NETIQ CORP, 424B4, 1999-07-30

NETIQ CORP
424B4, 1999-07-30
PREPACKAGED SOFTWARE

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<PAGE>

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-79373

3,000,000 Shares

[LOGO OF NET IQ APPEARS HERE]

Common Stock

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

Prior to this offering, there has been no public market for our common
stock. The initial public offering price is $13.00 per share. We have been
approved to list our common stock on The Nasdaq Stock Market's National Market
under the symbol "NTIQ."

The underwriters have an option to purchase a maximum of 450,000 additional
shares to cover over-allotments of shares.

Investing in the common stock involves risks. See "Risk Factors" on page 5.

<TABLE>
<CAPTION>
Underwriting
Discounts
Price to and Proceeds to
Public Commissions NetIQ
----------- ------------ -----------
<S> <C> <C> <C>
Per Share.................................. $13.00 $0.91 $12.09
Total...................................... $39,000,000 $2,730,000 $36,270,000
</TABLE>

Delivery of the shares of common stock will be made on or about August 4,
1999.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

Credit Suisse First Boston

BancBoston Robertson Stephens

Hambrecht & Quist

This prospectus is dated July 29, 1999.
<PAGE>

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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 33
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Page
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Management................................................................. 47
Certain Transactions....................................................... 57
Principal Stockholders..................................................... 59
Description of Capital Stock............................................... 61
Shares Eligible for Future Sale............................................ 64
Underwriting............................................................... 66
Notice to Canadian Residents............................................... 68
Legal Matters.............................................................. 69
Experts.................................................................... 69
Where To Find Other NetIQ Documents........................................ 69
Index to Consolidated Financial Statements................................. F-1
</TABLE>

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You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is
legal to sell these securities. The information in this prospectus is accurate
only on the date of this document.

Dealer Prospectus Delivery Obligation

Until August 23, 1999 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to their unsold allotments or
subscriptions.
<PAGE>

[Inside gatefold: Descriptive text accompanying graphic depiction of computer
console screen, computers and servers.

Applications Management Optimizing Performance and Availability for Highly
Complex Windows NT Environments

. Centrally manages the performance of distributed Windows NT-based systems
and applications

. Helps ensure the availability of systems and applications through automated
problem detection and correction

. Designed specifically for the Windows NT environment

. Integrates with leading systems management frameworks

NetIQ's Comprehensive Approach

NetIQ believes that the combination of AppManager's comprehensive functionality
together with its use of familiar and native Microsoft technology and standards
provides a superior solution for managing systems and applications in
distributed Windows NT environments.

Comprehensive and Easy to Use

The NetIQ AppManager Suite provides a consolidated view of a business' entire
Windows NT environment from a central, easy-to-use console.

Scalable and Reliable

The NetIQ AppManager Suite is highly reliable and scales easily to accommodate a
business' rapid growth in the number of windows NT-based servers and
applications.

Extensible and Interoperable

The NetIQ AppManager Suite can be easily extended to monitor a business'
custom applications without having to learn proprietary languages. And IT
personnel can easily integrate the NetIQ AppManager Suite with network and
systems management frameworks right "out-of-the-box."]
<PAGE>

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully.

NetIQ Corporation

We develop applications management software that enables businesses to
optimize the performance and availability of their Windows NT-based systems and
applications. As the use of Windows NT in highly complex computing
environments, including the Internet, continues to expand, businesses are
increasingly relying on Windows NT-based systems and applications for critical
business functions. These applications include Microsoft Exchange Server, Lotus
Domino/Notes, Oracle, Citrix WinFrame, Microsoft Internet Information Server
and Microsoft SQL Server. As a result, businesses are facing new challenges in
managing their highly complex Windows NT environments.

Our NetIQ AppManager Suite helps businesses address these challenges by
providing a comprehensive and automated solution to optimize the performance
and availability of these systems and applications and reduce associated
support costs. AppManager's architecture scales easily to accommodate rapid
growth in the number of servers and applications and can be closely integrated
with existing system, network and hardware management solutions. Moreover,
AppManager's comprehensive functionality and ease of use resulting from its use
of familiar Microsoft technology and standards offer a superior solution for
managing diverse Windows NT-based systems and applications in highly complex
computing environments, including the Internet.

Our products are used by businesses in a wide variety of industries and
computing environments. As of the date of this prospectus, we license our
AppManager products to more than 400 customers, including ALCOA, AT&T, Boeing
Shared Services Group, Charles Schwab & Co., Countrywide Home Loans, Dell
Computer, General Electric, Georgia-Pacific, Glaxo Wellcome, Merck & Co.,
Microsoft, Nabisco, NationsBank, Nordstrom Information Systems, Pfizer, Shell
Services International, Southern Company Services, the Department of Veterans
Affairs and Wells Fargo Bank N.A. We have established development and/or
marketing relationships with Citrix, Compaq, Computer Associates, Dell
Computer, Hewlett-Packard, IBM, including both its Lotus and Tivoli
subsidiaries, Microsoft and Oracle.

We were incorporated in California in June 1995 and our revenue has increased
from $0.4 million in fiscal 1997 to $7.1 million in fiscal 1998 to $15.1
million in the nine months ended March 31, 1999. We incurred net losses of $3.1
million in fiscal 1998 and $0.5 million in the nine months ended March 31, 1999
and at March 31, 1999 we had an accumulated deficit of $6.8 million.

Our principal executive offices are located at 5410 Betsy Ross Drive, Santa
Clara, California 95054, and our telephone number is (408) 330-7000. Our Web
address is www.netiq.com. Information contained on our Web site does not
constitute part of this prospectus.

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NetIQ, AppManager, Knowledge Scripts and Work Smarter are registered United
States trademarks of NetIQ. NetIQ Partner Network and the NetIQ logo are also
trademarks of NetIQ. This prospectus also contains trademarks and tradenames of
other companies.

3
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The Offering

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<C> <S>
Common stock offered........................ 3,000,000 shares
Common stock to be outstanding after this
offering................................... 14,624,274 shares
Use of proceeds............................. For working capital, capital
expenditures and potential
strategic investments or
acquisitions. See "Use of
Proceeds" on page 17 of this
prospectus
Nasdaq National Market symbol............... NTIQ
</TABLE>

Except as otherwise indicated, all references to the number of outstanding
shares of common stock are based on shares outstanding as of March 31, 1999 and
assume no exercise of the underwriters' over-allotment option and the
conversion of each outstanding share of convertible preferred stock into one
share of common stock immediately prior to the closing of this offering. Also,
the information in this prospectus reflects the effects of a 2-for-3 reverse
stock effected in July 1999.

Please see "Capitalization" on page 18 of this prospectus for a more complete
discussion regarding the outstanding shares of common stock, securities to
purchase common stock and other related matters.

Summary Consolidated Financial Information

The pro forma consolidated balance sheet data summarized below gives effect
to the conversion of outstanding preferred stock into common stock upon
completion of this offering. The pro forma consolidated balance sheet data also
reflects the repayment of a $5.0 million promissory note plus accrued interest
and the application of the net proceeds received in connection with the
exercise of a warrant to purchase 280,025 shares of common stock at an exercise
price of $11.70 per share. See "Capitalization" on page 18 of this prospectus,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 21 of this prospectus and "Description of Capital Stock" on
page 61 of this prospectus for further information regarding this warrant and
the promissory note. The pro forma as adjusted consolidated balance sheet data
summarized below reflects the application of the net proceeds from the sale of
the 3,000,000 shares of common stock offered by NetIQ at the initial public
offering price of $13.00 and after deducting the underwriting discounts and
commissions and estimated offering expenses.

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<CAPTION>
March 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $11,565 $ 9,728 $44,863
Working capital.................................. 5,076 8,239 43,374
Total assets..................................... 17,613 15,776 50,911
Long term obligations, less current portion...... 241 241 241
Total stockholders' equity....................... 5,971 9,134 44,269
</TABLE>

4
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RISK FACTORS

You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results and financial condition and could result in a complete loss of your
investment.

We have a history of losses, we expect to incur losses in the future and we may
not ever become profitable.

We were founded in June 1995, and our limited operating history makes it
difficult to forecast our future operating results. We have not been profitable
in any quarter since inception, and we incurred net losses of $0.9 million for
the period from inception through June 30, 1996, $2.3 million for fiscal 1997,
$3.1 million for fiscal 1998 and $0.5 million for the nine months ended March
31, 1999. As of March 31, 1999, we had an accumulated deficit of $6.8 million.
We expect to continue to incur net losses in the near future and possibly
longer. We anticipate that our expenses will increase substantially in the
foreseeable future as we continue to develop our technology, expand our
distribution channels and increase our sales and marketing activities. These
efforts may prove more expensive than we currently anticipate and we may not
succeed in increasing our revenue sufficiently to offset these higher expenses.
If we fail to increase our revenues to keep pace with our expenses, we will
continue to incur losses. If we do achieve profitability in any period, we
cannot be certain that we will sustain or increase such profitability on a
quarterly or annual basis. For more detailed information regarding our
operating results and financial condition, please see "Selected Consolidated
Financial Data" on page 20 of this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 21
of this prospectus.

Our revenue may not continue to grow at the same rate in the future as it has
in the past.

Although our revenue has grown substantially in recent quarters, we do not
expect our revenue to grow at such a rapid rate in the future, and our revenue
could in fact decline. Our total revenue has grown from $0.4 million in fiscal
1997 to $7.1 million in fiscal 1998 to $15.1 million in the nine months ended
March 31, 1999. This growth rate reflects the relatively recent introduction of
our AppManager product suite in the U.S. and abroad. As our business matures,
it is unlikely that our revenue will continue to grow at the same rapid pace as
it has since we introduced AppManager in 1997. If our revenue does not increase
at or above the rate analysts expect, the trading price for our common stock
may decline. We believe that our future growth rates will depend on our ability
to expand our penetration of our existing markets, which will require
significant expenses that we may not have sufficient resources to undertake.

Unanticipated fluctuations in our quarterly operating results due to such
factors as change in the demand for AppManager and changes in the market for
Windows NT and related products could affect our stock price.

We believe that quarter-to-quarter comparisons of our financial results are
not necessarily meaningful indicators of our future operating results, and you
should not rely on them as an indication of our future performance. If our
quarterly operating results fail to meet the expectations of analysts, the
trading price of our common stock could be negatively affected. Our quarterly
operating results have varied substantially in the past and may vary
substantially in the future depending upon a number of factors described below
and elsewhere in this "Risk Factors" section of the prospectus, including many
that are beyond our control. These factors include:

. Changes in demand for AppManager or for applications management software
solutions generally, including any changes in customer purchasing
patterns relating to year 2000 concerns
. Changes in demand for Windows NT-based systems and applications
. Increased competition in general and any changes in our pricing policies
that may result from increased competitive pressures

5
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. Varying budgeting cycles of our customers and potential customers
. Varying size, timing and contractual terms of enterprise-wide orders for
our products
. Our ability to develop and introduce on a timely basis new or enhanced
versions of our products
. Potential downturns in our customers' businesses, in the domestic or
international economies
. Changes in the mix of revenue attributable to domestic and international
sales
. Software defects and other product quality problems
. Changes in the mix of revenue attributable to higher-margin software
license revenue as opposed to substantially lower-margin service revenue

If a large number of the orders that are typically booked at the end of a
quarter are not booked, our net income and revenue for that quarter could be
substantially reduced.

A majority of our software license revenue in any quarter depends on orders
booked and shipped in the last month, weeks or days of that quarter. At the end
of each quarter, we typically have either minimal or no backlog of orders for
the subsequent quarter. If a large number of orders or any large, enterprise-
wide orders are not placed or are deferred, our net income and revenue in that
quarter could be substantially reduced.

If customers that are delaying introducing new software products to their
computing environments to avoid potential year 2000 problems also delay
purchases of our software, our revenue will be lower.

Prior to the end of 1999 and continuing into 2000, there is likely to be an
increased customer focus on addressing year 2000 compliance issues. Some
customers have indicated to us that they will delay deployment of new software,
including new versions and product updates, at various times over the next six
to nine months to avoid the possibility of introducing or encountering any new
year 2000 problems. There is a risk that existing or potential customers may
also choose to defer new software product purchases as a result of year 2000
concerns. Moreover, customers may reallocate capital expenditures or personnel
in order to fix year 2000 problems of existing systems instead of purchasing
new software. If customers defer purchases or reallocate capital expenditures
and personnel, it could lower our product sales and service revenue. In
addition, year 2000 compliance issues also could cause a significant number of
companies, including our current customers, to reevaluate their current system
needs and, as a result, consider switching to other systems and suppliers.

New product introductions and pricing strategies by our competitors could
adversely affect our ability to sell our products or could result in pressure
to price our products in a manner that reduces our margins.

We may not be able to compete successfully against our competitors and this
could impair our ability to sell our products. The market for applications
management software to help optimize the performance availability of Windows
NT-based systems and applications is new, rapidly evolving and highly
competitive, and we expect competition in this market to persist and intensify.
New products for this market are frequently introduced and existing products
are continually enhanced. Competition may also result in changes in pricing
policies by us or our competitors which could hurt our ability to sell our
products and could adversely affect our profits. Many of our current
competitors have greater financial, technical, marketing, professional services
and other resources than we do. For example, the annual revenue of each of our
major competitors, including IBM, Computer Associates and BMC, approximates or
exceeds $1 billion. As a result, they may be able to respond more quickly to
new or emerging technologies and changes in customer requirements. They may
also be able to devote greater resources to the development, promotion and sale
of their products than we can. Many of these companies have an extensive
customer base and broad customer relationships, including relationships with
many of our current and potential customers. If we are unable to respond as
quickly or effectively to changes in customer requirements as our competition,
our ability to grow our business and sell our products will be negatively
affected.

For a further description of the competitive pressures we face, see
"Business--Competition" on page 45 of this prospectus.

6
<PAGE>

New competitors could emerge and this could impair our ability to grow our
business and sell our products.

We may face competition in the future from established companies who have not
previously entered the market for applications management software for
optimizing the performance and availability of Windows NT-based systems and
applications as well as from emerging companies. Barriers to entry in the
software market are relatively low. Established companies may not only develop
their own Windows NT-based applications management solutions, but they may also
acquire or establish cooperative relationships with our current competitors. It
is possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. If those future competitors are
successful, we are likely to lose market share and our revenue would likely
decline.

We may face competition from Microsoft in the future. Microsoft may enter the
market for managing the performance and availability of Windows NT-based
systems and applications in the future. This could materially adversely affect
our competitive position and hurt our ability to sell our products. As part of
its competitive strategy, Microsoft could bundle applications management
software with its Windows NT operating system software, which could discourage
potential customers from purchasing our products. Even if the standard features
of future Microsoft operating system software were more limited than those of
our AppManager products, a significant number of customers or potential
customers might elect to accept more limited functionality in lieu of
purchasing additional software. Moreover, competitive pressures resulting from
this type of bundling could lead to price reductions for our products which
would reduce our profit margins.

Potential third party competition may create bundling or compatibility issues
and adversely affect our ability to sell our products. In addition to
Microsoft, other potential competitors may bundle their products or incorporate
applications management software for optimizing the performance availability of
Windows NT-based systems and applications into existing products, including for
promotional purposes. In addition, our ability to sell our products will
depend, in part, on the compatibility of our products with other third party
products, such as messaging, Internet and database applications. Some of these
third party software developers may change their products so that they will no
longer be compatible with our products. If our competitors bundled their
products in this manner or made their products incompatible with ours, this
could materially adversely affect our ability to sell our products and could
lead to price reductions for our products which could reduce our profit
margins.

Please see "Business--Competition" on page 45 of this prospectus for a
further discussion on the possible competitive pressures we may face in the
future.

We will need to expand our distribution channels in order to develop our
business and increase revenue.

Our ability to sell our products in new markets and to increase our share of
existing markets will be impaired if we fail to significantly expand our
distribution channels. Our sales strategy requires that we establish multiple
indirect marketing channels in the United States and internationally through
value added resellers, systems integrators and distributors and original
equipment manufacturers, and that we increase the number of customers licensing
our products through these channels. Moreover, our channel partners must market
our products effectively and be qualified to provide timely and cost-effective
customer support and service. If they are unable to do so, this could harm our
ability to increase revenue.

We will need to expand our relationship with Tech Data and develop
relationships with other distributors to increase sales of our products.

Our domestic resellers order our products through Tech Data Corporation,
which is currently our sole U.S. distributor. We intend to add additional U.S.
and international distributors, but may not be able to do so and may not be
able to maintain our existing relationship with Tech Data. Sales of our
AppManager products through Tech Data accounted for approximately $575,000, or
4%, of software license revenue for the nine

7
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months ended March 31, 1999. Our agreement with Tech Data is for successive
one-year terms that expire each June, but is subject to automatic one year
renewals unless either party provides a termination notice prior to the renewal
date. Either party to the distribution agreement may terminate the contract
upon 30 days written notice to the other party. Our current agreement with Tech
Data does not prevent Tech Data from selling products of other companies,
including those of our competitors, and does not require that Tech Data
purchase minimum quantities of our products. Tech Data and any of our future
distributors could give higher priority to the products of other companies than
they give to our products. As a result, any significant reduction in sales
volume through any of our current or future distribution partners could lower
our revenue. In addition, sales through these channels generally have lower
costs than direct sales and any significant decrease in sales through these
channels could also lower our gross margins. Furthermore, our relationships
with our distribution partners may not generate enough revenue to offset the
significant resources used to develop these channels.

We will need to expand our field sales and inside sales organizations to grow
our business and increase sales of our products.

Because we rely heavily on our field sales and inside sales organizations,
any failure to expand those organizations could limit our ability to sell our
products and expand our market share. We are planning to significantly expand
our field sales efforts in the U.S. and internationally and we are investing,
and plan to continue to invest, substantial resources in this expansion.
Despite these efforts, we may experience difficulty in recruiting and retaining
qualified field sales personnel. Concurrent with expanding our field sales
efforts, we are also expanding our efforts to sell our products through inside
sales personnel who, in addition to working with our third party channel
partners, sell our AppManager products through telephone sales efforts to
customers typically having fewer than 100 Windows NT servers and that are not
served through our field sales efforts or third party channels.

If the markets for Windows NT and applications management software for Windows
NT-based systems and applications do not continue to develop as we anticipate,
our ability to grow our business and sell our products will be adversely
affected.

Windows NT. AppManager is designed to support Windows NT-based systems and
applications and we expect our products to be dependent on the Windows NT
market for the foreseeable future. If the market for Windows NT systems
declines or develops more slowly than we currently anticipate, this would
materially adversely affect our ability to grow our business, sell our
products, and achieve and maintain profitability. Although the market for
Windows NT has grown rapidly in recent periods, this growth may not continue at
the same rate, or at all.

Applications Management Software for Windows NT. The market for applications
management software for optimizing the performance and availability of Windows
NT-based systems and applications may not develop or may grow more slowly than
we anticipate and this could materially adversely affect our ability to grow
our business, sell our products, and achieve and maintain profitability. The
rate of acceptance of our AppManager products is dependent upon the increasing
complexity of businesses' Windows NT environments as these businesses deploy
additional servers and applications using this operating system. Many companies
have been addressing their applications management needs for Windows NT-based
systems and applications internally and only recently have become aware of the
benefits of third-party solutions, such as our AppManager products, as their
needs have become more complex. Our future financial performance will depend in
large part on the continued growth in the number of businesses adopting third
party applications management software products and their deployment of these
products on an enterprise-wide basis.

The lengthy sales cycle for our products makes our revenues susceptible to
fluctuations.

The delay or failure to complete sales, especially large, enterprise-wide
sales, in a particular quarter or calendar year could reduce our quarterly and
annual revenue. We have traditionally focused sales of our products to
workgroups and divisions of a customer, resulting in a sales cycle ranging
between 90 and 180

8
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days. The sales cycle associated with the purchase of our products is subject
to a number of significant risks over which we have little or no control,
including:

. customers' budgetary constraints and internal acceptance procedures
. concerns about the introduction or announcement of our or our
competitors' new products, including product announcements by Microsoft
relating to Windows NT
. customer requests for product enhancements

Increasingly, we are focusing more of our selling effort on products for the
customer's entire enterprise. However, the sales cycle for these enterprise-
wide sales typically can be significantly longer than the sales cycle for
smaller-sized departmental sales. Enterprise-wide sales of our AppManager
products require an extensive sales effort throughout a customer's organization
because decisions to license and deploy this type of software generally involve
the evaluation of the software by many people, in various functional and
geographic areas, each often having specific and conflicting requirements. This
evaluation process often requires significant efforts to educate information
technology decision-makers about the benefits of our products for the Windows
NT environment.

We have experienced significant growth in our business in recent periods and
our ability to manage this growth and any future growth will affect our ability
to achieve and maintain profitability.

Our ability to achieve and maintain profitability will depend in part on our
ability to implement and expand operational, customer support and financial
control systems and to train and manage our employees. We may not be able to
augment or improve existing systems and controls or implement new systems and
controls in response to future growth, if any. In addition, we will need to
expand our facilities to accomodate the growth in our personnel. Any failure to
manage growth could divert management attention from executing our business
plan and hurt our ability to successfully expand our business. Our historical
growth has placed, and any further growth is likely to continue to place, a
significant strain on our resources. We have grown from 14 employees at June
30, 1996 to 111 employees at March 31, 1999. We have also opened 10 field sales
offices and have significantly expanded our operations. We are currently
implementing new financial and accounting systems and to be successful, we will
need to expand our other infrastructure programs, including implementing
additional management information systems, improving our operating and
administrative systems and controls, training new employees and maintaining
close coordination among our executive, engineering, accounting, finance,
marketing, sales, operations and customer support organizations. In addition,
our growth has resulted, and any future growth will result, in increased
responsibilities for management personnel. Managing this growth will require
substantial resources that we may not have.

We will need to recruit and retain additional qualified personnel to
successfully grow our business.

Our future success will also likely depend in large part on our ability to
attract and retain experienced sales, research and development, marketing,
technical assistance and management personnel. If we do not attract and retain
such personnel, this could materially adversely affect our ability to grow our
business. Competition for qualified personnel in the computer software industry
is intense, particularly in the Silicon Valley, and in the past we have
experienced difficulty in recruiting qualified personnel, especially technical
and sales personnel. Moreover, we intend to expand the scope of our
international operations and these plans will require us to attract experienced
management, service, marketing, sales and customer support personnel for our
international offices. We expect competition for qualified personnel to remain
intense, and we may not succeed in attracting or retaining such personnel. In
addition, new employees generally require substantial training in the use of
our products, which in turn requires significant resources and management
attention. There is a risk that even if we invest significant resources in
attempting to attract, train and retain qualified personnel, we will not be
successful in our efforts. Our costs of doing business would increase without
the expected increase in revenues.

9
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Our relationships with Microsoft are important to our product development,
marketing and sales efforts and any deterioration of these relationships could
adversely affect our ability to develop, market and sell our products.

Any deterioration of our relationships with Microsoft could materially
adversely affect our competitive position and our ability to develop, market
and sell our products. We do not have any agreements to ensure that our
existing relationships with Microsoft will continue or expand. We rely on our
participation in Microsoft's testing and feedback programs to develop our
technology and enhance the features and functionality of our software.
Traditionally, Microsoft has not prohibited companies who develop software that
supports Microsoft operating systems from participating in such programs.
However, Microsoft may prohibit us from participating in such programs in the
future for competitive or other reasons. Recently, Microsoft has permitted one
of our engineers to work with its Windows NT development group at its Redmond,
Washington headquarters. Microsoft also contracts for one of our engineers to
provide support for Microsoft's use of our products. Additionally, we
participate in joint marketing programs with Microsoft and count Microsoft as
one of our significant customers. Microsoft is also currently distributing our
AppManager WBEM product with its Windows 2000 operating server test version
release. However, Microsoft is under no obligation to continue to distribute
this product in the future, nor is Microsoft obligated to continue to work with
our engineers.

If we are unable to successfully to expand our international operations, this
could adversely affect our ability to grow our business.

We intend to expand the scope of our international operations and currently
have field offices in London, Munich, Sydney and Tokyo. If we are unable to
expand our international operations successfully and in a timely manner, this
could materially adversely affect our ability to increase revenue. Our
continued growth and profitability will require continued expansion of our
international operations, particularly in Europe and the Asia-Pacific region.
We have only limited experience in developing, marketing, selling and
supporting our products internationally and may not succeed in expanding our
international operations.

The success of our international operations is dependent upon many factors
which could adversely affect our ability to sell our products internationally
and could affect our profitability.

International sales represented approximately 10% of our total revenue in
fiscal 1998 and approximately 22% of total revenue for the nine months ended
March 31, 1999. Our international revenue is attributable principally to our
European operations. Our international operations are, and any expanded
international operations will be, subject to a variety of risks associated with
conducting business internationally, many of which are beyond our control. The
following factors may adversely affect our ability to achieve and maintain
profitability and our ability to sell our products internationally:

. Longer payment cycles . Fluctuations in currency
. Seasonal reductions in business exchange rates
activity during the summer . Recessionary environments in
months in Europe and other parts foreign economies
of the world . Problems in collecting accounts
. Increases in tariffs, duties, receivable
price controls or other . Difficulties in staffing and
restrictions on foreign managing international
currencies or trade barriers operations
imposed by foreign countries . Limited or unfavorable
. Difficulties in localizing our intellectual property protection
products for foreign markets

10
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If we do not respond adequately to our industry's evolving technology standards
or do not continue to meet the sophisticated needs of our customers, sales of
our products may decline.

Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
technologies, including technologies related to the development of the Windows
NT operating system generally. If we do not enhance our products to meet these
evolving needs, this could materially adversely affect our ability to remain
competitive and sell our products. We will have to develop and introduce new
products and enhancements to our existing AppManager products on a timely basis
to keep pace with technological developments, evolving industry standards,
changing customer requirements and competitive products that may render
existing products and services obsolete. In addition, because our AppManager
products are dependent upon Windows NT, we will need to continue to respond to
technology advances in this operating system, including major revisions. Our
position in the existing market for applications management software for
optimizing performance and availability of Windows NT-based systems and
applications could be eroded rapidly by product advances. Consequently, the
life cycles of our products are difficult to estimate. We expect that our
product development efforts will continue to require substantial investments
that we may not have the resources to make.

We may experience delays in developing our products that could adversely affect
our ability to introduce new products, maintain our competitive position and
grow our business.

If we are unable, for technological or other reasons, to develop and
introduce new and improved products in a timely manner, this could affect our
ability to introduce new products, maintain our competitive position and grow
our business and achieve and maintain profitability. We have experienced
product development delays in new versions and update releases in the past and
may experience similar or more significant product delays in the future. To
date, none of these delays has materially affected our business. However,
future delays may have a material adverse effect on our business. Difficulties
in product development could delay or prevent the successful introduction or
marketing of new or improved products or the delivery of new versions of our
products to our customers.

Our executive officers and other key personnel are critical to our business and
they may not remain with NetIQ in the future which could hurt our ability to
grow our business.

Our success will depend to a significant extent on the continued service of
our executive officers and other key employees, including key sales,
consulting, technical and marketing personnel. If we lose the services of one
or more of our executives or key employees, including if one or more of our
executives or key employees decided to join a competitor or otherwise compete
directly or indirectly with us, this could harm our business and could affect
our ability to successfully implement our business objectives.

Our future revenue is partially dependent upon our current customers licensing
additional AppManager products.

If our current customers do not purchase additional products, this would
reduce our revenue. During the nine months ended March 31, 1999, approximately
36% of license revenue was derived from additional sales to current customers.
In order to increase software license revenue, our sales efforts target our
existing customer base to expand these customers' use of our AppManager
products. Most of our current customers initially license a small portion of
our products for pilot programs. Our customers may not license additional
AppManager products and may not expand their use of our products. In addition,
as we deploy new versions of our AppManager products or introduce new products,
our current customers may not require the functionality of our new products and
may not license these products. We also depend on our installed customer base
for future revenue from maintenance renewal fees. The terms of our standard
license arrangements provide for a one-time license fee and a prepayment of one
year of software maintenance and support fees. Our maintenance agreements are
renewable annually at the option of our customers but there are no minimum
payment obligations or obligations to license additional software.

11
<PAGE>

Errors in our products could result in significant costs to us and could impair
our ability to sell our products.

Because our software products are complex, they may contain errors, or
"bugs," that can be detected at any point in a product's life cycle. These
errors could materially adversely affect our reputation which could result in
significant costs to us and could impair our ability to sell our products. The
costs we may incur in correcting any product errors may be substantial and
could decrease our profit margins. While we continually test our products for
errors and work with customers through our customer support services to
identify and correct bugs, errors in our products may be found in the future.
Testing for errors is complicated in part because it is difficult to simulate
the highly complex computing environments in which our customers use our
products as well as because of the increased functionality of our product
offerings. In the past, we have discovered errors in our products and have
experienced delays in the shipment of our products during the period required
to correct these errors. These delays have principally related to new versions
and product update releases. To date, none of these delays has materially
affected our business. However, product errors or delays in the future could be
material. Detection of any significant errors may result in, among other
things, loss of, or delay in, market acceptance and sales of our products,
diversion of development resources, injury to our reputation, or increased
service and warranty costs. Moreover, because our products support Windows NT-
based systems and applications, any software errors or bugs in the Windows NT
operating server software or the systems and applications that our products
manage may result in errors in the performance of our software.

We may be subject to product liability claims that could result in significant
costs to us.

We may be subject to claims for damages related to product errors in the
future. A material product liability claim could materially adversely affect
our business because of the costs of defending against these types of lawsuits,
diversion of key employees' time and attention from the business and potential
damage to our reputation. Our license agreements with our customers typically
contain provisions designed to limit exposure to potential product liability
claims. Some of our licensing agreements state that if our products fail to
perform, we will correct or issue replacement software. Our standard license
also states that we will not be liable for indirect or consequential damages
caused by the failure of our products. Limitation of liability provisions like
those in our license agreements, however, may not be effective under the laws
of some jurisdictions if local laws treat those types of warranty exclusions as
unenforceable. Although we have not experienced any product liability claims to
date, the sale and support of our products involves the risk of such claims. In
particular, issues relating to year 2000 compliance have increased awareness of
the potential adverse effects of software defects and malfunctions.

We have warranted to a majority of our major licensees that our products will
be year 2000 compliant and any problems our products experience with year 2000
issues could result in third party claims. Potential problems may occur in our
third party equipment or software, which could result in significant costs.

If any of our licensees experience year 2000 problems as a result of their
use of our AppManager products, they could assert claims for damages which, if
successful, could result in us incurring significant costs to us that could
lower our profit margins. While we currently believe that our software products
are generally year 2000 compliant, we may learn that our software products do
not contain all necessary software routines and codes necessary for the
accurate calculation, display, storage and manipulation of data involving
dates. In addition, in a majority of our major software licenses, we have
warranted that the use or occurrence of dates on or after January 1, 2000, will
not adversely affect the performance of our products with respect to four digit
date dependent data or the ability to create, store, process and output
information related to such data. In addition, we use third-party equipment and
software that may not be year 2000 compliant. If this third-party equipment or
software does not operate properly with regard to the year 2000, we may incur
unexpected expenses to remedy any problems. Moreover, if our key systems, or a
significant number of our systems, were to fail as a result of year 2000
problems, we could incur substantial costs and disruption of our business. For
a more detailed description of our year 2000 preparedness assessment, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance" on page 30 of this prospectus.

12
<PAGE>

If we fail to protect our intellectual property rights, competitors may be able
to use our technology or trademarks and this could weaken our competitive
position, reduce our revenue and increase costs.

Our success is heavily dependent upon proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights and prevent competitors from using our technology in their
products. These laws and procedures provide only limited protection. We have
applied for three patents relating to our engineering
work. Two of these patents have been issued or approved for issuance and the
third patent application is pending, but may never be issued. These patents may
not provide sufficiently broad protection or they may not prove to be
enforceable in actions against alleged infringers. Our ability to sell our
products and prevent competitors from misappropriating our proprietary
technology and trade names is dependent upon protecting our intellectual
property. Despite precautions that we take, it may be possible for unauthorized
third parties to copy aspects of our current or future products or to obtain
and use information that we regard as proprietary. In particular, we may
provide our licensees with access to our proprietary information underlying our
licensed applications. Additionally, our competitors may independently develop
similar or superior technology. Policing unauthorized use of software is
difficult and some foreign laws do not protect our proprietary rights to the
same extent as United States laws. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others.
Litigation could result in substantial costs and diversion of resources and
could materially adversely affect our business, future operating results and
financial condition.

While we have settled a claim that we infringed a third party's intellectual
property rights, third parties in the future for competitive or other reasons
could assert that our products infringe their intellectual property rights.
Such claims could injure our reputation and adversely affect our ability to
sell our products.

Third parties may claim that our current or future products infringe their
proprietary rights and these claims, whether they have merit or not, could harm
our business including by increasing our costs. We previously litigated a claim
with Compuware alleging that we had infringed a third party's intellectual
property rights, and although this claim has been settled and no other claims
of this nature are currently pending, any future claims could affect our
relationships with existing customers and may prevent future customers from
licensing our products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on page 21 of this prospectus for a
further discussion of the Compuware litigation and settlement agreement. The
intensely competitive nature of our industry and the important nature of
technology to our competitors' businesses may contribute to the likelihood of
being subject to third party claims of this nature. Any such claims, with or
without merit, could be time consuming, result in potentially significant
litigation costs, including costs related to any damages we may owe resulting
from such litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements. Royalty or license agreements may not be
available on acceptable terms or at all. We expect that software product
developers will increasingly be subject to infringement claims as the number of
products and competitors in the software industry grows and the functionality
of products in different industry segments overlaps.

Seasonal trends in sales of our software products may affect our quarterly
operating results.

We expect to experience seasonality in sales of our software products in the
future. These seasonal trends could materially affect our quarter-to-quarter
operating results. Revenue and operating results in our quarter ending December
31 are sometimes higher than in our other quarters, because many customers make
purchase decisions based on their calendar year-end budgeting requirements. In
addition, because the incentive compensation structure for our sales
organization is based, in part, on satisfaction of fiscal year-end quotas and
because our fiscal year ends on June 30, our quarter ending June 30 tends to
reflect the efforts of our sales organization to meet these fiscal year end
objectives.

13
<PAGE>

As our expanding international operations in Europe and the Asia-Pacific region
are increasingly conducted in currencies other than the U.S. dollar,
fluctuations in the value of foreign currencies could result in currency
exchange losses.

Currently, a majority of our international business is conducted in U.S.
dollars. However, as we expand our international operations, we expect that our
international business will increasingly be conducted in foreign currencies.
Fluctuations in the value of foreign currencies relative to the U.S. dollar
have caused, and we expect such fluctuation to increasingly cause, currency
translation gains and losses. We cannot predict the effect of exchange rate
fluctuations upon future quarterly and annual operating results. We may
experience currency losses in the future. To date, we have not adopted a
hedging program to protect us from risks associated with foreign currency
fluctuations.

Because we license technology from Summit Software that helps AppManager run
our applications management modules, any failure to maintain satisfactory
licensing arrangements with this party could result in substantial costs to us.

We license technology that helps AppManager run our applications management
modules from Summit Software on a non-exclusive, worldwide basis. Our
AppManager product modules for Windows NT, Windows NT Workstation and Super
Console incorporate the Summit Software technology. Although our agreement
allows us to continue to sell products using the Summit technology for a period
of 24 months after the license terminates, our ability to sell our products
could be adversely affected if we are not able to replace this technology on
commercially reasonable terms. We license this technology on a year-to-year
basis which is automatically renewed each August unless otherwise terminated.
Our license for this technology is terminable by Summit upon 60 days notice in
the event we breach our agreement with Summit, including our failure to pay
royalty fees on a timely basis or any other material breach by us of the
license agreement. For a further description of our license agreement with
Summit, see "Business--Intellectual Property" on page 46 of this prospectus.

Provisions in our charter documents and in Delaware law may discourage
potential acquisition bids for NetIQ and prevent changes in our management
which our stockholders may favor.

Provisions in our charter documents could discourage potential acquisition
proposals and could delay or prevent a change in control transaction that our
stockholders may favor. These provisions could have the effect of discouraging
others from making tender offers for our shares, and as a result, these
provisions may prevent the market price of our common stock from reflecting the
effects of actual or rumored takeover attempts and may prevent stockholders
from reselling their shares at or above the price at which they purchased their
shares. These provisions may also prevent changes in our management that our
stockholders may favor. Our charter documents do not permit stockholders to act
by written consent, do not permit stockholders to call a stockholders meeting
and provide for a classified board of directors, which means stockholders can
only elect, or remove, a limited number of our directors in any given year.
Furthermore, upon completion of the offering, our board of directors will have
the authority to issue up to 5,000,000 shares of preferred stock in one or more
series. Our board of directors can fix the price, rights, preferences,
privileges and restrictions of such preferred stock without any further vote or
action by our stockholders. The issuance of shares of preferred stock may delay
or prevent a change in control transaction without further action by our
stockholders. In addition, Delaware law may inhibit potential acquisition bids
for NetIQ. We are subject to the antitakeover provisions of Delaware law which
regulate corporate acquisitions. Delaware law prevents certain Delaware
corporations, including NetIQ, from engaging, under certain circumstances, in a
"business combination" with any "interested stockholder" for three years
following the date that such stockholder became an interested stockholder. For
a further discussion of these charter provisions and Delaware law, see
"Description of Capital Stock" on page 61 of this prospectus.

14
<PAGE>

The substantial number of shares that will be eligible for sale in the near
future may adversely affect the market price for our common stock and may
prevent stockholders from reselling their shares at or above the price at which
they purchased their shares.

Sales of a substantial number of shares of our common stock in the public
market following this offering could materially adversely affect the market
price for our common stock. As additional shares of our common stock become
available for resale in the public markets, this could increase the supply for
our common stock which could adversely affect the price of our common stock.
This may prevent stockholders from reselling their shares at or above the price
at which they purchased their shares. The number of shares of common stock
available for sale in the public market is limited by restrictions under
federal securities law and under agreements that our stockholders have entered
into with the underwriters or with us.

For a further description of the eligibility of shares for sale into the
public market following the offering see "Shares Eligible for Future Sale" on
page 64 of this prospectus.

New investors in our common stock will experience immediate and substantial
dilution.

The initial public offering price is substantially higher than the book value
per share of our common stock. Investors purchasing common stock in this
offering will, therefore, incur immediate dilution of $9.97 in net tangible
book value per share of common stock giving effect to the initial public
offering price of $13.00 and after taking into consideration the effects of the
issuance of the shares offered hereby and the exercise of the warrant to
purchase 280,025 shares of common stock issued to Compuware. See "Dilution" on
page 19 of this prospectus for a further discussion of the dilutive effects of
this offering and the exercise of the Compuware warrant. This dilution figure
includes the impact of deductions of the estimated underwriting discounts and
commissions and estimated offering expenses payable from the initial public
offering price. Investors will incur additional dilution upon the exercise of
outstanding stock options.

Our stock will likely be subject to substantial price and volume fluctuations
which may prevent stockholders from reselling their shares at or above the
price at which they purchased their shares.

Fluctuations in the price and trading volume of our common stock may prevent
stockholders from reselling their shares above the price at which they
purchased their shares. Stock prices and trading volumes for many software
companies fluctuate widely for a number of reasons, including some reasons
which may be unrelated to their businesses or results of operations. This
market volatility, as well as general domestic or international economic,
market and political conditions, could materially adversely affect the market
price of our common stock without regard to our operating performance. In
addition, our operating results may be below the expectations of public market
analysts and investors. If this were to occur, the market price of our common
stock would likely significantly decrease.

Our investment of the proceeds from this offering may not yield a significant
return.

We will have broad discretion as to the use of the proceeds from this
offering and we may not invest these proceeds to yield a significant return.
Our primary purposes for this offering are to create a public market for our
common stock and to raise working capital for general corporate purposes, and
potential strategic investments or acquisitions. See "Use of Proceeds" on page
17 of this prospectus for a further discussion regarding our plans regarding
the use of proceeds from this offering. Until the need arises to use the
proceeds, we plan to invest the net proceeds in investment grade, interest-
bearing securities.

We may have contingent liability arising out of a possible violation of Section
5 of the Securities Act of 1933 in connection with e-mails to employees and
other potential participants in the directed share program.

As part of the offering, the underwriters and NetIQ had reserved up to
150,000 shares at the initial public offering price in connection with a
directed shares program for employees and other persons associated with NetIQ.
On June 29, 1999, NetIQ posted e-mails and other written information on an
internal

15
<PAGE>

e-mail bulletin board with respect to this directed share program and,
subsequent to that time, certain of our executive officers sent e-mails to
potential participants in the directed share program. At most, we believe that
300 individuals would have received or had access to the e-mails or the
postings. These postings and e-mails set forth certain procedural aspects of
the directed share program and informed these individuals that they would have
an opportunity to participate in the directed share program. NetIQ may have a
contingent liability arising out of a possible violation of Section 5 of the
Securities Act of 1933 in connection with the postings to employees and the e-
mails sent to other potential participants in the directed share program. In
light of the events discussed above, the underwriters and NetIQ have terminated
the directed shares program. Any liability would depend upon the number of
shares purchased by the recipients of such e-mails. If any such liability is
asserted, we will contest the matter strenuously. We do not believe that any
such liability would be material to our financial condition.

FORWARD-LOOKING STATEMENTS

Many statements under the captions "Prospectus Summary," "Risk Factors," "Use
of Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations and
intentions and other statements contained in the prospectus that are not
historical facts. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, there
are important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements, including our
plans, objectives, expectations and intentions and other factors discussed
under "Risk Factors" beginning on page 5 of this prospectus.

16
<PAGE>

USE OF PROCEEDS

We will receive net proceeds of $35,135,000 from the sale of 3,000,000 shares
of common stock at the initial public offering price of $13.00 per share after
deducting underwriting commissions, discounts and estimated expenses.

The principal purposes of this offering are to create a public market for our
common stock and to raise working capital. As of the date of this prospectus,
we have no specific plans regarding the use of the net proceeds of this
offering other than for general corporate purposes. Pending such uses, we
intend to invest the net proceeds of the initial public offering in investment
grade, interest-bearing securities. We may use the proceeds of the offering for
potential strategic investments or acquisitions that complement our products,
services, technologies or distribution channels. However, we do not currently
have any plans to make any such strategic investments or acquisitions.

Upon the completion of this offering we will pay approximately $1.8 million
to satisfy our outstanding loan obligation to Compuware which will become due
upon completion of this offering. In addition, approximately $3.3 million of
the loan obligation to Compuware will be cancelled in connection with
Compuware's exercise of their warrant to purchase 280,025 shares of common
stock at a purchase price of $11.70 per share, 90% of the public offering price
of $13.00 per share, which exercise will be effective upon completion of the
offering. The Compuware loan was made and the Compuware warrant was issued in
connection with a settlement agreement we entered into with Compuware in March
1999. For a more complete description of the Compuware loan, the Compuware
warrant, the Compuware settlement agreement and a discussion of our liquidity
position, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 21 of this prospectus.

DIVIDEND POLICY

We have never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future.

17
<PAGE>

CAPITALIZATION

The following table sets forth our capitalization at March 31, 1999 on the
following three bases:

. actual
. on a pro forma basis to reflect the automatic conversion of all
outstanding preferred stock into common stock, the repayment of a $5.0
million promissory note plus accrued interest and the exercise of a
warrant to purchase 280,025 shares of common stock upon completion of
this offering, and to show the effects of increases in the number of
authorized shares of common stock and preferred stock upon completion of
this offering
. on a pro forma as adjusted basis to show the effect of our receipt of the
estimated net proceeds from the sale of 3,000,000 shares of common stock
offered at the initial public offering price of $13.00 per share and the
application of the net proceeds therefrom

As indicated above, the pro forma capitalization information reflects the
repayment of a $5.0 million promissory note plus accrued interest of $113,000
and the receipt of net proceeds in connection with the exercise of a warrant to
purchase 280,025 shares of common stock at the exercise price of $11.70 per
share, and the resulting charge to operations of approximately $364,000 for the
fair value of such warrant, based on the initial public offering price of
$13.00 per share, which promissory note and warrant were issued to Compuware as
part of the settlement agreement relating to litigation involving Compuware.
Under the terms of the warrant, the per share exercise price is equal to 90% of
the per share sales price of shares of common stock sold in this offering. For
further information regarding this warrant and for more information regarding
the repayment of the promissory note and of accrued interest thereon which is
payable upon completion of the initial public offering contemplated by this
prospectus, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Overview" on page 21 of this prospectus and
"Description of Capital Stock" on page 61 of this prospectus.

The outstanding share information excludes 2,846,744 shares of common stock
that were reserved for issuance upon exercise of stock options under our stock
option plan as of March 31, 1999, of which options to purchase 2,114,739 shares
were outstanding at such date at a per share weighted average exercise price of
$0.76. In addition, in connection with this offering, our board of directors
has approved an increase of 1,366,666 shares to be reserved under our stock
option plan and 500,000 shares to be reserved under our employee stock purchase
plan. The outstanding share information also excludes 26,666 shares of common
stock issued by NetIQ in May 1999 in connection with a software development
agreement.

The capitalization information set forth in the table below is qualified by,
and should be read in conjunction with, the more detailed Consolidated
Financial Statements and notes thereto appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
March 31, 1999
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Current portion of long-term obligations........ $ 5,144 144 144
Long-term obligations, less current portion..... 241 241 241
Stockholders' equity:
Preferred Stock, $0.001 par value, 11,100,000
shares authorized and 7,399,977 outstanding,
actual; 5,000,000 shares authorized, no
shares outstanding, pro forma; 5,000,000
shares authorized, no shares outstanding, pro
forma as adjusted............................. 10,955 -- --
Common Stock, $0.001 par value, 30,000,000
shares authorized, 3,944,272 shares
outstanding, actual; 100,000,000 shares
authorized, 11,624,274 shares outstanding,
pro forma; 100,000,000 shares authorized,
14,624,274 shares outstanding, pro forma as
adjusted...................................... 4,143 18,738 53,873
Deferred stock-based compensation.............. (2,325) (2,325) (2,325)
Accumulated deficit............................ (6,802) (7,279) (7,279)
------- ------- -------
Total stockholders' equity................... 5,971 9,134 44,269
------- ------- -------
Total capitalization....................... $11,356 $ 9,519 $44,654
======= ======= =======
</TABLE>

18
<PAGE>

DILUTION

The pro forma net tangible book value of NetIQ as of March 31, 1999, was
$9,134,000, or approximately $0.79 per share. Pro forma net tangible book value
per share represents the pro forma amount of NetIQ's total assets less total
liabilities, divided by the number of shares of common stock outstanding, and
reflects the effects of the conversion of the outstanding preferred stock into
common stock, the exercise of the Compuware warrant, the repayment of the
Compuware $5.0 million note and accrued interest thereon. After giving effect
to the sale of the 3,000,000 shares of common stock offered at the initial
public offering price of $13.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by NetIQ, our pro forma net tangible book value at March 31, 1999, would have
been $44,269,000, or approximately $3.03 per share. This represents an
immediate increase in pro forma net tangible book value of $2.24 per share to
existing stockholders and an immediate dilution in net tangible book value of
$9.97 per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:

<TABLE>
<S> <C> <C> <C>
Initial public offering price per share..................... $13.00
Pro forma net tangible book value per share as of March
31, 1999................................................. $0.79
Increase attributable to new investors.................... 2.24
--- -----
Pro forma net tangible book value per share after offering.. 3.03
--- ------
Dilution per share to new investors......................... $ 9.97
======
</TABLE>

The following table sets forth, on a pro forma basis as of March 31, 1999,
the differences between the number of shares of common stock purchased, the
total consideration paid and the average price per share paid by existing
holders of common stock including the assumed exercise of warrants, and by the
new investors, before deducting underwriting discounts and commissions and
estimated offering expenses payable by NetIQ, at the public offering price of
$13.00 per share.

<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 11,624,274 79% $14,436,000 27% $ 1.24
New investors.................. 3,000,000 21 39,000,000 73 $13.00
---------- ----- ----------- -----
Total........................ 14,624,274 100.0% 53,436,000 100.0%
========== ===== =========== =====
</TABLE>

To the extent that any shares are issued upon exercise of options that were
outstanding at March 31, 1999 or granted after that date, or reserved for
future issuance under our stock plans, there will be further dilution to new
investors. For a more detailed discussion of our stock plans and outstanding
options to purchase common stock see "Management--Incentive Stock Plans" on
page 51 of this prospectus, "Description of Capital Stock" on page 61 of this
prospectus and Notes 5 and 13 of Notes to Consolidated Financial Statements on
pages F-10 and F-17 of this prospectus.

19
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations," which are included elsewhere in this prospectus. The
consolidated statements of operations data for the years ended June 30, 1996,
1997 and 1998, and the nine months ended March 31, 1999, and the consolidated
balance sheet data at June 30, 1997 and 1998, and March 31, 1999, are derived
from the audited consolidated financial statements included elsewhere in this
prospectus. The consolidated balance sheet data as of June 30, 1996, are
derived from audited financial statements not included in this prospectus. The
consolidated statements of operations data for the nine months ended March 31,
1998, are derived from unaudited consolidated financial statements included
elsewhere in this prospectus. In our opinion, these unaudited statements
include all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the information when read in conjunction with the
consolidated financial statements and notes thereto. Results for the nine
months ended March 31, 1999, are not necessarily indicative of the expected
results for the full year.

<TABLE>
<CAPTION>
Nine Months
Year Ended June 30, Ended March 31,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of
Operations Data:
Revenue:
Software license................ $ -- $ 369 $ 6,603 $ 3,186 $13,137
Service......................... -- 19 467 234 1,972
------- ------- ------- ------- -------
Total revenue................. -- 388 7,070 3,420 15,109
------- ------- ------- ------- -------
Cost of revenue:
Software license................ -- 9 235 159 532
Service......................... -- 46 407 203 894
------- ------- ------- ------- -------
Total cost of revenue......... -- 55 642 362 1,426
------- ------- ------- ------- -------
Gross profit..................... -- 333 6,428 3,058 13,683
Operating expenses:
Sales and marketing............. 77 1,238 5,748 3,600 8,027
Research and development........ 665 1,003 2,192 1,462 2,652
General and administrative...... 264 479 1,611 994 2,239
Stock-based compensation........ -- 10 250 83 1,355
------- ------- ------- ------- -------
Total operating expenses...... 1,006 2,730 9,801 6,139 14,273
------- ------- ------- ------- -------
Loss from operations............. (1,006) (2,397) (3,373) (3,081) (590)
Interest income, net............. 97 116 262 215 89
------- ------- ------- ------- -------
Net loss......................... $ (909) $(2,281) $(3,111) $(2,866) $ (501)
======= ======= ======= ======= =======
Basic and diluted net loss per
share(1)........................ $ (1.55) $ (1.62) $ (1.34) $ (1.31) $ (0.15)
======= ======= ======= ======= =======
Shares used to compute basic and
diluted net loss per share(1)... 587 1,411 2,325 2,192 3,294
======= ======= ======= ======= =======
Pro forma basic and diluted net
loss per share(2)............... $ (0.32) $ (0.05)
======= =======
Shares used to compute pro forma
basic and diluted net loss per
share(2)........................ 9,725 10,694
======= =======
</TABLE>

<TABLE>
<CAPTION>
June 30,
------------------- March 31,
1996 1997 1998 1999
----- ------ ------ ---------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 32 $7,748 $3,358 $11,565
Working capital.................................. 1,755 7,493 4,314 5,076
Total assets..................................... 2,255 8,202 8,205 17,613
Long-term obligations, less current portion...... -- -- -- 241
Total stockholders' equity....................... 1,880 7,787 4,939 5,971
</TABLE>
- --------
(1) See Note 6 to the Consolidated Financial Statements for the determination
of shares used in computing basic and diluted net loss per share on page F-
14 of this prospectus.

(2) See Note 1 to the Consolidated Financial Statements for the determination
of shares used in computing pro forma basic and diluted net loss per share
on page F-8 of this prospectus.

20
<PAGE>

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

The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with our Consolidated
Financial Statements and the Notes thereto. This discussion contains forward-
looking statements based upon current expectations that involve risks and
uncertainties, such as our plans, objectives, expectations and intentions. Our
actual results and the timing of events could differ materially from those
anticipated in these forward-looking statements as a result of several factors,
including those set forth in the following discussion and under "Risk Factors,"
"Business" and elsewhere in this prospectus.

Overview

We develop applications management software that enables businesses to
optimize the performance and availability of their Windows NT-based systems and
applications.

From our incorporation in June 1995 until the first sales of AppManager in
February 1997, we were principally engaged in development-stage activities,
including product development, sales and marketing efforts and recruiting
qualified management and other personnel. Our total revenue has grown from
$388,000 in fiscal 1997, to $7.1 million in fiscal 1998 and to $15.1 million in
the nine months ended March 31, 1999. This rapid revenue growth reflects our
relatively early stage of development, and we do not expect revenue to increase
at the same rate in the future.

Operating expenses grew from $1.0 million in fiscal 1996 to $2.7 million in
fiscal 1997 to $9.8 million in fiscal 1998 and to $14.3 million in the nine
months ended March 31, 1999. Our operating expenses increased as we expanded
our operations, including growing our employee base from 14 at June 30, 1996 to
111 at March 31, 1999. Our operating expenses, which include charges for stock-
based compensation, together with cost of revenue have exceeded revenue in
every quarter since inception. This reflects our strategy to make the
investments necessary to capture market share and grow revenue as quickly as
possible, while maintaining a high level of fiscal control, product quality and
customer satisfaction. Our cumulative losses have resulted in an accumulated
deficit of $6.8 million at March 31, 1999.

We have derived the large majority of our revenue from software licenses. We
also derive revenue from sales of annual maintenance service agreements and, to
a lesser extent, consulting and training services. Service revenue has
increased in recent periods as license revenue has increased and as the size of
our installed base has grown. We expect service revenue to increase as a
percentage of total revenue in the future and, as a consequence, our cost of
service revenue to increase in absolute dollars and as a percentage of total
revenue. The pricing of the AppManager Suite is based on the number of systems
and applications managed, although volume and enterprise pricing is also
available. Our customers typically purchase one year of product software
maintenance with their initial license of our products. Thereafter, customers
are entitled to receive software updates, maintenance releases and technical
support for an annual maintenance fee equal to a fixed percentage of the
current list price of the licensed product.

Cost of service revenue, as a percentage of service revenue, has declined
from 242% in fiscal 1997 to 87% in fiscal 1998 and 45% in the nine months ended
March 31, 1999. Cost of software license revenue has remained in the range of
2% to 6% of license revenue throughout these periods. Although service revenue
has increased as a percentage of total revenue from 5% in fiscal 1997 to 7% in
fiscal 1998 to 13% in the nine months ended March 31, 1999, the declining cost
of service revenue has resulted in an increase in overall gross margin from 86%
in fiscal 1997 to 91% in each of fiscal 1998 and the nine months ended March
31, 1999. We anticipate that service revenue will increase as a percentage of
total revenue in the future as customers continue to renew maintenance service
contracts and, if we are unable to reduce the costs of service revenue, our
margins may decline.

21
<PAGE>

We sell our products through both our direct sales force, which includes our
field and inside sales personnel, as well as through indirect channels, such as
distributors, value-added resellers and original equipment manufacturers. To
date, the majority of our sales have resulted from the efforts of our field and
inside sales personnel. However, revenue through our third-party channel
partners represented approximately 10% of total revenue in fiscal 1998 and 30%
of total revenue in the nine months ended March 31, 1999, and our strategy is
to increase sales through third-party channel partners. During both fiscal 1998
and the nine months ended March 31, 1999, no single customer accounted for more
than 10% of our consolidated revenue. International sales did not account for
any of our revenue in fiscal 1997, but represented 10% of total revenue in
fiscal 1998 and 22% of total revenue in the nine months ended March 31, 1999.
We anticipate that as we expand our international sales efforts, the percentage
of revenue derived from international sources will continue to increase.

Generally, we sell perpetual licenses and recognize revenue in accordance
with generally accepted accounting principles upon meeting each of the
following criteria:

. execution of a written purchase order, license agreement or contract;
. delivery of software and authorization keys;
. the license fee is fixed and determinable;
. collectibility of the proceeds within six months is assessed as being
probable; and
. vendor-specific objective evidence exists to allocate the total fee to
elements of the arrangement.

Vendor-specific objective evidence is based on the price generally charged when
an element is sold separately, or if not yet sold separately, is established by
authorized management. All elements of each order are valued at the time of
revenue recognition. For sales made through our distributors, resellers and
original equipment manufacturers, we recognize revenue at the time these
partners report to us that they have sold the software to the end user and
after all revenue recognition criteria have been met.

In September 1996, Compuware Corporation filed a complaint against us
alleging misappropriation of trade secrets, copyright infringement, unfair
competition and other claims. Compuware asserted these claims after a number of
prior Compuware employees founded our company or later joined us as officers
and employees. See "Management--Executive Officers and Directors" at page 47 of
this prospectus for a description of the prior positions held by our officers
while at Compuware. We reached a settlement of these claims in January 1999 and
final documentation was entered into and the claims dismissed in March 1999.
Prior to reaching a settlement with Compuware, we incurred significant expenses
related to the litigation, primarily relating to legal fees, and management
attention was partially diverted to this litigation matter. As part of the
settlement in March 1999, Compuware loaned us $5.0 million, subordinated to our
bank credit facility, with interest at 6% per year. This loan, including all
accrued interest, is payable upon the closing of this offering. Additionally,
as part of the settlement in March 1999, we issued Compuware a warrant to
purchase 280,025 shares of common stock at 90% of the per share sale price of
shares sold to investors in this offering, or $11.70 per share using the
initial offering price of $13.00 per share. Compuware has delivered to us a
notice that it will exercise the warrant in full upon the closing of this
offering. The settlement agreement with Compuware provides that the maximum
number of shares purchasable under the warrant equals two percent of the
outstanding number of shares of our outstanding stock assuming exercise of all
outstanding options on the date that we filed our registration statement in
connection with this offering. The 280,025 warrant share figure represents two
percent of our outstanding common stock on May 26, 1999, the date we filed our
registration statement for this offering. Upon completion of this offering, we
will pay approximately $1.8 million to satisfy our loan and interest obligation
to Compuware, and the remaining $3.3 million loan obligation will be forgiven
in connection with Compuware's exercise of the warrant. Additionally, as part
of our settlement agreement, we agreed not to recruit personnel from Compuware
until after December 31, 1999, or release any systems management software for
managing UNIX systems on or before December 31, 1999.

22
<PAGE>

Historical Results of Operations

The following table sets forth our historical results of operations expressed
as a percentage of total revenue for fiscal 1997 and 1998 and for the nine
months ended March 31, 1998 and 1999. We did not have any revenue in fiscal
1996. Our historical operating results are not necessarily indicative of the
results for any future period.

<TABLE>
<CAPTION>
Percentage of Total Revenue
----------------------------------
Year Ended Nine Months
June 30, Ended March 31,
------------- ------------------
1997 1998 1998 1999
----- ----- ------- -------
<S> <C> <C> <C> <C>
Consolidated Statement of Operations Data
Revenue:
Software license........................ 95% 93% 93% 87%
Service................................. 5 7 7 13
----- ---- ------- -------
Total revenue......................... 100 100 100 100
----- ---- ------- -------
Cost of revenue:
Software license........................ 2 3 5 3
Service................................. 12 6 6 6
----- ---- ------- -------
Total cost of revenue................. 14 9 11 9
----- ---- ------- -------

Gross margin:............................. 86 91 89 91

Operating expenses:
Sales and marketing..................... 319 81 105 53
Research and development................ 259 31 43 18
General and administrative.............. 123 23 29 15
Stock-based compensation................ 3 4 2 9
----- ---- ------- -------
Total operating expenses.............. 704 139 179 95
----- ---- ------- -------
Loss from operations...................... (618) (48) (90) (4)
Interest income, net...................... 30 4 6 1
----- ---- ------- -------
Net loss.................................. (588)% (44)% (84)% (3)%
===== ==== ======= =======
- --------------
Cost of software license revenue, as a
percentage of software license revenue... 2 % 4 % 5 % 4 %
Cost of service revenue, as a percentage
of service revenue....................... 242 % 87 % 87 % 45 %
</TABLE>

Comparison of Nine Months Ended March 31, 1998 and 1999

Revenue

Our total revenue increased from $3.4 million in the nine months ended March
31, 1998, to $15.1 million in the nine months ended March 31, 1999,
representing growth of 342%. During this same period, our software license
revenue increased from $3.2 million to $13.1 million, representing growth of
312%. These increases were due primarily to increases in the number of software
licenses sold, reflecting increased acceptance of our AppManager products and
expansion of our field and inside sales organizations and our third-party
channel partners. During the nine months ended March 31, 1999, approximately
36% of license revenue was derived from current customers, compared to
approximately 14% in the nine months ended March 31, 1998. Service revenue
increased from $234,000 in the nine months ended March 31, 1998 to $2.0 million
in the nine months ended March 31, 1999, representing growth of 743%. This
increase was due primarily to maintenance fees associated with new software
licenses. Approximately 65% of consolidated license revenues since inception of
the Company was recorded in the nine months ended March 31, 1999. Service
revenue increased as a percentage of total revenue due to the compounding
effect of our base of installed licenses as a significant majority of our early
customers have renewed their maintenance service agreements.

23
<PAGE>

Cost of Revenue

Cost of Software License Revenue. Our cost of software license revenue
includes the costs associated with software packaging, documentation, such as
user manuals and CDs, and production, as well as non-employee commissions and
royalties. Our cost of software license revenue has increased from $159,000, or
5% of software license revenue, in the nine months ended March 31, 1998, to
$532,000, or 4% of software license revenue, in the nine months ended March 31,
1999. The increase in absolute dollar amount was due principally to increases
in software license revenue, while the percentage decline was due to decreases
in non-employee commissions and royalty costs, which represented 3% of license
revenue in nine months ended March 31, 1998, but less than 2% in nine months
ended March 31, 1999.

Cost of Service Revenue. Cost of service revenue consists primarily of
personnel costs and expenses incurred in providing telephonic and on-site
maintenance services and consulting services. Costs associated with training
activities consist principally of allocated labor and departmental expenses as
well as training materials. Cost of service revenue was $203,000 and $894,000
during the nine months ended March 31, 1998 and 1999, respectively,
representing 87% and 45% of related service revenue. The increase in dollar
amount of cost of service revenue is primarily attributable to the growth in
our installed customer base. Cost of service revenue as a percent of service
revenue declined due primarily to economies of scale achieved as our revenue
and installed base have grown. We expect service revenue to increase as a
percentage of total revenue as our installed license base grows and, as a
consequence, our cost of service revenue to increase in absolute dollars and as
a percentage of total revenue.

Operating Expenses

Sales and Marketing. Our sales and marketing expenses consist primarily of
personnel costs, including salaries and employee commissions, as well as
expenses relating to travel, advertising, public relations, seminars, marketing
programs, trade shows and lead generation activities. Sales and marketing
expenses increased from $3.6 million in the nine months ended March 31, 1998,
to $8.0 million in the nine months ended March 31, 1999. This increase in
dollar amount was due primarily to the hiring of additional field sales, inside
sales and marketing personnel, which increased from 21 people to 37 people at
the end of each period, and expanding our sales infrastructure and third-party
channel partners, as well as higher commissions, which increased 233% compared
to our total revenue increases of 342%. Sales and marketing expenses
represented 105% and 53% of total revenue for the nine months ended March 31,
1998 and 1999, respectively. The decline in sales and marketing expenses as a
percentage of total revenue was principally the result of economies of scale
resulting from the increased number of sales transactions, including follow-on
sales to existing customers, as well as the allocation of marketing expenses
over a substantially increased revenue base. We expect to continue hiring
additional sales and marketing personnel and to increase promotion, advertising
and other marketing expenditures in the future. Accordingly, we expect sales
and marketing expenses will increase in absolute dollars in future periods.

Research and Development. Our research and development expenses consist
primarily of salaries and other personnel-related costs, as well as facilities
costs, consulting fees and depreciation. These expenses increased from $1.5
million, or 43% of total revenue, in the nine months ended March 31, 1998, to
$2.7 million, or 18%, of total revenue in the nine months ended March 31, 1999.
This increase in dollar amount resulted principally from increases in
engineering and technical writing personnel, which increased from 23 people to
35 people at the end of each period, together with increases in facility costs
relating to our new facility which we leased in July 1998. The decline in
research and development expenses as a percentage of total revenue was due to
the growth in total revenue. To date, all research and development costs have
been expensed as incurred in accordance with Financial Accounting Standards
Board Statement No. 86 as our current software development process is
essentially completed concurrent with the establishment of technological
feasibility. We expect to continue to devote substantial resources to product
development such that research and development expenses will increase in
absolute dollars in future periods and may increase slightly in the near future
as a percentage of total revenue as a result of expenses related to a third
party development effort which will be incurred primarily over the next several
quarters.

24
<PAGE>

General and Administrative. Our general and administrative expenses consist
primarily of personnel costs for finance and administration, information
systems and human resources, as well as professional services expenses such as
legal and accounting, and provision for doubtful accounts. General and
administrative expenses increased from $1.0 million in the nine months ended
March 31, 1998, to $2.2 million in the nine months ended March 31, 1999,
representing 29% and 15% of total revenues, respectively. The increase in
dollar amount was due primarily to increased staffing necessary to manage and
support our growth. General and administrative personnel increased from five
people at March 31, 1998, to 12 people at March 31, 1999. Legal expenses have
been a significant cost in both periods, amounting to $458,000 and $897,000 for
the nine months ended March 31, 1998 and 1999, respectively. These legal costs
have principally been due to the Compuware litigation, for which a settlement
was reached in January 1999 and final documentation was entered into and the
claims dismissed in March 1999. In addition, occupancy costs charged to general
and administrative expense increased by $533,000 during the period as a result
of the lease of our new facility in July 1998. The decrease in general and
administrative expense as a percentage of total revenue was due primarily to
the growth in total revenue. We believe that our general and administrative
expenses will increase in absolute dollars as we expand our administrative
staff, add new financial and accounting software systems, and incur additional
costs related to being a public company, such as expenses related to directors'
and officers' liability insurance, investor relations and stock administration
programs and increased professional fees.

Stock-Based Compensation. During the nine months ended March 31, 1998 and
1999, we recorded deferred stock-based compensation of $473,000 and $2.7
million, respectively, relating to stock option grants to employees and non-
employees. These amounts are being amortized over the vesting periods of the
granted options, which is generally four years for employees. During the nine
months ended March 31, 1998 and 1999, we recognized stock-based compensation
expense of $83,000 and $1.4 million, respectively. At March 31, 1999, total
deferred stock-based compensation was $2.3 million. We expect to amortize
approximately $600,000 of deferred stock-based compensation for the quarter
ended June 30, 1999, and up to approximately $200,000 of deferred stock-based
compensation each quarter through June 30, 2003.

Interest Income, Net. Interest income, net, represents interest income earned
on our cash and cash equivalent balances and interest expense on our equipment
loans and loan subordinated to our bank line of credit. For the nine months
ended March 31, 1998 and 1999, interest and other income, net, was $215,000 and
$89,000, respectively. The decline in interest income, net is the result
primarily of lower cash and cash equivalent balances in the 1999 period,
coupled with interest on the $5.0 million subordinated debt, commencing in the
quarter ended March 31, 1999. The subordinated loan plus any accrued interest
will be repaid upon the closing of this offering and will be offset by the cash
proceeds from the exercise of the Compuware warrant. See "--Liquidity and
Capital Resources" on page 29 of this prospectus for a further discussion of
this loan and the Compuware warrant.

Income Taxes. We incurred net operating losses in the nine months ended March
31, 1998 and 1999, and consequently paid no federal, state or foreign income
taxes.

Comparison of Fiscal Years Ended June 30, 1996, 1997 and 1998

The trends discussed in the comparisons of operating results for the nine
months ending March 31, 1998 and 1999, generally apply to the comparison of
results of operation for fiscal 1996, 1997 and 1998, except for differences
discussed below.

Revenue

We did not recognize any revenue in fiscal 1996. We began selling software
licenses for the AppManager Suite in February 1997, and our software license
revenue increased from $369,000 in fiscal 1997 to $6.6

25
<PAGE>

million in fiscal 1998. Service revenue increased from $19,000 in fiscal 1997
to $467,000 in fiscal 1998, principally from increases in new customer
licenses.

Cost of Revenue

Cost of Software License Revenue. Our cost of software license revenue
increased from $9,000, or 2% of software license revenue, in fiscal 1997 to
$235,000, or 4% of software license revenue, in fiscal 1998. The increase in
absolute dollar amount was due principally to increases in the number of
software licenses sold, while the percentage increase was due principally to an
increase in our reserve for product returns by $50,000 in fiscal 1998.

Cost of Service Revenue. Our cost of service revenue increased from $46,000
in fiscal 1997 to $407,000 in fiscal 1998. These costs amounted to 242% and 87%
of service revenue, respectively. The decline in cost of service revenue as a
percentage of service revenue declined due primarily to economies of scale
achieved as our revenue and installed base have grown.

Operating Expenses

Sales and Marketing. Our sales and marketing expenses increased from $77,000
in fiscal 1996, to $1.2 million in fiscal 1997 and to $5.7 million in fiscal
1998. The increase reflects the hiring of additional sales and marketing
personnel in connection with the building of our direct, reseller and original
equipment manufacturer channels, and higher commissions associated with
increased sales volume. Our personnel in sales and marketing increased from
three at June 30, 1996, to nine at June 30, 1997, to 34 at June 30, 1998. Sales
and marketing expenses accounted for 319% of total revenue in fiscal 1997 and
81% of total revenue in fiscal 1998. The decrease as a percentage of total
revenue was due primarily to growth in our total revenue.

Research and Development. Research and development expenses increased from
$665,000 in fiscal 1996, our first year of product development, to $1.0 million
in fiscal 1997, and to $2.2 million in 1998. The increase in each of these
periods was due primarily to increases in personnel in each period. Our
personnel in research and development increased from six at June 30, 1996 to 14
at June 30, 1997 and to 30 at June 30, 1998. Research and development expenses
accounted for 259% of total revenue in fiscal 1997 and 31% of total revenue in
fiscal 1998. The decrease as a percentage of total revenue was due primarily to
growth in our total revenue.

General and Administrative. General and administrative expenses increased
from $264,000 in fiscal 1996, to $479,000 in fiscal 1997 and to $1.6 million in
fiscal 1998. These costs, which represented 123% of total revenue in fiscal
1997 and 23% of total revenue in 1998, were the result of increases in
personnel, facility-related costs and legal expenses. Our personnel in general
and administrative positions increased from two at June 30, 1996 and 1997, to
eight at June 30, 1998. Legal expenses were $186,000 in fiscal 1997 and
$762,000 in fiscal 1998, and related principally to the Compuware litigation
that commenced in September 1996 for which a settlement was reached in January
1999 and final documentation was entered into and the claims dismissed in March
1999. The decrease as a percentage of total revenue was the result of growth in
our total revenue.

Stock-Based Compensation. In fiscal 1998, we recorded deferred stock-based
compensation of $1.2 million in connection with stock option grants and
amortized $250,000 of this amount as an expense for that year.

Interest Income, Net. We recognized interest income, net of $97,000, $116,000
and $262,000 in fiscal 1996, 1997 and 1998, respectively. These amounts are the
result of investments made out of cash balances in excess of operating
requirements, which resulted from our two preferred stock financings in
September 1995 and May 1997.

Income Taxes. We incurred net operating losses in fiscal 1996, 1997 and 1998,
and consequently paid no federal, state or foreign income taxes.

26
<PAGE>

Quarterly Results of Operations

The following table sets forth our unaudited quarterly results of operations
data for the seven most recent quarters ended March 31, 1999, as well as such
data expressed as a percentage of our total revenue for the periods presented.
The information in the table below should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto included elsewhere in
this prospectus. We have prepared this information on the same basis as the
Consolidated Financial Statements and the information includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. Our quarterly operating results have varied substantially
in the past and may vary substantially in the future. You should not draw any
conclusions about our future results from the results of operations for any
particular quarter.

<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------
Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31,
1997 1997 1998 1998 1998 1998 1999
-------- -------- -------- -------- -------- -------- --------
(in thousands, except as a percentage of total revenue)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data
Revenue:
Software license....... $ 526 $1,479 $ 1,181 $3,417 $3,640 $4,519 $4,978
Service................ 23 75 136 233 450 628 894
------ ------ ------- ------ ------ ------ ------
Total revenue......... 549 1,554 1,317 3,650 4,090 5,147 5,872
Cost of revenue:
Software license....... 18 68 73 76 87 158 287
Service................ 20 65 118 204 176 384 334
------ ------ ------- ------ ------ ------ ------
Total cost of
revenue.............. 38 133 191 280 263 542 621
------ ------ ------- ------ ------ ------ ------
Gross profit........... 511 1,421 1,126 3,370 3,827 4,605 5,251
Operating expenses:
Sales and marketing.... 895 1,209 1,496 2,148 2,125 2,864 3,038
Research and
development........... 416 493 553 730 884 806 962
General and
administrative........ 261 332 401 617 523 742 974
Stock-based
compensation.......... -- -- 83 167 364 661 330
------ ------ ------- ------ ------ ------ ------
Total operating
expenses............. 1,572 2,034 2,533 3,662 3,896 5,073 5,304
------ ------ ------- ------ ------ ------ ------
Loss from operations... (1,061) (613) (1,407) (292) (69) (468) (53)
Interest income, net... 90 71 54 47 19 38 32
------ ------ ------- ------ ------ ------ ------
Net loss............... $ (971) $ (542) $(1,353) $ (245) $ (50) $ (430) $ (21)
====== ====== ======= ====== ====== ====== ======
As a Percentage of Total
Revenue:
Revenue:
Software license....... 96% 95% 90% 94% 89% 88% 85%
Service................ 4 5 10 6 11 12 15
------ ------ ------- ------ ------ ------ ------
Total revenue......... 100 100 100 100 100 100 100
Cost of revenue:
Software license....... 3 5 6 2 2 3 5
Services............... 4 4 9 6 4 7 6
------ ------ ------- ------ ------ ------ ------
Total cost of
revenue.............. 7 9 15 8 6 10 11
------ ------ ------- ------ ------ ------ ------
Gross margin........... 93 91 85 92 94 90 89
Operating expenses:
Sales and marketing.... 163 78 114 59 52 56 52
Research and
development........... 76 32 42 20 22 16 16
General and
administrative........ 47 20 30 16 13 14 16
Stock-based
compensation.......... 0 0 6 5 9 13 6
------ ------ ------- ------ ------ ------ ------
Total operating
expenses............. 286 130 192 100 96 99 90
------ ------ ------- ------ ------ ------ ------
Loss from operations... (193) (39) (107) (8) (2) (9) (1)
Interest income, net... 16 4 4 1 1 1 1
------ ------ ------- ------ ------ ------ ------
Net loss............... (177)% (35)% (103)% (7)% (1)% (8)% (0)%
====== ====== ======= ====== ====== ====== ======
- --------------
Cost of software
license revenue, as a
percentage of software
license revenue....... 3% 5% 6% 2% 2% 3% 6%
Cost of service
revenue, as a
percentage of service
revenue............... 87% 87% 87% 88% 39% 61% 37%
</TABLE>

27
<PAGE>

The trends discussed in the comparisons of operating results for the nine
months ended March 31, 1998 and 1999, and fiscal 1996, 1997 and 1998 generally
apply to the comparison of results of operations for our seven most recent
quarters ended March 31, 1999, except for differences as discussed below.

Our total revenue increased in every quarter, except the quarter ended March
31, 1998, which reflected a modest decline from the prior quarter due to the
timing of initial orders, which at our early stage of development represented
significant portions of revenue. Our service revenue has increased every
quarter and reflects an increasing percentage of total revenue due to the
compounding effect of our base of installed licenses.

Cost of software license revenue ranged from 2% to 6% of related software
license revenue during the seven quarters ended March 31, 1999, as a result of
the timing of the purchase of user manuals, packaging materials and CDs, which
are expensed when purchased in volume. Cost of service revenue was
approximately 87% of related service revenue in each of the four quarters ended
June 30, 1998, based on time spent on post-sale support activities by home
office and field-based technical personnel. Cost of service revenue declined in
fiscal 1999 as a percentage of total revenue due primarily to economies of
scale achieved as our revenue and installed base grew. During the quarter ended
December 31, 1998, we incurred a one-time charge of $132,000 relating to a
special consulting project for one customer. Excluding this one-time charge,
the cost of service revenue as a percentage of service revenue would have been
40% for that quarter.

Total operating expenses increased in absolute dollar terms in every quarter
during the seven quarters ended March 31, 1999. Total operating expenses during
the first three quarters of fiscal 1998 ranged from 130% to 286% of total
revenue, due principally to the start-up nature of our various operating
activities, and since that time have ranged from 90% to 100% of total revenue
as an explicit strategy of investment to allow for rapid growth. In the near
future, we expect to continue to devote substantial resources to product
development and expansion of our sales and marketing efforts, and expect that
total operating expenses to increase in absolute dollars in future periods,
although the percentage of revenue will vary depending on the level of revenue.

We have experienced some seasonality of buying patterns resulting in
generally higher orders in the quarters ended December 31 and June 30 and we
expect these seasonal trends to continue for the foreseeable future. See "Risk
Factors--Seasonal trends in sales of our software products ..." on page 13 of
this prospectus for a further discussion of these seasonal trends.

Recent Operating Results

For our quarter ended June 30, 1999, we had total revenue of approximately
$6.5 million, total cost of revenue of approximately $600,000 and operating
expenses of approximately $7.0 million. We incurred a net loss of approximately
$1.1 million. Our operating expenses increased as compared to our quarter ended
March 31, 1999, due to increases in sales and marketing expenses, primarily
related to increases in commissions, increases in research and development
expenses, related primarily to a new development project, and increases in
other operating expenses due to a non-cash charge of approximately $364,000
relating to the exercise of the warrant to purchase common stock issued in
connection with the Compuware litigation settlement agreement (based on the
initial public offering price of $13.00 per share). We believe this unaudited
information reflects all adjustments, consisting of only normal recurring
adjustments that we consider necessary for a fair presentation of the
information for the period presented. These results may not be indicative of
our future performance.

Effect of Recent Accounting Pronouncements

In June 1997, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 130, Reporting Comprehensive Income, which requires an enterprise to
report, by major components and as a single total, the change in its net assets
during the period from nonowner sources; and SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about its products, services, geographic areas and major customers.
Our comprehensive loss was equal to our net loss for all periods presented. We
currently operate in one reportable segment under SFAS No. 131.

28
<PAGE>

In June 1998, FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for us in fiscal 2001.
Although we have not fully assessed the implications of SFAS No. 133, we do not
believe that adoption of this statement will have a material impact on our
financial position, results of operations or cash flows.

In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-9 which provides certain amendments to
SOP 97-2 Software Revenue Recognition, and is effective for our fiscal year
beginning July 1, 1999. We do not believe that adoption of this statement will
have a material impact on our financial position, results of operations or cash
flows.

Liquidity and Capital Resources

We have funded our operations to date primarily through private sales of
preferred equity securities, totaling $11.0 million and, to a lesser extent,
through capital equipment leases and sales of common stock and option
exercises. As of March 31, 1999, we had $11.6 million in cash and cash
equivalents.

Our operating activities resulted in net cash outflows of $834,000, $2.0
million and $3.9 million in fiscal 1996, 1997 and 1998, respectively. Sources
of cash during these periods were principally from increases in deferred
revenue, accrued compensation and other liabilities. Uses of cash in these
periods were principally from net losses and increases in accounts receivable.
In the nine months ended March 31, 1999, our operating activities provided
positive cash flow of $3.4 million derived principally from increases in
deferred revenue and stock-based compensation.

Our investing activities, after excluding the purchase and maturity of
temporary cash investments in fiscal 1996 and fiscal 1997, resulted in cash
outflows, principally related to the acquisition of capital assets, of
$152,000, $238,000, $529,000 and $790,000 in the fiscal 1996, 1997 and 1998,
and the nine months ended March 31, 1999, respectively.

Financing activities provided cash of $3.1 million in fiscal 1996, $7.9
million in fiscal 1997, principally related to the proceeds of the issuance of
preferred stock. Financing activities provided cash of $5.6 million in the nine
months ended March 31, 1999, principally from the proceeds of the $5.0 million
loan from Compuware and proceeds from our bank credit facility.

As of March 31, 1999, our principal commitments consisted of the $5.0 million
loan from Compuware, $385,000 of advances under our prior bank credit facility
in equipment purchases, and $3.1 million in accounts payable, accrued
compensation and other accrued liabilities. The Compuware loan will be repaid
upon completion of the offering, which will be offset by the cash proceeds of
approximately $3.3 million from the exercise of the warrant issued to Compuware
in connection with the settlement of litigation. We have a term loan in the
principal amount of $433,000 with a bank that will be repaid through monthly
installments through January 2002. The borrowings from Compuware and the bank
are secured by substantially all of our assets.

Deferred revenue consist principally of the unrecognized portion of revenue
received under maintenance service agreements. These amounts are recognized
ratably over the term of the service agreement. Deferred revenue was $3.2
million at March 31, 1999.

We believe that the net proceeds from this offering, together with our cash
balances and cash flow generated by operations will be sufficient to satisfy
our anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. Thereafter, we may require additional funds to
support our working capital requirements, or for other purposes, and may seek
to raise such additional funds through public or private equity financings or
from other sources. We may not be able to obtain adequate or favorable
financing at that time. Any financing we obtain may dilute your ownership
interests. A portion of our cash may

29
<PAGE>

be used to acquire or invest in complementary businesses or products or to
obtain the right to use complementary technologies. From time to time, in the
ordinary course of business, we may evaluate potential acquisitions of
businesses, products or technologies. We have no current plans, agreements or
commitments, and are not currently engaged in any negotiations with respect to
any such transaction.

Year 2000 Compliance

Background of Year 2000 Issues

Many currently-installed computer and communications systems and software
products are unable to distinguish between twentieth century dates and twenty-
first century dates. This situation could result in system failures or
miscalculations causing disruptions, in the operations of any business,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. As a result,
many companies' software and computer and communications systems may need to be
upgraded or replaced to comply with such "year 2000" requirements.

Our Products

In the ordinary course of our business, we test and evaluate our software
products. We believe that our AppManager Suite is year 2000 compliant, meaning
that the use or occurrence of dates on or after January 1, 2000, will not
materially affect the performance of such software products or the ability of
such products to correctly create, store, process and output information of
data involving dates. However, we may learn that some modules do not contain
all necessary software routines and codes necessary for the accurate
calculation, display, storage and manipulation of data involving dates. In
addition, in the majority of our larger contracts with customers, we have
warranted that the use or occurrence of dates on or after January 1, 2000, will
not adversely affect the performance of our products with respect to four digit
date dependent data or the ability to create, store, process and output
information related to such data. If any of our licensees experience year 2000
problems as a result of their use of our software products, those licensees
could assert claims for damages. Many of our licensing agreements provide that
if our products do not perform to their specifications, we will correct such
problems or issue replacement software. If these corrective measures fail, we
may refund the license fee associated with the non-performing product. To date
we have not received any year 2000 related claims on our software products.

Our State of Readiness

Our business depends on the operation of numerous systems that could
potentially be impacted by year 2000 related problems. The systems include:

. computer and communications hardware and software systems used to
deliver our software enabling keys and allow our customers and employees
to download product, documentation and Knowledge Scripts

. computer and communications hardware and software systems used
internally in the management of our business

. communications networks such as the Internet and private intranets

. the internal systems of our customers and suppliers

. non-information technology systems and services we use to manage our
business, such as telephone, security and building management systems.

Based on an analysis of all systems potentially impacted by conducting
business in the year 2000 and beyond, we are pursuing a phased approach to
making such systems and our operations ready for the year 2000. Beyond
awareness of the issues and scope of systems involved, the phases of activities
in progress include:

30
<PAGE>

. an assessment of specific underlying computer and communications
systems, programs and hardware

. remediation or replacement of year 2000 non-compliant technology

. validation and testing of technologically-compliant year 2000 solutions

. implementation of year 2000 compliant systems.

The table below provides a summary of the status and timing of phased
activities.

<TABLE>
<CAPTION>
Impacted Systems Status Targeted Implementation
---------------- ------ -----------------------
<S> <C> <C>
Hardware and software Systems upgraded or July 31, 1999
systems used to deliver replaced as appropriate,
services conducting validation and
testing
Hardware and software Systems upgraded or July 31, 1999
systems used to manage replaced as appropriate,
our business conducting validation and
testing
Communication networks Assessment completed, September 30, 1999
used to provide services conducting validation and
testing
Operability with internal Assessment completed, September 30, 1999
systems of customers and conducting validation and
suppliers testing
Non-information technology Assessment and remediation September 30, 1999
systems and services underway, conducting
validation and testing
</TABLE>

We have obtained assurances from a majority of the providers of our internal
production computer systems, including Compaq, Dell, Hewlett-Packard, IBM and
Micron, that our computer systems are year 2000 compliant. These production
computers run on the Microsoft Windows NT Server 4.0 operating system, and in
accordance with Microsoft's instructions a corrective release has been
implemented to ensure that this operating system is year 2000 compliant. We
have also obtained assurances from a majority of the providers of our
significant software applications such as Microsoft Exchange Server 5.5 and
Microsoft SQL Server 6.5, that these applications are year 2000 compliant. We
have also received assurances from the provider of our new accounting system
software, that this software is year 2000 compliant.

Our network routers are manufactured by Cisco Systems. We have replaced non-
compliant series routers with compliant series routers. We have also received
assurances from our third party vendors that our other networking equipment is
year 2000 compliant and that our remote access equipment, such as our Lucent
InterNetworking Systems, is year 2000 compliant.

We have also received assurances from our third party vendors that our
telephone system and our voicemail system are year 2000 compliant. Our Cardkey
building security system is in the process of being upgraded to a new system
which we believe will be year 2000 compliant. Regarding other non-information
technology systems, such as the fire alarm system for our building, we are
awaiting responses to our written questionnaires from providers of these
systems.

Costs to Address Year 2000 Issues

To date, we have not incurred any material costs directly associated with our
year 2000 compliance efforts, except for compensation expense associated with
our salaried employees who have devoted some of their time to our year 2000
assessment and remediation efforts. We do not expect the total cost of year
2000

31
<PAGE>

problems to be material to our business, financial condition and operating
results. We would have incurred the replacement cost of non-information
technology systems regardless of the year 2000 issue due to technology
obsolescence and our growth. We have and will continue to expense all costs
arising from year 2000 issues, funding them from working capital.

We do not believe that future expenditures to upgrade internal systems and
applications will materially harm our business. In addition, although we do not
know the potential costs of redeployment of personnel and any delays in
implementing other projects, we anticipate the costs to be immaterial and we
expect minimal adverse impact to the business.

See "Risk Factors--We have warranted..." on page 12 of this prospectus for a
discussion of risks to our business related to year 2000 issues.

Contingency Plans

We have not yet developed a contingency plan for handling year 2000 problems
that are not detected and corrected prior to their occurrence. Upon completion
of testing and implementation activities, we will be able to assess areas
requiring contingency planning, and we expect to institute appropriate
contingency planning at that time. Any failure to address any unforeseen year
2000 issue could harm our business.

Customers' Purchasing Patterns

Prior to the end of 1999 and continuing into 2000, there is likely to be an
increased customer focus on addressing year 2000 compliance issues. Some
customers have indicated to us that they will delay deployment of new software,
including new versions and product updates, at various times over the next six
to nine months to avoid the possibility of introducing or encountering any new
year 2000 problems. There is a risk that existing or potential customers may
also choose to defer new software product purchases as a result of year 2000
concerns. Moreover, customers may reallocate capital expenditures or personnel
in order to fix year 2000 problems of existing systems instead of purchasing
new software. If customers defer purchases or reallocate capital expenditures
and personnel, it could materially adversely affect our business, future
quarterly and annual operating results and financial condition. In addition,
year 2000 compliance issues also could cause a significant number of companies,
including our current customers, to reevaluate their current system needs and,
as a result, consider switching to other systems and suppliers.

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<PAGE>

BUSINESS

The following Business section contains forward-looking statements relating
to future events or our future financial performance, which involves risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of several factors,
including those set forth in "Risk Factors" and elsewhere in this prospectus.

NetIQ Overview

We develop applications management software that enables businesses to
optimize the performance and availability of their Windows NT-based systems and
applications. As use of Windows NT in highly complex computing environments,
including the Internet, continues to expand, businesses are increasingly
relying on Windows NT-based systems and applications for critical business
functions. These applications include Microsoft Exchange Server, Lotus
Domino/Notes, Oracle, Citrix WinFrame, Microsoft Internet Information Server
and Microsoft SQL Server. As a result, these businesses are facing new
challenges in managing their highly complex Windows NT environments in order to
maintain required service levels, ensure continuous uptime and reduce support
costs. Our NetIQ AppManager Suite enables businesses to address these
challenges by centrally managing the performance of their highly complex
Windows NT environments, helping ensure availability through automated
monitoring, correction and reporting features and lower the total cost of
ownership. We believe that AppManager's comprehensive functionality and ease of
use resulting from the utilization of familiar Microsoft technology and
standards offer a superior solution for managing diverse Windows NT-based
systems and applications in highly complex computing environments.

Our products are used by businesses in a wide variety of industries and
computing environments. As of the date of this prospectus, we license our
AppManager products to more than 400 customers, including ALCOA, AT&T, Boeing
Shared Services Group, Charles Schwab & Co., Countrywide Home Loans, Dell
Computer, General Electric, Georgia-Pacific, Glaxo Wellcome, Merck & Co.,
Microsoft, Nabisco, NationsBank, Nordstrom Information Systems, Pfizer, Shell
Services International, Southern Company Services, the Department of Veterans
Affairs and Wells Fargo Bank, N.A. These customers have purchased at least
$100,000 in software licenses and services since the beginning of fiscal 1997,
and accounted for approximately 34% of our total revenue in fiscal 1998 and 32%
of total revenue in the nine months ended March 31, 1999. International Data
Corporation reports that we are one of the five largest performance management
software providers for the Windows NT environment as measured by software
license and maintenance revenue for 1998.

Industry Background

The Windows NT operating system is a leading platform for distributed
computing. According to International Data Corporation a leading information
technology research firm, the market for Windows NT-based servers will grow
from 1.3 million servers in 1998, or 32% of all server operating systems
shipped in that year, to an estimated 3.3 million servers by 2002, or 51% of
all server operating systems shipped in that year. The growth of Windows NT has
been driven by the use of this platform for applications that businesses
increasingly rely on such as electronic messaging, Internet, group
collaboration and database applications. For example, businesses are
increasingly deploying electronic mail servers using Windows NT. According to
International Data Corporation, the worldwide market for all new electronic
mail server software, for example Microsoft Exchange and Lotus Domino/Notes,
will grow from 698,000 servers in 1998 to 868,000 servers in 2001. In addition,
International Data Corporation also estimates that the percentage of all
electronic mail server software deployed on Windows NT as opposed to other
operating systems will grow from approximately 43% in 1998 to approximately 65%
in 2001. Because businesses rely on Windows NT-based systems and applications,
these systems and applications require high performance and availability
standards, including around-the-clock uptime.

The growth and deployment of Windows NT-based systems and applications in
highly complex computing environments have created a number of unique
performance and application management challenges. These complex, distributed
computing environments are characterized by multiple servers running multiple
enterprise-

33
<PAGE>

wide system applications at remote locations. These challenges range from
basic tasks such as monitoring central processing unit utilization and memory
and disk-space availability to tasks as complex as monitoring Internet traffic
and e-mail response times or identifying specific database commands that are
creating bottlenecks for system performance. The consequences of failing to
meet these challenges are particularly high because businesses are
increasingly relying on the applications being deployed on Windows NT to
perform critical business functions. Moreover, the manner in which businesses
are deploying these systems and applications can increase the likelihood
of system failure. According to the Gartner Group, an industry research firm,
in a survey of more than 100 companies, Windows NT-specific issues created an
average of 224.5 hours of unscheduled downtime per machine per year, as
compared to UNIX system-specific issues which averaged 23.6 hours of downtown
and AS/400 system-specific issues which averaged 5.2 hours of downtime.

A new and rapidly growing market has emerged to address the performance and
availability management challenges created by the evolution of enterprise
distributed computing on Windows NT. The goal of applications management
solutions is to ensure the availability of distributed computing resources and
to optimize the performance of these resources through automated monitoring,
correction and reporting procedures. According to International Data
Corporation, the Windows NT-based distributed operations management market is
expected to grow from $1.1 billion in 1998 to $2.8 billion by 2002.

We believe that traditional systems management solutions have not been able
to adequately address the unique challenges of the complex deployment of
systems and applications within the Windows NT environment. Among these
traditional systems management solutions are "framework" products that attempt
to address all aspects of system and application management problems across
multiple platforms, such as Windows NT, UNIX and AS/400, with a single product
suite. According to the Gartner Group, these framework products have generally
performed poorly, have been difficult to implement and Gartner Group estimates
that 36 months after purchase, 70% of enterprise management framework
implementations fail to be fully and successfully implemented and utilized.
UNIX-based systems management vendors have attempted to modify their UNIX-
based platforms to address specific systems and applications management needs
for Windows NT. In addition, because these framework and UNIX-based systems
management solutions have not been designed specifically for the Windows NT
platform, they often are not easy to use because they do not incorporate the
"look and feel" of Windows NT. Furthermore, many of these systems management
solutions offer only limited reporting functions and utilize an architecture
that does not easily scale to accommodate the growth in the number of Windows
NT servers and applications organizations are deploying across their computing
enterprises. Because of their limitations, framework and UNIX-based system
management solutions often require extensive and costly customization, long
deployment times and significant ongoing support, thereby increasing
organizations' total cost of ownership.

The unique challenges for managing Windows NT-based systems and applications
have created the need for Windows NT-based applications management solutions
designed specifically for the Windows NT environment. We believe a complete
applications management software solution for the distributed Windows NT
environment must incorporate the following characteristics:

. Comprehensive breadth and depth of performance and availability
management capabilities optimized for the Windows NT environment
. Familiar "look and feel" of Microsoft Windows NT-based products that
information technology professionals can easily adopt and use
. Advanced architecture that scales to support rapid growth in the number
of servers and applications deployed on the Windows NT platform yet
retains centralized access and control
. Rapid deployment capabilities and low maintenance costs that result in
improved return on investment
. Close integration with other systems, network and hardware management
solutions

34
<PAGE>

The NetIQ Solution

Our AppManager products provide a comprehensive solution for centrally
managing the performance of businesses' Windows NT environments. Utilizing a
centralized console with automated monitoring, correction and reporting
capabilities, our products help optimize the performance and availability of
Windows NT systems and applications and reduce associated support costs. Key
features of our solution include:

Comprehensive Windows NT-Based Systems and Application Management
Functionality

AppManager consists of fully integrated product modules known as
"AppManagers" that provide comprehensive functionality for managing Windows NT-
based systems and the popular applications that run on Windows NT. AppManager
has broad functionality that enables information technology professionals to
rapidly detect problems, identify the underlying source of the problems,
implement corrective measures and generate focused management reports through
an automated process. AppManager also provides more than 500 pre-packaged
"Knowledge Scripts," or business rules and policies, that indicate the most
relevant statistics that need to be monitored at specified thresholds and
intervals. Information technology professionals can easily customize these
Knowledge Scripts or develop their own to meet organization-specific
requirements.

Utilizes and Builds Upon Microsoft Technology and Standards

AppManager utilizes and builds upon leading Microsoft technologies and
standards, protocols and application programming interfaces. As a result,
AppManager looks, feels and operates in the same manner as Microsoft Windows NT
products, helping information technology professionals adopt and use AppManager
more easily than system management solutions that have been adapted from
solutions for non-Windows platforms. Furthermore, as new and emerging Windows
NT standards and product features develop, we will incorporate these standards
and features into AppManager.

Scalable Product; Centralized Control

AppManager's architecture scales easily to accommodate growth in the number
of Windows NT servers and Windows NT-based applications that organizations
deploy in their computing environments. Many of our customers gradually adopt
and roll-out Windows NT throughout their enterprise on a server-by-server
basis, and deploy additional Windows NT-based applications on an application-
by-application basis. As customers increase their use of Windows NT-based
systems and applications, our architecture scales to accommodate this growth
and continues to enable information technology professionals to manage their
server base from a centralized console.

Rapid Deployment; Reduced Total Cost of Ownership

Because AppManager provides comprehensive, "out-of-the-box" functionality and
has the "look and feel" of Microsoft Windows NT products, it is easier for
information technology professionals to deploy and maintain our products than
traditional system management solutions. AppManager requires minimal
customization, maintenance and ongoing customer support and is designed to
reduce the total cost of ownership and administration of distributed Windows NT
environments, relative to other system management solutions. Our Knowledge
Scripts enable information technology professionals to quickly implement
AppManager and our architecture enables organizations to efficiently roll-out
AppManager from limited departmental uses to managing multiple important
applications throughout an organization.

Open Architecture that Integrates with Existing System, Network and Hardware
Management Products

Since many of our customers have made significant investments in legacy
system and network management applications, we have designed our products to
integrate closely with these solutions. We have developed "connectors" that
integrate with leading enterprise management framework products by sharing
performance and event information. In addition, because many organizations have
purchased Windows NT

35
<PAGE>

servers from multiple hardware vendors, AppManager includes product modules
that integrate with hardware management tools to monitor the status and
performance of the hardware underlying Windows NT systems.

Optimized for Microsoft's Channel

Because we focus exclusively on the Windows NT market, we understand and can
address the needs of this marketplace. We target our sales efforts on the
Windows NT segments of our customers' information technology departments where
the need for products and expertise similar to ours is particularly acute.
Moreover, because our products have the "look and feel" of Microsoft technology
and are developed for Microsoft users, Microsoft's third party resellers and
channel partners typically find our products easy to market, sell and support.

Strategy

Our objective is to be the leading provider of applications management
software that enables businesses to optimize the performance and availability
of their Windows NT-based systems and applications. Key elements of our
strategy include:

Enhancing Position as a Leading Provider of Windows NT Applications
Management Solutions

We intend to strengthen our technology leadership position in the Windows NT
applications management software market by continuing to focus on managing
applications that businesses are increasingly relying on to perform critical
business functions, including electronic messaging, Internet, group
collaboration and database applications. We intend to enhance our comprehensive
solutions by offering broader "out-of-the box" functionality and closer
integration with third party system, network and hardware management products.
We also intend to continue to introduce additional AppManager modules for
managing additional important applications such as Microsoft's Commerce Server.

Target Enterprise-wide Deployment within Existing Customer Base

As of the date of this prospectus, we license our products to over 400
customers across a broad range of industries. A number of our customers
initially deploy AppManager on a departmental basis or for managing particular
Windows NT-based systems or applications. We have focused and will continue to
focus on expanding existing customers' use of AppManager to an enterprise-wide
deployment managing multiple applications.

Expand Distribution Channels

We have formed relationships with value added resellers, system integrators,
original equipment manufacturers and distributors. We intend to build upon
these relationships and to pursue new ones. In particular, we intend to
continue to focus on relationships with third party resellers of Microsoft
products that constitute the most significant distribution channel for Windows
NT-based systems and applications.

Increase International Presence

We believe that international markets present a substantial growth
opportunity for us as the worldwide market for Windows NT-based systems and
applications continues to expand and as organizations increasingly recognize
the advantages of applications management solutions. We intend to expand our
field and inside sales forces and establish additional field offices in the
United States and internationally. We plan to complement our current
international distribution channels by developing relationships with additional
international resellers, distributors and original equipment manufacturers.
Working with our Japanese original equipment manufacturers, we have developed
branded Japanese versions of our AppManager products for each of these original
equipment manufacturers to market, sell and support and we intend to develop
additional localized versions of our products in the future.

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<PAGE>

Expand Relationships with Microsoft

We intend to expand our relationships with Microsoft to further develop our
applications management solutions for Windows NT-based systems and applications
and expand our penetration of the Windows NT market. We participate in
Microsoft's testing and feedback programs for new systems and applications and
intend to support all current and future Windows NT technologies and standards.
We plan to continue to participate in joint marketing programs with Microsoft,
expand Microsoft's use of our products and continue to support new Microsoft
Windows NT-based applications.

Products and Technology

We develop, market and support the NetIQ AppManager Suite, a leading
applications management software solution for distributed Windows NT
environments. AppManager's automated monitoring, correction and reporting
features help information technology professionals optimize the performance and
increase the availability of their Windows NT-based systems and electronic
messaging, Internet and database applications, while reducing associated
support costs. Additionally, AppManager can monitor the status and performance
of the hardware underlying Windows NT systems. By using our AppManager
connector integration products, information technology professionals can use
AppManager with system and network management framework products to share
performance and event information. The following diagram illustrates how
AppManager enables information technology professionals to comprehensively
manage applications, underlying operating systems and hardware platforms that
businesses rely on to perform critical business functions in their Windows NT
environment from a central console.

NetIQ's Comprehensive Approach to Managing
Windows NT Environments

[Graphic depiction of the interface between the company's product, the
applications, the Windows NT operating system and hardware platforms.]

37
<PAGE>

Our AppManager product suite is a set of fully integrated product modules
known as "AppManagers." The following table summarizes the functionality of our
Windows NT-based AppManager products by server or product category.

<TABLE>
<CAPTION>
Server or NetIQ Products
Product Category (Year Introduced) Representative Functionality
- --------------------------------------------------------------------------------------
<C> <C> <S>
Windows NT AppManager for . Identifies CPU bottlenecks
Operating and
Systems . Microsoft Windows NT (1996) terminates runaway
processes
. Microsoft Cluster Server (1997) . Checks if key services are
down and
. Windows NT Server, Terminal Server auto-starts
Edition
(1998) . Tracks disk space
utilization
. Citrix WinFrame (1998) . Determines if running low
on DHCP
. Microsoft Windows Load Balance leases
Service (1999)
. Resets terminal server
session
. Reboots downed Windows NT
server
- --------------------------------------------------------------------------------------
Messaging Servers AppManager for . Monitors e-mail
connectivity and
. Microsoft Exchange Server (1996) response time
. Lotus Domino/Notes (1997) . Reports on e-mail traffic
flow
. Microsoft Message Queue Server . Identifies top senders and
(1997) receivers of e-mail
. Monitors e-mail space
usage
- --------------------------------------------------------------------------------------
Internet/Web AppManager for . Monitors connection to
Servers URLs
. Microsoft Internet Information . Examines contents of URLs
Server (1996) and checks
. Microsoft Commercial Internet for changes
System News Server
(1997) . Monitors the availability
of a web server
. Microsoft Proxy Server (1998) . Displays HTTP connections
. Microsoft Site Server (1999) . Detects unauthorized login
attempts
. Microsoft Site Server, Commerce . Detects if an Internet
Edition (1999) port or IP address can be
accessed
- --------------------------------------------------------------------------------------
Database Servers AppManager for . Identifies SQL statements
utilizing
. Microsoft SQL Server (1996) most amount of system
resources
. Microsoft Transaction Server . Monitors database space
(1997) usage
. Oracle (1998) . Tracks locking conditions
. Truncates transaction log
if running out of space
- --------------------------------------------------------------------------------------
Hardware AppManager for . Monitors computer
Management temperature
Tools . Compaq Insight Manager (1997) . Detects if UPS battery is
running low
. HP TopTools for Servers (1998) . Reports error status of
network interface
. Dell OpenManage (1998) cards
. NEC ESMPro* (1998) . Monitors system voltage
. IBM NetFinity (1999) . Tracks asset information
such as serial numbers
- --------------------------------------------------------------------------------------
Third-Party Tools AppManager for . Detects if software
distribution has
. Microsoft Systems Management failed
Server (1996)
. Microsoft SNA Server (1999) . Checks status of tool's
services and
. CA ARCServe (1999) auto-restart
. Seagate Backup Exec (1999) . Monitors SNA connections
. Determines if backup job
has failed
- --------------------------------------------------------------------------------------
"Connector" to AppManager Connector for . Receives events from
Management AppManager
Frameworks . Tivoli Enterprise (1998) . Invokes AppManager console
from
. CA Unicenter TNG (1998) within framework
. HP OpenView Network Node Manager . Distributes AppManager
(1998) software
- --------------------------------------------------------------------------------------
Console Products AppManager for . Views and acknowledges
events
. Operator Console (1996) . Generates service level
agreement
. Developer Console (1996) reports
. Web Access Console (1997) . Edits pre-defined
Knowledge Scripts
. Displays performance
metrics
</TABLE>
- --------------------------------------------------------------------------------
* Available only with the Japanese edition of the NetIQ AppManager Suite.

We also provide a localized version of our AppManager products for the
Japanese market.

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<PAGE>

Native Windows NT Implementation

AppManager uses standard Microsoft technology such as Visual Basic for
Applications scripting, the Microsoft COM object model and SQL Server. As a
result, AppManager looks, feels and operates the same as Microsoft products.
Our use of widely accepted Microsoft standards also makes our AppManager
products easy to customize and implement in a customer's existing IT
environment. We intend to continue to support new Microsoft technology,
including emerging Windows 2000-based technologies such as Active Directory and
Windows Management Instrumentation, a component of Microsoft's Web-based
Enterprise Management initiative, or WBEM.

Open Architecture that Easily Scales to Accommodate Growth

AppManager's advanced architecture easily scales to accommodate growth in the
number of Windows NT servers businesses deploy in their highly complex
computing environment and includes an exception-based communication mechanism
that reports only system events and exception data which minimizes network
traffic, and intelligent management agents that can continue to monitor systems
and applications regardless of the status of the network connection. AppManager
also offers information technology professionals the flexibility to work from a
robust Web-based interface to start and stop monitoring jobs and view
performance and event data.

AppManager's architecture is comprised of the following tiers:

. AppManager Console. The console is an easy-to-use graphical user
interface program that displays systems and applications as resource
icons within a familiar Microsoft Explorer-type tree view. The console is
used to centrally define and control the execution of Knowledge Scripts,
business rules and policies. The Knowledge Scripts run as Visual Basic
for Applications scripts that collect performance data, monitor for
events and initiate corrective actions.
. Web Console. The Web console is an optional program that lets users
monitor their entire Windows NT environment from a Web browser.
. Repository Server. The repository server is a Microsoft SQL Server
database that stores performance and availability management data. The
repository server allows for custom reporting and provides over 165
standardized reports for users to choose from. These standardized reports
focus on summarizing inventory, performance and event data collected by
AppManager for both Windows NT-based systems and applications, and are
designed to help information technology personnel determine if they are
meeting their required service levels.
. Management Server. The management server is a program that manages event-
driven communication between the repository and the agent programs.
. Agent. The agent is an easy-to-use and easy-to-deploy program that
receives requests from the management server to either run or stop a
Knowledge Script. After receiving a request, the agent program
communicates back any system events and exceptional data collected by the
running Knowledge Scripts. Users can centrally "push" the AppManager
agents to remote systems for easy deployment.

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<PAGE>

The following graphic illustrates the multiple tiers of the NetIQ AppManager
architecture:

[Graphic depiction of the relationship between AppManager consoles, management
server, repository server and agents.]

40
<PAGE>

Customers

As of the date of this prospectus, we license our AppManager products to more
than 400 customers. The following is a representative list of our customers
that have purchased at least $100,000 in software licenses and services since
the beginning of fiscal 1998:

Government Utilities/Energy

Defense Intelligence Agency Exxon Computing Services
Department of Veterans Affairs Fina Oil and Chemical Company
Ministere Emploi et Solidarite Koch Industries
US Postal Inspection Service Shell Services International

Southern Company Services
Financial Services Williams Information Services

Arthur Andersen & Co. Manufacturing/Distribution
Charles Schwab & Co.

Dresdner Bank AG ALCOA
Great West Life & Annuity Insurance Boeing Shared Services
JC Bradford & Co. General Electric
NationsBank/Bank of America Georgia-Pacific

Northern Trust
Safeco Insurance Companies Pharmaceuticals/Health Care

Standard & Poor's
Unum Corp. Baptist Memorial Hospital
Wells Fargo Bank N.A. Cerner Corporation
Glaxo Wellcome

High Technology Mayo Foundation for Medical
Education and Research

Dell Computer Merck & Co.
Interliant Pfizer

Microsoft Corporation
Microstrategy Retail/Consumer Packaged Goods

NCR Corporation
Network Associates London Drugs
PeopleSoft Nabisco Foods
Siemens Business Services Nordstrom Information Systems
Office Depot

Pepsi-Cola
Philip Morris Europe

Telecommunications

American Telephone & Telegraph
Co.
BellSouth Cellular Corp.
Belgacom

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<PAGE>

Representative Customer Applications

<TABLE>
<S> <C>
Customer Application
- -----------------------------------------------------------------------------
Office Depot As the world's largest supplier of office products with
global operations that include over 739 stores across
North America, France and Japan, Office Depot relies on
its Microsoft Windows NT-based e-commerce site to serve
thousands of customers. As a key element of the
company's information technology strategy, Office Depot
depends on the NetIQ AppManager Suite to ensure the
performance and availability of over 130 distributed
Windows NT and Exchange servers that run the company's
public e-commerce site, Business Services Division and
support center. AppManager is also instrumental in
maintaining the health of the company's Compaq hardware
deployment via integration with Compaq Insight Manager.
- -----------------------------------------------------------------------------

Southern Company The largest producer of electricity in the United
States, Atlanta-based Southern Company supplies
electricity to 11 million customers in the southeastern
United States, while its international subsidiaries and
affiliates serve South America, Europe, and Asia.
Southern Company depends on an information
infrastructure that includes more than 500 Windows NT
servers running numerous critical applications. Having
rejected systems management frameworks as not providing
enough depth or breadth within the Windows NT
environment, Southern Company decided to look for an
optimized management solution. Southern Company's
requirements included that the management tool must be
able to be deployed in an easy and quick manner, and it
must provide the deep level of monitoring required by
Southern Company to ensure the availability and
reliability of the Windows NT infrastructure. Southern
Company selected AppManager because it best met those
requirements, and subsequently rolled out AppManager to
their entire Windows NT server deployment in less than
three months.
- -----------------------------------------------------------------------------

Countrywide Enterprise server management tools are crucial assets to
Home Loans the information technology support staff of Countrywide
Home Loans, the nation's largest independent residential
mortgage lender and servicer. Tools such as NetIQ
AppManager Suite enable Countrywide's network
administrators to avoid potentially critical system or
application problems, as well as the ability to
accurately diagnose failures if they do occur.
AppManager also enhances and extends Countrywide's
monitoring capabilities, giving staff quick access to
systems information on virtually any of its 400
Microsoft BackOffice-based production servers.

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

Charles Schwab Charles Schwab & Co., Inc., a securities brokerage firm,
uses AppManager to monitor its Windows NT-based server
environment at its more than 290 branch offices. Schwab
initially licensed AppManager to monitor its messaging
environment and later expanded its use to a Windows-NT
based server environment.

</TABLE>

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<PAGE>

Sales, Marketing and Distribution

Field and Inside Sales

We market our software and services through our field sales organization
located at our headquarters facility in Santa Clara, California, our domestic
field offices in Chicago, Dallas, Denver, New York and Washington, D.C., and
our international field offices in London, Munich, Sydney and Tokyo. Each of
our field sales offices includes a territory manager and one or more systems
engineers. The territory manager and system engineer concentrate on Fortune
1000-sized accounts that have at least 100 Windows NT servers. Channel sales
representatives focus on managing sales activities of our regional channel
partners and branch sales offices of our national reseller partners. Typically,
our sales process will include an initial sales presentation in person or over
the phone, a product demonstration, a product evaluation period, a closing
meeting and a purchase process. Generally the sales process includes licensing
our products to potential customers on a trial basis. Our sales process
typically takes 90 to 180 days, but this process can be longer for large,
enterprise-wide sales.

Our field sales organization is complemented by an inside sales organization
with offices at our Santa Clara, California headquarters and in our London and
Sydney field offices. Our inside sales organization typically handles orders
from customers who have fewer than 100 Windows NT servers that are not
processed or sold through the channel, or at times in concert with our channel
partners. Our inside sales personnel also handle sales lead qualification, help
recruit regional channel partners and distribute leads to the field sales
organization or channel partners.

Value Added Resellers, System Integrators, Distributors and Original
Equipment Manufacturers

We have implemented a channel partner program, our NetIQ Partner Network,
that provides training, certification, technical support, priority
communications regarding upcoming activities and products and joint sales and
marketing activities. In North America, Tech Data is the primary distributor of
our product and our sole U.S. distributor as of the date of this prospectus,
and, as of March 31, 1999, we had over 50 third party channel partners who
purchase our products through Tech Data. We sell our products to Tech Data
based upon previously-negotiated prices. Tech Data, in turn, resells our
products to their resellers at previously-negotiated prices. Our agreement with
Tech Data is for successive one-year terms that expire each June, but is
subject to automatic one-year renewals unless either party provides a
termination notice prior to the renewal date. Either party to the distribution
agreement may terminate the contract upon 30 days written notice to the other
party. We have also established a network of value added resellers and system
integrators in Europe, Latin America and the Asia-Pacific region who perform
marketing, sales and technical support functions in their country or region.
Each value added reseller may distribute our products directly to the customer
and/or through other resellers. We had 25 channel partners outside of North
America as of March 31, 1999. In addition, we have worked with NEC, Fujitsu and
Hitachi to develop branded Japanese versions of AppManager that each of these
original equipment manufacturers markets, sells and supports.

Marketing

We have a number of marketing programs designed to inform customers about the
capabilities and benefits of our AppManager products. Our marketing efforts
include participation in industry trade shows, technical conferences and
technology seminars, preparation of competitive analyses, sales training,
publication of technical and educational articles in industry journals,
advertising, public relations, and analyst and press tours.

Relationships with Developers of Windows NT-Based Systems and Applications

We have relationships with developers of Windows NT-based systems and
applications including Citrix, Compaq, Computer Associates, Dell Computer,
Hewlett-Packard, IBM, including both its Lotus and Tivoli subsidiaries,
Microsoft and Oracle. As part of these relationships, we often develop joint
marketing programs with these software and hardware vendors. Our relationship
with Microsoft is an example of this type of

43
<PAGE>

product-based relationship. Microsoft is one of our largest customers, and
sales of software licenses to Microsoft represented 2% of our software license
revenue in both fiscal 1998 and the nine months ended March 31, 1999.
Microsoft's information technology group selected AppManager to monitor the
performance and availability of its worldwide Windows NT environment, as well
as to centrally monitor its Windows NT-based applications server
infrastructure. Microsoft also currently distributes our AppManager for WBEM
Agent on its current version of Windows 2000 operating system software.
Recently, Microsoft has permitted one of our engineers to work with its Windows
NT development group at its Redmond, Washington headquarters. Microsoft also
contracts for one of our engineers to provide support for Microsoft's use of
our products. Another example of our product-based relationships is our
relationship with Compaq, whose service organization is a worldwide reseller of
AppManager.

International Sales

International sales did not account for any of our revenue in fiscal 1997,
but represented 10% of total revenue in fiscal 1998 and 22% of total revenue in
the nine months ended March 31, 1999. We anticipate that as we expand our
international sales efforts, the percentage of revenue derived from
international sources will continue to increase. Currently, a majority of our
international business is conducted in U.S. dollars. However, as we expand our
international operations, we expect that our international business will
increasingly be conducted in foreign currencies. Fluctuations in the value of
foreign currencies relative to the U.S. dollar have caused, and we expect such
fluctuation to increasingly cause, currency transaction gains and losses. We
cannot predict the effect of exchange rate fluctuations upon future quarterly
and annual operating results. We may experience currency losses in the future.
To date, we have not adopted a hedging program to protect us from risks
associated with foreign currency fluctuations.

Customer Support

Our technical support organization provides ongoing technical support for our
customers and for prospective customers during the period in which a
prospective customer evaluates our AppManager. We offer technical support
services 24 hours a day, seven days a week via our Internet site, telephone, e-
mail, a support Web site and fax. Customers are notified about the availability
of regular maintenance and enhancement releases via Internet-based e-mail.
Initial product license fees include one year of product software maintenance
and support. Thereafter, customers are entitled to receive software updates,
maintenance releases and technical support for an annual maintenance fee.

We also offer training courses for the implementation and administration of
our products. Product training is provided on a periodic basis at our
headquarters in Santa Clara, California, at the offices of members of our NetIQ
Partner Network and also at customer sites throughout the United States and
Europe.

Our professional services group provides product training, consulting and
implementation services for a fee in order to assist customers in maximizing
the benefits of our products. A significant focus of our professional services
group is also to train and support partners who are members of the NetIQ
Network Partner channel program in how to provide AppManager-related services
and support to customers.

Research and Development

Our research and development organization is responsible for the design,
development and release of our products. The group is organized into
development, quality assurance, product management, documentation and
localization disciplines. Members from each discipline form separate product
teams that work closely with sales, marketing and customer support to better
understand market needs and user requirements. Additionally, we have a well
developed information feedback loop with our customers to respond to and
address their changing system and application management requirements. When
appropriate, we also utilize third parties to expand the capacity and technical
expertise of our internal research and development team. On occasion, we have
licensed third-party technology which we believe shortens time to market
without compromising competitive position or product quality.

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<PAGE>

We have made substantial investments in research and development. Our
research and development expenses were $0.7 million, $1.0 million, $2.2 million
and $2.7 million in fiscal 1996, 1997 and 1998 and the nine months ended March
31, 1999, respectively. The dollar increase in fiscal 1997 and fiscal 1998 was
due primarily to increased staffing and the purchasing of additional hardware
and software for development and testing purposes. For a further discussion of
our research and development programs, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 21
of this prospectus and "Risk Factors--If we do not respond adequately to our
industry's evolving technology standards . . ." on page 11 of this prospectus.

Competition

The market for applications management software for optimizing the
performance and availability of Windows NT-based systems and applications is
new, rapidly evolving and highly competitive, and we expect competition in this
market to persist and intensify. New products for this market are frequently
introduced and existing products are continually enhanced. We may not be able
to compete successfully against current and/or future competitors and such
inability would materially adversely affect our business, future quarterly and
annual operating results and financial condition. See "Risk Factors--New
product introductions and pricing strategies by our existing competitors . . ."
beginning on page 6 of this prospectus, regarding risks associated with current
competitive pressures.

Existing Competition. We currently face competition from a number of sources,
including:

. Providers of network and systems management framework products such as
IBM, Computer Associates and Hewlett-Packard
. Providers of performance and availability management solutions such as
BMC Software
. Customers' internal information technology departments that develop or
integrate system and application monitoring tools for their particular
needs

Future Competition. We may face competition in the future from established
companies who have not previously entered the market for performance and
availability management software for Windows NT-based systems and applications
as well as from emerging companies. Barriers to entry in the software market
are relatively low. Established companies may not only develop their own
Windows NT-based system and application management solutions, but they may also
acquire or establish cooperative relationships with our current competitors,
including cooperative relationships between large, established companies and
smaller private companies. These larger companies may be able to acquire the
technology and expertise of smaller companies to penetrate our market quickly.
It is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share.

To date, Microsoft has not competed against us in the market for applications
management software for optimizing the performance and availability of Windows
NT-based systems and applications. However, Microsoft may enter this market in
the future, and this could materially adversely affect our business, future
annual and quarterly results of operations and financial condition. As part of
its competitive strategy, Microsoft could bundle performance and availability
management software with its Windows NT operating system software and this
could discourage potential customers from purchasing our products. Even if the
functionality provided as standard features by future Microsoft operating
system software were more limited than that of our AppManager products, a
significant number of customers or potential customers might elect to accept
more limited functionality in lieu of purchasing additional software. Moreover,
competitive pressures resulting from this type of bundling could lead to price
reductions for our products which would reduce our margins and could materially
adversely affect our business, quarterly and annual operating results and
financial condition.

In addition to Microsoft, other potential competitors may bundle their
products or incorporate applications management software for optimizing the
performance and availability of Windows NT-based systems and applications into
existing products including for promotional purposes. In addition, our ability
to sell our

45
<PAGE>

products will depend, in part, on the compatibility of our products with other
third party products. These third party software developers may change their
products so that they will no longer be compatible with our products. If our
competitors were to bundle their products in this manner or make their products
non-compatible with ours, this could materially adversely affect our ability to
sell our products and could lead to price reductions for our products which
could reduce our profit margins.

Intellectual Property

Our success is heavily dependent upon proprietary technology. We rely
primarily on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. These laws and procedures provide only limited protection.
We have applied for three patents relating to our engineering work. Two of
these patents have been issued or approved for issuance. The third patent
application is pending.

We license technology that helps AppManager Suite run our applications
management modules from Summit Software on a non-exclusive, worldwide basis.
Our AppManager product modules for Windows NT, Windows NT Workstation and Super
Console incorporate to Summit Software technology. Under the terms of our
license agreement, we pay limited royalties to Summit. We license this
technology on a year-to-year basis which is automatically renewed each August
and, in the event our license agreement for this technology is terminated, we
may continue to sell our AppManager Suite with the Summit technology for a
period of 24 months following the termination of the licensing agreement. Our
license is terminable upon 60 days notice in the event a default under the
licensing agreement occurs, including our failure to pay royalty fees on a
timely basis or any other material breach by us of the license agreement.

Employees

As of March 31, 1999, we had 111 employees, 35 of whom were engaged in
research and development, 38 in sales and marketing, 26 in customer support and
12 in finance and administration. None of our employees is represented by a
collective bargaining agreement. We have not experienced any work stoppages and
consider our relations with our employees to be good. For a discussion of our
need to attract and retain additional qualified personnel, see "Risk Factors--
We will need to recruit and retain additional qualified personnel..." on page 9
of this prospectus.

Facilities

Our principal administrative, sales, marketing, customer support and research
and development facility is located at our headquarters facility in Santa
Clara, California. We currently occupy approximately 23,000 square feet of
office space in the Santa Clara facility under the terms of a lease expiring in
July 2003. Our current facility will not be adequate to meet our needs for the
next 12 months and we are currently evaluating additional space in the local
area. We believe that suitable additional facilities will be available as
needed on commercially reasonable terms.

We also lease space for sales and marketing offices in Denver, New York City,
Dallas, and Washington, D.C. and have international field offices in Sydney,
London, Munich, and Tokyo.

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<PAGE>

MANAGEMENT

The following table sets forth information with respect to our executive
officers and directors as of the date of this prospectus.

Executive Officers And Directors

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Ching-Fa Hwang................... 50 President, Chief Executive Officer and
Director
James A. Barth................... 56 Vice President, Finance, Chief Financial
Officer and Secretary
Her-Daw Che...................... 50 Vice President, Engineering and Director
Thomas R. Kemp................... 33 Vice President, Marketing
Stephen M. Kendall............... 43 Vice President, Asia Pacific
Glenn S. Winokur................. 40 Vice President, Sales
Kuo-Wei ("Herbert") Chang(1)(2).. 37 Director
Louis C. Cole(2)................. 55 Director
Alan W. Kaufman(1)(2)............ 61 Director
Ying-Hon Wong.................... 41 Director
</TABLE>
- ---------------------
(1) Member of Audit Committee

(2) Member of Compensation Committee

Ching-Fa Hwang co-founded NetIQ in June 1995 and has served as our President
and Chief Executive Officer and as a director since our inception. From June
1995 to March 1999, Mr. Hwang also served as our Chief Financial Officer. From
September 1994 to June 1995, Mr. Hwang served as the Vice President of Research
at Compuware, a developer of information systems software. From August 1993 to
September 1994, Mr. Hwang served as the Vice President of Technical Services
and General Manager at the EcoSystems Business Group of Compuware. In May 1991,
Mr. Hwang co-founded EcoSystems Software, a client/server management software
provider, and served as its Vice President of Engineering from its inception
until its sale to Compuware in August 1993. Mr. Hwang holds a B.S. in
electrical engineering from National Taiwan University and a M.S. in computer
science from the University of Utah.

James A. Barth has served as our Vice President, Finance, Chief Financial
Officer and Secretary since March 1999. From November 1997 until March 1999,
Mr. Barth served as the Vice President, Chief Financial Officer and Secretary
of Interlink Computer Sciences, a developer of enterprise networking software
designed for the IBM mainframe platform. From October 1994 to August 1997, Mr.
Barth served as Executive Vice President, Chief Financial Officer and Secretary
at MagiNet, a provider of interactive entertainment and information systems for
hotels. From March 1994 to October 1994, he served as Vice President and Chief
Financial Officer at ACC Microelectronics, a semiconductor company. From 1982
to March 1994, Mr. Barth served as Vice President, Chief Financial Officer and
Secretary at Rational Software, a developer of object-oriented software
engineering tools. Mr. Barth holds a B.S. in business administration from the
University of California at Los Angeles and is a certified public accountant.

Her-Daw Che co-founded NetIQ and has served as our Vice President,
Engineering and as a director since November 1995. From September 1993 to July
1995, Mr. Che served as the Director of Engineering of the EcoSystems Business
Group at Compuware. Mr. Che co-founded EcoSystems and served as its Director of
Engineering from its inception until its sale to Compuware. Mr. Che holds a
B.S. in electrical engineering from National Taiwan University and an M.S. in
computer science and a Ph.D. in computer science from the University of
Pennsylvania.

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<PAGE>

Thomas R. Kemp has served as our Vice President, Marketing since May 1997.
From January 1996 to April 1997, Mr. Kemp served as our Director of Products.
From April 1995 to November 1995, Mr. Kemp served as a Director of Product
Management at Compuware and from August 1993 to March 1995, he served as a
Manager of Systems Engineers at Compuware. From July 1992 to July 1993, Mr.
Kemp served as a Manager of System Engineers at EcoSystems until its sale to
Compuware. Prior to July 1992, Mr. Kemp held various consulting and marketing
positions at Oracle Corporation, a database management company. Mr. Kemp holds
a B.S. in computer science and history from the University of Michigan.

Glenn S. Winokur has served as our Vice President, Sales since May 1997. From
May 1996 to April 1997, Mr. Winokur served as our Director of Sales. From March
1994 to May 1996, Mr. Winokur served as a Regional Sales Manager at Compuware.
Mr. Winokur has a B.S. in business administration and marketing from the
University of Illinois.

Stephen M. Kendall has served as our Vice President, Asia Pacific since
September 1997. From March 1997 to August 1997, Mr. Kendall served as a Vice
President at Commerce Direct International. From December 1993 to January 1997,
Mr. Kendall served as the Vice President of Sales, Asia Pacific at Cheyenne
Software, a provider of storage management, security and communications
software products. Mr. Kendall has a B.A. in Asian studies from Cornell
University and a M.B.A. from the Institut Europeen d'Administration des
Affaires in Fontainebleau, France.

Kuo-Wei ("Herbert") Chang has been a director since May 1997. Since April
1996, Mr. Chang has been the president of InveStar Capital, Inc., a technology
venture capital management firm based in Taiwan. From July 1994 to March 1996,
Mr. Chang was a Senior Vice President at the WK Technology Fund, a technology
venture capital management firm based in Taiwan. From July 1992 to June 1994,
Mr. Chang served as the Vice President of Sales and Marketing at DynaLab, a
developer of electronic document solutions. Mr. Chang holds a B.S. in geology
from National Taiwan University and a M.B.A. from National Chiao-Tung
University in Taiwan.

Louis C. Cole has been a director since September 1998. Since June 1989, Mr.
Cole has been President, Chief Executive Officer and a director of Legato
Systems, which develops, markets and supports network storage management
software products. Since April 1995, Mr. Cole has also served as Chairman of
the Board of Legato. Mr. Cole also serves as a director of Inference, a
provider of enterprise customer relationship management software, and Rogue
Wave Software, a provider of object-oriented software parts and related tools
software. Mr. Cole holds a B.S. in mathematics and education from Pennsylvania
State University at Edinboro.

Alan W. Kaufman has been a director since August 1997. Since August 1997, Mr.
Kaufman has served as a director of QueryObject Systems, which develops and
markets proprietary business intelligence software, and he has served as
Chairman of the Board of QueryObject since March 1998. Mr. Kaufman was
President and Chief Executive Officer of QueryObject from October 1997 to
December 1998. From December 1996 to October 1997, Mr. Kaufman was an
independent consultant. From April 1985 to December 1996, Mr. Kaufman held
various positions at Cheyenne Software, including most recently as Executive
Vice President of Worldwide Sales. Mr. Kaufman is also a director of Global
Telecommunication Solutions, a provider of prepaid phone cards. Mr. Kaufman
holds a B.S. in electrical engineering from Tufts University.

Ying-Hon Wong co-founded NetIQ in June 1995 and has served as a director
since our inception. Since January 1991, Mr. Wong has been a General Partner of
Wongfratris Investment Company, a venture investment firm. Mr. Wong holds a
B.S. in electrical engineering and industrial engineering from Northwestern
University and a M.B.A. from the Wharton School of Business at the University
of Pennsylvania.

Classified Board

Our certificate of incorporation and bylaws provide for a board of directors
of six members consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of

48
<PAGE>

directors will be elected each year. To implement the classified structure,
prior to the completion of this offering, two of the nominees to the board will
be elected to one-year terms, two will be elected to two-year terms and two
will be elected to three-year terms. After this offering, directors will be
elected for three-year terms. Herbert Chang and Ying-Hon Wong have been
designated Class I directors whose terms expire at the 1999 annual meeting of
stockholders. Alan Kaufman and Her-Daw Che have been designated Class II
directors whose terms expire at the 2000 annual meeting of stockholders. Louis
Cole and Ching-Fa Hwang have been designated Class III directors whose terms
expire at the 2001 annual meeting of stockholders. See "Description of Capital
Stock--Antitakeover Effects of Some Provisions of Our Certificate of
Incorporation and Bylaws" beginning on page 62 of this prospectus for a further
description of the antitakeover provisions in our charter documents.

Executive officers are appointed by the board of directors on an annual basis
and serve until their successors have been duly elected and qualified. There
are no family relationship among any of our directors, officers or key
employees.

Audit Committee

We have established an audit committee, which consists of Mr. Chang and Mr.
Kaufman. The audit committee reviews our internal accounting procedures and
consults with and reviews the services provided by our independent auditors.

Compensation Committee Interlocks and Insider Participation

The Compensation Committee consists of Mr. Chang, Mr. Cole and Mr. Kaufman.
The Compensation Committee is responsible for determining salaries, incentives
and other forms of compensation for our directors, officers and other employees
and administering various incentive compensation and benefit plans. Ching-Fa
Hwang, our President, Chief Executive Officer and a member of our board of
directors, participates in all discussions and decisions regarding salaries and
incentive compensation for all of our employees and consultants, except that he
is excluded from discussions regarding his own salary and incentive
compensation. No interlocking relationship exists between any member of our
Compensation Committee and any member of any other company's board of directors
or compensation committee.

Director Compensation

We reimburse each member of our board of directors for out-of-pocket expenses
incurred in connection with attending board meetings. No member of our board of
directors currently receives any additional cash compensation for serving as a
member of the Board.

In May 1997, we granted an option to Herbert Chang in his capacity as a
director to purchase up to 183,333 shares of common stock with an exercise
price of $0.30 per share which vests in annual installments over three years.
Because of Mr. Chang's contractual obligations with Investar Burgeon Venture
Capital, the option was issued in the name of Investar Burgeon Venture Capital
Inc. The vesting of this option terminates if Mr. Chang ceases to be a member
of the board of directors.

In August 1997, we granted an option to Alan Kaufman as a director to
purchase up to 66,666 shares of common stock at an exercise price of $0.30 per
share. This option vests in annual installments over four years.

In November 1998, we granted an option to Louis Cole as a director to
purchase up to 50,000 shares of common stock at an exercise price of $1.50 per
share. 25% of the option shares vest on the first anniversary of the grant date
and the remaining shares vest ratably on a quarterly basis over the next three
years.

In November 1998, we granted non-statutory options to purchase up to 66,666
shares of common stock to Her-Daw Che and 80,000 shares of common stock to
Ching-Fa Hwang, each with an exercise
price of $1.50 per share. 37.5% of the shares subject to these options were
vested at the time of grant, and 6.25% of the remaining shares subject to these
options vest on a quarterly basis through April 2001.

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<PAGE>

In November 1998, we granted an option to Ying-Hon Wong in his capacity as a
director to purchase up to 53,333 shares of common stock with an exercise price
of $1.50 per share. Because of Mr. Wong's contractual obligations with
Wongfratris Investment Company, the option was issued in the name of
Wongfratris Investment Company. In January 1999 this option was exercised in
full subject to a right of repurchase in favor of NetIQ with respect to 63.5%
of the shares acquired if Mr. Wong ceases to be a member of the board of
directors. This repurchase right lapses as to 6.25% of the shares purchased
each quarter through April 2001.

See "Certain Transactions" on page 57 of this prospectus for additional
information about a consulting arrangement we have with one of our directors.

Our stock option plan includes an automatic nondiscretionary grant mechanism
that provides that options will be granted to non-employee directors who on the
date of grant do not beneficially hold 1% or more of our total voting power.
Our stock option plan specifically provides for an initial automatic grant of
an option to purchase 8,333 shares of common stock to a non-employee director
who first becomes a director after our initial public offering. After our
initial public offering, each non-employee director who has served on the board
for at least six months will be granted an option to purchase 8,333 shares of
common stock on that date of the annual meeting of our stockholders. However,
if the first annual meeting following our initial public offering falls within
six months of the effective date of the initial public offering no grants will
be made until the following annual meeting. Each option granted to a non-
employee director under this program will have a term of five years and the
shares subject to these options shall be fully vested on the date of grant. The
exercise price of these options will be 100% of the fair market value per share
of common stock on the date of grant. See "Incentive Stock Plans--1995 Stock
Plan" on page 51 of this prospectus for more detailed information regarding our
stock option plan.

Executive Compensation

The table below sets forth information concerning the compensation earned for
services rendered to NetIQ in all capacities during the fiscal year ended June
30, 1999 by our President and Chief Executive Officer and our next most highly
compensated executive officers whose salary, bonus and commission for fiscal
1999 exceeded $100,000. Other than the salary, bonus and commission described
in the table below, we did not pay any named executive officer any fringe
benefits, perquisites or other compensation in excess of 10% of such executive
officer's salary and bonus during fiscal 1999. Bonus and commission figures for
fiscal 1999 include bonuses and commissions earned and paid in fiscal 1999 as
well as bonuses and commissions earned in fiscal 1999 but paid in fiscal 2000.
Commissions are cash-based incentive compensation for our sales executives that
are earned as licenses are sold.

Summary Compensation Table

<TABLE>
<CAPTION>
Annual Other Annual Long Term All Other
Compensation Compensation Compensation Compensation
-------------- ------------ ------------ ------------------
Securities
Underlying Life
Name and Principal Options Insurance Medical
Position Salary Bonus Commissions (#'s) Premiums Expenses
- ------------------ -------- ----- ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Ching-Fa Hwang
President and Chief
Executive Officer..... $ 93,749 $ -- $ -- 80,000 $108 $1,683
Thomas R. Kemp
Vice President,
Marketing............. 113,699 -- -- 33,333 108 2,333
Stephen M. Kendall
Vice President, Asia
Pacific............... 100,328 -- 19,437 20,000 108 6,714
Glenn Winokur
Vice President, Sales.. 90,287 -- 133,450 33,333 108 2,536
</TABLE>

50
<PAGE>

Option Grants During Fiscal Year 1999

The following table sets forth information with respect to stock options
granted to each of the named executive officers during fiscal 1999, including
the potential realizable value giving effect to the initial public offering
price of $13.00 per share over the 10 year term of the options based on assumed
rates of stock appreciation of 5% and 10%, compounded annually and subtracting
from that result the total option exercise price. These assumed rates of
appreciation comply with the rules of the SEC and do not represent our estimate
of future stock price. Actual gains, if any, on stock option exercises will be
dependent on the future performance of our common stock. In fiscal 1999, we
granted options to acquire up to an aggregate of 1,299,216 shares to employees
and directors, all under our stock option plan and all at an exercise price
equal to not less than the fair market value of our common stock on the date of
grant as determined in good faith by the board of directors. Optionees may pay
the exercise price by cash, check, promissory note, delivery of already-owned
shares of our common stock which have been owned by the optionee for more than
six months or the date of surrender or under a cashless exercise procedure, to
the extent authorized by the board. Options under the stock option plan
generally vest over four years with 25% of the shares subject to option vesting
on the first anniversary of the grant date, and the remaining option shares
vesting ratably quarterly thereafter.
<TABLE>
<CAPTION>
Individual Grants Potential
------------------------------------------- Realizable Value
Percent of at Assumed
Total Annual Rates of
Number of Options Stock Price
Securities Granted to Appreciations for
Underlying Employees Exercise Options Terms
Options in Price Expiration ---------------------
Name Granted Fiscal 1999 Per Share Date 5% 10%
- ---- ---------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ching-Fa Hwang.......... 80,000 6.16% $1.50 05/18/02 $1,574,050 $2,577,492
Thomas R. Kemp.......... 33,333 2.57% 11.25 04/30/09 330,851 748,948
Stephen M. Kendall...... 20,000 1.54% 11.25 04/30/09 198,513 449,373
Glenn Winokur........... 33,333 2.57% 11.25 04/30/09 330,851 748,948
</TABLE>

Aggregate Option Exercises During the Last Fiscal Year and Fiscal Year-End
Option Values

The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during fiscal 1999, and the number of
shares of common stock subject to exercisable stock options held as of June 30,
1999, by the named executive officers. The "Value Realized" and the "Value of
Unexercised In-the-Money Options at June 30, 1999" is based upon a value of
$13.00 per share, the initial public offering price, minus the per share
exercise price, multiplied by the number of shares underlying the option.

<TABLE>
<CAPTION>
Number of Shares Number of Securities Value of Unexercised
Acquired on Underlying Unexercised In-the-Money Options at
Exercise Options at June 30, 1999 June 30, 1999
------------------- ------------------------- -------------------------
Value
Date Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ching-Fa Hwang.......... -- -- 40,000 40,000 $460,000 $460,000
Thomas R. Kemp.......... 67,493 $ 872,360 1,670 94,168 21,210 841,338
Stephen M. Kendall...... 39,790 505,333 -- 76,876 -- 757,325
Glenn Winokur........... 90,208 1,167,292 22,290 74,167 287,433 583,725
</TABLE>

Incentive Stock Plans

1995 Stock Plan

The board of directors adopted our stock option plan in November 1995 and our
stockholders approved the stock option plan in April 1996. In connection with
this offering, the board of directors approved the amendment and restatement of
stock option plan in May 1999 and we anticipate that our stockholders will
approve the amendment and restatement prior to the completion of this offering.
The stock option plan provides for the grant to employees of incentive stock
options within the meaning of Section 422 of the United States tax code, and
for the grant to employees, directors and consultants of nonstatutory stock
options and stock purchase rights.

51
<PAGE>

Number of Shares of Common Stock Available under the Stock Option Plan

As of March 31, 1999, a total of 3,966,666 shares of common stock were
authorized for issuance under the stock option plan, of which options to
acquire 2,114,739 shares were issued and outstanding as of that date. As part
of the May 1999 amendment and restatement of the stock option plan, the board
of directors approved an increase of 1,366,666 shares reserved for issuance
under the stock option plan to a total of 5,333,332. The stock option plan
provides for annual increases in the number of shares available for issuance
thereunder, on the first day of each new fiscal year, effective beginning with
July 1, 2000, equal to the lesser of 4% of the outstanding shares of common
stock on the first day of the fiscal year, 1,333,333 shares or an amount as the
board may determine.

Administration of the Stock Option Plan

The stock plan administrator, which is the board of directors or a committee
of the board, administers the stock option plan. In the case of options
intended to qualify as "performance-based compensation" within the meaning of
the United States tax code, the committee will consist of two or more "outside
directors" within the meaning of the United States tax code. The administrator
has the power to determine the terms of the options or stock purchase rights
granted, including the exercise price, the number of shares subject to each
option or stock purchase rights, the exercisability of the options and the form
of consideration payable upon exercise.

Options

The administrator determines the exercise price of nonstatutory stock options
granted under the stock option plan, but with respect to nonstatutory stock
options intended to qualify as "performance-based compensation" within the
meaning of the United States tax code, the exercise price must at least be
equal to the fair market value of the common stock on the date of grant. The
exercise price of all incentive stock options granted under the stock option
plan must be at least equal to the fair market value of the common stock on the
date of grant. For any participant who owns stock possessing more than 10% of
the voting power of all classes of our outstanding capital stock, the exercise
price of any incentive stock option granted must equal at least 110% of the
fair market value on the grant date and the term of such incentive stock option
must not exceed five years. The term of all other options granted under the
stock option plan may not exceed 10 years.

An optionee generally must exercise an option granted under the stock option
plan at the time set forth in the optionee's option agreement after the end of
optionee's status as an employee, director or consultant of NetIQ, or within 12
months after the optionee's termination by death or disability, but in no event
later than the expiration of the option's term.

Stock Purchase Rights

The administrator determines the exercise price of stock purchase rights
granted under the stock option plan. In the case of stock purchase rights,
unless the administrator determines otherwise, the restricted stock purchase
agreement entered into in connection with the exercise of the stock purchase
rights contains a a repurchase option that we may exercise upon the voluntary
or involuntary termination of the purchaser's service with us for any reason,
including death or disability. The purchase price for shares we repurchase
under restricted stock purchase agreements will be the original price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to NetIQ. The repurchase option lapses at a rate that the
administrator determines.

Outside Director Options

The stock option plan also provides for an initial automatic grant of an
option to purchase 8,333 shares of common stock to a director who first becomes
a non-employee director after our initial public offering, and who does not
beneficially hold 1% or more of the total voting power of our voting securities
on the date of

52
<PAGE>

grant. After our initial public offering, each non-employee director who has
served on the board for at least the six previous months will be granted an
option to purchase 8,333 shares of common stock on the date of the annual
meeting of our stockholders. However, if the first annual meeting following our
initial public offering falls within six months of the effective date of the
initial public offering no grants will be made until the following annual
meeting. Each option granted to a non-employee director under this program will
have a term of five years and the shares purchasable under these options are
fully vested on the date of grant. The exercise price of these options will be
100% of the fair market value per share of common stock on the date of grant.

Transferability of Options and Stock Purchase Rights

An optionee generally may not transfer options and stock purchase rights
granted under the stock option plan and only an optionee may exercise an option
and stock purchase rights during his or her lifetime.

Adjustments upon Merger or Asset Sale

The stock option plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute each option or stock purchase rights. If
the outstanding options or stock purchase rights are not assumed or
substituted, the administrator will provide notice to the optionee that he or
she has the right to exercise the option or stock purchase rights as to all of
the shares subject to the option or stock purchase rights, including shares
which would not otherwise be exercisable, for a period of 15 days from the date
of the notice. The option or stock purchase rights will terminate upon the
expiration of the 15-day period. If an optionee's employment with the successor
corporation is terminated other than for cause or if a director's service with
the successor corporation is terminated other than for voluntary resignation,
which will not be considered voluntary if requested by the acquiring company,
within twelve months after a change of control, the optionee will fully vest in
the right to exercise all of the shares subject to the option or stock purchase
rights, including shares which would not otherwise be exercisable.

Amendment and Termination of the Stock Option Plan

Unless terminated sooner, the stock option plan will terminate automatically
in 2005. In addition, the administrator has the authority to amend, suspend or
terminate the stock option plan, provided that no such action may affect any
share of common stock previously issued and sold or any option previously
granted under the stock option plan.

1999 Employee Stock Purchase Plan

The board of directors adopted our stock purchase plan in May 1999 and we
anticipate our stockholders will approve the stock purchase plan prior to
completion of this offering.

Number of Shares of Common Stock Available under the Stock Purchase Plan

A total of 500,000 shares of common stock has been reserved for issuance
under the stock purchase plan. In addition, the stock purchase plan provides
for annual increases in the number of shares available for issuance under the
stock purchase plan on the first day of each fiscal year, beginning on July 1,
2000, equal to the lesser of 2% of the outstanding shares of common stock on
the first day of the fiscal year, 666,666 shares or an amount as the board may
determine.

Administration of the Stock Purchase Plan

The board of directors or a committee appointed by the board administers the
stock purchase plan. The board or its committee has full and exclusive
authority to interpret the terms of the stock purchase plan and determine
eligibility.

53
<PAGE>

Eligibility to Participate

Employees are eligible to participate if they are customarily employed by
NetIQ or any participating subsidiary for at least 20 hours per week and more
than five months in any calendar year. However, an employee may not be granted
an option to purchase stock under the stock purchase plan if such an employee:

. immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock, or

. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.

Offering Periods and Contributions

The stock purchase plan, which is intended to qualify under Section 423 of
the United States tax code, contains consecutive, overlapping 24 month offering
periods. Each offering period includes four six-month purchase periods. The
offering periods generally start on the first trading day on or after May 1 and
November 1 of each year, except for the first such offering period which will
commence on the first trading day on or after the effective date of this
offering and will end on the last trading day on or before October 30, 2001.

The stock purchase plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single purchase
period is 3,333 shares.

Purchase of Shares

Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The price of stock
purchased under the stock purchase plan is 85% of the lower of the fair market
value of the common stock at the beginning of the offering period or end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, participants will withdraw from the current offering period following
the exercise and will automatically re-enroll in a new offering period.
Participants may end their participation at any time during an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with NetIQ.

Transferability of Rights

A participant may not transfer rights granted under the stock purchase plan
other than by will, the laws of descent and distribution or as otherwise
provided under the stock purchase plan.

Adjustments upon Merger or Asset Sale

The stock purchase plan provides that, in the event of our merger with or
into another corporation or a sale of substantially all of our assets, a
successor corporation may assume or substitute for each outstanding option an
option of its own. If the successor corporation refuses to assume or substitute
its own options for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.

Amendment and Termination of the Stock Purchase Plan

The stock purchase plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the stock purchase plan at
any time, except that, subject to exceptions described in the stock purchase
plan, no such action may adversely affect any outstanding rights to purchase
stock under the stock purchase plan.

54
<PAGE>

401(k) Plan

We have adopted a tax-qualified employee savings and retirement plan, the
401(k) plan, for all eligible employees. Eligible employees may elect to defer
a percentage of their eligible compensation to the 401(k) plan, subject to the
statutorily prescribed annual limit. We may make matching contributions on
behalf of all participants in the 401(k) plan in an amount determined by our
board of directors. We may also make additional discretionary profit-sharing
contributions in such amounts as determined by the board of directors, subject
to statutory limitations. Matching and profit-sharing contributions, if any,
are subject to a vesting schedule; all other contributions are at all times
fully vested. The 401(k) plan, and the accompanying trust, is intended to
qualify under Sections 401(a) and 501(a) of the United States tax code so that
contributions by employees or by NetIQ to the 401(k) plan, and income earned
(if any) on plan contributions, are not taxable to employees until distributed
from the 401(k) plan, and so that contributions by NetIQ, if any, will be
deductible by NetIQ when made. The trustee under the 401(k) plan, at the
direction of each participant, invests the assets of the 401(k) plan in any of
a number of investment options.

Change in Control Agreements

We have entered into change of control severance agreements with each of our
executive officers. The Agreements provide that in the event of the executive's
involuntary termination without cause within 12 months after a change of
control, the executive is entitled to six months of severance pay, six months
of continued coverage under group health, life and other insurance
arrangements, and full acceleration of all outstanding options granted to the
executive. For purposes of these agreements, a "change of control" occurs if

. our stockholders approve a merger or consolidation of NetIQ with any
other corporation, other than a merger or consolidation which would
result in our voting securities outstanding immediately prior thereto
continuing to represent more than 50% of the total voting power of the
surviving entity in the merger;

. our stockholders approve a plan of complete liquidation or an agreement
for the sale or disposition by us of all or substantially all of our
assets;

. any person becomes the "beneficial owner," directly or indirectly, of
our securities representing 50% or more of the total voting power
represented by our then outstanding voting securities; or

. a change in the composition of the board that results in fewer than a
majority of the directors being incumbent directors, meaning directors
who either are directors as of the date of the change of control
severance agreements, or are elected, or nominated for election, to the
board with the affirmative votes of at least a majority of those
directors whose election or nomination was not in connection with any
transaction described above or in connection with an actual or
threatened proxy contest relating to the election of directors.

See "Incentive Stock Plans--1995 Stock Plan" on page 51 of this prospectus
for a description of the change of control provisions of our stock option plan.

Limitations on Directors' Liability and Indemnification

Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following acts:

. any breach of their duty of loyalty to the corporation or its
stockholders

. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law

. unlawful payments of dividends or unlawful stock repurchases or
redemptions

. any transaction from which the director derived an improper personal
benefit

55
<PAGE>

This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.

Our certificate of incorporation and bylaws provide that we will indemnify
our directors and executive officers and other corporate agents to the fullest
extent permitted by law. We believe that indemnification under our bylaws
covers at least negligence and gross negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability arising out of his
or her actions in this capacity, regardless of whether the bylaws would permit
indemnification.

We have entered into agreements to indemnify our directors and executive
officers, in addition to the indemnification provided for in our certificate of
incorporation and bylaws. These agreements, among other things, provide for
indemnification of our directors and executive officers for many expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of NetIQ, arising out of such person's services as a director or
executive officer of ours, any subsidiary of ours or any other company or
enterprise to which the person provided services at our request. We believe
that these provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.

56
<PAGE>

CERTAIN TRANSACTIONS

September 1995 Series A Preferred Stock Financing. In September 1995, we sold
4,666,656 shares of Series A Preferred Stock at a per share purchase price of
$0.60. Purchasers of the Series A Preferred Stock included Sen-Tien Lee, who
holds more than 5% of the outstanding common stock; Wongfratris Investment
Company, which holds more than 5% of the outstanding common stock and whose
representative, Ying-Hon Wong, who is a member of the board of directors;
Direct International Limited, which holds more than 5% of the outstanding
common stock; Ching-Fa Hwang, who is our President and Chief Executive Officer
and a member of the board of directors; and Her-Daw Che, who is our Vice
President, Engineering and a member of the board of directors. The following
table summarizes purchases of Series A Preferred Stock by the these individuals
and entities:

<TABLE>
<CAPTION>
Number of
Name of Stockholder Series A Shares
------------------- ---------------
<S> <C>
Sen-Tien Lee................................................. 833,333
Direct International Limited................................. 500,000
Wongfratris Investment Company............................... 500,000
Ching-Fa Hwang (1)........................................... 333,333
Her-Daw Che (2).............................................. 166,666
</TABLE>
- ---------------------
(1) Shares held by Mr. Hwang and his wife in joint tenancy.
(2) Represents shares purchased by the Che Family Trust.

May 1997 Series B Preferred Stock Financing. In May 1997, we sold 2,733,321
shares of Series B Preferred Stock at a per share purchase price of $3.00.
Purchasers of the Series B Preferred Stock include InveStar Burgeon Venture
Capital Inc., which holds more than 5% of the outstanding common stock and
whose representative, Herbert Chang, is a member of the board of directors;
Sen-Tien Lee; Direct International Limited; Ching-Fa Hwang; Wongfratris
Investment Company; Her-Daw Che; and Thomas R. Kemp, who is our Vice President,
Marketing. The following table summarizes purchases of Series B Preferred Stock
by these individuals and entities:

<TABLE>
<CAPTION>
Number of
Name of Stockholder Series B Shares
------------------- ---------------
<S> <C>
InveStar Burgeon Venture Capital............................ 666,666
Sen-Tien Lee................................................ 166,666
Direct International Limited................................ 100,000
Ching-Fa Hwang (1).......................................... 99,998
Wongfratris Investment Company.............................. 96,666
Her-Daw Che (2)............................................. 66,666
Thomas R. Kemp.............................................. 26,666
</TABLE>
- ---------------------
(1) Includes shares purchased by Jerry Hwang and Andrew Hwang, Mr. Hwang's
children and by Mr. Hwang and his wife in joint tenancy.
(2) Represents shares purchased by the Che Family Trust, Austin Che and Joyce
Che, Mr. Che's children.

Consulting Arrangement. Ying-Hon Wong, one of our directors and a general
partner of Wongfratris Investment Company, earned $55,000, $60,000, $60,000 and
$45,000 in consulting fees in fiscal 1996, 1997, and 1998 and the nine months
ended March 31, 1999, respectively, under a consulting arrangement under which
Mr. Wong is paid $5,000 per month that is terminable at any time. Since co-
founding NetIQ, Mr. Wong has provided general business consulting services to
us on a variety of issues including financial management, marketing and sales
strategies, recruiting and employee development, fund raising, investor
relationship management and consultation regarding the defense of legal claims.

Change of Control Severance Agreement. We have entered into change of control
severance agreements with each of our executive officers. For a more detailed
description of the change of control severance agreements, see "Management--
Change in Control Agreements" on page 55 of this prospectus.

57
<PAGE>

Option Grants to Directors and Significant Stockholders. In November 1995, in
connection with his assistance in helping us obtain the Series A Preferred
Stock financing, we granted an option exercisable for 133,333 shares of common
stock to C. S. Ho, the director of Direct International Limited, with an
exercise price of $0.06 per share which vests in annual installments over four
years. In May 1999, after determining that our need for additional private
financing was low, we accelerated the vesting on this option so that Mr. Ho
could purchase all of the shares subject to this option to minimize accounting
charges associated with future vesting of this option.

We also have issued options to purchase common stock to Messrs. Chang,
Kaufman, Cole, Che, Hwang and Wong under our stock option plan. Because of
contractual obligations involving Messrs. Chang and Wong and their affiliated
investment entities, the option grant to Mr. Chang was issued in the name of
InveStar Burgeon Venture Capital Inc. and the option grant to Mr. Wong was
issued in the name of Wongfratris Investment Company. For a more detailed
description of the options granted Messrs. Chang and Wong, see "Director
Compensation" on page 49 of this prospectus.

58
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership
of our common stock as of March 31, 1999 by the following individuals or
groups:

. each person or entity who . each of our directors
beneficially owns more
than 5% of our outstanding
common stock

. all directors and executive
officers as a group

. each of the named
executive officers

Except as otherwise noted the address for each holder of more than 5% of our
common stock is c/o NetIQ Corporation, 5410 Betsy Ross Drive, Santa Clara,
California 95054. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
Percentage ownership is based on 11,624,274 shares of common stock outstanding
as of March 31, 1999 as adjusted to reflect the conversion of all outstanding
shares of preferred stock upon the closing of this offering, and 14,624,274
shares immediately following the completion of this offering. The figure for
shares outstanding after completion of this offering also includes 280,025
shares issuable in connection with the exercise of a warrant held by Compuware.
See "Capitalization" on page 18 of this prospectus and "Description of Capital
Stock" on page 61 of this prospectus for a further discussion of the Compuware
warrant. Shares of common stock subject to options that are currently
exercisable or exercisable within 60 days of March 31, 1999 are treated as
outstanding and to be beneficially owned by the person holding the options for
the purpose of computing the percentage ownership of the person and are listed
below under the "Number of Shares Underlying Options" column below, but these
options are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.

</TABLE>

59
<PAGE>

<TABLE>
<CAPTION>
Percentage of
Shares
Number Outstanding
of Shares -----------------
Number Underlying Before After
Name and Address of Shares Options Offering Offering
- ---------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C>
Current Named Executive Officers and
Directors:
Ching-Fa Hwang (4)..................... 1,899,997 40,000 16.6% 13.2%
Stephen M. Kendall..................... 31,249 -- * *
Glenn S. Winokur (5)................... 90,208 13,125 * *
Her-Daw Che (6)........................ 1,073,332 33,333 9.5% 7.6%
Ying-Hon Wong (7)...................... 1,083,332 -- 9.3% 7.4%
Thomas R. Kemp......................... 163,664 -- 1.4% 1.1%
Herbert Chang (8)...................... 666,666 122,222 6.7% 5.3%
Alan W. Kaufman........................ -- 16,666 * *
Louis C. Cole.......................... -- -- -- --
All directors and executive officers as 5,008,448
a group (10 persons).................. 225,346 44.2% 35.2%
</TABLE>
- ---------------------
* less than 1%
(1) The general partners of Wongfratris Investment Company include Mr. Wong, a
member of our board of directors, Y. Wood Wong and Y. Kuen Wong.
(2) The general partners of InveStar Burgeon Capital include Mr. Chang, a
member of our board of directors, and Kenneth Tai.
(3) Includes 133,333 shares issuable upon exercise of stock options exercisable
within 60 days of March 31, 1999 held by C.S. Ho, a Director of Direct
International Limited and one of our consultants. Mr. Ho is the sole
general partner of Direct International Limited.
(4) Includes 33,332 shares held by Mr. Hwang's children and 399,999 shares held
by Mr. Hwang and his wife in joint tenancy.
(5) Includes 90,208 held by the Glenn S. Winokur Living Trust dated July 29,
1999, of which Mr. Winokur is the trustee.
(6) Includes 13,333 shares held by Austin Che, Mr. Che's son, 13,333 shares
held by Joyce Che, Mr. Che's daughter and 206,666 shares held by the Che
Family Trust.
(7) Includes shares held by Wongfratris Company of which Mr. Wong is a general
partner. Mr. Wong disclaims beneficial ownership of the shares held by
Wongfratris Company, except to the extent of his pecuniary interest as a
general partner. Certain of these shares are subject to a repurchase option
in favor of NetIQ should Mr. Wong's membership on the board of directors
terminate. See "Management--Director Compensation" on page 49 of this
prospectus for a more detailed description of the option granted Mr. Chang.
(8) Includes shares and options held by InveStar Burgeon Venture Capital. Mr.
Chang is the president of InveStar Capital, Inc., the investment manager of
InveStar Burgeon Venture Capital, Inc. Mr. Chang disclaims beneficial
ownership of the shares held by InveStar Burgeon Venture Capital.

60
<PAGE>

DESCRIPTION OF CAPITAL STOCK

General

After this offering, we will be authorized to issue 100,000,000 shares of
common stock, $0.001 par value, and 5,000,000 shares of undesignated preferred
stock, $0.001 par value. Immediately after this offering, we estimate there
will be approximately 14,624,274 shares of common stock outstanding, 2,114,739
shares of common stock will be issuable upon exercise of outstanding options
and no shares of preferred stock will be issued and outstanding based on shares
and options outstanding as of March 31, 1999.

The figure for outstanding shares of common stock upon completion of this
offering reflects the issuance of 280,025 shares of common stock in connection
with the presumed exercise of a warrant to purchase shares of common stock
issued to Compuware as part of the settlement arrangement relating to
litigation involving Compuware. Under the terms of the warrant, the per share
exercise price of the warrant is $11.70, 90% of the per share price to the
public in this offering. The purchase price for the shares of common stock
Compuware can purchase under its warrant is payable in cash or by the
cancellation of indebtedness. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
beginning on page 29 of this prospectus for a discussion of our outstanding
indebtedness to Compuware.

Our certificate of incorporation and bylaws contain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and which may have the effect of
delaying, deferring, or preventing a future takeover or change in control of
NetIQ unless such takeover or change in control is approved by the board of
directors.

Common Stock

Holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Holders of common stock do not have
cumulative voting rights, and, therefore, holders of a majority of the shares
voting for the election of directors can elect all of the directors. If this
occurs, the holders of the remaining shares will not be able to elect any
directors.

Holders of the common stock are entitled to receive such dividends as may be
declared from time to time by the board of directors out of funds legally
available therefor, subject to the terms of any existing or future agreements
between NetIQ and our debtholders. We have never declared or paid cash
dividends on our capital stock, expect to retain future earnings, if any, for
use in the operation and expansion of its business, and do not anticipate
paying any cash dividends in the foreseeable future. In the event of
liquidation, dissolution or winding up of NetIQ, the holders of common stock
are entitled to share ratably in all assets legally available for distribution
after payment of all debts and other liabilities and subject to the prior
rights of any holders of preferred stock then outstanding. Holders of common
stock have no preemptive or other subscription or conversion rights. There are
no redemption or sinking fund provisions applicable to the common stock.

Preferred Stock

Effective upon the closing of this offering, we will be authorized to issue
5,000,000 shares of undesignated preferred stock. The board of directors has
the authority to issue the preferred stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series, without any further
vote or action by our stockholders. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of delaying, deferring or
preventing a

61
<PAGE>

change in control of NetIQ without further action by the stockholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of common stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of
common stock, including the loss of voting control to others. We have no
current plans to issue any shares of preferred stock.

Registration Rights

The holders of 7,399,977 shares of common stock are entitled to rights with
respect to registration of such shares under the Securities Act. These rights
are provided under the terms of an agreement between NetIQ and the holders of
registrable securities. Beginning six months following the completion of this
offering, holders of then outstanding registrable securities may require on up
to two occasions that we register their shares for public resale. We are
obligated to register these shares only if the outstanding registrable
securities have an anticipated public offering price of at least $5,000,000.
Also, holders of registrable securities who hold more than two percent of our
outstanding common stock on a fully diluted basis, may require on two separate
occasions in any 12 month period that shares for public resale on Form S-3 or
similar short-form registration if the value of the securities to be registered
is at least $1,000,000. Furthermore, in the event we determine to register any
of our securities under the Securities Act, either of our own account or for
the account of other security holders exercising their registration rights, the
holders of registrable securities are entitled to include their shares of
common stock in the registration. The registration rights are subject to
conditions and limitations, among them the right of the underwriter to limit
the number of shares included in the registration which may reduce the number
of shares proposed to be registered in view of market conditions. These
registration rights are not triggered by this offering. All expenses in
connection with any registration, other than underwriting discounts and
commissions, will be borne by us. All registration rights will terminate five
years following the consummation of this offering.

Antitakeover Effects of Some Provisions of Certificate of Incorporation and
Bylaws

Some of the provisions of our certificate of incorporation and bylaws could
make the following more difficult:

. acquisition of NetIQ by means of a tender offer;

. acquisition of NetIQ by means of a proxy contest or otherwise; or

. the removal of our incumbent officers and directors.

These provisions, summarized below, are generally expected to discourage
coercive takeover practices and inadequate takeover bids. These provisions are
also designed to encourage persons seeking to acquire control of NetIQ to first
negotiate with our board. We believe that the benefits of increased protection
resulting from our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure NetIQ outweigh the
disadvantages of discouraging these proposals because we believe that the
negotiation of these proposals could result in an improvement of their terms.
See "Risk Factors--Provisions in our charter documents... " on page 14 of this
prospectus for a further discussion of these charter provisions.

Election and Removal of Directors. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term,
one class being elected each year by our stockholders. See "Management--
Executive Officers and Directors--Classified Board" on page 48 of this
prospectus for a further discussion of the election and terms of the directors.
This system of electing and removing directors may tend to discourage a third
party from making a tender offer or otherwise attempting to obtain control of
NetIQ because it generally makes it more difficult for stockholders to replace
a majority of the directors.

Stockholder Meetings. Under our bylaws, only the board of directors, the
chairman of the board, the president and the chief executive officer may call
special meetings of stockholders.

62
<PAGE>

Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.

Elimination of Stockholder Action By Written Consent. Our certificate of
incorporation and bylaws eliminate the right of stockholders to act by written
consent without a meeting.

Elimination of Cumulative Voting. Our certificate of incorporation and bylaws
do not provide for cumulative voting in the election of directors.

Undesignated Preferred Stock. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock
with voting or other rights or preferences that could impede the success of any
attempt to change control of NetIQ. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of NetIQ.

Amendment of Charter Provisions. The amendment of the above provisions
relating to the election and removal of directors, stockholder meetings and the
elimination of stockholder action by written consent requires approval by
holder of at least 66 2/3% of the outstanding common stock.

See "Risk Factors--Provisions in our charter documents..." on page 14 of this
prospectus for a further discussion of the charter documents.

Effect of Delaware Antitakeover Statute

We are subject to Section 203 of the Delaware General Corporation Law which
regulates corporate acquisitions. Section 203 generally prevents Delaware
corporations, including those whose securities are listed for trading on the
Nasdaq National Market, from engaging in a business combination with any
interested stockholder for three years following the date that such stockholder
became an interested stockholder. A business combination includes, among other
things, a merger or consolidation involving NetIQ and the interested
stockholder and the sale of more than 10% of our assets. Generally, an
interested stockholder is any entity or person beneficially owning 15% or more
of our outstanding voting stock and any entity or person affiliated with or
controlling or controlled by such entity or person. A Delaware corporation may
"opt out" of the Section with an express provision in its original certificate
of incorporation or an express provision in its certificate of incorporation or
bylaws resulting from amendments approved by the holders of at least a majority
of the corporation's outstanding voting shares. We have not "opted out" of the
Section. See "Risk Factors--Provisions in our charter documents and in Delaware
law..." on page 14 of this prospectus for a further discussion of antitakeover
provisions of Delaware law.

Nasdaq National Market Listing

We have been approved for listing our shares on the Nasdaq Stock Market's
National Market under the symbol "NTIQ."

Transfer Agent

The transfer agent and registrar for the common stock is BankBoston, N.A. and
can be contacted by phone at (781) 575-3120.

63
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

After this offering, we will have outstanding 14,624,274 shares of common
stock based upon shares outstanding at March 31, 1999, assuming no exercise of
the underwriters' over-allotment option. Excluding the 3,000,000 shares of
common stock offered hereby and assuming no exercise of the underwriters' over-
allotment option, as of the effective date of the registration statement, there
will be 11,344,249 shares of common stock outstanding, all of which are
"restricted" shares under the Securities Act, excluding 280,025 shares issuable
upon the exercise of the warrant held by Compuware. For more detail on the
Compuware warrant see "Capitalization" on page 18 of this prospectus, and
"Description of Capital Stock" on page 61 of this prospectus.

All restricted shares are subject to lock-up agreements with the underwriters
under which the holders of the restricted shares have agreed not to sell,
pledge or otherwise dispose of their shares for a period of 180 days after the
date of this prospectus. Credit Suisse First Boston Corporation may release the
shares subject to the lock-up agreements in whole or in part at any time with
or without notice. However, Credit Suisse First Boston Corporation has no
current plans to do so. The following table indicates approximately when the
11,344,249 shares of our common stock that are not being sold in the offering
but which will be outstanding at the time the offering is complete will be
eligible for sale into the public market:

<TABLE>
<CAPTION>
Eligibility of Restricted Shares for Sale in Public Market
----------------------------------------------------------
------------------------------------------------------------------------------
<S> <C>
At effective date............................................... 0
------------------------------------------------------------------------------
180 days after effective date................................... 11,344,249
</TABLE>

All shares issuable upon exercise of the Compuware warrant will be
"restricted" shares under the Securities Act and will not become eligible for
resale until the resale requirements of Rule 144 are met. Many of the
restricted shares that will become available for sale in the public market
beginning 180 days after the effective date will be subject to volume and other
resale restrictions pursuant to Rule 144 because the holders are affiliates of
NetIQ. In general, under Rule 144, an affiliate of NetIQ, or person who has
beneficially owned restricted shares for at least one year, will be entitled to
sell in any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the common stock, approximately
143,442 shares immediately after this offering, or the average weekly trading
volume during the four calendar weeks preceding the date on which notice of the
sale is filed with the SEC. Sales under Rule 144 are subject to requirements
relating to manner of sale, notice and availability of current public
information about NetIQ. A person who is not deemed to have been an affiliate
of ours at any time during the 90 days immediately preceding the sale and who
has beneficially owned his or her shares for at least two years is entitled to
sell his or her shares under Rule 144(k) without regard to the limitations
described above.

As of March 31, 1999, 3,966,666 shares were reserved for issuance under the
stock plan, of which options to purchase 2,114,739 shares were then
outstanding. Based on options outstanding as of March 31, 1999, beginning 180
days after the effective date approximately 917,554 shares issuable upon the
exercise of vested options will become eligible for sale and 33,333 shares
issued under restricted stock agreements under the stock option plan will no
longer be subject to a repurchase option and will be eligible for resale.
Additionally, in May 1999 our board of directors approved an increase of
1,366,666 shares in the number of shares reserved under the stock option plan
and a reserve of 500,000 shares for options under the stock purchase plan.

We intend to file, within 180 days after the date of this prospectus, a Form
S-8/S-3 registration statement under the Securities Act to register shares
issued under restricted stock purchase agreements under the stock option plan,
shares issued in connection with option exercises and shares reserved for
issuance under all stock plans. Shares of common stock issued under the
restricted stock agreements under the stock option plan or

64
<PAGE>

upon exercise of options after the effective date of the Form S-8/S-3 will be
available for sale in the public market, subject to Rule 144 volume limitations
applicable to affiliates and lock-up agreements.

Lock-Up Agreements

All officers and directors and holders of common stock and options to
purchase common stock have agreed under "lock-up" agreements that they will not
offer, sell, contract to sell, pledge, grant any option to sell, or otherwise
dispose of, directly or indirectly, any shares of common stock or securities
convertible or exchangeable for common stock, or warrants or other rights to
purchase common stock for a period of 180 days after the transfer or date of
this prospectus without the prior written consent of Credit Suisse First Boston
Corporation.

65
<PAGE>

UNDERWRITING

Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 1999, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, BancBoston Robertson
Stephens, Inc. and Hambrecht & Quist LLC are acting as representatives, the
following respective numbers of shares of common stock:

<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation............................. 1,192,500
BancBoston Robertson Stephens Inc. ................................ 728,750
Hambrecht & Quist LLC.............................................. 728,750
First Albany Corporation........................................... 50,000
Invemed Associates LLC............................................. 50,000
Prudential Securities Incorporated................................. 50,000
Charles Schwab & Co., Inc. ........................................ 50,000
SG Cowen Securities Corporation.................................... 50,000
SoundView Technology Group, Inc. .................................. 50,000
C.E. Unterberg, Towbin............................................. 50,000
---------
Total............................................................ 3,000,000
=========
</TABLE>

The underwriting agreement provides that the underwriters are obligated to
purchase all of the shares of common stock offered in this offering if any are
purchased, other than those shares covered by the over-allotment option
described below. The underwriting agreement also provides that if an
underwriter defaults the purchase commitments of non-defaulting underwriters
may be increased or the offering of common stock may be terminated.

We have granted to the underwriters a 30-day option to purchase on a pro rata
basis up to 450,000 additional shares of common stock at the initial public
offering price less the underwriting discounts and commissions. This option may
be exercised only to cover over-allotments of common stock.

The underwriters propose to offer the common stock initially at the public
offering price on the cover page of this prospectus and to selling group
members at that price less a concession of $0.10 per share. The underwriters
and the selling group members may allow a discount of $0.55 per share on sales
to other broker/dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
representatives.

The following table summarizes the discounts and commissions and estimated
expenses that we will pay.

<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
share over-allotment over-allotment
----- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions
paid by us........................... $0.91 $2,730,000 $3,139,500
Expenses payable by us................ $0.38 $1,135,000 $1,135,000
</TABLE>

The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock being offered.

We, our executive officers, directors and our existing stockholders have
agreed not to offer, sell, contract to sell, announce their intention to sell,
pledge or otherwise dispose of, directly or indirectly, or file with the SEC a
registration statement under the Securities Act relating to, any additional
shares of our common stock or securities convertible into or exchangeable or
exercisable for any shares of our common stock without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days
after the date of this prospectus, except in our case for grants of employee
stock options under the terms of a plan in effect on the date hereof, issuances
of securities upon the exercise of employee stock options outstanding on the
date hereof or the exercise of any other stock options outstanding on the date
hereof.

66
<PAGE>

We have agreed to indemnify the underwriters against liabilities or to
contribute to payments which the underwriters may be required to make in
respect thereof.

We have been approved to list our shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "NTIQ."

Prior to the offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be determined by
negotiation between us and the representatives, and does not reflect the market
price for the common stock following the offering. Among the principal factors
considered in determining the initial public offering price will be:

. the information in this prospectus and otherwise available to the
representatives; market conditions for initial public offerings;

. the history of and prospects for the industry in which we will compete;

. the ability of our management;

. our prospects for future earnings; the present state of our development
and our current financial condition;

. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;

. the general condition of the securities markets at the time of this
offering; and other relevant factors.

We can offer no assurances that the initial public offering price will
correspond to the price at which the common stock will trade in the public
market subsequent to the offering or that an active trading market for the
common stock will develop and continue after the offering.

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Securities Exchange Act.

. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position. Stabilizing transactions permit
bids to purchase shares of the common stock so long as the stabilizing
bids do not exceed a specified maximum.

. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.

. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a syndicate covering transaction to
cover syndicate short positions.

These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq Stock Market's National Market or otherwise and, if
commenced, may be discontinued at any time.

67
<PAGE>

NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or under a
discretionary exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common stock.

Representations of Purchasers

Each purchaser of common stock in Canada who receives a purchase confirmation
will be deemed to represent to us and the dealer from whom the purchase
confirmation is received that (1) the purchaser is entitled under applicable
provincial securities laws to purchase common stock without the benefit of a
prospectus qualified under the securities laws, (2) where required by law, that
the purchaser is purchasing as principal and not as agent, and (3) the
purchaser has reviewed the text above the text under "Resale Restrictions."

Rights of Action (Ontario Purchasers)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.

Enforcement of Legal Rights

All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer and these persons. All or a substantial portion of the assets
of the issuer and these persons may be located outside of Canada and, as a
result, it may not be possible to satisfy a judgment against the issuer or
these persons in Canada or to enforce a judgment obtained in Canadian courts
against the issuer or these persons outside of Canada.

Notice to British Columbia Residents

A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.

Taxation and Eligibility for Investment

Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in our
common stock in their particular circumstances and with respect to the
eligibility of our common stock for investment by the purchaser under relevant
Canadian legislation.

68
<PAGE>

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for NetIQ
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters will be passed upon for the underwriters by
Morrison & Foerster LLP, Palo Alto, California. As of the date of this
prospectus, WS Investment Company 95B, an investment partnership composed of
current and former members of and persons associated with Wilson Sonsini
Goodrich & Rosati, Professional Corporation beneficially own a total of 41,666
shares of NetIQ's common stock.

EXPERTS

The consolidated financial statements as of June 30, 1997 and 1998, and March
31, 1999, and for each of the years in the three year period ended June 30,
1998, and for the nine months ended March 31, 1999, included in this prospectus
and the related financial statement schedule included elsewhere in the
registration statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and elsewhere in the
registration statement, and have been so included in reliance upon the reports
of such firm given upon their authority as experts in auditing and accounting.

WHERE TO FIND OTHER NETIQ DOCUMENTS

We have filed a registration statement on Form S-1 with the SEC with respect
to the common stock offered hereby. This prospectus, which constitutes a part
of the registration statement, does not contain all of the information set
forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to
NetIQ and the common stock, reference is made to the registration statement and
its exhibits and schedules. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's Web site at http://www.sec.gov.

Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act and, in
accordance with this law, will file periodic reports, proxy statements and
other information with the SEC. These periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference rooms, our Web site and the Web site of the SEC referred to
above.

69
<PAGE>

NetIQ CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of NetIQ Corporation:

We have audited the accompanying consolidated balance sheets of NetIQ
Corporation and subsidiaries (the Company) as of June 30, 1997 and 1998 and
March 31, 1999, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended June 30, 1996, 1997 and
1998 and the nine months ended March 31, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of NetIQ Corporation and subsidiaries
as of June 30, 1997 and 1998 and March 31, 1999, and the results of their
operations and their cash flows for the years ended June 30, 1996, 1997 and
1998 and the nine months ended March 31, 1999 in conformity with generally
accepted accounting principles.

/s/ Deloitte & Touche LLP

San Jose, California
May 19, 1999
(July 27, 1999 as to Note 13)

F-2
<PAGE>

NetIQ CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
June 30,
---------------- March 31,
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 7,748 $ 3,358 $11,565
Accounts receivable, net of allowance for
uncollectible accounts of $307 and $505 in 1998
and 1999 (none in 1997)......................... 159 4,055 4,766
Prepaid expenses................................. 1 167 146
------- ------- -------
Total current assets........................... 7,908 7,580 16,477
Property and equipment, net........................ 272 527 1,036
Other assets....................................... 22 98 100
------- ------- -------
Total assets................................... $ 8,202 $ 8,205 $17,613
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt.................................. $ -- $ -- $ 5,144
Accounts payable................................. 227 535 1,331
Accrued compensation and related benefits........ 78 809 820
Other liabilities................................ 38 375 917
Deferred revenue................................. 72 1,547 3,189
------- ------- -------
Total current liabilities...................... 415 3,266 11,401
Long-term debt..................................... -- -- 241
------- ------- -------
Total liabilities.............................. 415 3,266 11,642
------- ------- -------
Commitments and contingencies (Note 8)

Stockholders' equity:
Convertible preferred stock--$0.001 (total
liquidation preference of $11,000,000);
11,100,000 shares authorized and 7,399,977
outstanding..................................... 10,955 10,955 10,955
Common stock--$0.001; 30,000,000 shares
authorized; shares outstanding: 1997, 3,027,583;
1998, 3,217,833; 1999, 3,944,272................ 48 1,302 4,143
Note receivable from stockholder................. (6) (6) --
Deferred stock-based compensation................ (20) (1,011) (2,325)
Accumulated deficit.............................. (3,190) (6,301) (6,802)
------- ------- -------
Total stockholders' equity..................... 7,787 4,939 5,971
------- ------- -------
Total liabilities and stockholders' equity... $ 8,202 $ 8,205 $17,613
======= ======= =======
</TABLE>

See notes to consolidated financial statements.

F-3
<PAGE>

NetIQ CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Nine Months
Years Ended June 30, Ended March 31,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Software license............. $ -- $ 369 $ 6,603 $ 3,186 $13,137
Service...................... -- 19 467 234 1,972
------- ------- ------- ------- -------
Total revenue.............. -- 388 7,070 3,420 15,109
------- ------- ------- ------- -------
Cost of revenue:
Software license............. -- 9 235 159 532
Service...................... -- 46 407 203 894
------- ------- ------- ------- -------
Total cost of revenue...... -- 55 642 362 1,426
------- ------- ------- ------- -------
Gross profit................... -- 333 6,428 3,058 13,683
Operating expenses:
Sales and marketing.......... 77 1,238 5,748 3,600 8,027
Research and development..... 665 1,003 2,192 1,462 2,652
General and administrative... 264 479 1,611 994 2,239
Stock-based compensation..... -- 10 250 83 1,355
------- ------- ------- ------- -------
Total operating expenses... 1,006 2,730 9,801 6,139 14,273
------- ------- ------- ------- -------
Loss from operations........... (1,006) (2,397) (3,373) (3,081) (590)
Interest income (expense):
Interest income.............. 98 119 262 215 119
Interest expense............. (1) (3) -- -- (30)
------- ------- ------- ------- -------
Interest income, net....... 97 116 262 215 89
------- ------- ------- ------- -------
Net loss....................... $ (909) $(2,281) $(3,111) $(2,866) $ (501)
======= ======= ======= ======= =======
Basic and diluted net loss per
share......................... $ (1.55) $ (1.62) $ (1.34) $ (1.31) $ (0.15)
======= ======= ======= ======= =======
Shares used to compute basic
and diluted net loss per
share......................... 587 1,411 2,325 2,192 3,294
======= ======= ======= ======= =======
Pro forma basic and diluted net
loss per share (Note 1)....... $ (0.32) $ (0.05)
======= =======
Shares used to compute pro
forma basic and diluted net
loss per share (Note 1)....... 9,725 10,694
======= =======
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

NetIQ CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share amounts)

<TABLE>
<CAPTION>
Convertible Note
Preferred Stock Common Stock Receivable Deferred
----------------- ----------------- from Stock-based Accumulated
Shares Amount Shares Amount Stockholder Compensation Deficit Total
--------- ------- --------- ------ ----------- ------------ ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
July 1995--Issuance of
common stock to
founders at $0.00075
per share............. -- $ -- 2,766,665 $ 2 $-- $ -- $ -- $ 2
September 1995--
Issuance of Series A
preferred stock at
$0.60 per share, net
of issuance costs of
$14................... 4,666,656 2,786 -- -- -- -- -- 2,786
December 1995 and April
1996--issuance of
common stock at $0.06
per share............. -- -- 116,000 7 (6) -- -- 1
Net loss............... -- -- -- -- -- -- (909) (909)
--------- ------- --------- ------ --- ------- ------- ------
Balances, June 30,
1996................... 4,666,656 2,786 2,882,665 9 (6) -- (909) 1,880
May 1997--Issuance of
Series B preferred
stock at $3.00 per
share, net of issuance
costs of $31.......... 2,733,321 8,169 -- -- -- -- -- 8,169
Exercise of stock
options............... -- -- 144,918 9 -- -- -- 9
Deferred stock-based
compensation.......... -- -- -- 30 -- (30) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- 10 -- 10
Net loss............... -- -- -- -- -- -- (2,281) (2,281)
--------- ------- --------- ------ --- ------- ------- ------
Balances, June 30,
1997................... 7,399,977 10,955 3,027,583 48 (6) (20) (3,190) 7,787
Exercise of stock
options............... -- -- 190,250 13 -- -- -- 13
Deferred stock-based
compensation.......... -- -- -- 1,241 -- (1,241) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- 250 -- 250
Net loss............... -- -- -- -- -- -- (3,111) (3,111)
--------- ------- --------- ------ --- ------- ------- ------
Balances, June 30,
1998................... 7,399,977 10,955 3,217,833 1,302 (6) (1,011) (6,301) 4,939
Exercise of stock
options............... -- -- 784,772 178 -- -- -- 178
Repurchase of common
stock................. -- -- (58,333) (4) 6 -- -- 2
Deferred stock-based
compensation.......... -- -- -- 2,667 -- (2,667) -- --
Amortization of
deferred stock
compensation.......... -- -- -- -- -- 1,353 -- 1,353
Net loss............... -- -- -- -- -- -- (501) (501)
--------- ------- --------- ------ --- ------- ------- ------
Balances, March 31,
1999................... 7,399,977 $10,955 3,944,272 $4,143 $-- $(2,325) $(6,802) $5,971
========= ======= ========= ====== === ======= ======= ======
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>

NetIQ CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Nine Months Ended
Years Ended June 30, March 31,
------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $ (909) $(2,281) $(3,111) $(2,866) $ (501)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation................ 26 70 198 138 271
Stock-based compensation.... -- 10 250 83 1,355
Gain on the sale of
property and equipment..... -- -- -- -- 8
Changes in:
Accounts receivable....... -- (159) (3,896) (1,257) (711)
Prepaid expenses.......... (12) 10 (166) (29) 21
Accounts payable.......... 29 199 308 235 796
Accrued compensation and
related benefits......... 32 46 731 238 11
Other liabilities......... -- 38 337 131 542
Deferred revenue.......... -- 72 1,475 516 1,642
------- ------- ------- ------- -------
Net cash provided by
(used in) operating
activities............. (834) (1,995) (3,874) (2,811) 3,434
------- ------- ------- ------- -------
Cash flows from investing
activities:
Purchases of property and
equipment, net.............. (149) (220) (453) (322) (799)
Purchase/maturity of short-
term investments............ (2,085) 2,085 -- -- --
Other........................ (3) (18) (76) 4 (2)
Proceeds from the sale of
property and equipment...... -- -- -- -- 11
------- ------- ------- ------- -------
Net cash provided by (used
in) investing activities... (2,237) 1,847 (529) (318) (790)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Borrowings on line of credit
facility.................... 314 133 -- --
Payments on line of credit
facility.................... -- (447) -- -- --
Proceeds from borrowings..... -- -- -- -- 5,433
Payments on borrowings....... -- -- -- -- (48)
Proceeds from sale of common
stock....................... 3 9 13 9 178
Proceeds from issuance of
preferred stock............. 2,786 8,169 -- -- --
------- ------- ------- ------- -------
Net cash provided by
financing activities....... 3,103 7,864 13 9 5,563
------- ------- ------- ------- -------
Net increase (decrease) in cash
and cash equivalents.......... 32 7,716 (4,390) (3,120) 8,207
Cash and cash equivalents,
beginning of year............. -- 32 7,748 7,748 3,358
------- ------- ------- ------- -------
Cash and cash equivalents, end
of year....................... $ 32 $ 7,748 $ 3,358 $ 4,628 $11,565
======= ======= ======= ======= =======
Noncash investing and financing
activities:
Issuance (receipt) of common
stock for stockholder's note
receivable.................. $ 6 $ -- $ -- $ -- $ (6)
Supplemental disclosure of cash
flow information--cash paid
for:
Interest..................... $ 1 $ 3 $ -- $ -- $ 12
Income taxes................. $ 2 $ 1 $ 3 $ 3 $ 45
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

1. Organization and Summary of Significant Accounting Policies

Organization--NetIQ Corporation (the Company) was incorporated in California
in June 1995 to develop, market and support performance and availability
management software for the Microsoft Windows NT environment. The Company
markets its products through its field and inside sales organization and
reseller channel partners, which are focused on customers primarily located in
the United States, Europe and Asia.

Basis of Presentation--The consolidated financial statements include the
accounts of the Company and its subsidiaries, all of which are wholly-owned.
All significant intercompany accounts and transactions have been eliminated in
consolidation.

Use of Estimates--The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash
equivalents.

Property and Equipment--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives, generally three to five years.

Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards(SFAS) No. 86, Computer Software To
Be Sold, Leased or Otherwise Marketed. The costs to develop such software have
not been capitalized as the Company believes its current software development
process is essentially completed concurrent with the establishment of
technological feasibility.

Revenue Recognition--Statement of Position 97-2, Software Revenue Recognition
("SOP 97-2"), was issued in October 1997 by the American Institute of Certified
Public Accountants ("AICPA") and was amended by Statement of Position 98-4
("SOP 98-4"). The Company adopted SOP 97-2 effective July 1, 1997 and SOP 98-4
effective March 31, 1998. The Company believes its current revenue recognition
policies and practices are consistent with SOP 97-2 and SOP 98-4. Additionally,
the AICPA issued SOP 98-9 in December 1998, which provides certain amendments
to SOP 97-2, and is effective for transactions entered into by the Company
beginning July 1, 1999. The Company does not believe that adoption of these
amendments will have a material impact on its financial position, results of
operations or cash flows.

Software license revenue is recognized upon meeting each of the following
criteria: execution of a written purchase order, license agreement or contract;
delivery of software and authorization keys; the license fee is fixed and
determinable; collectibility of the proceeds within six months is assessed as
being probable; and vendor specific objective evidence exists to allocate the
total fee to elements of the arrangement. Vendor-specific objective evidence is
based on the price generally charged when an element is sold separately, or if
not yet sold separately, is established by authorized management. All elements
of each order are valued at the time of revenue recognition. For sales made
through distributors, resellers and original equipment manufacturers the
Company recognizes revenue at the time these partners report to the Company
that they have sold the software to the end user and all revenue recognition
criteria have been met. Service revenue includes maintenance revenue, which is
deferred and recognized ratably over the maintenance period, and revenue from
consulting and training services, which is recognized as services are
performed.

F-7
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

Income Taxes--Deferred tax assets and liabilities are recorded for the
expected future tax consequences of temporary differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. A
valuation allowance is recorded to reduce net deferred tax assets to amounts
that are more likely than not to be realized.

Stock-Based Compensation--The Company accounts for its employees stock option
plan in accordance with provisions of Accounting Principles Board (APB) Opinion
No. 25 Accounting for Stock Issued to Employees.

Net Loss per Share--Basic loss per share excludes dilution and is computed by
dividing net loss by the weighted average number of common shares outstanding,
less shares subject to repurchase by the Company. Diluted net loss per share
reflects the potential dilution that could occur if securities or other
contracts to issue common stock (convertible preferred stock, warrants and
common stock options) were exercised or converted into common stock. Common
share equivalents are excluded from the computation in loss periods as their
effect would be antidilutive.

Pro Forma Net Loss per Share--Pro forma basic and diluted net loss per share
is computed by dividing net loss attributable to common stockholders by the
weighted average number of common shares outstanding for the period (excluding
shares subject to repurchase) and the weighted average number of common shares
resulting from the assumed conversion of all outstanding shares of convertible
preferred stock upon the closing of the initial public offering contemplated by
this Prospectus.

Unaudited Interim Financial Information--The interim financial information
for the nine months ended March 31, 1998 is unaudited and has been prepared on
the same basis as the audited financial statements. In the opinion of
management, such unaudited financial information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim information.

Foreign Currency Transactions--The functional currency of the Company's
foreign subsidiaries is the U.S. dollar. For those foreign subsidiaries whose
books and records are not maintained in the functional currency, all monetary
assets and liabilities are remeasured at the current exchange rate at the end
of each period reported, nonmonetary assets and liabilities are remeasured at
historical rates and revenues and expenses are remeasured at average exchange
rates in effect during the period. Transaction gains and losses, which are
included in other income (expense) in the accompanying consolidated statements
of operations, have not been significant.

Concentration of Credit Risk--Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of trade
receivables. The Company sells its products to companies in diverse industries
and generally does not require its customers to provide collateral to support
accounts receivable. To reduce credit risk, management performs ongoing credit
evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses.

Certain Significant Risks and Uncertainties--The Company operates in the
software industry, and accordingly, can be affected by a variety of factors.
For example, management of the Company believes that changes in any of the
following areas could have a significant negative effect on the Company's
future financial position, results of operations and cash flows; demand for
performance availability and management software solutions, including any
adverse purchasing patterns caused by Year 2000 related concerns; new product
introductions by competitors; development of distribution channels; demand for
Windows NT-based systems and applications; ability to implement and expand
operational customer support and financial control systems to manage rapid
growth, both domestically and internationally; the hiring, training and
retention of key

F-8
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

employees; relationship with Microsoft; fundamental changes in technology
underlying software products; litigation or other claims against the Company.

Recently Issued Accounting Standards--In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No. 130, Reporting Comprehensive Income,
which requires an enterprise to report, by major components and as a single
total, the change in its net assets during the period from nonowner sources;
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. The Company's comprehensive
loss was equal to its net loss for all periods presented. The Company currently
operates in one reportable segment under SFAS No. 131.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedge accounting
when certain conditions are met. SFAS No. 133 is effective for the Company in
fiscal 2001. Although the Company has not fully assessed the implications of
SFAS No. 133, the Company does not believe that adoption of this statement will
have a material impact on the Company's financial position or results of
operations.

2. Property and Equipment

Property and equipment consist of (in thousands):

<TABLE>
<CAPTION>
June 30,
----------- March 31,
1997 1998 1999
---- ----- ---------
<S> <C> <C> <C>
Computer equipment and software....................... $317 $ 760 $1,173
Furniture and fixtures................................ 51 55 336
Construction in progress.............................. -- 6 72
---- ----- ------
368 821 1,581
Less accumulated depreciation......................... (96) (294) (545)
---- ----- ------
Property and equipment, net........................... $272 $ 527 $1,036
==== ===== ======
</TABLE>

3. Settlement of Litigation

In September 1996, Compuware Corporation filed a complaint against the
Company alleging misappropriation of certain trade secrets, copyright
infringement, unfair competition and other claims. A settlement of these claims
was reached in January 1999 and final documentation ("Settlement Agreement")
was entered into and the charges dismissed in March 1999.

In March 1999, as a part of the Settlement Agreement, the Company received a
loan of $5,000,000 under a subordinated secured promissory note. The loan bears
interest at 6% per year and principal and accrued interest are payable on the
earliest of (i) an initial public offering of the Company's securities raising
in excess of $10,000,000, (ii) a change in control meeting certain criteria,
(iii) in the event of the Company filing for bankruptcy or insolvency or other
specified events of default or (iv) January 1, 2002. The note is secured by
security agreements covering all of the Company's assets and is subordinated to
any bank credit facility.

Also in March 1999, as a part of the Settlement Agreement, the Company issued
a warrant to purchase up to 2% of the total of the outstanding common stock and
common stock equivalents of the Company, calculated

F-9
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

immediately prior to the events described in (i) or (ii) as follows, (i) the
filing of a registration statement relating to the public offering of Company's
common stock or (ii) the signing of a definitive agreement regarding a change
in control occurring prior to the initial public offering of the Company's
common stock. The warrant is exercisable either upon (i) the effectiveness of a
registration statement or (ii) the closing of a change in control transaction.
The exercise price, in the case of (i), is 90% of the price to the public or,
in the case of (ii), is 80% of the cash value of a share of common stock if the
event takes place before December 31, 1999 or 90% of the cash value of a share
of common stock if the event takes place on or after January 1, 2000. The fair
value of such warrant, approximately $364,000 based on an initial public
offering price of $13.00 per share, will be charged to operating results in the
quarter ending June 30, 1999 (See Note 13). The fair value of the warrant
approximated the intrinsic value due to the diminimus life of the warrant.

4. Debt

The Company has a Loan and Security Agreement (the "Agreement") with a
financial institution, which provides for a maximum credit facility of
$2,000,000. The credit facility is limited to the Company's eligible
receivables, as defined, plus outstanding letters of credit with the bank.
Borrowings bear interest at the bank's prime rate (7.75% at March 31, 1999)
plus 0.25%. The Company may request a maximum of $400,000 in letters of credit
to be issued against the credit facility. At March 31, 1999, there were no
obligations outstanding under this facility. This facility expired in May 1999.

Additionally, the Agreement provides for equipment advances of $500,000
through November 15, 1998. During the nine months ended March 31, 1999, the
Company obtained advances of $433,000 for capital acquisitions. Advances bear
interest at the bank's prime rate plus 0.75% which is payable monthly.
Commencing December 1998, payments of principal and interest are due in equal
monthly installments over a 36-month period. At March 31, 1999, the outstanding
obligation was $385,000. Borrowings on the facility are due as follows:
remainder of fiscal 1999, $36,000; fiscal 2000, $144,000; fiscal 2001,
$144,000; and fiscal 2002, $61,000. Borrowings under the Agreement are
collateralized by a lien on all of the Company's assets.

5. Stockholders' Equity

At March 31, 1999, convertible preferred stock consists of:

<TABLE>
<CAPTION>
Aggregate
Shares Shares Price Per Amount (Net of Liquidation
Designated Outstanding Share Issuance Costs) Preference
---------- ----------- --------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Series A....... 4,666,656 4,666,656 $0.60 $ 2,786,304 $ 2,800,000
Series B....... 2,733,321 2,733,321 $3.00 8,169,049 8,200,000
--------- --------- ----------- -----------
7,399,977 7,399,977 $10,955,353 $11,000,000
========= ========= =========== ===========
</TABLE>

Significant terms of the convertible preferred stock are as follows:

. Each share is convertible, at the option of the holder, into one share of
common stock (subject to adjustments for events of dilution). Shares of
Series A and B will be automatically converted into common stock upon the
closing of a public offering yielding proceeds in excess of $7,500,000
and at a price of not less than $2.40 and $6.00 per share, respectively,
or upon the approval (by vote or written consent) of at least 66 2/3% of
the then outstanding shares of Series A or at least a majority of the
then outstanding shares of Series B.

. Each share has the same voting rights as the number of shares of common
stock into which it is convertible.

F-10
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

. In the event of liquidation, dissolution or winding up of the Company,
the preferred shareholders of Series A and Series B shall receive an
amount equal to $0.60 and $3.00 per share, respectively, plus an amount
equal to all declared but unpaid dividends on each share. Any remaining
assets will be distributed among the holders of Series A and Series B
preferred stock and common stock, pro rata, based on the number of shares
of common stock held by each shareholder on an as-converted basis. In
total, the holders of Series A and Series B preferred stock shall not be
entitled to receive more than $1.50 and $7.50 per share, respectively.

. Holders of preferred stock are entitled to annual noncumulative dividends
of $0.06 and $0.24 per share for Series A and Series B, respectively,
when and if declared by the Board of Directors, prior to any dividends
declared on common stock. No such dividends have been declared.

Restricted Stock--During fiscal year 1996 and the nine months ended March 31,
1999, the Company issued 2,882,667 and 53,333 shares of common stock at a total
price of $9,035 and $80,000, respectively, to officers and employees of the
Company. The shares are subject to repurchase by the Company at the original
purchase price per share upon termination of employment prior to vesting of
such shares. The restricted shares vest over periods ranging from one to four
years in accordance with the terms of the original stock purchase agreement. At
March 31, 1999, approximately 90,833 outstanding shares of such stock were
subject to repurchase.

The exercise price of $1.50 was less than the deemed fair value of the 53,333
shares issued during the nine months ended March 31, 1999. Accordingly, the
Company recorded $138,000 as deferred compensation and amortized $65,356 to
expense during the nine months ended March 31, 1999.

Stock-Based Compensation--In connection with options granted to purchase
common stock, the Company recorded deferred stock compensation of $30,000,
$1,241,000 and $2,667,000 in fiscal years 1997 and 1998 and the nine months
ended March 31, 1999, respectively. Such amounts represent, for employee stock
options, the difference between the exercise price and the fair value of the
Company's common stock at the date of grant, and, for non-employee options, the
deemed fair value of the option at the date of vesting. The deferred charges
for employee options are being amortized to expense through fiscal year 2003
and the deferred charges for non employee options are being amortized to
expense through the end of fiscal year 1999. Stock-based compensation expense
for employee and non-employee options of $10,000, $250,000 and $1,355,000 was
recognized during fiscal years 1997 and 1998 and the nine months ended
March 31, 1999, respectively.

Options granted to non-employees--The Company has granted options to non-
employees for consulting and legal services performed. The vesting period for
these options ranges from immediate vesting to vesting over 4 years and the
option exercise period ranges from 6 months to 10 years. Stock options issued
to non-employees are accounted for in accordance with provisions of Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation" and Emerging Issues Task Force Issue (EITF) No. 96-18,
"Accounting for Equity Instruments That Are Issued To Other Than Employees for
Acquiring, or in Conjunction With Selling, Goods or Services." The fair value
of stock options issued to non-employees was calculated using a risk free
interest rate of 6%, expected volatility of 50% and the actual length of the
option.

During fiscal year 1996, 150,667 options were granted at an exercise price of
$0.03 and no compensation related to these options was recorded for fiscal year
1996. At June 30, 1996, unvested options totaled 104,167.

During fiscal year 1997, 142,833 options were granted at an exercise price of
$0.03. In connection with these options, the Company recorded deferred stock
compensation of $30,000 and amortized $10,000 as an expense during fiscal year
1997. At June 30, 1997, unvested options totaled 142,306 and unamortized
deferred stock compensation related to unvested options totaled $20,000.

F-11
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

During fiscal year 1998, 133,333 options were granted at an exercise price of
$0.13. In connection with these options, the Company recorded deferred stock
compensation of $285,000 and amortized $152,000 as an expense during fiscal
year 1998. At June 30, 1998, unvested options totaled 142,306 and unamortized
deferred stock compensation related to unvested options totaled $153,000.

During the nine months ended March 31, 1999, 20,333 options were granted at
an exercise price of $0.13 and 108,333 options were granted at an exercise
price of $0.67. In connection with these options, the Company recorded deferred
stock compensation of $1,039,000 and amortized $806,000 as an expense during
the nine months ended March 31, 1999. At March 31, 1999, unvested options
totaled 38,284 and unamortized deferred stock compensation related to unvested
options totaled $386,000.

Common Shares Reserved for Issuance--At March 31, 1999, the Company had
reserved shares of common stock for issuance as follows:

<TABLE>
<S> <C>
Conversion of convertible preferred stock....................... 7,399,977
Issuance under stock option plan................................ 2,846,744
Contingent common stock warrant outstanding..................... 269,181
----------
Total......................................................... 10,515,902
==========
</TABLE>

Stock Option Plan--Under the Company's 1995 Stock Option Plan (the "Plan")
3,966,666 shares are reserved for issuance to employees, consultants and
directors. Incentive stock options are granted at fair market value (as
determined by the Board of Directors) at the date of grant; nonstatutory
options and stock sales may be offered at not less than 85% of fair market
value. Generally, options become exercisable over four years and expire ten
years after the date of grant.

A summary of stock option activity under the Plan is as follows:

<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding, July 1, 1995...................... -- --
Granted (weighted-average fair value of
$0.01)........................................ 767,329 $0.06
--------- -----
Outstanding, June 30, 1996 (53,333 shares
exercisable at $0.06)......................... 767,329 0.06
Granted (weighted-average fair value of
$0.03)........................................ 951,156 0.11
Exercised...................................... (144,918) 0.06
Canceled....................................... (149,992) 0.06
--------- -----
Outstanding, June 30, 1997 (249,705 shares
exercisable at $0.06)......................... 1,423,575 0.09
Granted (weighted-average fair value of
$1.26)........................................ 1,005,627 0.30
Exercised...................................... (190,250) 0.08
Canceled....................................... (2,657) 0.30
--------- -----
Outstanding, June 30, 1998 (631,723 shares
exercisable at $0.13)......................... 2,236,295 0.20
Granted (weighted-average fair value of
$3.06)........................................ 685,714 2.00
Exercised...................................... (784,772) 0.23
Canceled....................................... (22,498) 0.30
--------- -----
Outstanding, March 31, 1999.................... 2,114,739 $0.76
========= =====
</TABLE>

F-12
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

At March 31, 1999, 732,005 shares were available under the Plan for future
grant.

The following table summarizes information concerning options outstanding as
of March 31, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Vested
------------------------------------- ------------------
Weighted Average Weighted Weighted
Number of Remaining Average Vested at Average
Range of Options Contractual Life Exercise March 31, Exercise
Exercise Prices Outstanding (Years) Price 1999 Price
--------------- ----------- ---------------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.06-$0.30........ 1,583,295 8.30 $0.23 400,965 $0.18
$1.50-$3.00........ 486,775 9.69 1.76 173,167 1.50
$9.00.............. 44,669 9.97 9.00 2,000 9.00
--------- ---- ----- ------- -----
$0.06-$9.00........ 2,114,739 8.65 $0.76 576,132 $0.61
========= ==== ===== ======= =====
</TABLE>

Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123), requires the disclosure of pro forma net income
or loss had the Company adopted the fair value method since the Company's
inception. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of the Black-Scholes option pricing model, even
though such model was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. The Black-Scholes model also
requires subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.

The weighted-average fair value of the Company's stock-based awards to
employees was estimated using the minimum value method and assuming no
dividends will be declared and the following additional assumptions:

<TABLE>
<CAPTION>
Year Ended Nine Months
June 30, Ended March
-------------- 31,
1996 1997 1998 1999
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Estimated life (in years)............................ 3.97 3.67 4.0 4.0
Risk-free interest rate.............................. 6.0% 6.0% 5.6% 6.0%
</TABLE>

For pro forma purposes, the estimated fair value of the Company's stock-based
awards to employees is amortized, using the straight-line method over the
options' vesting periods. The Company's pro forma results are as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended June 30, Ended March
------------------------ 31,
1996 1997 1998 1999
------ ------- ------- -----------
<S> <C> <C> <C> <C>
Net Loss:
As reported............................ $(909) $(2,281) $(3,111) $ (501)
Pro forma.............................. (909) (2,281) (3,395) (1,336)
Basic and diluted net loss per share:
As reported............................ $(1.55) $ (1.62) $ (1.34) $(0.15)
Pro forma.............................. (1.55) (1.62) (1.46) (0.41)
</TABLE>

F-13
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

6. Net Loss per Share

The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands).

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended June 30, March 31,
------------------------ ------------------
1996 1997 1998 1998 1999
------ ------- ------- ----------- ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net loss (numerator), basic
and diluted................. $ (909) $(2,281) $(3,111) $(2,866) $ (501)
------ ------- ------- ------- ------
Shares (denominator):
Weighted average common
shares outstanding........ 2,641 2,944 3,095 3,059 3,503
Weighted average common
shares outstanding subject
to repurchase............. (2,054) (1,533) (770) (867) (209)
------ ------- ------- ------- ------
Shares used in computation,
basic and diluted........... 587 1,411 2,325 2,192 3,294
====== ======= ======= ======= ======
Net loss per share, basic and
diluted..................... $(1.55) $ (1.62) $ (1.34) $ (1.31) $(0.15)
====== ======= ======= ======= ======
</TABLE>

For the above mentioned periods, the Company had securities outstanding which
could potentially dilute basic earnings per share in the future, but were
excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following:

<TABLE>
<CAPTION>
Year Ended June Nine Months Ended
30, March 31,
----------------- -----------------
1996 1997 1998 1998 1999
----- ----- ----- ----------- -----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Convertible preferred stock............ 4,667 7,400 7,400 7,400 7,400
Shares of common stock subject to
repurchase............................ 1,819 1,048 293 476 90
Outstanding options.................... 767 1,424 2,236 1,826 2,115
Warrant................................ -- -- -- -- 269
----- ----- ----- ----- -----
Total.................................. 7,253 9,872 9,929 9,702 9,874
===== ===== ===== ===== =====
</TABLE>

7. Income Taxes

The Company's deferred income tax assets are comprised of the following
(in thousands):

<TABLE>
<CAPTION>
June 30,
---------------- March 31,
1997 1998 1999
------- ------- ---------
<S> <C> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards............. $ 1,212 $ 2,897 $ 861
Accruals deductible in different periods..... (7) (373) 783
Research and development and alternative
minimum tax credit.......................... -- 140 508
Other........................................ -- (173) (75)
------- ------- -------
1,205 2,491 2,077
Valuation allowance............................ (1,205) (2,491) (2,077)
------- ------- -------
Total.......................................... $ -- $ -- $ --
======= ======= =======
</TABLE>

F-14
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, as well as net operating
loss and tax credit carryforwards. Due to the uncertainty surrounding the
realization of the benefits of its favorable tax attributes in future tax
returns, the Company has fully reserved its net deferred tax assets.

The Company's effective tax rate differs from the expected benefit at the
federal statutory rate as follows:

<TABLE>
<CAPTION>
June 30
--------------------- March 31,
1996 1997 1998 1999
----- ----- ------- ---------
<S> <C> <C> <C> <C>
Federal statutory tax benefit............... $(309) $(776) $(1,057) $(170)
State tax benefit........................... (55) (139) (180) (29)
Stock compensation expense.................. -- 100 542
Valuation allowance......................... 392 869 1,286 (414)
Other....................................... (28) 46 (149) 71
----- ----- ------- -----
$ -- $ -- $ -- $ --
===== ===== ======= =====
</TABLE>

Substantially all of the Company's loss operations for all periods presented
are generated from domestic operations.

At March 31, 1999, the Company had net operating loss ("NOL") carryforwards
of approximately $2,251,000 for federal and $1,050,000 for state income tax
purposes. The federal NOL carryforwards expire through 2011 and the state NOL
carryforwards expire through 2003. In addition, at March 31, 1999, the Company
had $249,000 of research and development tax credit carryforwards for federal
and $172,000 for state income tax purposes and $87,000 of alternative minimum
tax carryforwards. The extent to which the loss carryforwards can be used to
offset future taxable income may be limited, depending on the extent of
ownership changes within any three-year period as provided in the Tax Reform
Act of 1986 and the California Conformity Act of 1987. Additionally, loss
carryforwards generated in fiscal 1997 may expire within six years, as the
Company elected to change their tax fiscal year end to June 30.

8. Commitments and Contingencies

Operating Leases--The Company leases its facility under a noncancelable
operating lease which expires in July 2003, and certain equipment under an
operating lease. Under the terms of the facility lease, the Company is
responsible for its proportionate share of maintenance, property tax and
insurance expenses. The agreement provides an option to extend the lease for
two years and a second option to extend for an additional 28 months. Future
minimum annual lease commitments are as follows: remainder of fiscal 1999,
$186,000; fiscal 2000, $781,000; fiscal 2001, $707,000; fiscal 2002, $730,000;
fiscal 2003, $759,000; fiscal 2004, $63,000.

Facilities rent expense was approximately $48,000, $79,000, $224,000 and
$671,000 for fiscal years 1996, 1997 and 1998 and the nine months ended March
31, 1999, respectively.

Royalty Agreement--In August 1996, the Company entered into a Software
License and Distribution Agreement which provides the Company a non-exclusive
worldwide license to certain third-party technology. The Company is required to
pay specified royalties based on a percentage of revenue from products
incorporating the technology. Total royalty expense under the Agreement for
fiscal year 1998 and the nine months ended March 31, 1999 was $103,000 and
$191,000, respectively. No royalties were payable in fiscal 1997.

Legal Matters--The Company is involved in or may be subject to various other
claims and legal actions, but Management does not expect that the outcome of
these other claims and actions will have a material effect on the Company's
financial condition.

F-15
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

9. Employee Benefit Plan

The Company sponsors a 401(k) Savings and Retirement Plan (the Plan) for all
eligible employees who meet certain eligibility requirements. Participants may
contribute, on a pre-tax basis, between 1% and 15% of their annual
compensation, but not to exceed a maximum contribution amount pursuant to
Section 401(k) of the Internal Revenue Code. The Company is not required to
contribute, nor has it contributed, to the Plan for any of the periods
presented.

10. Major Customers

Five customers accounted for 33%, 28%, 15%, 14% and 10% of accounts
receivable at June 30, 1997. One customer accounted for 10% of accounts
receivable at June 30, 1998. No single customer accounted for 10% of accounts
receivable at March 31, 1999. Two customers accounted for 45% and 12% of total
revenue in fiscal 1997. No single customer accounted for greater than 10% of
total revenue in fiscal 1998 or for the nine months ended March 31, 1999.

11. Segment and Geographic Information

As discussed in Note 1, the Company follows the requirements of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. As defined
in SFAS No. 131, the Company operates in one reportable segment: the design,
development, marketing, support and sales of performance and availability
management software for the Microsoft Windows NT environment. No individual
foreign country accounted for greater than 10% of total revenue or long-lived
assets in any of the periods presented. The following table summarizes total
net revenue and long-lived assets attributed to significant countries (in
thousands).

<TABLE>
<CAPTION>
Year Ended June
30, Nine Months
---------------- Ended March
1996 1997 1998 31, 1999
---- ---- ------ -----------
<S> <C> <C> <C> <C>
Total net revenue:
United States................................. $ -- $388 $6,342 $11,775
Foreign....................................... -- -- 728 3,334
---- ---- ------ -------
Total net revenue*.......................... $ -- $388 $7,070 $15,109
==== ==== ====== =======
Long-lived assets:
United States................................. $126 $294 $ 528 $ 1,000
Foreign....................................... -- -- 97 136
---- ---- ------ -------
Total long-lived assets..................... $126 $294 $ 625 $ 1,136
==== ==== ====== =======
</TABLE>
- --------
* Net revenue are attributed to countries based on location of customer
invoiced.

12. Related Party Transaction

During fiscal years 1996, 1997 and 1998 and the nine months ended March 31,
1999, a member of the Company's board of directors earned $55,000, $60,000,
$60,000 and $45,000, respectively, in consulting fees.

F-16
<PAGE>

NetIQ CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Years Ended June 30, 1996, 1997 and 1998 and the Nine Months Ended March 31,
1999

13. Subsequent Events

On May 19, 1999, the Board of Directors approved, subject to stockholder
approval, the following:

. adoption of the employee stock purchase plan. Under the purchase plan,
eligible employees are allowed to have salary withholdings of up to 15% of
their base compensation to purchase shares of common stock at a price equal
to 85% of the lower of the market value of the stock at the beginning or end
of defined purchase periods. The initial purchase period commences upon the
effective date for the initial public offering of NetIQ's common stock.
NetIQ has initially reserved 500,000 shares of common stock under this plan,
plus an annual increase to be added on the first day of NetIQ's fiscal year
beginning July 1, 2000 equal to the lesser of (i) 666,666 shares, (ii) 2% of
the shares of common stock outstanding on the last day of the preceding
fiscal year or (iii) an amount determined by the board of directors.

. amendment of the stock option plan. The number of shares of NetIQ common
stock available for issuance under the stock option plan was increased by
1,366,666 shares from 3,966,666 to 5,333,332 shares, plus an annual
increase, effective on the first day of each fiscal year, beginning July 1,
2000, equal to the lesser of (i) 4% of the shares of common stock
outstanding on the last day of the preceding fiscal year, (ii) 1,333,333
shares or (iii) an amount determined by NetIQ's board of directors.
Additionally, the stock option plan includes an automatic nondiscretionary
grant mechanism that provides that options will be granted to non-employee
directors who on the date of grant do not beneficially own 1% or more of the
total voting power of NetIQ's voting securities. The stock option plan
specifically provides for an initial automatic grant of an option to
purchase 8,333 shares of common stock to a non-employee director who first
becomes a director after NetIQ's initial public offering. Each non-employee
director who has served on the board for at least six months will
subsequently be granted an option to purchase 8,333 shares of common stock
on the date of the annual meeting of stockholders. However, if the first
annual meeting following NetIQ's initial public offering falls within six
months of the effective date of the initial public offering no grants will
be made until the following annual meeting. Each option granted to an
outside director under this program will have a term of five years and the
shares subject to these options will be fully vested on the date of grant.
The exercise price of these options will be 100% of the fair market value
per share of common stock on the date of grant.

. reincorporation of NetIQ in the State of Delaware and the associated
exchange of one share of common stock or preferred stock of NetIQ for every
share of common stock or preferred stock, as the case may be, of NetIQ's
California predecessor. Such reincorporation and exchange of shares became
effective on July 22, 1999, and

. an increase of authorized shares of common stock to 100,000,000 shares and
creation of newly undesignated preferred stock totaling 5,000,000 shares,
contingent upon the reincorporation of the Company in Delaware and the
closing of the initial public offering contemplated by NetIQ.

On June 16, 1999 Compuware executed an agreement to exercise its warrant to
purchase 280,025 shares of common stock upon the effectiveness of this
registration statement. The value of such warrant, approximating $364,000 based
on an initial public offering price of $13.00 per share, will be charged to
operating results in the quarter ended June 30, 1999.

On June 28, 1999, the board of directors approved, subject to stockholder
approval, a two-for-three reverse split of the outstanding shares of common and
preferred stock. Such reverse stock split became effective on July 27, 1999.

All share and per share amounts in these consolidated financial statements
have been adjusted to give effect to the reincorporation and the two-for-three
reverse stock split.

F-17
<PAGE>

[Descriptive text accompanying NetIQ logo]

NetIQ is a leading provider of applications management software that enables
businesses to optimize the performance and availability of their Windows NT-
based systems and critical business applications including Internet-based
applications. The NetIQ AppManager Suite enables organizations to centrally
manage the performance of their highly complex Windows NT environments, helps
ensure availability through automated monitoring, correction and reporting
features and helps lower the total cost of ownership.

<PAGE>

[NetIQ LOGO APPEARS HERE]