased intangibles... (13,968,600) (5,474,343) 4,158,100 (15,284,843)
------------ ----------- ----------- ------------ ------------
Total deferred tax
liabilities............. (14,511,600) (5,474,343) -- 4,029,200 (15,956,743)
------------ ----------- ----------- ------------ ------------
Total net deferred tax
assets.................. 19,577,765 (3,673,243) 8,787,700 16,468,269 41,160,491
Valuation allowance....... (11,877,000) (1,801,100) (8,787,700) (16,468,269) (38,934,069)
------------ ----------- ----------- ------------ ------------
Deferred tax assets,
net..................... $ 7,700,765 $(5,474,343) $ -- $ -- $ 2,226,422
============ =========== =========== ============ ============

Presented in the balance sheets as:

DECEMBER 31,
-----------------------
2000 1999
---------- ----------

Net current deferred tax assets............................. $ -- $ --
Net deferred tax assets, noncurrent......................... 2,226,422 7,700,765
---------- ----------
Deferred tax assets, net of valuation allowance............. $2,226,422 $7,700,765
========== ==========

The increase in deferred tax assets during 2000 results primarily from
operating losses, tax deductions arising from the exercise of stock options, a
more rapid amortization of the intangible assets of CAI and VIE than is allowed
for tax purposes, loss carryforwards acquired from Convoy and Microscript as
reflected on final returns for those entities, restructuring and other accruals
not expended at year end, and increased tax credit carryforwards. As described
in Note 3, deferred tax liabilities were recognized during 2000 in purchase
accounting for the lack of tax basis in intangibles acquired, other than
goodwill.

Changes in the valuation allowance are reflected in the table above. A
portion of the valuation allowance at December 31, 2000, $4,496,100 relates to
the acquired tax loss carryforwards of the businesses purchased. If

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

these deferred tax assets are realized, the benefit will reduce goodwill arising
from the Convoy and Microscript acquisitions rather than future income tax
expense. A portion of the allowance, $17,969,700, relates to the stock-based
compensation deductions recognizable upon exercise of the underlying employee
stock options, which is included in our net operating loss carryforwards. If and
when that portion of the valuation allowance is reversed, the benefit will be
added to paid-in capital, rather than being shown as a reduction of future
income tax expense. The remainder of the allowance, $16,468,269, relates to
operating losses, credit carryforwards and other future tax benefits. Based on a
judgmental assessment of available evidence and using a more likely than not
standard, management does not believe these net deferred tax assets meet the
criteria for expected realization at the present time. Management's judgment in
this regard may change in the future. Future increases or decreases in the
valuation allowance deemed necessary based on changed circumstances may have a
significant affect on income tax provisions and reported results of future
periods.

As of December 31, 2000, the Company had net operating loss carryforwards
totaling approximately $91.3 million, including the acquired loss carryforwards.
These carryforwards expire beginning in 2010. The Company also has research and
development tax credit carryforwards of approximately $4.3 million expiring
beginning in 2010.

The income tax benefit calculated using the federal statutory rate is
different than the income tax benefit for financial reporting purposes as
follows:

2000 1999 1998
------------ ------------ -----------

Income tax benefit at the federal statutory
rate....................................... $(21,027,713) $(22,502,808) $(3,324,252)
State income tax benefit, net of federal tax
effect..................................... (871,285) (843,335) (116,575)
Foreign tax benefit at lower effective
rate....................................... 495,240 1,831,085 59,000
Nondeductible expenses, including intangibles
charged-off, but not amortizable for
foreign tax purposes....................... 7,580,540 10,079,314 1,713,919
Increase in tax credit carryforwards......... (1,619,800) (1,521,000) (624,830)
Change in valuation allowance................ 16,468,269 (4,000,000) 645,100
Other........................................ (234,104) (1,024,636) 369,238
------------ ------------ -----------
Net benefit (provision) for income
taxes............................ $ 791,147 $(17,981,380) $(1,278,400)
============ ============ ===========

Loss before income taxes reflected in the accompanying consolidated
statements of operations is attributable to domestic and foreign sources as
follows:

2000 1999 1998
------------ ------------ -----------

United States................................ $(41,817,930) $(54,331,534) $(5,572,682)
Foreign...................................... $(18,225,611) $ (9,887,957) (4,148,575)
Other........................................ (266,163) (102,396) (13,152)
Eliminations................................. (35,638) (74,247) (42,803)
------------ ------------ -----------
Consolidated....................... $(60,079,179) $(64,293,738) $(9,777,212)
============ ============ ===========

(8) STOCKHOLDERS' EQUITY

Public Offerings

In June 1997, the Company completed its initial public offering ("IPO") and
issued 6,348,000 shares of its common stock to the public at a price of $6.00
per share. The Company received approximately $34,226,000 of cash, net of
underwriting discounts, commissions and other offering costs.

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In May 1998, the Company sold 4,757,000 shares of its common stock to the
public at a price of $11.38 per share, which resulted in net proceeds to the
Company of $50,595,000. In December 1998, the Company sold 4,780,000 shares of
its common stock to the public at a price of $34.00 per share which resulted in
net proceeds to the Company of $153,727,000.

Change in Authorized Shares and Authorization of Treasury Share Transactions

On June 15, 1999, the Company's stockholders approved an amendment to the
Company's Certificate of Incorporation to increase the authorized shares of
common stock from 45,000,000 to 200,000,000. The Certificate of Amendment was
filed with the State of Delaware on August 11, 1999.

In August 1999, the Company's board of directors authorized the repurchase
of up to the lesser of 10% of NEON's outstanding shares of common stock or stock
repurchase expenditures of $30,000,000. During 2000 and 1999, 258,130 and 20,000
shares, respectively, were repurchased by the Company at an average cost of
$17.28 per share. Effective December 31, 2000, 130,568 shares were reissued from
treasury stock to fulfill the Company's 401(k) match obligation.

Stock Split

On November 11, 1998, the Company's board of directors approved a
two-for-one stock split, payable in the form of a stock dividend to stockholders
of record as of November 23, 1998. All share and per share data in these
financial statements have been retroactively adjusted to reflect this stock
split.

Stock Options

The Company's 1995 Stock Option Plan (the "1995 Plan"), as amended,
provides for the grant of options to purchase up to an aggregate of 7,066,666
shares of common stock to employees and nonemployees; of which 266,666 shares
are available for grants to nonemployees and consultants. In May 1998, the
Company's board of directors approved an amendment to the 1995 Plan to include a
provision providing for automatic increases in the number of shares available
for grant each fiscal year. Incentive stock options granted to employees have an
exercise price equal to the fair market value of the underlying shares at the
date of grant. The exercise price of nonstatutory options granted to employees
and consultants is determined by the board of directors. The term of all options
granted under the 1995 Plan may not exceed 10 years; options granted through
2000 have a term of five years. Options vest as determined by the Board, but
generally vesting occurs as to one-sixth of the shares after one year, an
additional one-third after two years and the remainder after three years from
the date of grant. If employment is terminated for any reason, vested options
must be exercised within 60 days of termination or they are automatically
canceled.

In 1998, the Company's board of directors approved the adoption of an
additional option plan for its employees (the "1998 Plan") and reserved
2,575,000 shares for issuance under the plan. The 1998 Plan provides for the
granting of nonstatutory stock options. The board of directors determines the
term of each award, the exercise price and conditions under which the option
becomes exercisable. The term of all options granted may not exceed 10 years;
options granted through 2000 have a term of five years. Generally, vesting
occurs as to one-fourth of the shares after one year, and an additional one
forty-eighth of the shares vest each month for the following three years.

As part of the acquisitions of Microscript, Convoy and CAI, all outstanding
stock options of those companies were exchanged for options to purchase, in the
aggregate, 251,178 shares of the Company's common stock.

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Nonemployee Options

During 1996, the Company granted, from the 1995 Plan, stock options to
nonemployees for 35,158 shares at a weighted average exercise price of $3.01 per
share (range of $1.13 to $7.32) and recognized expense of $72,917 related to
these options based on the value of the services received. Options for 32,494
shares were exercised prior to December 31, 1998. During both 2000 and 1999, 888
options to purchase common stock were exercised at a weighted average exercise
price of $4.78 and $2.25 per share, respectively. At December 31, 2000, 888
options were outstanding and exercisable at a weighted average exercise price of
$5.63 per share. The accounting for these options is the same under APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("ABP 25") and Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123").

Director Plan

The Company adopted an option plan (the "Director Plan") during 1997 for
its nonemployee directors. The Director Plan provides for the automatic grant to
each nonemployee director, on the day following each annual shareholder meeting,
of an option to purchase 10,000 shares of the Company's common stock at an
exercise price equal to the fair market value of the common stock on the date of
grant. In addition, each new nonemployee director joining the board of directors
will automatically be granted an option to purchase 32,332 shares of the
Company's common stock at an exercise price equal to the fair market value at
date of grant. The board of directors has reserved an aggregate of 400,000
shares for issuance under the Director Plan, of which 145,000 shares remain
available for grant at December 31, 2000.

Employee Stock Purchase Plan

The Employee Stock Purchase Plan (the "Purchase Plan") permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed 10% of an employee's eligible compensation or, for the initial plan
period (July 1, 1997 through January 31, 1998), 20% of eligible compensation, at
a price equal to 85% of the lower of the fair market value of the common stock
on the first or last day of the plan period. The Purchase Plan will terminate in
ten years. The board of directors has reserved an aggregate of 1,233,332 shares
of common stock for issuance under the Purchase Plan, and has approved a
provision for an automatic increase in the number of shares available for grant
each fiscal year. At December 31, 2000, 634,021 shares remain available under
the Purchase Plan.

Stock Option Bonus Program

Effective July 1, 2000, the Company implemented a stock option bonus
program to further encourage ownership of our stock by employees. Under this
program, participating employees must make an irrevocable election at the
beginning of a plan period (generally, each calendar quarter) to receive stock
options in lieu of cash for either a fixed percentage or a specified dollar
amount of commissions and/or bonuses they may earn for that period. The number
of option shares awarded on the last day of each plan period is equal to four
times the cash compensation foregone, divided by the period-end market price of
our common stock. The employee's strike price is equal to 85% of the market
price of our common stock on the last day of plan period. Specific named
executive officers may receive options equal to five times the cash compensation
foregone, divided by the period-end market price, but their strike price is
equal to 100% of the period-end market price. The options are fully vested when
awarded on the last day of each plan period. Stock-based compensation is
recorded for the intrinsic value of the options awarded under the provisions of
APB Opinion No. 25. For the quarter ended September 30, 2000, options to
purchase 249,583 shares at $13.60 per share and 52,465 shares at $16.00 per
share were awarded under this program, the aggregate intrinsic value of which
was approximately $610,000. For the quarter ended December 31, 2000, options to
purchase 141,737 shares at $5.00 per share were awarded, the aggregate intrinsic
value of which was approximately $125,000.

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

401(k) Program

In July 2000, the Company adopted an employer match in shares of the
Company's common stock equal to 25% of each participant's calendar year 401(k)
contributions. The number of shares is determined by the lower of the annual
average daily closing market price of the Company's common stock or the closing
market price at the end of the calendar year. The Company has recorded
stock-based compensation at the end of each quarter equal to the greater of 25%
of participants' voluntary contributions or the number of shares issuable, based
on the year-to-date average market price, times the period end market price. A
final accounting will be made as of December 31 of each year for that year's
contribution. For the year ended December 31, 2000, the year-end market price of
$5.875 per share was lower than the average price for the year. The Company's
matching contribution of $767,612 was funded by the reissuance of 130,568
treasury shares to the 401(k) plan. The difference between the cost of the
treasury shares and the amount of the contribution is reflected in the statement
of stockholders' equity as a charge to accumulated deficit.

Stock Option Repricing Program

Effective December 7, 2000, the Company and its board of directors approved
a plan to reprice employee options. All employees, except certain executive
officers, were eligible to participate in the repricing program. All options
surrendered for repricing were exchanged for an equivalent number of repriced
options having a strike price equal to the greater of $7.00 or the closing share
price on December 7, 2000. All vesting schedules remained unchanged, however,
all repriced options are subject to a mandatory 90-day period expiring March 7,
2001 during which the options may not be exercised. These repriced options are
now subject to variable accounting as prescribed by FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25" ("FIN 44"). Of the Company's 6,680,255
outstanding options at December 31, 2000, approximately 4.6 million shares were
repriced and will be accounted for prospectively using the variable accounting
treatment described below until the options are exercised, forfeited or expire.

Variable accounting for these awards will require the Company to determine
the intrinsic value (excess of market price over exercise price) of each option
at each reporting date for recognition as stock-based compensation expense over
the vesting period or periods of each option. The cumulative amount of
compensation recognized will be adjusted at each period-end based on the change
in the intrinsic value from the previous reporting date. Any compensation
expense recognized with respect to unvested shares that are forfeited by
terminated employees will be reversed at the date of forfeiture. This accounting
is likely to create significant volatility in reported earnings because
increases in the market price of the Company's common stock in excess of the
exercise price will require significant compensation charges. However, any
subsequent decreases in the market price will result in the reversal of some or
all of the compensation expense previously recognized.

Statement of Financial Accounting Standards No. 123 ("SFAS 123")

SFAS 123, "Accounting for Stock-Based Compensation," defines a fair value
based method of accounting for employee stock options and similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
costs for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), provided
that pro forma disclosures are made of net income or loss and net income or loss
per share, assuming the fair value based method of SFAS 123 had been applied.
The Company has elected to account for its stock-based compensation plans under
APB 25. Accordingly, for purposes of the pro forma disclosures presented below,
the Company has computed the fair

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

values of all options granted during 2000, 1999 and 1998 using the Black-Scholes
pricing model and the following weighted average assumptions:

2000 1999 1998
--------- --------- ---------

Risk-free interest rate.............................. 5.79% 5.26% 5.10%
Expected lives....................................... 3.0 years 3.0 years 3.0 years
Expected volatility.................................. 102.0% 78.0% 65.5%
Expected dividend yield.............................. 0% 0% 0%

During 1998 through 2000, a forfeiture rate of 15% was estimated on all
option grants. Cumulative compensation cost recognized in pro forma net income
or loss with respect to options that are forfeited prior to vesting is adjusted
as a reduction of pro forma compensation expense in the period of forfeiture.
Actual volatility, under the Black-Scholes method, of the Company's common stock
was used to calculate the 1998 through 2000 information. Fair value computations
are highly sensitive to the volatility factor assumed in that the greater the
volatility, the higher the computed fair value of options granted.

SFAS 123 considers the repricing of options to be a modification of terms.
The Black Scholes value of the option immediately before the modification is
compared to the Black Scholes value immediately after the modification. The
increase in fair value measures additional compensation expense that is
recognized over the remaining vesting period, or immediately, to the extent the
shares are vested at the date of modification.

The total fair value of options granted or repriced was computed to be
approximately $71,917,000, $62,018,000 and $17,206,000 for the years ended
December 31, 2000, 1999 and 1998, respectively. The amount for 2000 includes the
fair value of canceled options that were repriced. These amounts are amortized
ratably over the vesting periods of the options. Pro forma stock-based
compensation, net of the effect of estimated forfeitures, was $24,268,404,
$14,535,227 and $4,208,404 for 2000, 1999 and 1998, respectively.

If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss and pro forma net loss per
common share would have been reported as follows:

YEAR ENDED DECEMBER 31,
------------------------------------------
2000 1999 1998
------------ ------------ ------------

Net loss --
As reported............................... $(60,870,326) $(46,312,358) $ (8,498,812)
Pro forma................................. $(85,138,730) $(60,847,585) $(12,707,216)
Pro forma net loss per common share --
As reported............................... $ (1.71) $ (1.44) $ (0.38)
Pro forma................................. $ (2.39) $ (1.89) $ (0.57)

Weighted average shares used to calculate pro forma net loss per share were
determined as described in Note 2, except in applying the treasury stock method
to outstanding options, net proceeds assumed received upon exercise were
increased by the amount of compensation cost attributable to future service
periods and not yet recognized as pro forma expense.

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the Company's option plans for the years ended December 31,
2000, 1999 and 1998 is as follows:

2000 1999 1998
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- --------- --------

Outstanding at beginning of
year........................ 6,594,364 $19.14 5,369,512 $ 7.40 4,204,050 $ 4.34
Granted....................... 8,105,824 15.47 3,411,561 30.66 2,327,781 13.39
Canceled...................... (6,592,889) 24.93 (803,390) 24.61 (314,057) 5.72
Exercised..................... (1,427,044) 7.40 (1,383,319) 4.59 (848,262) 3.17
---------- ------ ---------- ------ --------- ------
Outstanding at end of year.... 6,680,255 $10.99 6,594,364 $19.14 5,369,512 $ 7.40
========== ====== ========== ====== ========= ======
Exercisable at end of year.... 2,031,785 1,345,629 820,315
========== ========== =========

The options repriced in December 2000 are reflected in the above summary as
options granted and options canceled.

The weighted average exercise prices and weighted average fair values of
options granted during 2000, 1999 and 1998 are as follows:

2000 1999 1998
----------------------------- ----------------------------- -----------------------------
NUMBER OF FAIR EXERCISE NUMBER OF FAIR EXERCISE NUMBER OF FAIR EXERCISE
OPTIONS VALUE PRICE OPTIONS VALUE PRICE OPTIONS VALUE PRICE
--------- ------ -------- --------- ------ -------- --------- ------ --------

Exercise price less
than market
price.............. 936,318 $12.63 $18.34 148,228 $39.78 $ 3.14 102,950 $12.69 $ 6.58
Exercise price equal
to market price.... 2,392,430 $20.40 $31.03 3,263,333 $17.20 $31.91 2,204,831 $ 7.11 $15.04
Exercise price
greater than market
price.............. 4,777,076 $ 2.39 $ 7.23 -- $ -- $ -- 20,000 $ 7.95 $19.53
--------- --------- ---------
8,105,824 3,411,561 2,327,781
========= ========= =========

The following table summarizes information about the employee stock options
outstanding and exercisable at December 31, 2000:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 2000 LIFE IN YEARS PRICE 2000 PRICE
- ------------------------ -------------- ------------- -------- ------------ --------

$ 0.86- 1.13................ 985 5.1 $ 1.01 780 $ 1.03
$ 2.07- 2.14................ 404 7.7 $ 2.08 376 $ 2.08
$ 3.13- 4.50................ 244,996 1.2 $ 4.04 237,281 $ 4.06
$ 4.75- 7.06................ 5,134,136 5.5 $ 6.87 1,474,243 $ 6.70
$ 7.25- 9.50................ 32,269 3.5 $ 8.07 20,502 $ 7.98
$11.61-17.38................ 339,012 3.9 $13.73 140,793 $13.91
$17.75-26.19................ 326,187 5.1 $20.57 66,300 $19.06
$27.58-41.00................ 464,671 3.8 $39.36 84,067 $39.61
$41.94-62.50................ 130,513 3.8 $51.79 6,553 $54.05
$62.94-90.13................ 7,082 3.6 $67.76 890 $64.81
--------- --- ------ --------- ------
6,680,255 5.1 $10.99 2,031,785 $ 8.85
========= === ====== ========= ======

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) RELATED PARTY TRANSACTIONS

The Company has leased two buildings and a parking structure in Englewood,
Colorado from Greenwood Plaza Partners, LLP ("GPP") for use as our principal
corporate headquarters and at December 31, 2000, had subleased all unused excess
capacity. GPP is principally owned by the Company's Chief Executive Officer and
Chairman of the Board.

Through April 2000, the Company had funded approximately $25.4 million
toward a short-term loan to GPP for construction of the leased facilities. In
May 2000, GPP obtained interim (five-year) financing from a third-party lender
and repaid the loan from us in full. Terms of the interim financing require that
the Company maintain a balance of cash or investments with the lender. At
December 31, 2000, the restricted cash balance was $7.0 million. The restricted
cash represents one source of collateral to the lender in recognition that the
Company has a long-term master lease for the entire facility.

The Company leased and occupied completed portions of the facilities from
August 1999 through April 2000. The lease for the entire completed facility
commenced May 1, 2000. The facilities include approximately 200,000 rentable
square feet of space and 720 parking spaces in the garage. Rent paid to GPP for
year ended December 31, 2000 was approximately $3.7 million. Sublease income of
approximately $1.0 million for the year ended December 31, 2000 has been netted
against rent expense in the accompanying financial statements. The Company is
also responsible for all taxes, insurance, utilities, repairs and maintenance of
the facilities during the lease term. The initial term is ten years from May 1,
2000, and is renewable at the Company's option for two successive five-year
periods at then prevailing market rental rates.

A company owned by the Company's Chairman and Chief Executive Officer and
relatives provides air transportation service for the Company. Total expenses
incurred during the years 2000, 1999 and 1998 for services rendered by this
related party was approximately $655,000, $354,000 and $309,000, respectively.

On August 1, 1996, the Company entered into an employment agreement whereby
the Company issued a revolving line of credit to an employee. Under this
agreement, the employee may borrow up to $170,000, interest accrues at the prime
interest rate, and borrowings are secured by the employee's stock options in the
Company. The agreement matures on January 1, 2008, and interest is payable on a
quarterly basis. Amounts outstanding under this agreement at January 1, 1999
will be payable in equal monthly installments through the maturity date. The
amount outstanding under this agreement at December 31, 2000 and 1999 was
approximately $58,000 and $138,000, respectively.

(10) CONCURRENT AND RECIPROCAL TRANSACTIONS

During 2000, the Company established several strategic relationships
through private equity investments and other transactions described below.

As indicated in Note 5, during the third quarter of 2000, concurrent with
the Company's commitment to invest in the private equity offerings of five
early-stage e-Business companies, the investees purchased from the Company
software, support and professional services. These transactions resulted in the
recognition of software license revenues of approximately $4.6 million in the
third quarter, and deferred revenues for related maintenance and services of
approximately $1.3 million at September 30, 2000, of which approximately
$151,000 was recognized during the quarter ended December 31, 2000. The
aggregate cost of the equity investments made by the Company was $8.9 million.
No additional equity investments were made during the quarter ended December 31,
2000.

Third quarter transactions also included Company sales of software and
support to three other software and service vendors with a concurrent purchase
of software and/or services from those vendors. License revenues recognized
during the third quarter with respect to those transactions was approximately
$5.4 million, and related deferred revenues were approximately $800,000, of
which approximately $164,000 was recognized during the

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

quarter ended December 31, 2000. Assets acquired by the Company included rights
to embed technology of other vendors in products developed by the Company ($1.9
million), rights to sell software products of another vendor ($2.6 million),
support services ($730,000), and prepaid professional services ($1.5 million).

Other transactions that occurred throughout the year ended December 31,
2000, and which may also be considered reciprocal arrangements, included Company
purchases of software and support for its internal financial and administrative
system needs (approximately $4.4 million), purchases of rights to embed
technology of other vendors in integrated products developed by the Company
($2.0 million), and rights to resell products of another vendor ($1.3 million).
License revenues recognized from sales to these vendors during the year ended
December 31, 2000 totaled approximately $5.2 million, and related deferred
revenues were approximately $700,000, of which $350,000 was recognized prior to
year end.

License revenue recognized by the Company in the fourth quarter of 2000 on
concurrent transactions was approximately $750,000.

The above transactions effectively include nonmonetary sales of the
Company's software and services in exchange for equity securities of the
investees and for software and services of other vendors. The Company believes
that APB Opinion No. 29, "Accounting for Nonmonetary Transactions" ("APB 29"),
as interpreted by EITF Issues 86-29 and 00-08, requires the Company to account
for each of the transactions described above at fair value. With respect to the
Company's license agreements, all other revenue recognition criteria were
satisfied with respect to the amount of license revenue recognized.

The fair values of equity securities purchased by the Company were based on
concurrent or recent purchases of substantially similar securities of the
investees by independent third parties. The values of the Company's software
license arrangements were based on similar monetary transactions with other
customers. Prepaid professional services to be provided to the Company are
valued at the same rates charged to the Company for prior arrangements with the
vendor. For each of the other nonmonetary transactions described above, monetary
consideration was at least 25% of the total fair value of the transaction.

(11) COMMITMENTS AND CONTINGENCIES

Royalty Obligations

In May 1998, with the roll-out of the jointly-developed MQIntegrator and
MQSeries Integrator products, the Company began paying royalties to IBM for
sales of these products made by the Company's direct sales force through the OEM
arrangement. In 1999 and 1998, a significant portion of cost of software
licenses were attributable to this royalty obligation. Beginning in 2000, the
Company sells the MQSeries Integrator products solely through a different
arrangement under which it acts as an agent and the Company recognizes as
revenue only its share of transaction proceeds.

In 1998, the Company began accruing royalties to JP Morgan for the sales of
Business Event Manager. The Company's obligation under this arrangement is
subject to a cumulative maximum of $3,750,000. However, as the Company has
de-emphasized sales of this product, it is not anticipated to produce material
royalty obligations in the future. For the years ended December 31, 2000 and
1999, the Company incurred approximately zero and $138,000, respectively, toward
this cumulative maximum.

The Company also has several arrangements that give the Company the right
to sublicense software products of other vendors, either embedded in integrated
products developed by the Company, or in connection with sales of the Company's
products and services as a value added reseller. Compensation to these
third-party vendors may be in the form of fixed payments made in advance and
amortized over the term of the specific rights, the purchase by the Company of
specific products held for resale, or ongoing royalties due these vendors as the
related products are sold.

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NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Operating Leases

The Company leases its administrative offices, research facilities and
certain equipment under noncancelable operating lease agreements. Rent expense
under these leases for the years ended December 31, 2000, 1999 and 1998 was
approximately $9,347,000, $6,111,000 and $2,494,000, respectively. The following
is a schedule of future minimum lease payments as of December 31:

2001................................................... $ 8,244,000
2002................................................... 7,103,000
2003................................................... 6,810,000
2004................................................... 6,311,000
2005................................................... 6,216,000
Thereafter............................................. 26,147,000
-----------
$60,831,000
===========

Severance Agreements

In September 2000, the board of directors approved a Change of Control
Severance Agreement plan to assure the continued dedication and objectivity of
key executive employees in the event of a change of control of the Company. The
agreements with 13 Company executives generally provide for contingent severance
payments and other benefits if, within 18 months following a change of control,
the executive's employment is terminated involuntarily, other than for cause, or
voluntarily for good reason. Good reason would include a material reduction in
the executive's duties, title, authority or responsibilities. Benefits due would
include cash compensation equal to 100% (200% for five of the executives) of the
executive's highest annual compensation reported on Form W-2 (including bonuses
and stock-based compensation) during the preceding three-year period, immediate
vesting of all unvested stock options or restricted stock held, and continuation
at the Company's expense of health and other employee insurance programs for up
to 12 months. The maximum cash compensation that could be required under these
arrangements is estimated to be approximately $15 million.

Other Commitments

In September 2000, the Company entered into a reseller agreement with an
on-line eLearning company to resell their technical training titles to end
users. As part of this arrangement, the Company is committed to pay
approximately $1.5 million for internal use of training titles. This amount is
payable in quarterly installments beginning December 2000, with the final
payment due September 2003.

Known Claims

Significant litigation in which the Company is a defendant is described in
Note 15. As of the date of these financial statements, liabilities that may
arise from the ultimate resolution of these matters, if any, were not reasonably
estimable. Consequently, no provision for loss has been made in the accompanying
financial statements with respect to these matters.

72
75
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(12) SEGMENT INFORMATION AND CUSTOMER CONCENTRATIONS

The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are components of an enterprise for which
separate financial information is available and is evaluated regularly by the
chief operating decision maker, or decision making group, in deciding how to
allocate resources and assess performance of the segments of an enterprise. The
operating segments are managed separately because each operating segment
represents a strategic business unit that offers different products and serves
different markets.

The Company classifies its business activities into three operating
segments: The Americas, Europe and Asia Pacific, and Corporate and Other.
Information regarding the Company's operations in these three operating segments
are set forth below. For consolidated results, the accounting policies of the
operating segments are the same as those described in the summary of significant
accounting policies. There are no significant intersegment sales or transfers
between the segments for the periods presented.

2000 1999 1998
------------------------------------------ ------------------------------------------ --------
EUROPE EUROPE
THE AND ASIA CORPORATE THE AND ASIA CORPORATE THE
AMERICAS PACIFIC AND OTHER TOTAL AMERICAS PACIFIC AND OTHER TOTAL AMERICAS
-------- -------- --------- -------- -------- -------- --------- -------- --------
(AMOUNTS IN THOUSANDS)

Total revenues............. $94,011 $51,640 $ 42,697 $188,348 $71,876 $43,137 $ 11,211 $126,224 $43,603
Total cost of revenues..... 18,425 20,374 16,282 55,081 16,870 16,456 6,975 40,301 7,077
------- ------- --------- -------- ------- ------- --------- -------- -------
Gross profit............... 75,586 31,266 26,415 133,267 55,006 26,681 4,236 85,923 36,526
Selling and marketing...... 45,215 22,230 22,310 89,755 25,810 16,464 12,588 54,862 11,765
Research and development... -- -- 42,505 42,505 -- -- 34,873 34,873 --
General and
administrative........... -- -- 16,942 16,942 -- -- 15,620 15,620 --
------- ------- --------- -------- ------- ------- --------- -------- -------
Operating profit (loss)
before
acquisition-related,
restructuring and
stock-based compensation
charges.................. 30,371 9,036 (55,342) (15,935) 29,196 10,217 (58,845) (19,432) 24,761
Restructuring charges...... -- 4,848 4,848 -- -- 7,450 7,450 --
Stock-based compensation... -- -- 2,342 2,342 -- -- -- -- --
Asset impairment charges... -- -- 4,954 4,954 -- -- -- -- --
Acquisition-related
charges.................. -- -- 36,297 36,297 -- -- 44,543 44,543 --
------- ------- --------- -------- ------- ------- --------- -------- -------
Operating profit (loss).... 30,371 9,036 (103,783) (64,376) 29,196 10,217 (110,838) (71,425) 24,761
Other income and expense,
net...................... -- -- 4,297 4,297 -- -- 7,132 7,132 --
------- ------- --------- -------- ------- ------- --------- -------- -------
Net income (loss) before
tax...................... 30,371 9,036 (99,486) (60,079) 29,196 10,217 (103,706) (64,293) 24,761
Tax (benefit) provision.... -- -- 791 791 -- -- (17,981) (17,981) --
------- ------- --------- -------- ------- ------- --------- -------- -------
Net income (loss) after
tax...................... $30,371 $ 9,036 $(100,277) $(60,870) $29,196 $10,217 $ (85,725) $(46,312) $24,761
======= ======= ========= ======== ======= ======= ========= ======== =======

1998
------------------------------
EUROPE CORPORATE
AND ASIA AND
PACIFIC OTHER TOTAL
-------- --------- -------
(AMOUNTS IN THOUSANDS)

Total revenues............. $18,351 $ 3,860 $65,814
Total cost of revenues..... 3,488 4,043 14,607
------- -------- -------
Gross profit............... 14,863 (183) 51,207
Selling and marketing...... 5,976 4,200 21,942
Research and development... -- 15,839 15,839
General and
administrative........... -- 6,571 6,571
------- -------- -------
Operating profit (loss)
before
acquisition-related,
restructuring and
stock-based compensation
charges.................. 8,877 (26,793) 6,855
Restructuring charges...... -- -- --
Stock-based compensation... -- -- --
Asset impairment charges... -- -- --
Acquisition-related
charges.................. -- 19,376 19,376
------- -------- -------
Operating profit (loss).... 8,887 (46,169) (12,521)
Other income and expense,
net...................... -- 2,744 2,744
------- -------- -------
Net income (loss) before
tax...................... 8,887 (43,425) (9,777)
Tax (benefit) provision.... -- (1,278) (1,278)
------- -------- -------
Net income (loss) after
tax...................... $ 8,887 $(42,147) $(8,499)
======= ======== =======

During 2000, no end user customer contributed more than 10% of total
revenues, however, one partner contributed 17% of total revenues. The Company's
revenues from major partners and customers who represented more than 10% of
total revenues in any of the last three years in the period ended December 31,
2000 are as follows:

2000 1999 1998
---- ---- ----

Company A................................................... 17% 8% 8%
Company B................................................... -- 7% 10%

73
76
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS, PREPAID EXPENSES AND OTHER,
INTANGIBLES, NET, OTHER ASSETS, NET, ACCRUED LIABILITIES AND OTHER INCOME,
NET

Activity in the allowance for uncollectible accounts for the years ended
December 31, 2000, 1999 and 1998 was as follows:

BALANCE, CHARGED TO WRITE-OFFS, BALANCE,
BEGINNING COSTS AND NET OF END OF
OF YEAR EXPENSES RECOVERIES YEAR
--------- ---------- ----------- ---------

1998.................................... 300,000 620,030 120,030 800,000
1999.................................... 800,000 2,837,506 1,752,506 1,885,000
2000.................................... 1,885,000 13,477,000 6,621,000 8,741,000

Prepaid expenses and other consist of the following:

DECEMBER 31,
------------------------
2000 1999
----------- ----------

Prepaid expenses and support................................ $ 6,537,688 $3,159,741
Third-party software held for resale........................ 4,722,471 1,508,600
Contract bid deposit........................................ 1,000,000 --
Deposits.................................................... 410,379 290,357
Other....................................................... 943,980 1,172,496
----------- ----------
$13,614,518 $6,131,194
=========== ==========

Intangibles, net consists of the following:

DECEMBER 31,
---------------------------
2000 1999
------------ ------------

Goodwill, net............................................ $173,222,165 $149,107,721
Purchased software products, net......................... 15,742,128 17,519,986
Purchased rights to software technology, net............. 6,726,867 3,755,247
Trademarks and other..................................... 193,168 182,868
------------ ------------
$195,884,328 $170,565,822
============ ============

Other assets, net consists of the following:

DECEMBER 31,
------------------------
2000 1999
----------- ----------

Notes and accrued interest receivable....................... $ 174,058 $ 142,051
Deposits.................................................... 1,671,662 822,550
Equity investments.......................................... 11,786 351,786
Cost investments............................................ 8,900,000 --
Other, net.................................................. 470 5,967
----------- ----------
$10,757,976 $1,382,354
=========== ==========

74
77
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Accrued liabilities consist of the following:

DECEMBER 31,
-------------------------
2000 1999
----------- -----------

Accrued payroll and payroll related expenses............... $10,963,532 $10,854,576
Accrued restructuring charges.............................. 5,432,768 3,288,582
Accrued royalties.......................................... 872,439 379,012
Accrued business combination and deferred offering costs... -- 446,250
Accrued sales, use, VAT and other taxes.................... 3,566,688 1,399,624
Accrued contractor costs................................... -- 879,237
Other...................................................... 3,851,304 1,864,694
----------- -----------
$24,686,731 $19,111,975
=========== ===========

Other income, net consists of the following:

YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------

Interest income.................................. $3,771,518 $6,837,314 $2,893,124
Related party interest income (Note 9)........... 878,195 683,732 --
Interest expense................................. (12,983) (62,173) (46,675)
Foreign exchange gains and (losses), net and
other.......................................... (340,088) (326,526) (102,703)
---------- ---------- ----------
$4,296,642 $7,132,347 $2,743,746
========== ========== ==========

75
78
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) SELECTED QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following tables present unaudited quarterly consolidated statement of
operations data for each quarter in the two years ended December 31, 2000. This
data has been derived from unaudited consolidated financial statements that have
been prepared on the same basis as the audited consolidated financial statements
and include all adjustments (consisting only of normal recurring adjustments)
that management considers necessary for a fair presentation of such information.
Management believes quarter-to-quarter comparisons of our financial results
should not be relied upon as an indication of future performance, and operating
results may fluctuate from quarter to quarter in the future.

THREE MONTHS ENDED
--------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
2000 2000 2000 2000
------------ ------------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software licenses................... $ 19,932 $ 32,299 $ 28,359 $ 24,074
Software maintenance................ 4,774 6,040 5,585 5,264
Professional services............... 15,454 16,839 16,974 12,754
----------- ----------- ----------- -----------
Total revenues................. 40,160 55,178 50,918 42,092
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses........... 1,626 550 530 555
Cost of professional services and
maintenance....................... 14,714 13,601 13,436 10,069
----------- ----------- ----------- -----------
Total cost of revenues......... 16,340 14,151 13,966 10,624
----------- ----------- ----------- -----------
Gross profit........................ 23,820 41,027 36,952 31,468
Operating expenses:
Sales and marketing................. 30,454 22,404 19,420 17,477
Research and development............ 11,212 10,915 11,011 9,367
General and administrative.......... 4,672 4,188 4,111 3,971
Asset impairment charges............ 4,954 -- -- --
Restructuring costs................. 4,848 -- -- --
Stock-based compensation and related
payroll taxes..................... 462 1,268 51 561
Amortization of intangibles and
other acquisition-related
charges........................... 9,945 9,413 9,499 7,440
----------- ----------- ----------- -----------
Total operating expenses....... 66,547 48,188 44,092 38,816
----------- ----------- ----------- -----------
Loss from operations..................... (42,727) (7,161) (7,140) (7,348)
Other income, net........................ 652 985 1,019 1,640
----------- ----------- ----------- -----------
Net loss before income taxes... (42,075) (6,176) (6,121) (5,708)
Income tax provision..................... 186 200 204 200
----------- ----------- ----------- -----------
Net loss....................... $ (42,261) $ (6,376) $ (6,325) $ (5,908)
=========== =========== =========== ===========
Net loss per share, basic and
diluted...................... $ (1.16) $ (0.18) $ (0.18) $ (0.17)
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding,
basic and diluted............ 36,345,478 36,093,032 35,614,364 34,691,960
=========== =========== =========== ===========

76
79
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In addition to the asset impairment charges and restructuring charges shown
in the above summary, the Company recorded a significant adjustment to sales and
marketing expenses of approximately $9.9 million in the quarter ended December
31, 2000, to provide for uncollectible receivables.

THREE MONTHS ENDED
--------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
------------ ------------- ----------- -----------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)

CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Software licenses................... $ 20,905 $ 12,428 $ 8,866 $ 17,366
Software maintenance................ 5,301 4,077 3,702 3,097
Professional services............... 12,400 15,361 13,573 9,148
----------- ----------- ----------- -----------
Total revenues................. 38,606 31,866 26,141 29,611
----------- ----------- ----------- -----------
Cost of revenues:
Cost of software licenses........... 489 509 261 146
Cost of professional services and
maintenance....................... 10,648 11,730 10,320 6,198
----------- ----------- ----------- -----------
Total cost of revenues......... 11,137 12,239 10,581 6,344
----------- ----------- ----------- -----------
Gross profit........................ 27,469 19,627 15,560 23,267
Operating expenses:
Sales and marketing................. 15,538 16,078 13,421 9,825
Research and development............ 9,259 9,404 9,322 6,888
General and administrative.......... 4,041 4,623 3,890 3,066
Restructuring costs................. -- 7,445 -- --
Amortization of intangibles and
other acquisition-related
charges........................... 7,187 32,309 3,352 1,700
----------- ----------- ----------- -----------
Total operating expenses....... 36,025 69,859 29,985 21,479
----------- ----------- ----------- -----------
Income (loss) from operations............ (8,556) (50,232) (14,425) 1,788
Other income, net........................ 1,452 1,736 1,760 2,184
----------- ----------- ----------- -----------
Net income (loss) before income
taxes........................ (7,104) (48,496) (12,665) 3,972
Income tax (benefit) provision........... (1,967) (13,560) (3,844) 1,390
----------- ----------- ----------- -----------
Net income (loss).............. $ (5,137) $ (34,936) $ (8,821) $ 2,582
=========== =========== =========== ===========
Net income (loss) per share,
basic........................ $ (0.15) $ (1.06) $ (0.28) $ 0.08
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding,
basic........................ 33,861,328 33,008,293 31,488,578 30,632,010
=========== =========== =========== ===========
Net income (loss) per share,
diluted...................... $ (0.15) $ (1.06) $ (0.28) $ 0.08
=========== =========== =========== ===========
Weighted average shares of
common stock outstanding,
diluted...................... 33,861,328 33,008,293 31,488,578 34,421,437
=========== =========== =========== ===========

77
80
NEW ERA OF NETWORKS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(15) LITIGATION

The Company is involved in a declaratory judgment action in Federal
District Court for the State of Colorado and a trademark dilution case in Texas
District Court for Bend County against NEON Systems, Inc. over the use of the
trademark NEON. An adverse judgment or settlement, particularly in the Texas
action, may result in increased costs and expenses and may have an adverse
effect on our business. The Texas damage action was filed in June 1999.

In January 2001 the Company was named as a defendant in a number of class
action lawsuits alleging violation of the federal securities laws. Certain
executive officers of the Company also are named as defendants. Most of the
complaints in these lawsuits assert claims on behalf of purchasers of the
Company's securities between October and December 2000. The complaints allege
that the Company and the other defendants made material misrepresentations and
omissions regarding the Company's business and prospects, causing harm to
purchasers of the Company's securities. The complaints do not specify the amount
of damages sought. These cases are in the early stages and the Company has not
yet formally responded to the complaints. The Company believes this class action
lawsuit is without merit. The Company intends to deny all material allegations
and to defend itself vigorously. An adverse judgment or settlement in this
lawsuit could have a material adverse effect on the Company's financial
condition or results of operations. The ultimate outcome of these actions cannot
be presently determined. Accordingly, no provision for any liability or loss
that may result from adjudication or settlement thereof has been made in the
accompanying consolidated financial statements.

78
81

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.9 -- Amendment No. 2 to Registration Rights Agreement between
the Registrant and certain parties named therein dated
June 3, 1996 (which is incorporated herein by reference
to Exhibit 10.11 to the Registrant's 1997 S-1).
10.10 -- Standard Commercial Lease between Greenwood Plaza
Partners, LLC and the Registrant dated July 22, 1999
(which is incorporated herein by reference to Exhibit
10.10 to the Registrant's Annual Report on Form 10-K for
1999 dated March 29, 2000).
10.11 -- First Amendment to Standard Commercial Lease between
Greenwood Plaza Partners, LLC and the Registrant with
ancillary agreements dated May 2000 (which is
incorporated herein by reference to Exhibit 10.11 to the
Registrant's Quarterly Report on Form 10-Q dated August
14, 2000).
10.12 -- Agreement and Plan of Reorganization by and among Sybase,
Inc., Neel Acquisition Corp. and the Registrant dated
February 20, 2001 (which is incorporated herein by
reference to Exhibit 2.1 of the Registrant's Report on
Form 8-K dated February 28, 2001).
10.13 -- Form of Change of Control Severance Agreement as entered
into between the Registrant and each of George F. (Rick)
Adam, Jr., Patrick J. Fortune, Stephen E. Webb and
Frederick T. Horn.
10.14* -- Amended Change of Control Severence Agreement between
George F. (Rick) Adam, Jr. and the Registrant dated
February 16, 2001.
10.15* -- Amended Change of Control Severence Agreement between
Patrick J. Fortune and the Registrant dated February 16,
2001.
10.16* -- Amended Change of Control Severance Agreement between
Stephen E. Webb and the Registrant dated February 16,
2001.
10.17* -- Amended Change of Control Severance Agreement between
Frederick T. Horn and the Registrant dated February 16,
2001.
10.18* -- Change of Control Severance Agreement Dr. Franz Koepper
and the Registrant dated January 30, 2001.
10.19* -- Employment Agreement between Dr. Franz Koepper and SLI
Consulting AG dated January 1, 1998.
10.20* -- Amendment 2000/2001 to the Employment Agreement between
Dr. Franz Koepper and SLI Consulting AG dated December
24, 2000.
23.1 -- Consent of Arthur Andersen LLP.
24.1 -- Power of Attorney (which is included on page 41 herein).

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

* Indicates management compensatory plan, contract or arrangement.