NEON SYSTEMS INC, S-8, 1999-07-07

NEON SYSTEMS INC
S-8, 1999-07-07
PREPACKAGED SOFTWARE

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<PAGE>

As filed with the Securities and Exchange Commission on July 7, 1999
Registration No. 333-

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

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

FORM S-8
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

NEON SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

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

14100 SOUTHWEST FREEWAY, SUITE 500
SUGAR LAND, TEXAS 77478
(Address of Principal Executive Offices)

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

1993 STOCK PLAN
1999 LONG-TERM INCENTIVE PLAN
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
(Full Titles of the Plans)

JOE BACKER
PRESIDENT
NEON SYSTEMS, INC.
14100 SOUTHWEST FREEWAY, SUITE 500
SUGAR LAND, TEXAS 77478
(281) 491-4200
(Name, address and telephone number, including area code,
of agent for service)

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

WITH COPIES TO:

ROBERT P. TAYLOR, III, ESQ.
KENT JAMISON, ESQ.
LOCKE LIDDELL & SAPP LLP
2200 ROSS AVENUE, SUITE 2200
DALLAS, TEXAS 75201
(214) 740-8000

----------------------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------- ------------------ ---------------- ---------------------- -----------------------
TITLE PROPOSED PROPOSED MAXIMUM
OF SECURITIES AMOUNT TO MAXIMUM AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED BE REGISTERED OFFERING PRICE PRICE (1) REGISTRATION FEE
PER SHARE (1)
- -------------------------- ------------------ ---------------- ---------------------- -----------------------
<S> <C> <C> <C> <C>
Common Stock,
$0.01 Par Value

To be Issued under the 1,616,252 shares $2.42 (2) $3,911,329.80 $1087.35
1993 Stock Plan

To be Issued under the 2,000,000 shares $33.125 (3) $66,250,000 (3) $18,417.50
1999 Long-Term Incentive
Plan

To be Issued under the 100,000 shares $33.125 (3) $3,312,500 (3) $920.88
Stock Option Plan for
Non-Employee Directors

TOTAL 3,716,252 shares $73,473,829 $20,425.73
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) FOR THE SOLE PURPOSE OF CALCULATING THE REGISTRATION FEE, THE NUMBER OF
SHARES TO BE REGISTERED UNDER THIS REGISTRATION STATEMENT HAS BEEN BROKEN DOWN
INTO THREE SUBTOTALS. IN ADDITION, PURSUANT TO RULE 416 UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT ALSO COVERS SHARES OF COMMON
STOCK OF THE REGISTRANT ISSUABLE TO PREVENT DILUTION RESULTING FROM STOCK
SPLITS, STOCK DIVIDENDS OR SIMILAR TRANSACTIONS.

(2) COMPUTED IN ACCORDANCE WITH RULE 457(h) UNDER THE SECURITIES ACT OF 1933,
AS AMENDED. SUCH COMPUTATION IS BASED ON THE WEIGHTED AVERAGE OPTION EXERCISE
PRICE OF $2.42 PER SHARE COVERING OPTIONS FOR 1,616,252 SHARES PRESENTLY
OUTSTANDING UNDER THE REGISTRANT'S 1993 STOCK PLAN.

(3) ESTIMATED IN ACCORDANCE WITH RULE 457(c) AND (h) UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, SOLELY FOR PURPOSES OF CALCULATING THE REGISTRATION
FEE, BASED ON THE AVERAGE OF THE HIGH AND LOW PRICES REPORTED ON THE NASDAQ
NATIONAL MARKET ON JULY 6, 1999.

- -------------------------------------------------------------------------------
<PAGE>

PART I
INFORMATION REQUIRED IN THE SECTION 10(a) PROSPECTUS

The information specified by Item 1 (Plan Information) and Item 2
(Registrant Information and Employee Plan Annual Information) of Part I of Form
S-8 is omitted from this filing in accordance with the provisions of Rule 428
under the Securities Act of 1933, as amended (the "Securities Act"), and the
introductory Note to Part I of Form S-8.

PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT

ITEM 3. INCORPORATION OF DOCUMENTS BY REFERENCE.

The documents set forth below are incorporated by reference in this
Registration Statement. All documents subsequently filed by NEON Systems, Inc.
("NEON") pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), prior to the filing of a
post-effective amendment which indicates that all securities offered have been
sold or which deregisters all securities then remaining unsold, shall be deemed
to be incorporated by reference into this Registration Statement and to be a
part hereof from the date of filing of such documents. Any statement contained
in a document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Registration
Statement to the extent a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Registration Statement.

(a) NEON's annual report on Form 10-K for the year ended March
31, 1999;

(b) All other reports filed with the Securities and Exchange
Commission ("Commission") pursuant to Section 13(a) or 15(d)
of the Exchange Act since the end of the fiscal year covered
by the prospectus described in (a) above; and

(c) The description of the Common Stock which is contained in
NEON's Registration Statement on Form 8-A filed with the
Commission on March 1, 1999 pursuant to Section 12 of the
Exchange Act, and all amendments thereto and reports that have
been filed for the purpose of updating such description.

ITEM 4. DESCRIPTION OF SECURITIES.

Not Applicable.

II-1

<PAGE>

ITEM 5. INTERESTS OF NAMED EXPERTS AND COUNSEL.

Not Applicable.

ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Section 145 of the Delaware General Corporation Law (the "DGCL")
provides, in effect, that any person made a party to any action by reason of the
fact that he is or was a director, officer, employee or agent of NEON may and,
in certain cases, must be indemnified by NEON against, in the case of a
non-derivative action, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorney's fees) incurred by him as a result of
such action, and in the case of a derivative action, against expenses (including
attorney's fees), if in either type of action he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
NEON. This indemnification does not apply, in a derivative action, to matters as
to which it is adjudged that the director, officer, employee or agent is liable
to NEON, unless upon court order it is determined that, despite such
adjudication of liability but in view of all the circumstances of the case, he
is fairly and reasonably entitled to indemnity for expenses, and, in a
non-derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.

Article 15 of NEON's Amended and Restated Certificate of Incorporation
provides that no director of NEON shall be liable to NEON or its stockholders
for monetary damages for breach of fiduciary duty as a director to the fullest
extent permitted by the DGCL.

Article 16 of NEON's Amended and Restated Certificate of Incorporation
provides that NEON may indemnify to the fullest extent by Delaware law any and
all of its directors and officers, or former directors and officers, or any
person who may have served at NEON's request as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise.

Reference is made to the form of Indemnification Agreement by and
between NEON and its directors and executive officers filed as Exhibit 10.14 to
NEON's Registration Statement on Form S-1 (File No. 333-69651) declared
effective on March 4, 1999, pursuant to which NEON will be obligated to the
extent permitted by applicable law, to indemnify such directors against all
expenses, judgements, fines and penalties, incurred in connection with the
defense or settlement of any actions brought against them by reason of the fact
that they were directors of NEON or assumed certain responsibilities at the
direction of NEON. NEON has purchased directors' and officers' liability
insurance in order to limit its exposure to liability for indemnification of
directors and officers.

ITEM 7. EXEMPTION FROM REGISTRATION CLAIMED.

Not Applicable.

II-2

<PAGE>

ITEM 8. EXHIBITS.

5.1* Opinion of Locke Liddell & Sapp LLP.
23.1* Consent of KPMG LLP.
23.2* Consent of Locke Liddell & Sapp LLP (included in
opinion filed as Exhibit 5.1).
24.1* Power of Attorney (included on the signature pages
of this Registration Statement).
99.1* 1993 Stock Plan.
99.2* 1999 Long-Term Incentive Plan, as amended.
99.3* Stock Option Plan for Non-Employee Directors.

- --------------------------
* Filed herewith.

ITEM 9. UNDERTAKINGS.

NEON hereby undertakes:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration
Statement:

(i) To include any prospectus required by Section
10(a)(3) of the Securities Act;

(ii) To reflect in the prospectus any facts or events
arising after the effective date of this Registration
Statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in this Registration Statement;

(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
this Registration Statement or any material change to
such information in this Registration Statement;

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof;

(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering;

(4) That, for purposes of determining any liability under the
Securities Act, each filing of NEON's annual report pursuant
to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in this Registration Statement shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof; and

II-3

<PAGE>

(5) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of NEON pursuant to the foregoing
provisions, or otherwise, NEON has been advised that in the
opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the
payment by the NEON of expenses incurred or paid by a
director, officer or controlling person of NEON in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the NEON
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.

II-4

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-8 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on July 7, 1999.

NEON Systems, Inc.

By: /s/ Joe Backer
---------------------------------------
Joe Backer,
President & Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN AND WOMEN BY THESE PRESENTS, that each person whose
signature appears below hereby constitutes and appoints each of Joe Backer and
John S. Reiland, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done on
and about the premises as fully and to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURES TITLE DATE
---------- ----- ----

/s/ John J. Moores Chairman of the Board July 7, 1999
-----------------------
John J. Moores
President and Chief Executive
/s/ Joe Backer Officer (Principal Executive
----------------------- Officer) and Director July 7, 1999
Joe Backer

/s/ Peter Schaeffer Chief Technology Officer and
----------------------- Director July 7, 1999
Peter Schaeffer

II-5

<PAGE>

SIGNATURES TITLE DATE
---------- ----- ----

/s/ John S. Reiland Chief Financial Officer July 7, 1999
------------------------ (Principal Financial and
John S. Reiland Accounting Officer) and
Director

/s/ Charles E. Noell III Director July 7, 1999
------------------------
Charles E. Noell III

/s/ Norris van den Berg Director July 7, 1999
---------------------------
Norris van den Berg

/s/ Richard Holcomb Director July 7, 1999
---------------------------
Richard Holcomb

II-6

<PAGE>

INDEX TO EXHIBITS

Exhibit
Number Exhibit
------ -------

5.1* Opinion of Locke Liddell & Sapp LLP.
23.1* Consent of KPMG LLP.
23.2* Consent of Locke Liddell & Sapp LLP (included in opinion filed as
Exhibit 5.1).
24.1* Power of Attorney (included on the signature pages
of this Registration Statement).
99.1* 1993 Stock Plan.
99.2* 1999 Long-Term Incentive Plan, as amended.
99.3* Stock Option Plan for Non-Employee Directors.

- ---------------
* Filed herewith.

<PAGE>

EXHIBIT 5.1

July 7, 1999

NEON Systems, Inc.
14100 Southwest Freeway, Suite 500
Sugar Land, TX 77478

Re: Registration of 3,716,252 shares of Common Stock, par value
$.01 per share, pursuant to a Registration Statement on Form S-8

Ladies and Gentlemen:

We have acted as counsel for NEON Systems, Inc., a Delaware corporation
(the "Company"), in connection with the registration under the Securities Act of
1933, as amended (the "Securities Act"), pursuant to a Registration Statement on
Form S-8 (the "Registration Statement"), of 3,716,252 shares of Common Stock,
par value $.01 per share, of the Company (the "Common Stock") to be offered
pursuant to the 1993 Stock Plan, 1999 Long-Term Incentive Plan and the Stock
Option Plan for Non-Employee Directors (the "Plans").

Based upon our examination of such documents and the investigation of
such matters of law as we have deemed relevant or necessary in rendering this
opinion, we hereby advise you that we are of the opinion that:

Assuming, with respect to shares of Common Stock issued after the date
hereof, (i) the receipt of proper consideration for the issuance thereof in
excess of par value thereof, (ii) the availability of a sufficient number of
shares of Common Stock authorized by the Company's Certificate of Incorporation
then in effect, (iii) compliance with the terms of any agreement entered into in
connection with any options, stock appreciation rights ("SARs"), performance
units or restricted stock under the Plans, and (iv) no change occurs in the
applicable law or the pertinent facts, the shares of Common Stock purchasable
upon the exercise of any option, SAR or performance unit granted under the Plans
or the award of any restricted stock under the Plans, will upon issuance be duly
authorized and validly issued, fully paid and non-assessable shares of Common
Stock.

<PAGE>

We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement filed by the Company with the Securities and Exchange
Commission for the registration under the Securities Act, of 3,716,252 shares
of Common Stock of the Company covered by the Plans. By so consenting, we do not
thereby admit that our firm's consent is required by Section 7 of the Securities
Act.

Very truly yours,

/s/ LOCKE LIDDELL & SAPP LLP

<PAGE>

[LOGO]
Exhibit 23.1

[LETTERHEAD]

The Board of Directors
Neon Systems, Inc.

We consent to the use of our reports incorporated herein by reference.

/s/ KPMG LLP

July 2, 1999

<PAGE>

NEON SYSTEMS, INC.

1993 STOCK PLAN

1. PURPOSE. This 1993 Stock Plan (the "Plan") is intended to provide
incentives: (a) to the officers and other employees of Neon Systems, Inc., a
Delaware corporation (the "Company"), and of any present or future parent or
subsidiary of the Company (collectively, "Related Corporations"), by providing
them with opportunities to purchase stock in the Company pursuant to options
granted hereunder which qualify as "incentive stock options" ("ISOs") under
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code");
(b) to directors, officers, employees and consultants of the Company and Related
Corporations by providing them with opportunities to purchase stock in the
Company pursuant to options granted hereunder which do not qualify as ISOs
("Non-Qualified Options"); (c) to directors, officers, employees and consultants
of the Company and Related Corporations by providing them with awards of stock
in the Company ("Awards"); and (d) to directors, officers, employees and
consultants of the Company and Related Corporations by providing them with
opportunities to make direct purchases of stock in the Company ("Purchases").
Both ISOs and Non-Qualified options are referred to hereafter individually as an
"Option" and collectively as "Options." Options, Awards and authorizations to
make Purchases are referred to hereafter collectively as "Stock Rights." As used
herein, the terms "parent" and "subsidiary" mean "parent corporation" and
"subsidiary corporation," respectively, as those terms are defined in Section
424 of the Code.

2. ADMINISTRATION OF THE PLAN.

A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board") or by a
committee appointed by the Board (the "Committee"); provided that, to the
extent required by Rule 16b-3 promulgated under the Securities Exchange Act
of 1934 or any successor provision ("Rule 16b-3"), with respect to specific
grants of Stock Rights, the Plan shall be administered by a disinterested
administrator or administrators within the meaning of Rule 16b-3.
Hereinafter, all references in this Plan to the "Committee" shall mean the
Board if no Committee has been appointed. Subject to ratification of the
grant or authorization of each Stock Right by the Board (if so required by
applicable state law), and subject to the terms of the Plan, the Committee
shall have the authority to (i) determine the employees of the Company and
Related Corporations (from among the class of employees eligible under
paragraph 3 to receive ISOs) to whom ISOs shall be granted, and determine
(from among the class of individuals and entities eligible under paragraph
3 to receive Non-Qualified Options and Awards and to make Purchases) to
whom Non-Qualified Options, Awards and authorizations to make Purchases may
be granted; (ii) determine the time or times at which Options or Awards
shall be granted or Purchases made; (iii) determine the option price of
shares subject to each Option, which price shall not be less than the
minimum price specified in paragraph 6, and the purchase price of shares
subject to each Purchase; (iv) determine whether each Option granted shall
be an ISO or a Non-Qualified Option; (v) determine (subject to paragraph 7)
the time or times when each option shall become exercisable and the
duration of the exercise period; (vi) determine whether restrictions such
as repurchase options are to be imposed

1
<PAGE>

on shares subject to Options, Awards and Purchases and the nature of such
restrictions, if any; and (vii) interpret the Plan and prescribe and
rescind rules and regulations relating to it. If the Committee determines
to issue a Non-Qualified Option, it shall take whatever actions it deems
necessary, under Section 422 of the Code and the regulations promulgated
thereunder, to ensure that such Option is not treated as an ISO. The
interpretation and construction by the Committee of any provisions of the
Plan or of any Stock Right granted under it shall be final unless otherwise
determined by the Board. The Committee may from time to time adopt such
rules and regulations for carrying out the Plan as it may deem best. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Stock
Right granted under it.

B. COMMITTEE ACTIONS. The Committee may select one of its members
as its chairman, and shall hold meetings at such time and places as it may
determine. Acts by a majority of the members of the Committee, or acts
reduced to or approved in writing by a majority of the members of the
Committee (if consistent with applicable state law), shall constitute the
valid acts of the Committee. From time to time the Board may increase the
size of the Committee and appoint additional members thereof, remove
members (with or without cause) and appoint new members in- substitution
therefor, fill vacancies however caused, or remove all members of the
Committee and thereafter directly administer the Plan.

C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be
granted to members of the Board consistent with the provisions of the first
sentence of paragraph 2(A) above, if applicable. All grants of Stock
Rights to members of the Board shall in all other respects be made in
accordance with the provisions of this Plan applicable to other eligible
persons. Consistent with the provisions of the first sentence of paragraph
2(A) above, members of the Board who either (i) are eligible to receive
grants of Stock Rights pursuant to the Plan or (ii) have been granted Stock
Rights may vote on any matters affecting the administration of the Plan or
the grant of any Stock Rights pursuant to the Plan, except that no such
member shall act upon the granting to himself of Stock Rights, but any such
member may be counted in determining the existence of a quorum at any
meeting of the Board during which action is taken with respect to the
granting to such member of Stock Rights.

3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees
of the Company or any Related Corporation. Non-Qualified options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right.
Granting of any Stock Right to any individual or entity shall neither entitle
the recipient to, nor disqualify the recipient from, participation in any other
grant of Stock Rights.

4. STOCK. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, par value $.01 per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued pursuant to the Plan
is 100,000, subject to adjustment as provided in

2
<PAGE>

paragraph 13. If any Stock Right granted under the Plan shall expire or
terminate for any reason without having been exercised in full or shall cease
for any reason to be exercisable in whole or in part, the unpurchased shares
subject to such Stock Right shall again be available for grants of Stock Rights
under the Plan.

5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
at any time after May 14, 1993 and prior to May 13, 2003. The date of grant of
a Stock Right under the Plan will be the date specified by the Committee at the
time it grants the Stock Right; provided, however, that such date shall not be
prior to the date on which the Committee acts to approve the grant.

6. MINIMUM OPTION PRICE; ISO LIMITATIONS.

A. PRICE FOR NON-QUALIFIED OPTIONS. The exercise price per share
specified in the agreement relating to each Non-Qualified option granted
under the Plan shall in no event be less than the minimum legal
consideration required therefor under the laws of the State of Delaware or
the laws of any jurisdiction in which the Company or its successors in
interest may be organized.

B. PRICE FOR ISOS. The exercise price per share specified in the
agreement relating to each ISO granted under the Plan shall not be less
than the fair market value per share of Common Stock on the date of such
grant. In the case of an ISO to be granted to an employee owning stock
possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, the
price per share specified in the agreement relating to such ISO shall not
be less than one hundred ten percent (110%) of the fair market value per
share of Common Stock on the date of grant. For purposes of determining
stock ownership under this paragraph, the rules of Section 424(d) of the
Code shall apply.

C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible
employee may be granted Options treated as ISOs only to the extent that, in
the aggregate under this Plan and all incentive stock option plans of the
Company and any Related Corporation, ISOs do not become exercisable for the
first time by such employee during any calendar year with respect to stock
having a fair market value (determined at the time the ISOs were granted)
in excess of $100,000. The Company intends to designate any Options
granted in excess of such limitation as Non-Qualified Options.

D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an Option is
granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the last business day for
which the prices or quotes discussed in this sentence are available prior
to the date such Option is granted and shall mean (i) the average (on that
date) of the high and low prices of the Common Stock on the principal
national securities exchange on which the Common Stock is traded, if the
Common Stock is then traded on a national securities exchange; or (ii) the
last reported sale price (on that date) of the Common Stock on the NASDAQ
National Market List, if the Common Stock is not then traded on a national
securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for

3
<PAGE>

over-the-counter securities, if the Common Stock is not reported on the
NASDAQ National Market List. The "fair market value" of the stock issuable
upon exercise of an Option granted pursuant to the Plan within 120 days
prior to the time the Common Stock is publicly traded shall be deemed to be
equal to the initial per share purchase price at which the Common Stock is
offered to the public. However, if the Common Stock is not publicly traded
at the time an Option is granted under the Plan, "fair market value" shall
be deemed to be the fair value of the Common Stock as determined by the
Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of
the Common Stock in private transactions negotiated at arm's length.

7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10, each option shall expire on the date specified by the
Committee, but not more than (i) ten years from the date of grant in the case of
Options generally and (ii) five years from the date of grant in the case of ISOS
granted to an employee owning stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
Related Corporation, as determined under paragraph 6(B). Subject to earlier
termination as provided in paragraphs 9 and 10, the term of each ISO shall be
the term set forth in the original instrument granting such ISO, except with
respect to any part of such ISO that is converted into a Non-Qualified Option
pursuant to paragraph 16.

8. EXERCISE OF OPTION. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:

A. VESTING. The option shall either be fully exercisable on the
date of grant or shal1 become exercisable thereafter in such installments
as the Committee may specify.

B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable, it shall remain exercisable until expiration or termination of
the option, unless otherwise specified by the Committee.

C. PARTIAL EXERCISE. Each Option or installment may be exercised at
any time or from time to time, in whole or in part, for up to the total
number of shares with respect to which it is then exercisable.

D. ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date of exercise of any installment of any option; provided
that the Committee shall not, without the consent of an optionee,
accelerate the exercise date of any installment of any Option granted to
any employee as an ISO (and not previously converted into a Non-Qualified
Option pursuant to paragraph 16) if such acceleration would violate the
annual vesting limitation contained in Section 422(d) of the Code, as
described in paragraph 6(C).

9. TERMINATION OF EMPLOYMENT. If an ISO optionee ceases to be employed
by the Company and all Related Corporations other than by reason of death or
disability as defined in paragraph 10, no further installments of his or her
ISOs shall become exercisable, and his or her

4
<PAGE>

ISOs shall terminate after the passage of ninety (90) days from the date of
termination of his or her employment, but in no event later than on their
specified expiration dates, except to the extent that such ISOs (or
unexercised installments thereof ) have been converted into Non-Qualified
Options pursuant to paragraph 16. For purposes of this paragraph 9,
employment shall be considered as continuing uninterrupted during any bona
fide leave of absence (such as those attributable to illness, military
obligations or governmental service) provided that the period of such leave
does not exceed 90 days or, if longer, any period during which such
optionee's right to reemployment is guaranteed by statute. A bona fide leave
of absence with the written approval of the committee shall not be considered
an interruption of employment under this paragraph 9, provided that such
written approval contractually obligates the Company or any Related
Corporation to continue the employment of the optionee after the approved
period of absence. ISOs granted under the Plan shall not be affected by any
change of employment within or among the Company and Related Corporations, so
long as the optionee continues to be an employee of the Company, or any
Related Corporation. Nothing in the Plan shall be deemed to give any grantee
of any Stock Right the right to be retained in employment or other service by
the Company or any Related Corporation for any period of time.

10. DEATH; DISABILITY.

A. DEATH. If an ISO optionee ceases to be employed by the Company
and all Related Corporations by reason of his or her death, any ISO owned
by such optionee may be exercised, to the extent otherwise exercisable on
the date of his death, by his estate, personal representative or
beneficiary who has acquired the ISO by will or by the laws of descent and
distribution, at any time prior to the earlier of (i) the specified
expiration date of the ISO or (ii) the date 180 days following the date of
the optionee's death.

B. DISABILITY. If an ISO optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her disability,
such optionee shall have the right to exercise any ISO held by him or her
on the date of termination of employment, to the extent otherwise
exercisable on that date, at any time prior to the earlier of the specified
expiration date of the ISO or 180 days from the date of the termination of
the optionee's employment. For the purposes of the Plan, the term
"disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or any successor statute.

11. ASSIGNABILITY. No Stock Right shall be assignable or transferable by
the grantee except by will or by the laws of descent and distribution. During
the lifetime of a grantee each Stock Right shall be exercisable only by such
grantee.

12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any Non-
Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time

5
<PAGE>

confer authority and responsibility on one or more of its own members and/or one
or more officers of the Company to execute and deliver such instruments. The
proper officers of the Company are authorized and directed to take any and all
action necessary or advisable from time to time to carry out the terms of such
instruments.

13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:

A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of Options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.

B. CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated
with or acquired by another entity in a merger, sale of all or
substantially all of the Company's assets or otherwise (an "Acquisition"),
the Committee or the board of directors of any entity assuming the
obligations of the Company hereunder (the "Successor Board") shall, as to
outstanding Options, either (i) make appropriate provision for the
continuation of such Options by substituting on an equitable basis for the
shares then subject to such Options the consideration payable with respect
to the outstanding shares of Common Stock in connection with the
Acquisition; or (ii) upon written notice to the optionees, provide that all
Options must be exercised, to the extent then exercisable, within a
specified number of days of the date of such notice, at the end of which
period the Options shall terminate; or (iii) terminate all Options in
exchange for a cash payment equal to the excess of the fair market value of
the shares subject to such Options (to the extent then exercisable) over
the exercise price thereof.

C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the
Company or of another corporation are issued with respect to the
outstanding shares of Common Stock, an optionee upon exercising an Option
shall be entitled to receive for the purchase price paid upon such exercise
the securities he would have received if he had exercised his option prior
to such recapitalization or reorganization.

D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
shall be made only after the Committee, after consulting with counsel for
the Company, determines whether such adjustments would constitute a
"modification" of such ISOs (as that term is defined in Section 424 of the
Code) or would cause any adverse tax consequences for the holders of such
ISOs. If the Committee determines that such adjustments made with respect
to ISOs

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<PAGE>

would constitute a modification of such ISOs or would cause adverse tax
consequences to the holders, it may refrain from making such adjustments.

E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each option will terminate
immediately prior to the consummation of such proposed action or at such
other time and subject to such other conditions as shall be determined by
the Committee.

F. ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to Options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the Company.

G. FRACTIONAL SHARES. No fractional shares shall be issued under
the Plan and the optionee shall receive from the Company cash in lieu of
such fractional shares.

H. ADJUSTMENTS. Upon the happening of any of the events described
in subparagraphs A, B or C above, the class and aggregate number of shares
set forth in paragraph 4 hereof that are subject to Stock Rights which
previously have been or subsequently may be granted under the Plan shall
also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall determine the
specific adjustments to be made under this paragraph 13 and, subject to
paragraph 2, its determination shall be conclusive.

14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
installment thereof) shall be exercise by giving written notice to the Company
at its principal office address, or to such transfer agent as the Company shall
designate. Such notice shall identify the Stock Right being exercised and
specify the number of shares as to which such Stock Right is being exercised,
accompanied by full payment of the purchase price therefor either (a) in United
States dollars in cash or by check, (b) at the discretion of the Committee,
through delivery of shares of Common Stock having a fair market value equal as
of the date of the exercise to the cash exercise price of the Stock Right, (c)
at the discretion of the Committee, by delivery of the grantee's personal
recourse note bearing interest payable not less than annually at no less than
100% of the lowest applicable Federal rate, as defined in Section 1274(d) of the
Code, (d) at the discretion of the Committee and consistent with applicable law,
through the delivery of an assignment to the Company of a sufficient amount of
the proceeds from the sale of the Common Stock acquired upon exercise of the
Stock Right and an authorization to the broker or selling agent to pay that
amount to the Company, which sale shall be at the participant's direction at the
time of exercise, or (e) at the discretion of the Committee, by any combination
of (a), (b), (c) and (d) above. If the Committee exercises its discretion to
permit payment of the exercise price of an ISO by means of the methods set forth
in clauses (b), (c), (d) or (e) of the preceding sentence, such discretion shall
be exercised in writing at the time of the grant of the ISO in question. The
holder of a Stock Right shall not have the rights of a shareholder with respect
to the shares covered by such Stock Right until the date of issuance of a stock
certificate to such holder for such shares. Except as expressly provided above
in paragraph 13 with respect to changes in

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<PAGE>

capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.

15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board on May
14, 1993, subject, with respect to the validation of ISOs granted under the
Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the
approval of stockholders is not obtained prior to that May 14, 1994 any grants
of ISOs under the Plan made prior to that date will be rescinded. The Plan
shall expire at the end of the day on May 13, 2003 (except as to Options
outstanding on that date). Subject to the provisions of paragraph 5 above, Stock
Rights may be granted under the Plan prior to the date of stockholder approval
of the Plan. The Board may terminate or amend the Plan in any respect at any
time, except that, without the approval of the stockholders obtained within 12
months before or after the Board adopts a resolution authorizing any of the
following actions: (a) the total number of shares that may be issued under the
Plan may not be increased (except by adjustment pursuant to paragraph 13); (b)
the benefits accruing to participants under the Plan may not be materially
increased; (c) the requirements as to eligibility for participation in the Plan
may not be materially modified; (d) the provisions of paragraph 3 regarding
eligibility for grants of ISOs may not be modified; (e) the provisions of
paragraph 6(B) regarding the exercise price at which shares may be offered
pursuant to ISOs may not be modified (except by adjustment pursuant to paragraph
13); (f) the expiration date of the Plan may not be extended; and (g) the Board
may not take any action which would cause the Plan to fail to comply with Rule
16b-3. Except as otherwise provided in this paragraph 15, in no event may
action of the Board or stockholders alter or impair the rights of a grantee,
without such grantee.

16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS. The Committee, at the
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting Non-
Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action.

17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.

18. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after he makes a Disqualifying Disposition (as described in Sections
421, 422 and 424 of the Code and regulations thereunder) of any stock acquired
pursuant to the exercise of ISOs granted under the Plan. A Disqualifying
Disposition is generally any disposition occurring before the later of (a)

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<PAGE>

the date two years following the date the ISO was granted or (b) the date one
year following the date the ISO was exercised.

19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the vesting or transfer of restricted
stock or securities acquired on the exercise of a Stock Right hereunder, or the
making of a distribution or other payment with respect to such stock or
securities, the Company may withhold taxes in respect of amounts that constitute
compensation includible in gross income. The Committee in its discretion may
condition (i) the exercise of an option, (ii) the grant of an Award, (iii) the
making of a Purchase of Common Stock for less than its fair market value, or
(iv) the vesting or transferability of restricted stock or securities acquired
by exercising a Stock Right, on the grantee's making satisfactory arrangement
for such withholding. Such arrangement may include payment by the grantee in
cash or by check of the amount of the withholding taxes or, at the discretion of
the Committee, by the grantee's delivery of previously held shares of Common
Stock or the withholding from the shares of Common Stock otherwise deliverable
upon exercise of a Stock Right shares having an aggregate fair market value
equal to the amount of such withholding taxes.

20. GOVERNMENTAL REGULATION. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.

Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the Company may be required to file tax information
returns reporting the income received by grantees of Stock Rights in connection
with the Plan.

21. GOVERNING LAW; CONSTRUCTION. The validity and construction of the
Plan and the instruments evidencing Stock Rights shall be governed by the laws
of the State of Delaware, or the laws of any jurisdiction in which the Company
or its successors in interest may be organized. In construing this Plan, the
singular shall include the plural, unless the context otherwise requires.

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<PAGE>

FIRST AMENDMENT TO

NEON SYSTEMS, INC.

1993 STOCK PLAN

1. PURPOSE. This First Amendment to Neon Systems, Inc., 1993 Stock Plan
(this "Amendment") is intended to amend certain provisions of the 1993 Stock
Plan (the "Plan") of Neon Systems, Inc., a Delaware corporation (the "Company").
The Plan was adopted and approved by the Board of Directors and Sole Stockholder
of the Company on May 14, 1993.

2. AMENDMENT OF PLAN. The Plan is hereby amended as follows:

(a) AGGREGATE SHARES SUBJECT TO THE PLAN. The second sentence of
paragraph 4 of the Plan is hereby amended to read as follows:

The aggregate number of shares which may be issued pursuant to
the Plan is 320,000, subject to adjustment as provided in
paragraph 13.

(b) CORRECTION OF STATED TERMINATION DATE. The third sentence of
paragraph 15 of the Plan erroneously states that the Plan will end on May 13,
1993 rather than the intended expiration date of May 13, 2003. The third
sentence of such paragraph 15 is hereby amended by replacing the reference
therein to "May 13, 1993" with a reference to "May 13, 2003."

3. BOARD AND STOCKHOLDER APPROVAL. This Amendment will become effective
upon its adoption and approval by the Board of Directors of the Company and the
stockholders of the Company.

4. CONTINUATION OF THE PLAN. As modified hereby, the Plan shall continue
in full force and effect. References to the Plan after the date hereof shall
mean the Plan as amended pursuant to this Amendment. The law governing the
validity and construction of the Plan, as modified hereby, shall be that
determined in accordance with paragraph 21 of the Plan.

1
<PAGE>

SECOND AMENDMENT TO

NEON SYSTEMS, INC.

1993 STOCK PLAN

1. PURPOSE. This Second Amendment to Neon Systems, Inc. 1993 Stock Plan
(this "Amendment") is intended to amend certain provisions of the 1993 Stock
Plan (the "Plan") of Neon Systems, Inc., a Delaware corporation (the "Company").
The Plan was adopted and approved by the Board of Directors and Sole Stockholder
of the Company on May 14, 1993.

2. AMENDMENT OF PLAN. The Plan is hereby amended by amending the second
sentence of paragraph 4 of the Plan to read in its entirety as follows:

The aggregate number of shares which may be issued pursuant to
the Plan is 2,600,000, subject to adjustment as provided in
paragraph 13.

3. BOARD AND STOCKHOLDER APPROVAL. This Amendment will become effective
upon its adoption and approval by the Board of Directors of the Company and the
stockholders of the Company.

<PAGE>

NEON SYSTEMS, INC.
1999 LONG-TERM INCENTIVE PLAN

I. GENERAL

1. PURPOSE. The NEON Systems, Inc. 1999 Long-Term Incentive Plan (the
"1999 Plan") has been established by NEON Systems, Inc. (the "Company") to:

(a) Attract and retain key executive and managerial employees of
the Company;

(b) Motivate participating employees by means of appropriate
incentives, to achieve long-range goals;

(d) Further identify Participants' interests with those of the
Company's other stockholders through compensation alternatives based on
the Company's common stock;

and thereby promote the long-term financial interest of the Company and its
Subsidiaries, including the growth in value of the Company's equity and
enhancement of long-term stockholder return.

2. EFFECTIVE DATE. Subject to the approval of the holders of a
majority of the Stock of the Company, the 1999 Plan shall be effective as of
January 1, 1999; PROVIDED, HOWEVER, that awards made under the 1999 Plan
prior to such approval of the 1999 Plan by stockholders of the Company are
contingent on such approval of the 1999 Plan by the stockholders of the
Company and shall be null and void if approval of the stockholders of the
Company is withheld. The 1999 Plan shall terminate on December 31, 2008.

3. DEFINITIONS. The following definitions are applicable to the 1998
Plan.

"Board" means the Board of Directors of the Company.

"Change of Control" has the meaning ascribed to it in Part I.

"Code" means the Internal Revenue Code of 1986, as amended.

"Committee" means the Compensation Committee of the Board.

"Disabled" means the inability of a Participant, by reason of a physical
or mental impairment, to engage in any substantial gainful activity, of which
the Board shall be the sole judge.

"Fair Market Value" of any Stock means (a) if the Stock is listed on a
national securities exchange, the closing price on the Stock on a given date;
(b) if the Stock is traded on an exchange or market in which prices are
reported on a bid and asked price, the average of the mean between the

<PAGE>

bid and asked price for the Stock on a given date; and (c) if the Stock is
not listed on a national securities exchange nor traded on the
over-the-counter market, such value as the Committee, in good faith, shall
determine.

"1934 Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.

"Option Date" means, with respect to any Stock Option, the date on which
the Stock Option is awarded under the 1999 Plan.

"Participant" means any regular full-time employee of the Company or any
Subsidiary (meaning an employee who works 30 hours or more per week) who is
selected by the Committee to participate in the 1999 Plan.

"Permitted Transferees" means a member of an optionee's immediate
family, trusts for the benefit of such immediate family members, and
partnerships in which the optionee and/or such immediate family members are
the only partners, provided that no consideration is provided for the
transfer. Immediate family members shall include an optionee's spouse,
descendants (children, grandchildren and more remote descendants), and shall
include step-children and relationships arising from legal adoption.

"Related Company" means any corporation during any period in which it is
a Subsidiary, or during any period in which it directly or indirectly owns
50% or more of the total combined voting power of all classes of stock of the
Company that are entitled to vote.

"Restricted Period" has the meaning ascribed to it in Part V.

"Restricted Stock" has the meaning ascribed to it in Part V.

"Retirement" means (i) termination of employment in accordance with the
retirement procedures set by the Company from time to time; (ii) termination
of employment because a participant becomes Disabled; or (iii) termination of
employment voluntarily with the consent of the Company (of which the Board
shall be the sole judge).

"Stock" means NEON Systems, Inc. Common Stock.

"Stock Appreciation Right" means the right of a holder of a Stock Option
to receive Stock or cash as described in Part IV.

"Stock Option" means the right of a Participant to purchase Stock
pursuant to an Incentive Stock Option or Non-Qualified Option awarded
pursuant to the provisions of the 1999 Plan.

"Subsidiary" means any corporation during any period of which 50% or
more of the total combined voting power of all classes of stock entitled to
vote is owned, directly or indirectly, by the Company.

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<PAGE>

4. ADMINISTRATION. The authority to manage and control the operation
and administration of the 1999 Plan shall be vested in the Board. Subject to
the provisions of the 1999 Plan, the Board will have authority to select
employees to receive awards of Stock Options, with or without tandem Stock
Appreciation Rights, Restricted Stock and/or Performance Units, to determine
the time or times of receipt, to determine the types of awards and the number
of shares covered by the awards, to establish the terms, conditions,
performance criteria, restrictions, and other provisions of such awards, to
determine the number and value of Performance Units awarded and earned, and
to amend, modify or suspend awards. In making such award determinations, the
Board may take into account the nature of services rendered by the respective
employee, his or her present and potential contribution to the Company's
success and such other factors as the Board deems relevant. The Board is
authorized to interpret the 1999 Plan, to establish, amend, and rescind any
rules and regulations relating to the 1999 Plan, to determine the terms and
provisions of any agreements made pursuant to the 1999 Plan, to modify such
agreements, and to make all other determinations that may be necessary or
advisable for the administration of the 1999 Plan. With respect to persons
subject to Section 16 of the 1934 Act, transactions under the 1999 Plan are
intended to comply with all applicable conditions of Rule 16b-3 or its
successor rule or statute under the 1934 Act. To the extent any provision of
the 1999 Plan or action by the Board of Directors or the Committee fails to
so comply, it shall be deemed null and void, to the extent permitted by law.

The Board may delegate any or all of its authority, powers and
discretion under this 1999 Plan to the Committee, and the Board may revest
any or all such authority, powers and discretion in itself at any time. If
the 1999 Plan is delegated, the Committee shall consist solely of two or more
Non-Employee Directors (as defined in Rule 16b-3 under the 1934 Act) until
such time as such other requirements are imposed by applicable law. If
appointed, the Committee shall function as follows: A majority of the
Committee shall constitute a quorum, and the acts of a majority of the
members present at any meeting at which a quorum is present, or acts approved
in writing by all members of the Committee, shall be the acts of the
Committee, unless provisions to the contrary are embodied in the Company's
Bylaws or resolutions duly adopted by the Board. All actions taken and
decisions and determinations made by the Board or the Committee pursuant to
the Plan shall be binding and conclusive on all persons interested in the
Plan. No member of the Board or the Committee shall be liable for any action
or determination taken or made in good faith with respect to the Plan.

To the extent that the Board determines that it is desirable to qualify
Stock Options granted hereunder as "performance-based compensation" within
the meaning of Section 162(m) of the Code, the 1999 Plan shall be
administered by a committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.

5. PARTICIPATION. Subject to the terms and conditions of the 1999
Plan, the Board shall determine and designate, from time to time, the
full-time employees of the Company and/or its Subsidiaries who will
participate in the 1999 Plan. In the discretion of the Board, a Participant
may be awarded Stock Options with or without tandem Stock Appreciation
Rights, Restricted Stock or Performance Units or any combination thereof, and
more than one award may be granted to a Participant. Except as otherwise
agreed to by the Company and the Participant, any award under the 1999 Plan
shall not affect any previous award to the Participant under the 1999 Plan or
any other plan maintained by the Company or its Subsidiaries.

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<PAGE>

6. SHARES SUBJECT TO THE 1999 PLAN. The shares of Stock with respect
to which awards may be made under the 1999 Plan shall be either authorized
and unissued shares or issued and outstanding shares (including, in the
discretion of the Board, shares purchased in the market). Subject to the
provisions of paragraph I.10, the number of shares of Stock available under
the 1999 Plan for the grant of Stock Options with or without tandem Stock
Appreciation Rights, Performance Units and Restricted Stock shall not exceed
2,000,000 shares in the aggregate. If, for any reason, any award under the
1999 Plan or any portion of the award, shall expire, terminate or be
forfeited or cancelled, or be settled in cash pursuant to the terms of the
1999 Plan and, therefore, any such shares are no longer distributable under
the award, such shares of Stock shall again be available for award under the
1999 Plan. The maximum number of shares of Stock with respect to which
options or rights may be granted each calendar year to each employee shall be
100,000.

7. COMPLIANCE WITH APPLICABLE LAWS AND WITHHOLDING OF TAXES.
Notwithstanding any other provision of the 1999 Plan, the Company shall have
no liability to issue any shares of Stock under the 1999 Plan unless such
issuance would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity. Prior to the
issuance of any shares of Stock under the 1999 Plan, the Company may require
a written statement that the recipient is acquiring the shares for investment
and not for the purpose or with the intention of distributing the shares.
All awards and payments under the 1999 Plan are subject to withholding of all
applicable taxes, which withholding obligations may be satisfied, with the
consent of the Board, through the surrender of shares of Stock which the
Participant already owns, or to which a Participant is otherwise entitled
under the 1999 Plan. The Company shall have the right to deduct from all
amounts paid in cash in consequence of the exercise of a Stock Option or
Stock Appreciation Right or in connection with an award of Restricted Stock
or Performance Units under the 1999 Plan any taxes required by law to be
withheld with respect to such cash payments. Where an employee or other
person is entitled to receive shares of Stock pursuant to the exercise of a
Stock Option or a Stock Appreciation Right or with respect to an award of
Performance Units pursuant to the 1999 Plan, the Company shall have the right
to require the employee or such other person to pay to the Company the amount
of any taxes that the Company is required to withhold with respect to such
shares, or, in lieu thereof, to retain, or sell without notice, a sufficient
number of such shares to cover the amount required to be withheld. Upon the
disposition (within the meaning of Code Section 424(c)) of shares of Stock
acquired pursuant to the exercise of an Incentive Stock Option prior to the
expiration of the holding period requirements of Code Section 422(a)(1), the
employee shall be required to give notice to the Company of such disposition
and the Company shall have the rght to require the employee to pay to the
Company the amount of any taxes that are required by law to be withheld with
respect to such disposition. Upon termination of the Restricted Period with
respect to an award of Restricted Stock (or such earlier time, if any, as an
election is made by the employee under Code Section 83(b), or any successor
provisions thereto, to include the value of such shares in taxable income),
the Company shall have the right to require the employee or other person
receiving shares of Stock in respect of such Restricted Stock award to pay to
the Company the amount of taxes that the Company is required to withhold with
respect to such shares of Stock or, in lieu thereof, to retain or sell
without notice a sufficient number of shares of Stock held by it to cover the
amount required to be withheld. The Company shall have the right to deduct
from all dividends paid with respect to Restricted Stock the amount of taxes
that the Company is required to withhold with respect to such dividend
payments.

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<PAGE>

8. TRANSFERABILITY. Incentive Stock Options with or without tandem
Stock Appreciation Rights, Performance Units, and, during the period of
restriction, Restricted Stock awarded under the 1999 Plan are not
transferable except as designated by the Participant by will or by the laws
of descent and distribution. Incentive Stock Options may be exercised during
the lifetime of the Participant only by the Participant or his guardian or
legal representative. If provided in the option agreement, Non-Qualified
Stock Options with or without tandem Stock Appreciation Rights may be
transferred by a Participant to Permitted Transferees, and may be exercised
either by the Participant, his guardian or legal representative and as
otherwise permitted under the laws of descent and distribution, or by a
Permitted Transferee.

9. EMPLOYEE AND STOCKHOLDER STATUS. The 1999 Plan does not constitute
a contract of employment, and selection as a Participant will not give any
employee the right to be retained in the employ of the Company or any
Subsidiary. No award under the 1999 Plan shall confer upon the holder
thereof any right as a stockholder of the Company prior to the date on which
he fulfills all service requirements and other conditions for receipt of
shares of Stock. If the redistribution of shares is restricted pursuant to
paragraph I.7, certificates representing such shares may bear a legend
referring to such restrictions.

10. ADJUSTMENTS TO NUMBER OF SHARES SUBJECT TO THE 1999 PLAN. In the
event of any change in the outstanding shares of Stock of the Company by
reason of any stock dividend, split, spinoff, recapitalization, merger,
consolidation, combination, extraordinary dividend, exchange of shares or
other similar change, the aggregate number of shares of Stock with respect to
which awards may be made under the 1999 Plan, the terms and the number of
shares of any outstanding Stock Options, Stock Appreciation Rights,
Restricted Stock and Performance Units, and the purchase price of a share of
Stock under Stock Options, may be equitably adjusted by the Board in its sole
discretion.

11. BUSINESS COMBINATIONS. In addition to the rights and obligations
of the Committee to modify, adjust or accelerate exercisability of
outstanding options, in the event that, while any options, Stock Appreciation
Rights, Restricted Shares or Performance Units are outstanding under the 1999
Plan, there shall occur (a) a merger or consolidation of the Company with or
into another corporation in which the Company shall not be the surviving
corporation (for purposes of this paragraph 11, the Company shall not be
deemed the surviving corporation in any such transaction if, as the result
thereof, it becomes a wholly-owned subsidiary of another corporation), (b) a
dissolution of the Company, or (c) a transfer of all or substantially all of
the assets or shares of stock of the Company in one transaction or a series
of related transactions to one or more other persons or entities (any of the
foregoing events as described in (a)-(c) above, a "Change of Control") then,
with respect to each option, Stock Appreciation Right and share of Restricted
Stock outstanding immediately prior to the consummation of such transaction
and without the necessity of any action by the Committee:

(i) If provision is made in writing in connection with such
transaction for the continuance and/or assumption of the options,
rights, Restricted Shares and Performance Units granted under the 1999
Plan, or the substitution for such options, rights, Restricted Shares
and Performance Units of new options, rights, Restricted Shares and
Performance Units, with appropriate adjustment as to the number and kind
of shares or other securities deliverable with respect thereto, the
options, rights, Restricted Shares and Performance Units granted under
the 1998

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Plan, or the new options, rights, Restricted Shares and Performance
Units substituted therefor, shall continue, subject to such adjustment,
in the manner and under the terms provided in the respective agreements.

(ii) In the event provision is not made in connection with
such transaction for the continuance and/or assumption of the options,
rights, Restricted Shares and Performance Units granted under the 1999
Plan, or for the substitution of equivalent options, rights and awards,
then (A) each holder of an outstanding option shall be entitled,
immediately prior to the effective date of such transaction, to purchase
the full number of shares that he or she would otherwise have been
entitled to purchase during the entire remaining term of the option; (B)
the holder of any right shall be entitled, immediately prior to the
effective date of such transaction, to exercise such right to the extent
the related option is or becomes exercisable at such time in accordance
with its terms; (C) the recipient of any Performance Unit shall be
entitled, immediately prior to the effective date of such transaction,
to receive all remaining values under such unit; (D) all restrictions on
any award of Restricted Shares shall lapse, and (E) any restriction or
risk of forfeiture imposed under the 1999 Plan shall lapse immediately
prior to the effective date of such transaction. The unexercised
portion of any option or right shall be deemed cancelled and terminated
as of the effective date of such transaction.

12. AGREEMENT WITH COMPANY. At the time of any awards under the 1999
Plan, the Board will require a Participant to enter into an agreement with
the Company in a form specified by the Board, agreeing to the terms and
conditions of the 1999 Plan and to such additional terms and conditions, not
inconsistent with the 1999 Plan, as the Board may, in its sole discretion,
prescribe.

13. AMENDMENT AND TERMINATION OF 1999 PLAN. Subject to the following
provisions of this paragraph 13, the Board may at any time and in any way
amend, suspend or terminate the 1999 Plan. No amendment of the 1999 Plan
and, except as provided in paragraph I.10, no action by the Board shall,
without further approval of the stockholders of the Company, increase the
total number of shares of Stock with respect to which awards may be made
under the 1999 Plan, materially increase the benefits accruing to
Participants under the 1999 Plan or materially modify the requirements as to
eligibility for participation in the 1999 Plan, if stockholder approval of
such amendment is a condition of Securities and Exchange Commission Rule
16b-3 or its successor rule or statute, the Code or any exchange or market
system on which the Stock is listed at the time such amendment is adopted.
No amendment, suspension or termination of the 1998 Plan shall alter or
impair any Stock Option with or without tandem Stock Appreciation Right,
share of Restricted Stock or Performance Unit previously awarded under the
1999 Plan without the consent of the holder thereof.

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II. INCENTIVE STOCK OPTIONS

1. DEFINITION. The award of an Incentive Stock Option under the 1999
Plan entitles the Participant to purchase shares of Stock at a price fixed at
the time the option is awarded, subject to the following terms of this Part
II.

2. ELIGIBILITY. The Board shall designate the Participants to whom
Incentive Stock Options, as described in section 422(b) of the Code or any
successor section thereto, are to be awarded under the 1999 Plan and shall
determine the number of option shares to be offered to each of them.
Incentive Stock Options may be awarded only to employees. In no event shall
the aggregate Fair Market Value (determined at the time the option is
awarded) of Stock with respect to which Incentive Stock Options are
exercisable for the first time by an individual during any calendar year
(under all plans of the Company and all Related Companies) exceed $100,000.

3. PRICE. The purchase price of a share of Stock under each Incentive
Stock Option shall be determined by the Board, provided, however, that in no
event shall such price be less than the greater of (a) 100% of the Fair
Market Value of a share of Stock as of the Option Date (or 110% of such Fair
Market Value if the holder of the option owns stock possessing more than 10%
of the combined voting power of all classes of stock of the Company or any
Subsidiary) or (b) the par value of a share of Stock on such date. To the
extent provided by the Board, the full purchase price of each share of Stock
purchased upon the exercise of any Incentive Stock Option shall be paid in
cash or in shares of Stock (valued at Fair Market Value as of the day of
exercise), or in any combination thereof, at the time of such exercise and,
as soon as practicable thereafter, a certificate representing the shares so
purchased shall be delivered to the person entitled thereto.

4. EXERCISE. Each Incentive Stock Option shall become and be
exercisable at such time or times and during such period or periods, in full
or in such installments as may be determined by the Board at the Option Date.
In addition, if permitted by the Board or the terms of the agreement
evidencing such Stock Option, Participants may elect to pay the purchase
price of shares of Stock purchased upon the exercise of Incentive Stock
Options in cash or through the actual or constructive delivery at the time of
such exercise of shares of Stock (valued at Fair Market Value as of the day
of exercise) owned by the Participant, or any combination thereof, equivalent
to the purchase price of such Incentive Stock Options. A Participant's
payment of the purchase price in connection with the exercise of an Incentive
Stock Option through delivery of shares of Stock (the "ISO Stock") that were
acquired through the exercise of an Incentive Stock Option and that have not
been held for more than one year will be considered a disposition (within the
meaning of Code Section 424(c)) of the ISO Stock, resulting in the
disqualification of the ISO Stock from treatment as an incentive stock option
under Code Section 422, and the Participant's recognition of ordinary income.
Participants should consult with their tax advisors prior to electing to
exercise an Incentive Stock Option by this method.

5. OPTION EXPIRATION DATE. The "Expiration Date" with respect to an
Incentive Stock Option or any portion thereof awarded to a Participant under
the 1999 Plan means the earliest of:

(a) the date that is 10 years after the date on which the
Incentive Stock Option is awarded (or, if the Participant owns stock
possessing more than 10% of the combined voting power of all classes of
stock of the Company or any Subsidiary, the date that is five years
after the date on which the Incentive Stock Option is awarded);

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<PAGE>

(b) the date established by the Board at the time of the award;

(c) the date that is one year after the Participant's employment
with the Company and all Related Companies is terminated by reason of
the Participant becoming Disabled or by reason of the Participant's
death; or

(d) the date that is ninety (90) days after the Participant's
employment with the Company and all Related Companies is terminated by
reasons other than death or becoming Disabled.

All rights to purchase shares of Stock pursuant to an Incentive Stock Option
shall cease as of such option's Expiration Date.

III. NON-QUALIFIED STOCK OPTIONS

1. DEFINITION. The award of a Non-Qualified Stock Option under the
1999 Plan entitles the Participant to purchase shares of Stock at a price
fixed at the time the option is awarded, subject to the following terms of
this Part III.

2. ELIGIBILITY. The Board shall designate the Participants to whom
Non-Qualified Stock Options are to be awarded under the 1999 Plan and shall
determine the number of option shares to be offered to each of them.

3. PRICE. The purchase price of a share of Stock under each
Non-Qualified Stock Option shall be determined by the Board; provided,
however, that in no event shall such price be less than 50% of the Fair
Market Value of a share of Stock as of the Option Date.

4. EXERCISE. Each Non-Qualified Stock Option shall become and be
exercisable at such time or times and during such period or periods, in full
or in such installments as may be determined by the Board at the Option Date.
To the extent provided by the Board, the full purchase price of each share
of Stock purchased upon the exercise of any Non-Qualified Stock Option shall
be paid in cash or in shares of Stock (valued at Fair Market Value as of the
day of exercise), or in any combination thereof, at the time of such exercise
and, as soon as practicable thereafter, a certificate representing the shares
so purchased shall be delivered to the person entitled thereto. In addition,
if permitted by the Board or the terms of the agreement evidencing such Stock
Option, Participants may elect to pay the purchase price of shares of Stock
purchased upon the exercise of Non-Qualified Stock Options in cash or through
the constructive delivery at the time of such exercise of shares of Stock
(valued at Fair Market Value as of the day of exercise) owned by the
Participant, or any combination thereof, equivalent to the purchase price of
such Non-Qualified Stock Options, and, as soon as practicable thereafter, a
certificate representing the net number of shares so purchased shall be
delivered to the person entitled thereto. Participants also may elect to
pay, if permitted by the Board or the terms of the agreement evidencing such
Stock Option, the purchase price, in whole or in part, of shares of Stock
purchased upon the exercise of Non-Qualified Stock Options through the
Company's withholding of shares of Stock (valued at Fair Market Value as of
the day of exercise) that would otherwise by issuable upon exercise of such
options equivalent to the purchase price of such Non-Qualified Stock Options
and, as soon as practicable thereafter, a certificate representing the

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<PAGE>

net number of shares so purchased shall be delivered to the person entitled
thereto. In addition, if permitted by the Board or the terms of the
agreement evidencing such Stock Option, Participants may elect to pay the
purchase price of shares of Stock purchased upon the exercise of
Non-Qualified Stock Options by (a) delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to promptly deliver
to the Company the amount of sale or loan proceeds required to pay the
exercise price; (b) authorizing the Company to retain from the total number
of Shares as to which the Stock Option is exercised that number of Shares
having a Fair Market Value on the date of exercise equal to the exercise
price; or (c) any combination of the methods of payment described in this
paragraph.

5. OPTION EXPIRATION DATE. The "Expiration Date" with respect to a
Non-Qualified Stock Option or any portion thereof awarded to a Participant
under the 1999 Plan means the earliest of:

(a) the date established by the Board at the time of the award;

(b) the date that is one year after the Participant's employment
with the Company and all Related Companies is terminated by reason of
the Participant becoming Disabled or by reason of the Participant's
death; or

(c) the date that is one year after the Participant's employment
with the Company and all Related Companies is terminated by reasons
other than death or becoming Disabled.

All rights to purchase shares of Stock pursuant to a Non-Qualified Stock
Option shall cease as of such option's Expiration Date.

IV. STOCK APPRECIATION RIGHTS

1. DEFINITION. A Stock Appreciation Right is an award that may be
granted in tandem with a Non-Qualified Stock Option or Incentive Stock
Option, and entitles the holder to receive an amount equal to the difference
between the Fair Market Value of the shares of Stock at the time of exercise
of the Stock Appreciation Right and the option price, subject to the
applicable terms and conditions of the tandem options and the following
provisions of this Part IV.

2. ELIGIBILITY. The Board may, in its discretion, award the holders
of any Incentive Stock Options or Non-Qualified Stock Options awarded under
the 1999 Plan a Stock Appreciation Right under this Part IV concurrent with,
or subsequent to, the award of the Stock Option.

3. EXERCISE. A Stock Appreciation Right may be exercised under the
applicable terms and conditions of the Incentive Stock Option or
Non-Qualified Stock Option with respect to which the Stock Appreciation Right
is awarded. A Stock Appreciation Right shall entitle the holder of a Stock
Option to receive, upon the exercise of the Stock Appreciation Right, shares
of Stock (valued at their Fair Market Value at the time of exercise), cash or
a combination thereof, in the discretion of the Board, in an amount equal in
value to the excess of the Fair Market Value of the shares of Stock subject
to the Stock Appreciation Right as of the date of such exercise over

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<PAGE>

the purchase price of the Stock Option. The exercise of a Stock Appreciation
Right will result in the surrender of the related Incentive Stock Option or
Non-Qualified Stock Option and, unless otherwise provided by the Board in its
sole discretion, the exercise of a Stock Option will result in the surrender
of a related SAR, if any.

4. EXPIRATION DATE. The "Expiration Date" with respect to a Stock
Appreciation Right shall be determined by the Board, and shall be not later
than the Expiration Date for the related Stock Option. If neither the right
nor the related Stock Option is exercised before the end of the day on which
the right ceases to be exercisable, such right shall be deemed exercised as
of such date and payment shall be made to the holder in cash.

V. RESTRICTED STOCK

1. DEFINITION. Restricted Stock awards are grants of Stock to
Participants, the vesting of which is subject to a required period of
employment and any other conditions established by the Board.

2. ELIGIBILITY. The Board shall designate the Participants to whom
Restricted Stock is to be awarded and the number of shares of Stock that are
subject to the award.

3. TERMS AND CONDITIONS OF AWARDS. All shares of Restricted Stock
awarded to Participants under the 1999 Plan shall be subject to the following
terms and conditions and to such other terms and conditions, not inconsistent
with the 1999 Plan, as shall be prescribed by the Board in its sole
discretion and as shall be contained in the Agreement referred to in Part I,
paragraph 12.

(a) Restricted Stock awarded to Participants may not be sold,
assigned, transferred, pledged or otherwise encumbered, except as
hereinafter provided, for a period of 10 years or such shorter period as
the Board may determine, but not less than one year, after the time of
the award of such stock (the "Restricted Period"). Except for such
restrictions, the Participant as owner of such shares shall have all the
rights of a stockholder, including but not limited to the right to vote
such shares and, except as otherwise provided by the Board, the right to
receive all dividends paid on such shares.

(b) The Board may in its discretion, at any time after the date
of the award of Restricted Stock, adjust the length of the Restricted
Period to account for individual circumstances of a Participant or group
of Participants, but in no case shall the length of the Restricted
Period be less than one year.

(c) Except as otherwise determined by the Board in its sole
discretion, a Participant whose employment with the Company and all
Related Companies terminates prior to the end of the Restricted Period
for any reason shall forfeit all shares of Restricted Stock remaining
subject to any outstanding Restricted Stock Award.

(d) Each certificate issued in respect of shares of Restricted
Stock awarded under the 1999 Plan shall be registered in the name of the
Participant and, at the discretion of the Board, each such certificate
may be deposited in a bank designated by the Board. Each such
certificate shall bear the following (or a similar) legend:

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<PAGE>

"The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) contained in the NEON
Systems, Inc. 1999 Long-Term Incentive Plan and an agreement
entered into between the registered owner and NEON Systems,
Inc. A copy of such plan and agreement is on file in the
office of the Secretary of NEON Systems, Inc., 14100
Southwest Freeway, Suite 500, Sugar Land, Texas 77478.

(e) At the end of the Restricted Period for Restricted Stock,
such Restricted Stock will be transferred free of all restrictions to a
Participant (or his or her legal representative, beneficiary or heir).

4. SUBSTITUTION OF CASH. The Board may, in its discretion, substitute
cash equal to the Fair Market Value (determined as of the date of
distribution) of Stock otherwise required to be distributed to a Participant
in accordance with Part V, paragraph 3.

VI. PERFORMANCE UNITS

1. DEFINITION. Performance Units are awards to Participants who may
receive value for the units at the end of a Performance Period. The number
of units earned, and value received for them, will be contingent on the
degree to which the performance measures established at the time of the
initial award are met.

2. ELIGIBILITY. The Board shall designate the Participants to whom
Performance Units are to be awarded, and the number of units to be the
subject of such awards.

3. TERMS AND CONDITIONS OF AWARDS. For each Participant, the Board
will determine the timing of awards; the number of units awarded; the value
of units, which may be stated either in cash or in shares of Stock; the
performance measures used for determining whether the Performance Units are
earned; the performance period during which the performance measures will
apply; the relationship between the level of achievement of the performance
measures and the degree to which Performance Units are earned; whether,
during or after the performance period, any revision to the performance
measures or performance period should be made to reflect significant events
or changes that occur during the performance period; and the number of earned
Performance Units that will be paid in cash and/or shares of Stock.

4. PAYMENT. The Board will compare the actual performance to the
performance measures established for the performance period and determine the
number of units to be paid and their value. Payment for units earned shall
be wholly in cash, wholly in Stock or in a combination of the two, in a lump
sum or installments, and subject to vesting requirements and such other
conditions as the Board shall provide. The Board will determine the number
of earned units to be paid in cash and the number to be paid in Stock. For
Performance Units valued when awarded in shares of Stock, one share of Stock
will be paid for each unit earned, or cash will be paid for each unit earned
equal to either (a) the Fair Market Value of a share of Stock at the end of
the Performance Period or (b) the Fair Market Value of the Stock averaged for
a number of days determined by the Board. For Performance Units valued when
awarded in cash, the value of each unit earned will be paid in its initial
cash value, or shares of Stock will be distributed based on the cash value of
the units earned divided by (a) the Fair Market Value of a

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<PAGE>

share of Stock at the end of the Performance Period or (b) the Fair Market
Value of a share of Stock averaged for a number of days determined by the
Board.

5. RETIREMENT, DEATH OR TERMINATION. A Participant whose employment
with the Company and Related Companies terminates during a performance period
because of Retirement or death shall be entitled to the prorated value of
earned Performance Units, issued with respect to that performance period, at
the conclusion of the performance period based on the ratio of the months
employed during the period to the total months of the performance period. If
the Participant's employment with the Company and Related Companies
terminates during a performance period for any reason other than Retirement
or death, the Performance Units issued with respect to that performance
period will be forfeited on the date his employment with the Company and
Related Companies terminates. Notwithstanding the foregoing provisions of
this Part VI, if a Participant's employment with the Company and Related
Companies terminates before the end of the Performance Period with respect to
any Performance Units awarded to him, the Board may determine that the
Participant will be entitled to receive all or any portion of the units that
he or she would otherwise receive, and may accelerate the determination and
payment of the value of such units or make such other adjustments as the
Board, in its sole discretion, deems desirable.

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FIRST AMENDMENT TO

NEON SYSTEMS, INC.

1999 LONG-TERM INCENTIVE PLAN

1. PURPOSE. This First Amendment to Neon Systems, Inc., 1999
Long-Term Incentive Plan (this "Amendment"), dated as of June 30, 1999, is
intended to amend an error to a certain provision of the 1999 Long-Term
Incentive Plan (the "Plan") of Neon Systems, Inc., a Delaware corporation
(the "Company"). The Plan was adopted and approved by the Board of Directors
and the Stockholders to be effective as of January 1, 1999.

2. AMENDMENT OF PLAN. The Plan is hereby amended as follows:

EXPIRATION DATE OF NON-QUALIFIED STOCK OPTIONS. Section III. 5(c) of the
Plan is amended in its entirety to read as follows:

(c) the date that is ninety (90) days after the Participant's
employment with the Company and all Related Companies is terminated
by reasons other than death or becoming Disabled.

3. BOARD APPROVAL. This Amendment will become effective upon its
adoption and approval by the Board of Directors of the Company.

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<PAGE>

NEON SYSTEMS, INC.
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS

SECTION 1. PURPOSE OF PLAN.

The purpose of this Stock Option Plan for Non-Employee Directors (the
"PLAN") of NEON Systems, Inc., a Delaware corporation (the "COMPANY"), is to
provide directors of the Company who are not employed by the Company with the
opportunity to obtain equity ownership interests in the Company through the
exercise of stock options.

SECTION 2. PERSONS ELIGIBLE UNDER PLAN.

Participation in this Plan is limited to non-employee directors. A non-
employee director (referred to herein as a "DIRECTOR") is a director of the
Company who, at the time stock options are granted to him or her under the Plan
is not an employee of the Company or of any subsidiary of the Company.

SECTION 3. ADMINISTRATION.

This Plan shall be administered by the Board of Directors (the "BOARD") of
the Company. The grant of options (the "OPTIONS") to purchase shares of Common
Stock, par value $.01 per share, of the Company (the "COMMON SHARES") under this
Plan and the amount, price and nature of the awards shall be automatic as
described in Section 4. However, subject to the provisions of this Plan, the
Board, in its sole and absolute discretion, is authorized to do all things
necessary or desirable in connection with the administration of this Plan,
including, without limitation, the following:

(i) Subject to Section 8, adopt, amend and rescind rules and
regulations relating to this Plan;

(ii) Determine whether, and the extent to which, adjustments are
required pursuant to Section 7 hereof; and

(iii) Interpret and construe this Plan and the terms and conditions
of any Option granted hereunder.

SECTION 4. TERMS AND CONDITIONS OF OPTIONS.

(a) AMOUNT AND EXERCISE PRICE OF OPTION GRANTS. Each Director elected to
the Board following the date of the closing of the Company's initial public
offering of its Common Shares pursuant to a Form S-1 Registration Statement
filed with the Securities and Exchange Commission (the "IPO") and who was not
affiliated with the Company prior to the date of the original filing in December
1998 of the Company's Registration Statement on Form S-1 relating to the IPO
shall automatically be granted on the date of such election an Option to
purchase 7,500 Common Shares, subject to adjustment as provided in Section 7.
The exercise price (the "EXERCISE PRICE") for each Option granted pursuant to
this Section 4(a) shall be the fair market value of the Common Shares at the

<PAGE>

close of business on the last business day preceding the date of the Director's
initial election to the Board at an annual meeting of stockholders of the
Corporation (the "ANNUAL MEETING"), or if such Director is elected or appointed
to the Board other than at an Annual Meeting, on the last business day preceding
the date of such Director's election or appointment (in each event, the "DATE OF
GRANT"), which with respect to an Option shall be the closing price of such
Common Share on such Date of Grant (or, if there were no sales on such date, on
the immediately preceding business day on which there were sales) as reported on
the National Market System of the National Association of Securities Dealers,
Inc. Automated Quotation System ("NASDAQ"), or if such Common Shares are not
listed or admitted to trading on the NASDAQ National Market System, the last
quoted sales price or, if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the NASDAQ System or
such other system then in use or, if such Common Shares are not so reported on
the over-the-counter market or such other system, the closing price of such
Common Shares as reported on the New York Stock Exchange Composite Tape, or if
Common Shares are not listed or admitted to trading on the New York Stock
Exchange, as reported on the principal consolidated transaction reporting system
with respect to securities listed or admitted to trading on the New York Stock
Exchange, or, if the Common Shares are not listed or admitted to trading on the
New York Stock Exchange, as reported on the principal consolidated transaction
reporting system with respect to securities listed on the principal national
securities exchange on which the Common Shares are listed or admitted to trading
or, if the Common Shares are not listed or admitted to trading on any national
securities exchange, the average of the closing bid and asked prices as
furnished by a professional market maker making a market in the Common Shares as
selected by the Board.

(b) VESTING OF OPTIONS. Options granted under this Plan shall vest and
become exercisable in three consecutive 33-1/3% increments on the date of each
successive Annual Meeting following the Date of Grant of such Option and for so
long as such Optionee is a member of the Board as a Director.

(c) MANNER OF EXERCISE. Any vested and exercisable Option shall be
exercised by the holder thereof by giving written notice, signed by such holder,
to the Company stating the number of Common Shares with respect to which the
Option is exercisable and to which it is being exercised, accompanied by payment
in full of the applicable aggregate Exercise Price. Payment may be made in cash
or in Common Shares, valued at the fair market value per share on the date of
exercise, which shall be determined in accordance with SECTION 4(a) hereof. If
the Company shall have a class of its Common Shares registered pursuant to
Section 12 of the 1934 Act, unless the Board determines otherwise, an option
holder may also make payment at the time of exercise of an option for such class
of Common Shares by delivering to the Company a properly executed exercise
notice together with irrevocable instructions to a broker approved by the
Company that upon such broker's sale of shares with respect to which such option
is exercised, it is to deliver promptly to the Company the amount of sale
proceeds necessary to satisfy the option exercise price. No Option may be
exercised with respect to any fractional share and cash shall be paid in lieu of
fractional shares. As promptly as practicable following the receipt of a notice
hereunder, the Company shall issue a stock

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<PAGE>

certificate registered in the name of the Optionee exercising such Option,
representing the number of Common Shares issued to such Optionee upon exercise
of the Option.

(d) TERMINATION OR EXPIRATION. Each Option shall expire on the earlier of
the tenth anniversary of the Date of Grant or six months after the date the
Optionee ceases to be a director of the Company.

(e) TRANSFERABILITY. Neither the Option nor any interest therein may be
sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred
in any manner other than by will or the laws of descent and distribution.
During the recipient's lifetime, except as set forth in the preceding sentence,
an Option may only be exercised by the Optionee or the Optionee's guardian or
legal representative.

(f) PAYMENT OF WITHHOLDING TAXES. If the Company is obligated by law to
withhold an amount on account of any federal, state or local tax imposed as a
result of the exercise of the Option (such amount shall be referred to herein as
the "WITHHOLDING LIABILITY"), the Optionee shall, on the first date upon which
the Company becomes obligated to pay the Withholding Liability to the
appropriate taxing authority, pay the Withholding Liability to the Company in
full in cash or by check.

(g) STOCK EXCHANGE REQUIREMENTS AND APPLICABLE LAWS. Notwithstanding
anything to the contrary in this Plan, no Common Shares purchased upon exercise
of an Option, and no certificate representing all or any part of such shares,
shall be issued or delivered if (i) such shares have not been admitted to
listing upon official notice of issuance on each stock exchange upon which
shares of that class are then listed or (ii) in the opinion of counsel to the
Company, such issuance or delivery would cause the Company to be in violation of
or to incur liability under any federal, state or other securities law, or any
requirement of any stock exchange listing agreement to which the Company is a
party, or any other requirement of law or of any administrative or regulatory
body having jurisdiction over the Company. It is the Company's intent that this
Plan comply in all respects with Rule 16b-3 (together with any successor rule or
statute, "RULE 16b-3") of the Securities Exchange Act of 1934, as amended, and
any successor rule or statute (the "ACT"), and any regulations promulgated
thereunder. If any provision of this Plan is later found not to be in
compliance with Rule 16b-3, such provision shall be deemed null and void. All
grants and exercises of Options under this Plan shall be executed in accordance
with the requirements of Section 16 of the Act and any regulations promulgated
thereunder.

(h) STOCK OPTION AGREEMENT. Each grant of an Option under this Plan shall
be evidenced by an agreement duly executed on behalf of the Company and the
Optionee, dated as of the applicable Date of Grant. Each such agreement shall
set forth the number of Common Shares subject to the Option, the Exercise Price
and the date upon which the Option or portions thereof become exercisable and
shall incorporate by reference the terms and conditions of this Plan.

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<PAGE>

SECTION 5. STOCK SUBJECT TO PLAN.

(a) The maximum number of Common Shares that may be issued pursuant to all
Options granted under this Plan is 100,000, subject to adjustment as provided in
Section 7 hereof (such maximum number, as so adjusted, shall be referred to
herein as the "SHARE LIMITATION").

(b) Notwithstanding Sections 4(a) and (b) of this Plan, no Option shall be
granted under this Plan unless, on the Date of Grant, the sum of (i) the maximum
number of Common Shares issuable at any time pursuant to such Option, plus (ii)
the number of Common Shares that have previously been issued pursuant to the
exercise of Options granted under this Plan, plus (iii) the maximum number of
Common Shares that may be issued at any time thereafter pursuant to the exercise
of Options granted under this Plan that are outstanding on such date, does not
exceed the Share Limitation.

SECTION 6. DURATION OF PLAN.

(a) No Options shall be granted under this Plan after December 31, 2008.
Although Common Shares may be issued after December 31, 2008 pursuant to Options
granted prior to such date, no Common Shares shall be issued under this Plan
after December 31, 2018.

SECTION 7. ADJUSTMENTS FOR CHANGES IN CAPITALIZATION.

If the outstanding securities of the class then subject to this Plan are
increased, decreased, changed into or exchanged for a different number or kind
of shares of the Company through reorganization, recapitalization,
reclassification, stock dividend, stock split or reverse stock split, upon
proper authorization of the Board of Directors, an appropriate and proportionate
adjustment shall be made in (a) the number and type of shares or other
securities or cash or other property that may be acquired pursuant to Options
theretofore granted under this Plan, (b) the maximum number and type of shares
or other securities that may be issued pursuant to Options thereafter granted
under this Plan, and (c) the purchase price of the shares or other securities
that may be issued pursuant to Options theretofore granted under this Plan.

SECTION 8. AMENDMENT AND TERMINATION OF PLAN.

The Board may amend or terminate this Plan at any time and in any manner.
However, (a) no such amendment or termination shall deprive the recipient of any
Option theretofore granted under this Plan, without the consent of such
recipient, of any of his or her rights thereunder or with respect thereto, and
(b) no such amendment shall be effective without the approval of the
stockholders of the Company, if stockholder approval of the amendment is then
required pursuant to Rule 16b-3 under the Act, or the applicable rules of any
securities exchange or system.

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SECTION 9. BUSINESS COMBINATIONS.

In the event that, while any Options are outstanding under this Plan, there
shall occur (a) a merger or consolidation of the Company with or into another
Corporation in which the Company shall not be the surviving Corporation (for
purposes of this Section 9, the Company shall not be deemed the surviving
corporation in any such transaction if, as the result thereof, it becomes a
wholly-owned subsidiary of another Corporation), (b) a dissolution of the
Company, (c) a transfer of all or substantially all of the assets or shares of
stock of the Company in one transaction or a series of related transactions to
one or more other persons or entities, (d) if any "person" or "group" as those
terms are used in Sections 13(d) and 14(d) of the Act, other than Excluded
Persons, becomes the "beneficial owner" (as defined in Rule 13d-3 of the Act),
directly or indirectly, of securities of the Company representing 50% or more of
the combined voting power of the Company's then outstanding securities, or (e)
during any period of two consecutive years commencing on or after March 1, 1999,
individuals who at the beginning of the period constituted the Board cease for
any reason to constitute at least a majority, unless the election of each
director who was not a director at the beginning of the period has been approved
in advance by directors representing at least two-thirds (2/3) of the directors
then in office who were directors at the beginning of the period, then, with
respect to each Option outstanding immediately prior to the consummation of such
transaction, and without the necessity of any action by the Board, each such
Option shall terminate as of the effective date of such transaction, but each
holder of an outstanding Option shall be entitled, immediately prior to the
effective date of such transaction, to purchase the number of shares that he or
she would otherwise have been entitled to purchase during the entire remaining
term of the Option. The unexercised portion of any Option shall be deemed
cancelled and terminated as of the effective date of such transaction. The term
"EXCLUDED PERSONS" means each of Peter Schaeffer, John J. Moores, Charles E.
Noell III, Norris van den Berg and JMI Equity Fund, L.P., and any person, entity
or group under the control of any of them or a trustee or other fiduciary
holding securities under an employee benefit plan of the Company.

SECTION 10. EFFECTIVE DATE OF PLAN.

This Plan shall be effective as of February 1, 1999; provided, however,
that no Common Shares shall be issued under this Plan until it has been
approved, directly or indirectly, by the affirmative votes of the holders of a
majority of the securities of the Company present, or represented, and entitled
to vote in accordance with the laws of the State of Delaware.

SECTION 11. NO RIGHTS AS STOCKHOLDER AND RIGHTS OF DIRECTORS.

Neither the recipient of an Option under this Plan nor an Optionee's
successor or successors in interest shall have rights as a stockholder of the
Company with respect to any Common Shares subject to an Option granted to such
person until the date of issuance of a stock certificate for such Common Shares.
Neither this Plan, nor the granting of an Option hereunder, nor any other action
taken pursuant to this Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that a

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Director has a right to continue as a Director for any period of time or at any
particular rate of compensation.

SECTION 12. GOVERNING LAW.

This Plan and all rights and obligations under this Plan shall be construed
in accordance with and governed by the laws of the State of Delaware.

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