NETIQ CORP, S-1/A, 1999-06-29

NETIQ CORP
S-1/A, 1999-06-29
PREPACKAGED SOFTWARE

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As filed with the Securities and Exchange Commission on June 29, 1999

Registration No. 333-79373
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NetIQ Corporation
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
Delaware 7372 77-0405505
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, California 95054
(408) 330-7000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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Ching-Fa Hwang
President and Chief Executive Officer
NetIQ Corporation
5410 Betsy Ross Drive
Santa Clara, California 95054
(408) 330-7000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Thomas C. DeFilipps, Esq. William D. Sherman, Esq.
Wilson Sonsini Goodrich & Rosati Morrison & Foerster LLP
Professional Corporation 755 Page Mill Road
650 Page Mill Road Palo Alto, California 94304
Palo Alto, California 94304 (650) 813-5600
(650) 493-9300 ---------------

Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
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Proposed Proposed
Maximum Maximum
Title of Each Class of Aggregate Aggregate Amount of
Securities to be Amount to be Offering Price Offering Registration
Registered Registered per Share(1)(2) Price(1)(2) Fee(3)
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<S> <C> <C> <C> <C>
Common Stock, $0.001
par value............. 3,450,000 $13.00 $44,850,000 $12,469
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(1) Includes shares that the Underwriters have the option to purchase to cover
over-allotments, if any.

(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) promulgated under the Securities
Act of 1933, as amended.

(3) Paid in connection with the original filing on May 26, 1999.

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NetIQ hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until NetIQ shall file a further
amendment which specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the Registration Statement shall become effective on such
date as the Commission, acting pursuant to said Section 8(a), may determine.

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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and it is not soliciting an offer to buy +
+these securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED June 29, 1999

3,000,000 Shares

Common Stock

--------

Prior to this offering, there has been no public market for our common stock.
The initial public offering price is expected to be between $11.00 and $13.00
per share. We have applied 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 6.

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Underwriting
Price Discounts
to and Proceeds
Public Commissions to NetIQ
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<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
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Delivery of the shares of common stock will be made on or about , 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 , 1999.
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TABLE OF CONTENTS
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Page
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Prospectus Summary....................................................... 4
Risk Factors............................................................. 6
Forward-Looking Statements............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 34
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Management................................................................. 48
Certain Transactions....................................................... 58
Principal Stockholders..................................................... 60
Description of Capital Stock............................................... 62
Shares Eligible for Future Sale............................................ 65
Underwriting............................................................... 67
Notice to Canadian Residents............................................... 69
Legal Matters.............................................................. 70
Experts.................................................................... 70
Where To Find Other NetIQ Documents........................................ 70
Index to Consolidated Financial Statements................................. F-1
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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 , 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.

3
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[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

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 for the nine months ended March 31, 1999. We incurred net losses of
$3.1 million for fiscal 1998 and $0.5 million for 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.

4
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The Offering

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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, potential
strategic investments or
acquisitions and repayment of
certain indebtedness. See "Use
of Proceeds" on page of this
prospectus
Proposed Nasdaq National Market symbol...... NTIQ
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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 split to be effective prior to the closing of this offering, assumes that
the initial public offering price will be $12.00 per share, the midpoint of the
range disclosed on the cover of this prospectus, and assumes completion of our
reincorporation into Delaware which we expect will be effective in June 1999.

Please see "Capitalization" on page 19 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 $10.80 per share. See "Capitalization" on page 19 of this prospectus,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 23 of this prospectus and "Description of Capital Stock" on
page 62 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 assumed initial
public offering price of $12.00 and after deducting the underwriting discounts
and commissions and estimated offering expenses.

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March 31, 1999
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Pro Forma
Actual Pro Forma As Adjusted
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(in thousands)
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Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $11,565 $ 9,476 $41,821
Working capital.................................. 5,076 7,987 40,332
Total assets..................................... 17,613 15,524 47,869
Long term obligations, less current portion...... 241 241 241
Total stockholders' equity....................... 5,971 8,882 41,227
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5
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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 21 of this prospectus and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" beginning on page 22
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 very 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 for 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 which 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 performance and availability
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

6
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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 existing 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 current competitors and
this could impair our ability to sell our products. The market for performance
and availability management software for 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 46 of this prospectus.

7
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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 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. 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 performance and availability
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 gross margin.

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
performance and availability management software for 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" at page 46 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 hurt 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 or 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 months ended March 31, 1999. 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

8
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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. In addition to 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.

Performance and Availability Management Software for Windows NT. The market
for applications management software for 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
organizations' Windows NT environments as these organizations 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 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

9
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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 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 11 employees at June
30, 1996 to 110 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 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.

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

10
<PAGE>

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 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
exchange rates
. Seasonal reductions in business . Recessionary environments in
activity during the summer foreign economies
months in Europe and other parts . Problems in collecting accounts
of the world receivable
. Increases in tariffs, duties,
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

If we do not respond adequately to our industry's evolving technology standards
and 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 for this operating system, including major revisions. Our
position in the existing market for performance and availability management
software for Windows NT-based systems and applications could be eroded rapidly
by product advances. Consequently, the life cycles of our products are
difficult to estimate.

11
<PAGE>

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 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. Most of our current customers initially license a small
portion of our products for pilot programs. During the nine months ended March
31, 1999, approximately 36% of license revenue was derived from 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. 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.

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 gross 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 complex, distributed 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

12
<PAGE>

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 entails 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 which 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.

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

13
<PAGE>

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 competive 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 costs associated with these claims, whether the claims
have merit or not, could harm our business. 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 23 of this prospectus. 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 costly litigation, 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 segment 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.

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.

14
<PAGE>

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. 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 certain conditions occur, 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 47 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 63 of this prospectus.

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 65 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 $ in net

15
<PAGE>

tangible book value per share of common stock assuming an initial public
offering price of $12.00 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 20 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, the
repayment of an outstanding loan from Compuware and potential strategic
investments or acquisitions. See "Use of Proceeds" on page 18 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.

16
<PAGE>

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" and "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 6 of this prospectus.

17
<PAGE>

USE OF PROCEEDS

We will receive net proceeds of $32,345,000 from the sale of 3,000,000 shares
of common stock at an assumed initial public offering price of $12.00 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 $2.1 million
to satisfy our outstanding loan obligation to Compuware. In addition
approximately $3.0 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 $10.80 per share which
exercise will be effective upon completion of the offering. For a more complete
description of the Compuware loan, the Compuware warrant and a discussion of
our liquidity position, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" beginning on page 23 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.

18
<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 and 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 an assumed initial public offering price of $12.00 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 and the
receipt of net proceeds in connection with the exercise of a warrant to
purchase 280,025 shares of common stock at a exercise price of $10.80 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 23 of this prospectus and
"Description of Capital Stock" on page 62 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 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, 20,000,000
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 18,458 50,803
Deferred stock-based compensation.............. (2,325) (2,325) (2,325)
Accumulated deficit............................ (6,802) (7,251) (7,251)
------- ------- -------
Total stockholders' equity................... 5,971 8,882 41,227
------- ------- -------
Total capitalization....................... $11,356 $ 9,267 $41,612
======= ======= =======
</TABLE>

19
<PAGE>

DILUTION

The pro forma net tangible book value of NetIQ as of March 31, 1999 was
$5,971,000, or approximately $1.51 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 an assumed
initial public offering price of $12.00 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 $41,227,000, or approximately $2.82 per share. This
represents an immediate increase in pro forma net tangible book value of $1.31
per share to existing stockholders and an immediate dilution in net tangible
book value of $9.18 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>
Assumed public offering price per share..................... $12.00
Pro forma net tangible book value per share as of March
31, 1999................................................. $1.51
Increase attributable to new investors.................... 1.31
--- -----
Pro forma net tangible book value per share after offering.. 2.82
--- ------
Dilution per share to new investors......................... $ 9.18
======
</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 an assumed public offering
price of $12.00 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% $14,184,000 28% $ 1.22
New investors.................. 3,000,000 21 36,000,000 72 $12.00
---------- ----- ----------- -----
Total........................ 14,624,274 100.0% 50,184,000 100.0%
========== ===== =========== =====
</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 52 of this prospectus, "Description of Capital Stock" on page 62 of this
prospectus and Notes 5 and 13 of Notes to Consolidated Financial Statements on
pages F-11 and F-17 of this prospectus.

20
<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-7 of this prospectus.

21
<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 are a leading provider of 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 11 at June 30, 1996,
to 110 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 was the result of 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 a deficit in
retained earnings 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 1997 to 87% in 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 in 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.

22
<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 48 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 $10.80 per share using the
assumed initial offering price. Compuware has delivered us a notice that it
will exercise the warrant in full upon the closing of this offering. Upon
completion of this offering, we will pay approximately $2.1 million to satisfy
our loan and interest obligation to Compuware, and the remaining $3.0 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.

23
<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.

24
<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 1998 but less than 2% in 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 344%. 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.

25
<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 5
people to 12 people at the end of each period. 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. Additionally we anticipate that we
will incur additional general and administrative expenses of approximately
$336,000 in the quarter ending September 30, 1999, relating to the assumed
exercise of the warrant to purchase common stock issued in connection with the
Compuware litigation settlement agreement.

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 and we expect to incur
additional deferred stock-based compensation of approximately $600,000 in the
quarter ending June 30, 1999. We expect to amortize $600,000 of deferred stock-
based compensation in the quarter ending 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 is expected to be repaid
from the proceeds of the public offering. See "Business--Liquidity and Capital
Resources" on page 30 of this prospectus for a further discussion of this loan.

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

26
<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 one
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, 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 8
at June 30, 1998. Legal expenses, were $173,000 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.

27
<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>

28
<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 at the time
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 estimates of 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 $131,000
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 14 of
this prospectus for a further discussion of these seasonal trends.

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.

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 2000.
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.

29
<PAGE>

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 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 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

30
<PAGE>

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:

. 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.

31
<PAGE>

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 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.

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<PAGE>

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 13 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.

33
<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 are a leading provider of 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 insure 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.

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, organizations 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-

34
<PAGE>

wide system applications with remote consoles. 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 organizations 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 performance and availability
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 $2.2 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 application 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 system management solutions designed
specifically for the Windows NT environment. We believe a complete performance
and availability 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

The NetIQ Solution

Our AppManager products provide a comprehensive solution for centrally
managing the performance of organizations' Windows NT environments. Utilizing a
centralized console with automated monitoring,

35
<PAGE>

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 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.

36
<PAGE>

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 Application 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 organizations 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.

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

37
<PAGE>

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.]

38
<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>
<C> <C> <S>
Server or NetIQ Products
Product Category (Year Introduced) Representative Functionality
- ---------------------------------------------------------------------------------------
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 system events and exceptional data only 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.

40
<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.]

41
<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

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

Dresdner Bank AG
Great West Life & Annuity Insurance ALCOA

JC Bradford & Co. Boeing Shared Services
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>

Selected Customer Applications

<TABLE>
<S> <C>
Customer Application
- -----------------------------------------------------------------------------

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.
- -----------------------------------------------------------------------------

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
the company's Microsoft Windows NT-based e-commerce site
to serve thousands of customers, generating $50.35
million in the first quarter of 1999. 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. This
directly contributes to increased levels of application
availability, as well as overall higher service levels
for Countrywide's internal and external clients.

</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 Fairfax, Virginia, and
our international field offices in London, Munich, Sydney and Tokyo. Each of
our field sales offices includes a territory manager, one or more systems
engineers and a channel sales representative. The territory manager and system
engineer concentrate on Fortune 1000-sized accounts that have at least 100
Windows NT servers. The channel sales representative focuses 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, 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. 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 product-based relationship.
Microsoft is one of our largest customers. 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

44
<PAGE>

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.

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. 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

45
<PAGE>

purposes. For a further discussion of our research and development programs,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on page 25 of this prospectus and "Risk Factors--If we do not
respond adequately to our industry's evolving technology standards . . ." on
page 12 of this prospectus.

Competition

The market for performance and availability management software for 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-- . . ." on page 7 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 performance
and availability management software for 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 performance and availability management software for
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. 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.

46
<PAGE>

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 is incorporated in our AppManager Suite from
Summit Software on a non-exclusive, worldwide basis. 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 110 full-time employees, 35 of whom were engaged
in research and development, 37 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 additional and retain qualified personnel, see "Risk Factors--
We will need to recruit and retain additional qualified personnel..." on page
10 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 twelve 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
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 with Mr. Hwang 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.

48
<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

49
<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 a one-year term, two will be elected to two-year term and two
will be elected to a three-year term. 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."

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.
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 58 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 10 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 52 of this prospectus for more detailed information regarding our
stock option plan.

Executive Compensation

The table below sets forth information concerning the compensation awarded
to, earned by, or paid for services rendered to NetIQ in all capacities during
the fiscal year ended June 30, 1998 by our President and Chief Executive
Officer and our next most highly compensated executive officers whose salary
and bonus for fiscal 1998 exceeded $100,000. Other than the salary and bonus
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 1998. Bonus and commission
figures for fiscal 1998 include bonuses and commissions earned and paid in
fiscal 1998 as well as bonuses and commissions earned in fiscal 1998 but paid
in fiscal 1999. 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 Life
Name and Principal Underlying Insurance
Position Salary Bonus Commissions Options Premiums
- ------------------ -------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Ching-Fa Hwang
President and Chief
Executive Officer..... $ 91,947 $ -- $ -- -- $108
Thomas R. Kemp
Vice President,
Marketing............. 101,919 320 -- 23,332 108
Glenn S. Winokur
Vice President, Sales.. 85,212 17,858 219,029 16,666 108
</TABLE>

Option Grants During Fiscal Year 1998

The following table sets forth information with respect to stock options
granted to each of the named executive officers during fiscal 1998, including
the potential realizable value assuming an initial public offering

51
<PAGE>

price of $12.00 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 1998, we
granted options to acquire up to an aggregate of 1,005,627 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 1998 Per Share Date 5% 10%
- ---- ---------- ----------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Ching-Fa Hwang... -- -- -- -- -- --
Thomas R. Kemp... 16,666 1.66% $0.30 05/07/08 $481,168 $770,623
6,666 0.66% 0.30 06/22/08 192,467 308,249
Glenn S.
Winokur......... 16,666 1.66% 0.30 06/22/08 481,168 770,623
</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 1998, and the number of
shares of common stock subject to exercisable stock options held as of June 30,
1998, by the named executive officers. The "Value of Unexercised In-the-Money
Options at June 30, 1998" is based upon a value of $12.00 per share, the
assumed 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, 1998 June 30, 1998
------------------ ------------------------- -------------------------
Value
Date Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- --------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ching-Fa Hwang.......... -- -- -- -- -- --
Thomas R. Kemp.......... 85,333 $20,480 16,666 113,333 $ 198,992 $ 722,170
Glenn S. Winokur........ -- -- 84,166 69,166 1,004,942 1,349,184
</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.

52
<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

53
<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 10 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.

54
<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.

55
<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.

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

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.

56
<PAGE>

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.

57
<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, 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 and investor
relationship management, and 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 56 of this prospectus.

58
<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 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
50 of this prospectus.

59
<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 . all directors and executive
common stock 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 19 of this prospectus and "Description of Capital
Stock" on page 62 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>
<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>
5% Stockholders:
Wongfratris Investment Company(1)...... 1,083,332 -- 9.3% 7.4%
51 Jordan Place
Palo Alto, CA 94303
Sen-Tien Lee........................... 999,999 -- 8.6% 6.8%
29 Alley 18, Lane 325
Chien Kung Road
Taipei, Taiwan
R.O.C
InveStar Burgeon Venture Capital(2).... 666,666 122,222 6.7% 5.3%
Leeware One Building
Safe Haven Corporate Center
Seven Mile Beach, Grand Canyon
Cayman Islands
British West Indies
Direct International Limited(3)........ 600,000 133,333 6.2% 5.0%
Charlotte House, Charlotte St.
P.O. Box N-341
Nassau, Bahamas

Current Named Executive Officers and
Directors:
Ching-Fa Hwang (4)..................... 1,899,997 40,000 16.6% 13.2%
Glenn S. Winokur....................... 90,208 13,125 * *
Her-Daw Che (5)........................ 1,073,332 33,333 9.5% 7.6%
Ying-Hon Wong (6)...................... 1,083,332 -- 9.3% 7.4%
Thomas R. Kemp......................... 163,664 -- 1.4% 1.1%
Herbert Chang (7)...................... 666,666 122,222 6.7% 5.3%
Alan W. Kaufman........................ -- 16,666 * *
Louis C. Cole.......................... -- -- -- --
All directors and executive officers as
a group (10 persons).................. 5,008,448 225,346 44.2% 35.2%
</TABLE>

60
<PAGE>

- ---------------------
* 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 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.

(6) 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 50 of this
prospectus for a more detailed description of the option granted Mr. Chang.

(7) 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.

61
<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 $10.80, 90% of the per share sale price of
shares sold to investors 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 30 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

62
<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 15 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.

63
<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 15 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 15 of this prospectus for a further discussion of antitakeover
provisions of Delaware law.

Nasdaq National Market Listing

We have applied 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.

64
<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 19 of this prospectus, and
"Description of Capital Stock" on page 62 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 11,344,249 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

65
<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.

66
<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.............................
BancBoston Robertson Stephens, Inc.................................
Hambrecht & Quist LLC..............................................
Total............................................................
</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 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 $ per share. The underwriters
and the selling group members may allow a discount of $ 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........................... $ $ $
Expenses payable by us................ $ $ $
</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.

67
<PAGE>

The underwriters have reserved for sale, at the initial offering price, up to
shares of common stock for employees and other persons associated with
NetIQ who have expressed an interest in purchasing common stock in this
offering. The number of shares of common stock available for sale to the
general public in this offering will be reduced to the extent these persons
purchase the reserved shares. Any reserved shares not so purchased will be
offered by the underwriters to the general public on the same terms as the
other shares.

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 applied to list the 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.

68
<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.

69
<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 & Forester, 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, 1998 and 1997 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.

70
<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.

San Jose, California
May 19, 1999

( , 1999 as to Note 13)

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

To the Board of Directors and Stockholders of NetIQ Corporation:

The accompanying consolidated financial statements included herein reflect
the approval by the Company's stockholders of the Company's two-for-three
reverse stock split of the Company's common and preferred stock as described in
Note 13 to the consolidated financial statements. The above opinion is in the
form that will be signed by Deloitte & Touche LLP upon the effectiveness of
such event assuming that from May 19, 1999 to the effective date of such event,
no other events shall have occurred that would affect the accompanying
consolidated financial statements or notes thereto.

Deloitte & Touche LLP
San Jose, California

June 28, 1999

F-2
<PAGE>

NetIQ CORPORATION

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

<TABLE>
<CAPTION>
June 30, Pro Forma
---------------- March 31, March 31,
1997 1998 1999 1999
------- ------- --------- -----------
(Note 1)
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 7,748 $ 3,358 $11,565 $ 9,476
Accounts receivable, net of allowance
for uncollectible accounts of $307
and $505 in 1998 and 1999 (none in
1997)............................... 159 4,055 4,766 4,766
Prepaid expenses..................... 1 167 146 146
------- ------- ------- -------
Total current assets............... 7,908 7,580 16,477 14,388
Property and equipment, net............ 272 527 1,036 1,036
Other assets........................... 22 98 100 100
------- ------- ------- -------
Total assets....................... $ 8,202 $ 8,205 $17,613 $15,524
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt...................... $ -- $ -- $ 5,144 $ 144
Accounts payable..................... 227 535 1,331 1,331
Accrued compensation and related
benefits............................ 78 809 820 820
Other liabilities.................... 38 375 917 917
Deferred revenue..................... 72 1,547 3,189 3,189
------- ------- ------- -------
Total current liabilities.......... 415 3,266 11,401 6,401
Long-term debt......................... -- -- 241 241
------- ------- ------- -------
Total liabilities.................. 415 3,266 11,642 6,642
------- ------- ------- -------
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, actual; 5,000,000
shares authorized, none outstanding,
pro forma........................... 10,955 10,955 10,955 --
Common stock--$0.001; 20,000,000
shares authorized; shares
outstanding: 1997, 3,027,583; 1998,
3,217,833; 1999, 3,944,272, actual;
100,000,000 shares authorized;
11,624,274 shares outstanding, pro
forma............................... 48 1,302 4,143 18,458
Note receivable from stockholder..... (6) (6) -- --
Deferred stock-based compensation.... (20) (1,011) (2,325) (2,325)
Accumulated deficit.................. (3,190) (6,301) (6,802) (7,251)
------- ------- ------- -------
Total stockholders' equity......... 7,787 4,939 5,971 8,882
------- ------- ------- -------
Total liabilities and
stockholders' equity............ $ 8,202 $ 8,205 $17,613 $15,524
======= ======= ======= =======
</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

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

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.

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 Pro Forma Information--The unaudited pro forma balance sheet
presents the Company's balance sheet as if the following had occurred at March
31, 1999:

(i) the exercise of warrants to acquire 280,025 shares of common stock at
an exercise price of 90% of an assumed initial public offering price of
$12.00, which warrants will be exercised upon the closing of the initial
public offering contemplated by the Company (see Note 3); (ii) the
repayment of a $5 million promissory note and accrued interest thereon
which is payable upon the initial public offering contemplated by the
Company (see Note 3); and (iii) the conversion of each share of preferred
stock to one share of common stock upon closing of the initial public
offering . Estimated proceeds from the common stock to be issued as a
result of such initial public offering are excluded.

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.

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

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 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 2000. 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>

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

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 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 warrants are
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 value of such warrants will
be charged to operating results upon the effectiveness of a registration
statement or the closing of a change in control transaction. (See Note 13) .

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.

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

5. Stockholders' Equity

At March 31, 1999, convertible preferred stock (no par value) 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.

. 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,

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

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. At March 31, 1999, unvested
options granted to non-employees totaled 29,618. 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 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.

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 employees was calculated
using a risk free interest rate of 6%, expected volatility of 50% and the
actual length of the option.

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 warrants outstanding.................... 269,181
----------
Total......................................................... 10,515,902
==========
</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

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 a weighted average price of
$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>

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

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

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>

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>

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

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
Warrants............................... -- -- -- -- 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>

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............... $(342) $(776) $(1,057) $(170)
State tax benefit........................... (60) (139) (180) (29)
Stock compensation expense.................. -- 100 542
Valuation allowance......................... 392 869 1,286 (414)
Other....................................... 10 46 (149) 71
----- ----- ------- -----
$ -- $ -- $ -- $ --
===== ===== ======= =====
</TABLE>

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

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.

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.

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

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.

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

F-17
<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

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 stock exchange will become
effective prior to the effective date of the initial public offering
contemplated by NetIQ, 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.

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. 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-18
<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]
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. Other Expenses of Issuance and Distribution

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by NetIQ in connection with the
sale of Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC registration fee.............................................. $ 12,778
NASD filing fee................................................... 5,100
Nasdaq National Market listing fee................................ 95,000
Printing and engraving costs...................................... 200,000
Legal fees and expenses........................................... 400,000
Accounting fees and expenses...................................... 400,000
Blue Sky fees and expenses........................................ 5,000
Transfer Agent and Registrar fees................................. 10,000
Miscellaneous expenses............................................ 7,122
---------
Total........................................................... 1,135,000
=========
</TABLE>

ITEM 14. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.

Article X of our Restated Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.

Article VI of our Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of NetIQ if such person acted in
good faith and in a manner reasonably believed to be in and not opposed to the
best interest of NetIQ, and, with respect to any criminal action or proceeding,
the indemnified party had no reason to believe his or her conduct was unlawful.

We have entered into indemnification agreements with its directors and
executive officers, in addition to indemnification provided for in our Bylaws,
and intends to enter into indemnification agreements with any new directors and
executive officers in the future.

ITEM 15. Recent Sales of Unregistered Securities

Since incorporation in June 1995, we have issued unregistered securities to a
limited number of persons, as described below. None of these transactions
involved any underwriters, underwriting discounts or commissions, or any public
offering, and we believe that each transaction was exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) thereof,
Regulation D promulgated thereunder or Rule 701 pursuant to compensatory
benefit plans and contracts relating to compensation as provided under such
Rule 701. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates and instruments
issued in such transactions. All recipients had adequate access, through their
relationships with NetIQ, to information about NetIQ.

1. In July 1995, NetIQ issued and sold 2,766,665 shares of common stock to
founders and directors at a purchase price per share of $.00075. These
transactions were exempt from the registration requirements of the
Securities Act by virtue of Rule 701.

II-1
<PAGE>

2. In December 1995 and April 1996, NetIQ issued and sold a total of
116,000 shares of common stock to two directors at a purchase price of
$0.06. These transactions were exempt from the registration requirements
of the Securities Act by virtue of Section 4(2).

3. Pursuant to NetIQ's 1995 Stock Option Plan, from inception to March 31,
1999, we issued and sold an aggregate of 1,119,995 shares of common
stock to certain of its employees, officers, directors and consultants.
These transactions were exempt from the registration requirements of the
Securities Act by virtue of Rule 701.

4. On September 14, 1995, we issued and sold 4,666,656 shares of Series A
Preferred Stock to a total of 28 investors for an aggregate purchase
price of $2,800,000. These transactions were exempt from the
registration requirements of the Securities Act by virtue of Section
4(2) and Regulation D.

5. On May 14, 1997 we issued and sold 2,733,321 shares of Series B
Preferred Stock to a total of 32 investors for an aggregate purchase
price of $8,200,000. These transactions were exempt from the
registration requirements of the Securities Act by virtue of Section
4(2) and Regulation D.

6. On March 10, 1999, we issued to one party a warrant to purchase that
number of shares of Common Stock equal to 2% of the outstanding voting
stock of the company on a fully diluted basis as of the date of exercise
at an exercise price of 90% of the price to public in an initial public
offering undertaken by us. These transactions were exempt from the
registration requirements of the Securities Act by virtue of Section
4(2).

7. On May 28, 1999, we issued and sold to one party 26,666 shares of common
stock in connection with a software development agreement. These
transactions were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2).

ITEM 16. Exhibits and Financial Statement Schedules

(a) Exhibits

II-2
<PAGE>

<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <C> <S>
10.5A+ (a) BasicScript License Agreement, dated August 27, 1996, between NetIQ
and Henneberry Hill Technologies Corporation doing business as
Summit Software Company
10.5B (a) Amendment, dated May 21, 1999, to the BasicScript License Agreement
between NetIQ and Henneberry Hill Technologies Corporation doing
business as Summit Software Company

10.6+ (a) Software Distribution Agreement, dated June 23, 1998, between NetIQ
and Tech Data Product Management, Inc.
10.7 (a) Agreement of Sublease, dated July 31, 1998, between NetIQ and AMP
Incorporated
10.8 (a) Confidential Settlement Agreement, dated March 10, 1999, by and
between Compuware Corporation, NetIQ Corporation and the
individuals named therein
21.1 (a) List of subsidiaries
23.1 (b) Independent Auditors' Consent
23.3 (a) Form of Consent of Counsel (included in Exhibit 5.1)
24.1 (a) Power of Attorney
27.1 (a) Financial Data Schedule
</TABLE>
- ---------------------

+ Confidential treatment requested for portions of these agreements.

(a) Previously filed.

(b) Filed herewith.

(b) Financial Statement Schedules

(1) Schedule II - Valuation and Qualifying Accounts.

Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. Undertakings

The undersigned hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by NetIQ for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of NetIQ pursuant to the provisions referenced in Item 14 of this registration
statement or otherwise, we have been advised that in the opinion of the SEC
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by NetIQ of
expenses incurred or paid by a director, officer, or controlling person of
NetIQ in the successful defense of any action, suit or proceeding) is asserted
by a director, officer or controlling person in connection with the securities
being registered hereunder, we will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.

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

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act, NetIQ Corporation has
duly caused this Amendment No. 1 to the Registration Statement on Form S-1 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Santa Clara, State of California, on the 28th day of June, 1999.

NETIQ CORPORATION

Ching-Fa Hwang*
By: _____________________________________
Ching-Fa Hwang
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Name Title Date
---- ----- ----

<S> <C> <C>
Ching-Fa Hwang* President, Chief Executive June 28, 1999
______________________________________ Officer and Director
(Ching-Fa Hwang) (Principal Executive
Officer)

/s/ James A. Barth Vice President, Finance June 28, 1999
______________________________________ and Chief Financial
(James A. Barth) Officer (Principal
Financial and Accounting
Officer)

Kuo-Wei Chang* Director June 28, 1999
______________________________________
(Kuo-Wei Chang)

Her-Daw Che* Vice President, June 28, 1999
______________________________________ Engineering and Director
(Her-Daw Che)

Louis Cole* Director June 28, 1999
______________________________________
(Louis Cole)

Alan W. Kaufman* Director June 28, 1999
______________________________________
(Alan W. Kaufman)

Ying-Hon Wong* Director June 28, 1999
______________________________________
(Ying-Hon Wong)

/s/ James A. Barth
*By: _________________________________
(James A. Barth)
Attorney-in-Fact
</TABLE>

II-4
<PAGE>

INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To the Board of Directors and Stockholders of NetIQ Corporation:

We have audited the consolidated financial statements of NetIQ Corporation
(the Company) for the years ended June 30, 1996, 1997, 1998, and the nine
months ended March 31, 1999, and have issued our report thereon dated May 19,
1999 ( , 1999 as to Note 13)(included elsewhere in this registration
statement). Our audits also included the financial statement schedule of the
Company, listed in Item 16(b). The financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly in all material respects the information set
forth therein.

San Jose, California
May 19, 1999

To the Board of Directors and Stockholders of NetIQ Corporation:

The accompanying consolidated financial statements/schedule included herein
reflect the approval by the Company's stockholders of the Company's two-for-
three reverse stock split of the Company's common and preferred stock as
described in Note 13 to the consolidated financial statements. The above
opinion is in the form that will be signed by Deloitte & Touche LLP upon the
effectiveness of such event assuming that from May 19, 1999 to the effective
date of such event, no other events shall have occurred that would affect the
accompanying consolidated financial statements/schedule or notes thereto.

Deloitte & Touche LLP
San Jose, California

June 28, 1999

S-1
<PAGE>

SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

<TABLE>
<CAPTION>
Balance Charged Balance
at to cost at end
Beginning and Deductions/end of
of Period expenses of period period
--------- -------- -------------- -------
<S> <C> <C> <C> <C>
Year ended June 30, 1996
Allowance for doubtful accounts..... $ -- $ -- $-- $ --
Allowance for sales returns......... $ -- $ -- $-- $ --
==== ===== === ====
Year ended June 30, 1997
Allowance for doubtful accounts..... $ -- $ -- $-- $ --
Allowance for sales returns......... $ -- $ -- $-- $ --
==== ===== === ====
Year ended June 30, 1998
Allowance for doubtful accounts..... $ -- $ 307 $-- $307
Allowance for sales returns......... $ -- $ 50 $-- $ 50
==== ===== === ====
Nine months ended March 31, 1999
Allowance for doubtful accounts..... $307 $ 198 $-- $505
Allowance for sales returns......... $ 50 $ 115 $-- $165
==== ===== === ====
</TABLE>

S-2
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
Number Exhibit Title
------ -------------
<C> <C> <S>
1.1 (a) Form of Underwriting Agreement
3.1A (b) Certificate of Incorporation of NetIQ currently in effect
3.1B (a) Form of Restated Certificate of Incorporation of NetIQ to be in
effect after the closing of the offering made under this
Registration Statement
3.2A (b) Bylaws of NetIQ currently in effect
3.2B (a) Bylaws of NetIQ to be in effect after the closing of the offering
made under this Registration Statement
4.1 (a) Specimen Common Stock Certificate
4.2 (a) Registration Rights Agreement, dated May 14, 1997, by and among
NetIQ and certain NetIQ stockholders identified therein
5.1 (a) Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation
10.1 (a) Form of Indemnification Agreement between NetIQ and each of its
directors and executive officers
10.2 (a) Form of Change of Control Severance Agreements between NetIQ and
each of its executive officers
10.3A (a) Amended and Restated 1995 Stock Plan
10.3B (a) Form of Stock Option Agreement under the Amended and Restated 1995
Stock Plan
10.3C (a) Form of Director Option Agreement under 1995 the Amended and
Restated Stock Plan
10.4A (a) 1999 Employee Stock Purchase Plan
10.4B (a) Form of Subscription Agreement under the 1999 Employee Stock
Purchase Plan
10.5A+ (a) BasicScript License Agreement, dated August 27, 1996, between NetIQ
and Henneberry Hill Technologies Corporation doing business as
Summit Software Company
10.5B (a) Amendment, dated May 21, 1999, to the BasicScript License Agreement
between NetIQ and Henneberry Hill Technologies Corporation doing
business as Summit Software Company
10.6+ (a) Software Distribution Agreement, dated June 23, 1998, between NetIQ
and Tech Data Product Management, Inc.
10.7 (a) Agreement of Sublease, dated July 31, 1998, between NetIQ and AMP
Incorporated
10.8 (a) Confidential Settlement Agreement, dated March 10, 1999, by and
between Compuware Corporation, NetIQ Corporation and the
individuals named therein
21.1 (a) List of subsidiaries
23.1 (b) Independent Auditors' Consent
23.3 (a) Form of Consent of Counsel (included in Exhibit 5.1)
24.1 (a) Power of Attorney (see Page II-4)
27.1 (a) Financial Data Schedule
</TABLE>
- ---------------------

+ Confidential treatment requested for portions of these agreements.

<PAGE>

EXHIBIT 3.1A

AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

NETIQ CORPORATION

NetIQ Corporation, a corporation organized and existing under the laws of
the State of Delaware, hereby certifies as follows:

A. The name of the corporation is NetIQ Corporation. The corporation
was originally incorporated under the same name and the original Certificate of
Incorporation of the corporation was filed with the Secretary of State of the
State of Delaware on May 26, 1999.

B. This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of the General Corporation Law of the
State of Delaware by the Board of Directors and the stockholder of this
corporation.

C. Pursuant to Section 242 and 245 of the General Corporation Law of
the State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation.

D. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:

Article I.

The name of the corporation is NetIQ Corporation (the "Corporation").

Article II.

The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, Delaware 19801,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.

Article III.

The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
<PAGE>

Article IV.

1. Authorized Capital. This Corporation is authorized to issue
------------------
41,100,000 shares of its capital stock, $0.001 par value per share, which shall
be divided into two classes known as Common Stock and Preferred Stock,
respectively.

The total number of shares of Common Stock which this Corporation is
authorized to issue is 30,000,000. The total number of shares of Preferred
Stock which this Corporation is authorized to issue is 11,100,000. This
Corporation is authorized to issue two series of its Preferred Stock which shall
be known as its Series A Preferred Stock (the "Series A Preferred Stock"),
consisting of 7,000,000 shares, and its Series B Preferred Stock (the "Series B
Preferred Stock"), consisting of 4,100,000 shares. Except as specifically set
forth herein, reference hereafter to "Preferred Stock" shall mean the Series A
Preferred Stock or the Series B Preferred Stock.

2. Authorized Capital Following Automatic Conversion Event. Upon the
-------------------------------------------------------
automatic conversion of all outstanding shares of Preferred in accordance with
the provisions of Article V, Section 5.2 of this Certificate of Incorporation
(the "Automatic Conversion Event"), the Company shall immediately thereafter be
authorized to issue two classes of stock to be designated, respectively, Common
Stock and Preferred Stock. Immediately following any Automatic Conversion
Event, the total number of shares of Common Stock which the Company shall have
the authority to issue shall be 150,000,000, $.001 par value, and the total
number of shares of Preferred Stock the Company shall have the authority to
issue shall be 5,000,000, $.001 par value. Immediately following any Automatic
Conversion Event, the Preferred Stock may be issued from time to time in one or
more series pursuant to a resolution or resolutions providing for such issue
duly adopted by the Board of Directors (authority to do so being hereby
expressly vested in the Board). The Board of Directors is further authorized to
determine or alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and to fix the
number of shares of any series of Preferred Stock and the designation of any
such series of Preferred Stock. The Board of Directors, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares in any such series then
outstanding), the number of shares of any series subsequent to the issue of
shares of that series.

3. Restatement of Certificate of Incorporation. Immediately following
--------------------------------------------
any Automatic Conversion Event, the Board of Directors of the Company is
authorized, without the further consent or approval of the stockholders of the
Company to amend and restate this Certificate of Incorporation to show the
authorized classes of capital stock as set forth in the preceding paragraph and
to eliminate all references in this Certificate of Incorporation to the rights,
preferences, privileges and restrictions of the series of Preferred Stock
including those set forth in Article IV above and Article V below (and, in
connection with any such amendment and restatement, to renumber the remaining
Articles).
<PAGE>

Article V.

The rights, preferences, privileges and restrictions granted to or imposed
upon the respective classes of shares or the holders thereof are as follows:

1. Dividend Rights. The holders of the Series A Preferred Stock and
---------------
Series B Preferred Stock shall be entitled to receive, out of any funds legally
available therefor, when and as declared by the Board of Directors, dividends at
the rate of $.04 and $.16 per annum, respectively, on each outstanding share of
Preferred Stock held by them. Such dividends shall be paid prior and in
preference to any payment of any dividend on or any other distribution with
respect to any shares of Common Stock. The right to such dividends on the
Preferred Stock shall not be cumulative, and no right shall accrue to holders of
Preferred Stock by reason of the fact that dividends on such shares are not
declared or paid in any prior year. There shall be no preference to any payment
of dividend as between the Series A Preferred Stock and the Series B Preferred
Stock.

2. Liquidation Rights. In the event of any liquidation, dissolution or
------------------
winding up of the Corporation (a "Liquidation Event"), whether voluntary or not,
the assets of the Corporation legally available for distribution to its
shareholders shall be distributed as follows: (i) the holders of Preferred Stock
shall be entitled to receive, before any amount shall be paid to holders of
Common Stock or of any other stock ranking junior to the Preferred Stock on
liquidation, an amount equal to $0.40 per share of Series A Preferred Stock and
$2.00 per share of Series B Preferred Stock (as adjusted for stock splits,
combinations or similar events) plus all declared and unpaid dividends, if any,
to which the holders of outstanding shares of Preferred Stock are entitled;
provided, however, that (A) if, upon any Liquidation Event, the amounts payable
- -------- -------
with respect to the Preferred Stock and any other stock ranking as to any such
distribution on parity with the Preferred Stock are not paid in full, the
holders of the Preferred Stock and such other stock shall share any distribution
of assets at a rate proportional to the liquidation preference to which such
shares of Preferred Stock or other stock are entitled; (ii) the remaining assets
shall be distributed to the holders of Common Stock and Preferred Stock on a pro
rata, as-converted to Common Stock basis until the Series A Preferred Stock and
Series B Preferred Stock holders have received inclusive of the amount
stipulated in D.2.(i) above, $1.00 for the Series A Preferred Stock and $5.00
for the Series B Preferred Stock; and (iii) any remaining assets thereafter
shall be distributed to the holders of Common Stock and the Preferred Stock on a
pro rata, as converted to Common Stock basis; provided, however, that if the
-------- -------
holders of Common Stock would receive more than holders of a series of Preferred
Stock would receive under clauses (i) and (ii) herein, then holders of such
Preferred Stock shall not be entitled to any distribution under clause (i) or
(ii) herein and shall instead be entitled to receive their ratable share of any
distribution under clause (iii) above as though the holders of such Preferred
Stock were holders of shares of Common Stock into which such shares of Preferred
Stock would be convertible.

A Liquidation Event shall specifically include: (i) a consolidation or
merger of the Corporation with or into any other corporation, or any other
entity or person, or the exchange of substantially all of the outstanding stock
of the Corporation for shares of another entity or other property, in which,
after any such transaction, the prior shareholders of the Corporation hold less
than fifty percent (50%) of the voting shares of the continuing or surviving
entity; or (ii) a sale of all or substantially all of the assets of the
Corporation.
<PAGE>

3. Voting Rights. Except as otherwise required by law, the holders of
-------------
Preferred Stock and the holders of Common Stock shall be entitled to notice of
any shareholders meeting and to vote upon any matter submitted to the
shareholders for a vote, as follows: (i) the holders of Series A Preferred
Stock shall have one (1) vote for each full share of Common Stock into which
their respective shares of Preferred Stock are convertible on the record date
for the vote, (ii) the holders of Series B Preferred Stock shall have one (1)
vote for each full share of Common Stock into which their respective shares of
Preferred Stock are convertible on the record date for the vote, and (iii) the
holders of Common Stock shall have one (1) vote per share of Common Stock.

4. Certain Taxes. The Corporation shall pay any and all issuance and
-------------
other taxes (excluding any federal or state income taxes) that may be payable in
respect of any issuance or delivery of shares of Common Stock on conversion of
Preferred Stock. The Corporation shall not, however, be required to pay any tax
that may be payable in respect of any transfer involved in the issuance and
delivery of shares of Common Stock in a name other than that in which the shares
of Preferred Stock to which such issuance relates were registered, and no such
issuance or delivery shall be made unless and until the person requesting such
issuance has paid to the Corporation the amount of any such tax, or it is
established to the satisfaction of the Corporation that such tax has been paid.

5. Conversion. The holders of Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):

5.1 Right to Convert. Each share of Series A Preferred Stock or
----------------
Series B Preferred Stock shall be convertible, at the option of the holder
thereof, at any time after the date of issuance of such share, at the office of
the Corporation or any transfer agent for such stock, into such number of fully
paid and nonassessable shares of Common Stock as is determined by dividing $0.40
by the Series A Conversion Price or by dividing $2.00 by the Series B Conversion
Price as applicable to such series, determined as hereinafter provided, in
effect on the date the certificate is surrendered for conversion. The price at
which shares of Common Stock shall be deliverable upon conversion (the "Series A
Conversion Price" or the "Series B Conversion Price," as applicable) shall
initially be $0.40 for the Series A Preferred Stock and $2.00 for the Series B
Preferred Stock.

5.2 Automatic Conversion. Each share of the Series A Preferred
--------------------
Stock shall automatically be converted into shares of Common Stock at the then-
effective Series A Conversion Price (i) upon the date specified by the
affirmative vote, written consent or agreement of holders of at least 66 2/3% of
the shares of the Series A Preferred Stock then outstanding, (ii) upon the
closing of the sale of the Corporation's Common Stock in an underwritten public
offering registered under the Securities Act of 1933, as amended (the
"Securities Act"), other than a registration relating solely to a transaction
under Rule 145 under such Act (or any successor thereto) or relating to an
employee benefit plan of the Corporation, at a public offering wherein the
Common Stock is sold for not less than $1.60 per share and the aggregate
proceeds to the Corporation and/or any selling shareholders (prior to deductions
for underwriters' discounts and expenses relating to the issuance, including
without limitation fees of the Corporation's counsel) is not less than
$7,500,000, or (iii) if fewer than 1,666,667 shares of Series A Preferred Stock
are outstanding, as adjusted.
<PAGE>

Each share of the Series B Preferred Stock shall automatically be converted
into shares of Common Stock at the then-effective Series B Conversion Price (i)
upon the date specified by an affirmative vote, written consent or agreement of
holders of at least a majority of the shares of the Series B Preferred Stock
then outstanding, (ii) upon the Closing of the sale of the Corporation's Common
Stock in an underwritten public offering registered under the Securities Act of
1933, as amended (the "Securities Act"), other than a registration relating
solely to a transaction under Rule 145 under such Act (or any successor thereto)
or to an employee benefit plan of the Corporation, where the Common Stock is
sold for not less than $4.00 per share and the aggregate proceeds to the
Corporation and/or any selling shareholders (prior to deductions for
underwriter's discounts and expenses relating to the issuance, including without
limitation fees of the Corporation's counsel) is not less than $7,500,000, or
(iii) if fewer than 900,000 shares of Series B Preferred Stock are outstanding,
as adjusted.

5.3 Mechanics of Conversion.
-----------------------

5.3.1 Before any holder of Preferred Stock shall be entitled
voluntarily to convert the same into shares of Common Stock, he shall surrender
the certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for such stock, and shall give written
notice to the Corporation at such office that he elects to convert the same and
shall state therein the number of shares of Preferred Stock being converted and
the name or names in which he wishes the certificate or certificates for shares
of Common Stock to be issued. The Corporation shall as soon as practicable
thereafter issue and deliver at such office to such holder of Preferred Stock a
certificate or certificate for the number of shares of Common Stock to which he
shall be entitled. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of surrender of the
shares of Preferred Stock to be converted, and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.

5.3.2 If the conversion is in connection with an underwritten
offering of securities pursuant to the Securities Act, the conversion may, at
the option of any holder tendering shares of Preferred Stock for conversion, be
conditioned upon the closing with the underwriters of the sale of securities
pursuant to such offering, in which event the person(s) entitled to receive the
Common Stock upon conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of such
sale of securities.

5.4 Adjustments to Conversion Price for Certain Diluting Issues.
-----------------------------------------------------------

5.4.1 Special Definitions. For purposes of this Section 5,
-------------------
the following definitions apply:

(a) "Options" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or Convertible
Securities.

(b) "Original Issue Date" shall mean the date on which
share of Series B Preferred Stock was first issued.
<PAGE>

(c) The term "Conversion Price" shall mean the Series A
Conversion Price and the Series B Conversion Price, as applicable.

(d) "Convertible Securities" shall mean any evidences
indebtedness, shares or other securities convertible into or exchangeable for
Common Stock.

(e) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or, pursuant to Section 5.4.3 deemed to be
issued) by the Corporation after the Original Issue Date, other than shares of
Common Stock issued or issuable:

(1) upon conversion of shares of the then
outstanding Preferred Stock;

(2) up to 8,000,000 shares issued to officers,
directors or employees of, or consultants to, the Corporation pursuant to stock
option or stock purchase plans or agreements on terms approved by the Board of
Directors;

(3) as a dividend or distribution on Preferred
Stock;

(4) for which adjustment of the Preferred Stock
Conversion Price is made pursuant to Section 5.5;

(5) securities issued to lending or leasing
institutions or individuals in connection with bank debt, equipment leases or
non-equity interim financing, on terms approved by the Board of Directors;

(6) securities issued or issuable in an
acquisition or merger upon terms approved by a majority of the Board of
Directors; or

(7) securities issued in stock splits,
recapitalizations and similar transactions.

5.4.2 No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of a series of Preferred Stock pursuant to this Section 5.4
shall be made in respect of the issuance of Additional Shares of Common Stock
unless the consideration per share (determined pursuant to Section 5.4.5 hereof)
for an Additional Share of Common Stock issued or deemed to be issued by the
Corporation is less than the Conversion Price for such series of Preferred Stock
in effect on the date of, and immediately prior to, such issue.

5.4.3 Deemed Issue of Additional Shares of Common. Except as
-------------------------------------------
otherwise provided in Section 5.4 hereof, in the event the Corporation at any
time or from time to time after the Original Issue Date shall issue any Options
or Convertible Securities or shall fix a record date for the determination of
holders of any class of securities then entitled to receive any such Options or
Convertible Securities, then the maximum number of shares (as set forth in the
<PAGE>

instrument relating thereto without regard to any provisions contained therein
designed to protect against dilution) of Common Stock issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock, issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that in any such case in which Additional Shares of
Common Stock are deemed to be issued:

(a) no further adjustments in the Conversion Price
shall be made upon the subsequent issue of Convertible Securities or shares of
Common Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;

(b) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Corporation, or decrease or
increase in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Options or the rights of conversion or exchange under
such Convertible Securities (provided, however, that no such adjustment of the
Conversion Price shall affect Common Stock previously issued upon conversion of
the Preferred Stock);

(c) upon the expiration of any such Options or any
rights of conversion or exchange under such Convertible Securities which shall
not have been exercised, the Conversion Price computed upon the original issue
thereof (or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:

(1) in the case of Convertible Securities or
Options for Common Stock the only Additional Shares of Common Stock issued were
the shares of Common Stock, if any, actually issued upon the exercise of such
Options or the conversion or exchange of such Convertible Securities and the
consideration received therefor was the consideration actually received by the
Corporation for the issue of all such Options, whether or not exercised, plus
the consideration actually received by the Corporation upon such exercise, or
for the issue of all such Convertible Securities which were actually converted
or exchanged, plus the additional consideration, if any, actually received by
the Corporation upon such conversion or exchange, and

(2) in the case of Options for Convertible
Securities only the Convertible Securities, if any, actually issued upon the
exercise thereof were issued at the time of issue of such Options, and the
consideration received by the Corporation for the Additional Shares of Common
Stock deemed to have been then issued was the consideration actually received by
the Corporation for the issue of all such Options, whether or not exercised,
plus the consideration deemed to have been received by the Corporation
(determined pursuant to Section 5.4.5 upon the issuance of the Convertible
Securities with respect to which such Options were actually exercised);
<PAGE>

(d) no readjustment pursuant to clause (b) or (c)
above shall have the effect of increasing a Conversion Price to an amount which
exceeds the lower of (a) such Conversion Price on the original adjustment date,
or (b) such Conversion Price that would have resulted from any issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.

(e) in the case of any Options which expire by their
terms not more than sixty (60) days after the date of issue thereof, no
adjustment of a Conversion Price shall be made until the expiration or exercise
of all such Options, whereupon such adjustment shall be made in the same manner
provided above.

5.4.4 Adjustment of Conversion Price Upon Issuance of
-----------------------------------------------
Additional Shares of Common Stock. In the event the Corporation, at any time
- ----------------------------------
after the Original Issue Date, shall issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Section 5.4.3) without consideration or for a consideration per share less than
the Conversion Price for a series of Preferred Stock in effect on the date of
and immediately prior to such issue, then and in such event:

(1) the Conversion Price for such Preferred Stock
shall be reduced, concurrently with such issue, to a Conversion Price
(calculated to the hundredth of a cent) determined by multiplying the existing
Conversion Price of such series by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of Additional
Shares of Common Stock so issued would purchase at the Conversion Price in
effect immediately prior to such issuance, and the denominator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of such Additional Shares of Common Stock so issued.

(2) For the purpose of the above calculation, the
number of shares of Common Stock outstanding immediately prior to such issuance
shall be calculated as if all shares of Preferred Stock and all Convertible
Securities had been fully converted into shares of Common Stock immediately
prior to such issuance of Additional Shares of Common, but not including in such
calculation any additional shares of Common Stock issuable with respect to
shares of Preferred Stock, or Convertible Securities, solely as a result of the
adjustment of the respective Conversion Prices (or other conversion ratios)
resulting from the issuance of Additional Shares of Common Stock causing such
adjustment.

5.4.5 Determination of Consideration. For purposes of this
-------------------------------
Section 5.4, the consideration received by the Corporation for the issue of any
Additional Shares of Common Stock shall be computed as follows:

(a) Cash and Property. Such consideration shall:
-----------------

(1) insofar as it consists of cash, be computed
at the aggregate gross amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
<PAGE>

(2) insofar as it consists of property other than
cash, be computed at the fair market value thereof at time of such issue, as
determined in good faith by the Board of Directors; and

(3) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Corporation for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (a)(1) and (a)(2)
above, as determined in good faith by the Board of Directors.

(b) Options and Convertible Securities. The
----------------------------------
consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Section 5.4.3 relating to
Options and Convertible Securities shall be determined by dividing:

(1) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein designed to protect against dilution) payable
to the Corporation upon the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the case of Options for
Convertible Securities, the exercise of such Options for Convertible Securities
and the conversion or exchange of such Convertible Securities by

(2) the maximum number of shares of Common Stock
(as set forth in the instruments relating thereto, without regard to any
provision contained therein designed to protect against dilution) issuable upon
the exercise of such Options or conversion or exchange of such Convertible
Securities.

5.5 Adjustment to Conversion Prices for Stock Dividends and for
-----------------------------------------------------------
Combinations or Subdivisions of Common Stock. In the event that the Corporation
- --------------------------------------------
at any time or from time to time after the Original Issue Date shall declare or
pay, without consideration, any dividend on the Common Stock payable in Common
Stock or in any right to acquire Common Stock for no consideration, or shall
effect a subdivision of the outstanding shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the Conversion
Price for any series of Preferred Stock in effect immediately prior to such
event shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event that the
Corporation shall declare or pay, without consideration, any dividend on the
Common Stock payable in any right to acquire Common Stock for no consideration,
then the Corporation shall be deemed to have made a dividend payable in Common
Stock in an amount of shares equal to the maximum number of shares issuable upon
exercise of such rights to acquire Common Stock.

5.6 Adjustments for Reclassification and Reorganization. If the
---------------------------------------------------
Common Stock issuable upon conversion of the Preferred Stock shall be changed
into the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or
<PAGE>

otherwise (other than a subdivision or combination of shares provided for in
Section 5.5) the Conversion Prices then in effect shall, concurrently with the
effectiveness of such reorganization or reclassification, be proportionately
adjusted so that each series of Preferred Stock shall be convertible into, in
lieu of the number of shares of Common Stock which the holders would otherwise
have been entitled to receive, a number of shares of such other class or classes
of stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the holders upon conversion of the Preferred Stock
immediately before that change.

5.7 No Impairment. The Corporation will not, by amendment of this
-------------
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Preferred Stock against impairment.

5.8 Certificates as to Adjustments. Upon the occurrence of each
------------------------------
adjustment or readjustment of any Conversion Price pursuant to this Section 5,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Preferred Stock a certificate executed by the Corporation's President
or Chief Financial Officer setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price for such series of Preferred Stock at the time in effect and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of such series
of Preferred Stock.

5.9 Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose,
including, without limitation, engaging in best efforts to obtain the requisite
shareholder approval of any necessary amendment to this Certificate of
Incorporation.

5.10 Fractional Shares. No fractional share shall be issued upon
-----------------
the conversion of any share or shares of Preferred Stock. All shares of Common
Stock (including fractions thereof) issuable upon conversion of more than one
share of Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the
<PAGE>

issuance of a fraction of a share of Common Stock, the Corporation
shall, in lieu of issuing any fractional share, pay the holder otherwise
entitled to such fraction a sum in cash equal to the fair market value of such
fraction on the date of conversion (as determined in good faith by the Board of
Directors).

5.11 Notices. Any notice required by the provisions of this Section
-------
5 to be given to the holders of shares of the Preferred Stock shall be deemed
given when personally delivered to such holder (including delivery by courier
service) or five (5) business days after the same has been deposited in the
United States mail, certified or registered mail, return receipt requested,
postage prepaid, and addressed to each holder of record at its address appearing
on the books of the Corporation.

6. Covenants. In addition to any other rights provided by law the
---------
following covenants shall apply:

6.1 The Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than a majority
of the outstanding shares of each class of Preferred Stock each voting as a
separate class:

(a) amend or repeal any provision of, or add any provision
to, the Corporation's Certificate of Incorporation or by-laws if such action
would alter or change the preferences, rights, privileges or powers of, or the
restrictions provided for the benefit of, such class of the Preferred Stock;

(b) increase or decrease the number of shares of such class
of Preferred Stock authorized hereby;

(c) authorize or issue shares of any class or series of
stock not authorized herein having any preference or priority as to dividends or
assets superior to or on a parity with any such preference or priority of such
class of Preferred Stock; authorize or issue shares of stock of any class or
series of any bonds, debentures, notes or other obligations convertible into or
exchangeable for, or having option rights to purchase, any shares of stock of
this Corporation having any preference or priority as to dividends or assets
superior to or on a parity with any such preference or priority of such class of
Preferred Stock; or

(d) reclassify any class or series of any Common Stock into
shares having any preference or priority as to dividends or assets superior to
or on a parity with any such preference or priority of such class of Preferred
Stock; provided, however, that this Section 6.1 shall only be effective as to
-------- -------
the Series A Preferred Stock, while at least 1,666,667 share of Series A
Preferred are outstanding, and as to the Series B Preferred Stock while at least
900,000 share of Series B Preferred Stock are outstanding.

6.2 The Corporation shall not, without first obtaining the
affirmative vote or written consent of the holders of not less than a majority
of the outstanding shares of all of the Preferred Stock voting as one class:
<PAGE>

(a) consolidate or merge the Corporation with or into any
other corporation, or any entity or person, or exchange substantially all of the
outstanding stock of the Corporation for shares of another entity or property,
in which, after any such transaction, the prior shareholders of the Corporation
hold less than fifty percent (50%) of the voting shares of the continuing or
surviving entity;

(b) sell all or substantially all of the assets of the
Corporation; or

(c) pay or declare any dividend on or other distribution
with respect to any Common Stock (except dividends payable solely in shares of
Common stock), or apply any of its assets to the redemption, retirement,
purchase or acquisition, directly or indirectly, through subsidiaries or
otherwise, of any Common Stock, except from employees, directors, and
consultants of this corporation pursuant to the terms of restrictive stock
agreements or as otherwise approved by the Board of Directors; provided,
--------
however, that this Section 6.2 shall only be effective while at least
- -------
2,566,667 share of Preferred Stock are outstanding.

7. Election of Directors. Notwithstanding provisions other than in
---------------------
this section 7, upon the first issuance by the Company of its Series B Preferred
Stock, the following provisions shall determine the election of directors of the
Company:

7.1 Number of Directors. The authorized number of directors shall
-------------------
be six (6).

7.2 Election of Directors.
---------------------

(a) The holders of the Series B Preferred Stock, voting as
a separate class, shall be entitled to elect two (2) of the directors of the
Corporation.

(b) The holders of the Series A Preferred Stock (on an as
converted to Common Stock basis) and the Common Stock, voting together as a
single class, shall be entitled to elect all other directors of the Corporation.

Article VI.

The name and mailing address of the incorporator are as follows:

Mark Baudler, Esq.
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050

Article VII.

The Corporation is to have perpetual existence.
<PAGE>

Article VIII.

Elections of directors need not be by written ballot unless a stockholder
demands election by written ballot at the meeting and before voting begins or
unless the Bylaws of the Corporation shall so provide.

Article IX.

1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which constitute the whole Board of Directors of the corporation shall be
designated in the Bylaws of the corporation.

2. At such time as the Company closes an underwritten public offering of
the Company's common stock pursuant to an effective registration statement filed
under the Securities Act of 1933, as amended, the Board of Directors shall be
divided into three classes designated as Class I, Class II and Class III,
respectively. Directors shall be assigned to each class in accordance with a
resolution or resolutions adopted by the Board of Directors. At the first
annual meeting of stockholders following such closing of an underwritten public
offering, the term of office of the Class I directors shall expire and Class I
directors shall be elected for a full term of three years. At the second annual
meeting of stockholders following such closing of an underwritten public
offering, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third annual
meeting of stockholders following such closing of an underwritten public
offering, the term of office of the Class III directors shall expire and Class
III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting.

3. Notwithstanding the foregoing provisions of this Article, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.

4. Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of voting stock of the corporation entitled to
vote generally in the election of directors ("Voting Stock") voting together as
a single class; or (ii) by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Newly created directorships resulting from any increase in the
number of directors shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors. Any director
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of the class of directors in which the
<PAGE>

new directorship was created or the vacancy occurred and until such director's
successor shall have been elected and qualified.

5. The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of
the voting power of the then outstanding shares of Voting Stock, voting together
as a single class, shall be required for the adoption, amendment or repeal of
the following sections of the corporation's Bylaws by the stockholders of this
corporation: 2.2 (Annual Meeting) and 2.3 (Special Meeting).

6. No action shall be taken by the stockholders of the corporation
except in accordance with the Bylaws.

7. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause by the affirmative vote of the holders of at
least a majority of the voting power of all of the then-outstanding shares of
the Voting Stock, voting together as a single class; or (ii) without cause by
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock

Article X.

Notwithstanding any other provisions of this Certificate of Incorporation
or any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any affirmative vote of the holders of any particular class
or series of the Voting Stock required by law, this Certificate of Incorporation
or any Preferred Stock Designation, the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of
the then-outstanding shares of the Voting Stock, voting together as a single
class, shall be required to alter, amend or repeal Article IX or this Article X.

Article XI.

The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in Article X of this
Certificate, and all rights conferred upon the stockholders herein are granted
subject to this right.

Article XII.

In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
<PAGE>

Article XIII.

1. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall be indemnified by the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.

2. The Corporation shall indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.

3. Neither any amendment nor repeal of this Article XIII, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article XIII, shall eliminate or reduce the effect of
this Article XIII, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article XIII, would accrue
or arise, prior to such amendment, repeal or adoption of an inconsistent
provision.

Article XIV.

Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.

Article XV.

Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation.

Article XVI.

Until the Company closes an underwritten public offering of the Company's
common stock pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, stockholders shall be entitled to cumulative
voting rights as set forth in this Article XVI and the Bylaws of the
Corporation. At all elections of directors of the Corporation, each holder of
stock or of any class or classes or of a series or series thereof shall be
entitled to as many votes as shall equal the number of votes which (except for
this provision as to cumulative voting) such stockholder would be entitled to
cast for the election of directors with respect to such stockholder's shares of
stock multiplied by the number of directors to be elected, and such stockholder
may cast all of such votes for a single director or may distribute them among
the number of directors to be voted for, or for any two or more of them as such
stockholder may see fit. As of the date the Company closes an
<PAGE>

underwritten public offering of the Company's common stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended, this Article XVI shall no longer be effective and may be deleted
herefrom upon any restatement of this Certificate of Incorporation.
<PAGE>

IN WITNESS WHEREOF, the Company has caused this Amended and Restated
Certificate of Incorporation to be signed by Ching-Fa Hwang, its President and
Chief Executive Officer, effective as of June 22, 1999.

NETIQ CORPORATION

/s/ Ching-Fa Hwang
------------------
Ching-Fa Hwang
President and Chief Executive Officer

Attest:

/s/ James A. Barth
- ------------------
James A. Barth
Vice President and Chief Financial Officer

<PAGE>

EXHIBIT 3.2A

AMENDED AND RESTATED BYLAWS

NETIQ CORPORATION
a Delaware Corporation

Effective as of June 22, 1999

<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I CORPORATE OFFICES 1
1.1 REGISTERED OFFICE................................................. 1
1.2 OTHER OFFICES..................................................... 1

ARTICLE II MEETINGS OF STOCKHOLDERS 1
2.1 PLACE OF MEETINGS................................................. 1
2.2 ANNUAL MEETING.................................................... 1
2.3 SPECIAL MEETING................................................... 1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.................................. 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS... 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE...................... 3
2.7 QUORUM............................................................ 3
2.8 ADJOURNED MEETING; NOTICE......................................... 4
2.9 VOTING............................................................ 4
2.10 WAIVER OF NOTICE.................................................. 4
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING........... 5
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS....... 5
2.13 PROXIES........................................................... 6
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE............................. 6
2.15 CONDUCT OF BUSINESS............................................... 6

ARTICLE III DIRECTORS 7
3.1 POWERS............................................................ 7
3.2 NUMBER............................................................ 7
3.3 CLASSES OF DIRECTORS.............................................. 7
3.4 RESIGNATION AND VACANCIES......................................... 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.......................... 8
3.6 REGULAR MEETINGS.................................................. 9
3.7 SPECIAL MEETINGS; NOTICE.......................................... 9
3.8 QUORUM............................................................ 9
3.9 WAIVER OF NOTICE.................................................. 9
3.10 ADJOURNED MEETING; NOTICE......................................... 10
3.11 CONDUCT OF BUSINESS............................................... 10
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................. 10
3.13 FEES AND COMPENSATION OF DIRECTORS................................ 10
3.14 REMOVAL OF DIRECTORS.............................................. 10
</TABLE>

-i-
<PAGE>

TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE IV COMMITTEES............................................................ 11
4.1 COMMITTEES OF DIRECTORS............................................ 11
4.2 COMMITTEE MINUTES.................................................. 11
4.3 MEETINGS AND ACTION OF COMMITTEES.................................. 11

ARTICLE V OFFICERS............................................................... 12
5.1 OFFICERS........................................................... 12
5.2 APPOINTMENT OF OFFICERS............................................ 12
5.3 REMOVAL AND RESIGNATION OF OFFICERS................................ 12
5.4 CHAIRMAN OF THE BOARD.............................................. 13
5.5 CHIEF EXECUTIVE OFFICER............................................ 13
5.6 PRESIDENT.......................................................... 13
5.7 VICE PRESIDENT..................................................... 13
5.8 SECRETARY.......................................................... 14
5.9 CHIEF FINANCIAL OFFICER............................................ 14
5.10 ASSISTANT SECRETARY................................................ 15
5.11 AUTHORITY AND DUTIES OF OFFICERS................................... 15

ARTICLE VI INDEMNITY............................................................. 15
6.1 THIRD PARTY ACTIONS................................................ 15
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION...................... 15
6.3 SUCCESSFUL DEFENSE................................................. 16
6.4 DETERMINATION OF CONDUCT........................................... 16
6.5 PAYMENT OF EXPENSES IN ADVANCE..................................... 16
6.6 INDEMNITY NOT EXCLUSIVE............................................ 16
6.7 INSURANCE INDEMNIFICATION.......................................... 17
6.8 THE CORPORATION.................................................... 17
6.9 EMPLOYEE BENEFIT PLANS............................................. 17
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES........ 17

ARTICLE VII RECORDS AND REPORTS.................................................. 18
7.1 MAINTENANCE AND INSPECTION OF RECORDS.............................. 18
7.2 INSPECTION BY DIRECTORS............................................ 18
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS..................... 18

ARTICLE VIII GENERAL MATTERS..................................................... 19
8.1 CHECKS............................................................. 19
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS................... 19
</TABLE>

-ii-
<PAGE>

TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES............................. 19
8.4 SPECIAL DESIGNATION ON CERTIFICATES................................ 20
8.5 LOST CERTIFICATES.................................................. 20
8.6 CONSTRUCTION; DEFINITIONS.......................................... 20
8.7 DIVIDENDS.......................................................... 21
8.8 FISCAL YEAR........................................................ 21
8.9 SEAL............................................................... 21
8.10 TRANSFER OF STOCK.................................................. 21
8.11 STOCK TRANSFER AGREEMENTS.......................................... 21
8.12 REGISTERED STOCKHOLDERS............................................ 21

ARTICLE IX AMENDMENTS............................................................ 22

ARTICLE X DISSOLUTION............................................................ 22

ARTICLE XI CUSTODIAN............................................................. 22
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES....................... 22
11.2 DUTIES OF CUSTODIAN............................................... 23

ARTICLE XII LOANS TO OFFICERS.................................................... 23
</TABLE>

-iii-
<PAGE>

AMENDED AND RESTATED BYLAWS OF

NETIQ CORPORATION

ARTICLE I

CORPORATE OFFICES
-----------------

1.1 REGISTERED OFFICE
-----------------

The registered office of the Corporation shall be 1209 Orange Street, in
the City of Wilmington, County of New Castle, State of Delaware, 19801. The
name of the registered agent of the Corporation at such location is The
Corporation Trust Company.

1.2 OTHER OFFICES
-------------

The board of directors may at any time establish other offices at any
place or places where the Corporation is qualified to do business.

ARTICLE II

MEETINGS OF STOCKHOLDERS
------------------------

2.1 PLACE OF MEETINGS
-----------------

Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the Corporation.

2.2 ANNUAL MEETING
--------------

The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. At the meeting, directors shall
be elected and any other proper business may be transacted.

2.3 SPECIAL MEETING
---------------

A special meeting of the stockholders may be called at any time by (i)
the board of directors, (ii) the chairman of the board, (iii) the president,
(iv) the chief executive officer or (v) one or more stockholders holding shares
in the aggregate entitled to cast not less than fifty percent (50%) of the votes
at that meeting.
<PAGE>

If a special meeting is called by any person other than the board of
directors, the request shall be in writing, specifying the time of such meeting
and the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, any vice
president, or the secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The officer
receiving the request shall cause notice to be promptly given to the
stockholders entitled to vote, in accordance with the provisions of Sections 2.4
and 2.5 of this Article II, that a meeting will be held at the time requested by
the person or persons who called the meeting, not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is not
given within twenty (20) days after the receipt of the request, the person or
persons requesting the meeting may give the notice. Nothing contained in this
paragraph of this Section 2.3 shall be construed as limiting, fixing, or
affecting the time when a meeting of stockholders called by action of the board
of directors may be held.

2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------

All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.6 of these Bylaws not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notice shall specify the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.

2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------

To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
stockholder's notice must be delivered to or mailed and received by the
secretary of the Corporation not less than 90 days prior to the meeting;
provided, however, that in the event that less than 100 days notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. To be in
proper form, a stockholder's notice to the secretary shall set forth:

(i) the name and address of the stockholder who intends to make the
nominations, propose the business, and, as the case may be, the name
and address of the

-2-
<PAGE>

person or persons to be nominated or the nature of the business to be
proposed;

(ii) a representation that the stockholder is a holder of record of stock
of the Corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or introduce
the business specified in the notice;

(iii) if applicable, a description of all arrangements or understandings
between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder;

(iv) such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or intended to
be proposed by the board of directors; and

(v) if applicable, the consent of each nominee to serve as director of
the Corporation if so elected.

The chairman of the meeting may refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.

2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------

Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.

2.7 QUORUM
------

The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting, or
(ii) the stockholders entitled to vote thereat, present in person or represented
by proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or

-3-
<PAGE>

represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.

When a quorum is present or represented at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provisions of the statutes or
of the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of the question.

2.8 ADJOURNED MEETING; NOTICE
-------------------------

When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.

2.9 VOTING
------

The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Sections 2.12 and 2.14 of
these Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).

Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.

2.10 WAIVER OF NOTICE
----------------

Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.

-4-
<PAGE>

2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------

Except as otherwise provided in this Section 2.11, any action required
by this chapter to be taken at any annual or special meeting of stockholders of
a Corporation, or any action that may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice, and
without a vote if a consent in writing, setting forth the action so taken, is
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.

Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.

Notwithstanding the foregoing, at such time that the Company closes an
underwritten public offering of the Company's common stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended, the stockholders of the Corporation may not take action by written
consent without a meeting but must take any such actions at a duly called annual
or special meeting.

2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------

In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action.

If the board of directors does not so fix a record date, the fixing of
such record date shall be governed by the provisions of Section 213 of the
General Corporation Law of Delaware.

A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.

-5-
<PAGE>

2.13 PROXIES
-------

Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the Corporation, but no such
proxy shall be voted or acted upon after 3 years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.

2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------

The officer who has charge of the stock ledger of a Corporation shall
prepare and make, at least 10 days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The stock ledger shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.

2.15 CONDUCT OF BUSINESS
-------------------

Meetings of stockholders shall be presided over by the chairman of the
board, if any, or in his absence by the president, or in his absence by a vice
president, or in the absence of the foregoing persons by a chairman designated
by the board of directors, or in the absence of such designation by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such matters as the regulation of the manner of voting and conduct of business.

-6-
<PAGE>

ARTICLE III

DIRECTORS
---------
3.1 POWERS
------

Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these Bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.

3.2 NUMBER
------

The authorized number of directors of the Corporation shall be six (6).
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.

3.3 CLASSES OF DIRECTORS
--------------------

At such time that the Company closes an underwritten public offering of
the Company's common stock pursuant to an effective registration statement filed
under the Securities Act of 1933, as amended, the Directors shall be divided
into three classes designated as Class I, Class II and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting of
stockholders following such closing of an underwritten public offering, the term
of office of the Class I Directors shall expire and Class I Directors shall be
elected for a full term of three years. At the second annual meeting of
stockholders following such closing of an underwritten public offering, the term
of office of the Class II Directors shall expire and Class II Directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following such closing of an underwritten public offering, the term
of office of the Class III Directors shall expire and Class III Directors shall
be elected for a full term of three years. At each succeeding annual meeting of
stockholders, Directors shall be elected for a full term of three years to
succeed the Directors of the class whose terms expire at such annual meeting.

Notwithstanding the foregoing provisions of this Article, each Director
shall serve until his successor is duly elected and qualified or until his
earlier death, resignation or removal. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.

3.4 RESIGNATION AND VACANCIES
-------------------------

Any director may resign at any time upon written notice to the
Corporation. Subject to the requirements, if any, set forth in the certificate
of incorporation, stockholders may remove directors

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<PAGE>

with or without cause. Unless otherwise provide in the certificate of
incorporation, any vacancy occurring in the board of directors with or without
cause may be filled by a majority of the remaining members of the board of
directors, although such majority is less than a quorum, or by a plurality of
the votes cast at a meeting of stockholders, and each director so elected shall
hold office until the expiration of the term of office of the director whom he
has replaced.

Unless otherwise provided in the certificate of incorporation or these
Bylaws:

(i) Vacancies and newly created directorships resulting from any increase
in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled
by a majority of the directors then in office, although less than a
quorum, or by a sole remaining director.

(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created
directorships of such class or classes or series may be filled by a
majority of the directors elected by such class or classes or series
thereof then in office, or by a sole remaining director so elected.

If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation Law
of Delaware.

If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least 10% of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.

3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------

The board of directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.

Unless otherwise restricted by the certificate of incorporation or these
Bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar

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<PAGE>

communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.

3.6 REGULAR MEETINGS
----------------

Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.

3.7 SPECIAL MEETINGS; NOTICE
------------------------

Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.

Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least 4 days before the time of
the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least 48 hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.

3.8 QUORUM
------

At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation.

3.9 WAIVER OF NOTICE
----------------

Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.

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<PAGE>

3.10 ADJOURNED MEETING; NOTICE
-------------------------

If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.

3.11 CONDUCT OF BUSINESS
-------------------

Meetings of the board of directors shall be presided over by the
chairman of the board, if any, or in his absence by the chief executive officer,
or in their absence by a chairman chosen at the meeting. The secretary shall act
as secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting. The chairman of any
meeting shall determine the order of business and the procedures at the meeting.

3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------

Unless otherwise restricted by the certificate of incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.

3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------

Unless otherwise restricted by the certificate of incorporation or these
Bylaws, the board of directors shall have the authority to fix the compensation
of directors. The directors may be paid their expenses, if any, of attendance
at each meeting of the board of directors and may be paid a fixed sum for
attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.

3.14 REMOVAL OF DIRECTORS
--------------------

Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors. If at any time a class
or series of shares is entitled to elect one or more directors, the provisions
of this Article 3.14 shall apply to the vote of that class or series and not to
the vote of the outstanding shares as a whole.

-10-
<PAGE>

ARTICLE IV

COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------

The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the Corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the Bylaws of the Corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the Corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the Corporation or a revocation
of a dissolution, or (v) amend the Bylaws of the Corporation; and, unless the
board resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.

4.2 COMMITTEE MINUTES
-----------------

Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.

4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------

Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special meetings and notice), Section 3.8

-11-
<PAGE>

(quorum) Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of
adjournment), Section 3.11 (conduct of business) and 3.12 (action without a
meeting), with such changes in the context of those Bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members; provided, however, that the time of regular meetings of committees may
also be called by resolution of the board of directors and that notice of
special meetings of committees shall also be given to all alternate members, who
shall have the right to attend all meetings of the committee. The board of
directors may adopt rules for the government of any committee not inconsistent
with the provisions of these Bylaws.

ARTICLE V

OFFICERS
--------
5.1 OFFICERS
--------

The officers of the Corporation shall be a chief executive officer, one
or more vice presidents, a secretary and a chief financial officer. The
Corporation may also have, at the discretion of the board of directors, a
chairman of the board, a president, a chief operating officer, one or more
executive, senior or assistant vice presidents, assistant secretaries and any
such other officers as may be appointed in accordance with the provisions of
Section 5.2 of these Bylaws. Any number of offices may be held by the same
person.

5.2 APPOINTMENT OF OFFICERS
-----------------------

Except as otherwise provided in this Section 5.2, the officers of the
Corporation shall be appointed by the board of directors, subject to the rights,
if any, of an officer under any contract of employment. The board of directors
may appoint, or empower an officer to appoint, such officers and agents of the
business as the Corporation may require (whether or not such officer or agent is
described in this Article V), each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in these Bylaws or
as the board of directors may from time to time determine. Any vacancy
occurring in any office of the Corporation shall be filled by the board of
directors or may be filled by the officer, if any, who appointed such officer.

5.3 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------

Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors or, in the case of an officer appointed by
another officer, by such other officer.

Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in

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<PAGE>

that notice; and, unless otherwise specified in that notice, the acceptance
of the resignation shall not be necessary to make it effective. Any resignation
is without prejudice to the rights, if any, of the Corporation under any
contract to which the officer is a party.

5.4 CHAIRMAN OF THE BOARD
---------------------

The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these Bylaws. If there is no
chief executive officer, then the chairman of the board shall also be the chief
executive officer of the Corporation and shall have the powers and duties
prescribed in Section 5.5 of these Bylaws.

5.5 CHIEF EXECUTIVE OFFICER
-----------------------

The Chief Executive Officer of the Corporation shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and the officers of the Corporation. He or she shall
preside at all meetings of the stockholders and, in the absence or nonexistence
of a Chairman of the Board at all meetings of the Board of Directors. He or she
shall have the general powers and duties of management usually vested in the
chief executive officer of a Corporation, including general supervision,
direction and control of the business and supervision of other officers of the
Corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.

The Chief Executive Officer shall, without limitation, have the
authority to execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.

5.6 PRESIDENT
---------

Subject to such supervisory powers as may be given by these Bylaws or
the Board of Directors to the Chairman of the Board or the Chief Executive
Officer, if there be such officers, the president shall have general
supervision, direction and control of the business and supervision of other
officers of the Corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws. In the event a Chief
Executive Officer shall not be appointed, the President shall have the duties of
such office.

5.7 VICE PRESIDENT
--------------

In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the chief executive officer and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the chief executive
officer. The vice

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<PAGE>

presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors,
these Bylaws, the chief executive officer or the chairman of the board.

5.8 SECRETARY
---------

The secretary shall keep or cause to be kept, at the principal executive
office of the Corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.

The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.

The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these Bylaws. He shall keep the seal of the Corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these Bylaws.

5.9 CHIEF FINANCIAL OFFICER
-----------------------

The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director.

The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the Corporation with such depositaries as may
be designated by the board of directors. He shall disburse the funds of the
Corporation as may be ordered by the board of directors, shall render to the
chief executive officer and directors, whenever they request it, an account of
all of his transactions as treasurer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these Bylaws.

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<PAGE>

5.10 ASSISTANT SECRETARY
-------------------

The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.

5.11 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------

In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the board of directors or the stockholders.

ARTICLE VI

INDEMNITY
---------

6.1 THIRD PARTY ACTIONS
-------------------

The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.

6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
---------------------------------------------

The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other

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<PAGE>

enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in manner he reasonably believed to
be in or not opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Delaware Court of Chancery or the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Delaware Court of Chancery or such other court shall deem
proper.

6.3 SUCCESSFUL DEFENSE
------------------

To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.

6.4 DETERMINATION OF CONDUCT
------------------------

Any indemnification under Sections 6.1 and 6.2 (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that the indemnification of the director, officer, employee
or agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.

6.5 PAYMENT OF EXPENSES IN ADVANCE
------------------------------

Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article VI.

6.6 INDEMNITY NOT EXCLUSIVE
-----------------------

The indemnification and advancement of expenses provided or granted
pursuant to the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of

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<PAGE>

stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another while holding such office.

6.7 INSURANCE INDEMNIFICATION
-------------------------

The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.

6.8 THE CORPORATION
---------------

For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting Corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
and subject to the provisions of this Article VI (including, without limitation
the provisions of Section 6.4) with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.

6.9 EMPLOYEE BENEFIT PLANS
----------------------

For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Article VI.

6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
-----------------------------------------------------------

The indemnification and advanced of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who

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<PAGE>

has ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.

ARTICLE VII

RECORDS AND REPORTS
-------------------

7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------

The Corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.

Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business .

7.2 INSPECTION BY DIRECTORS
-----------------------

Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the
Corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.

7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------

The chairman of the board, the chief executive officer, any vice
president, the chief financial officer, the secretary or assistant secretary of
this Corporation, or any other person authorized by the board of directors or
the chief executive officer or a vice president, is authorized to vote,
represent, and exercise on behalf of this Corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
this Corporation. The authority granted herein

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may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.

ARTICLE VIII

GENERAL MATTERS
---------------
8.1 CHECKS
------

From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.

8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------

The board of directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.

8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------

The shares of a corporation shall be represented by certificates,
provided that the board of directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.

The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock

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<PAGE>

certificate issued to represent any such partly paid shares, upon the books and
records of the Corporation in the case of uncertificated partly paid shares, the
total amount of the consideration to be paid therefor and the amount paid
thereon shall be stated. Upon the declaration of any dividend on fully paid
shares, the Corporation shall declare a dividend upon partly paid shares of the
same class, but only upon the basis of the percentage of the consideration
actually paid thereon.

8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------

If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and"or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, the designations,
the preferences, and the relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and"or rights.

8.5 LOST CERTIFICATES
-----------------

Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and cancelled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.

8.6 CONSTRUCTION; DEFINITIONS
-------------------------

Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a Corporation and a natural
person.

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<PAGE>

8.7 DIVIDENDS
---------

The directors of the Corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the Corporation's
capital stock.

The directors of the Corporation may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.

8.8 FISCAL YEAR
-----------

The fiscal year of the Corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.

8.9 SEAL
----

The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.

8.10 TRANSFER OF STOCK
-----------------

Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.

8.11 STOCK TRANSFER AGREEMENTS
-------------------------

The Corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.

8.12 REGISTERED STOCKHOLDERS
-----------------------

The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the

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<PAGE>

part of another person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.

ARTICLE IX

AMENDMENTS
----------

The original or other Bylaws of the Corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
Corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.

ARTICLE X

DISSOLUTION
-----------

If it should be deemed advisable in the judgment of the board of
directors of the Corporation that the Corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.

At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the Corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the Corporation shall be dissolved.

ARTICLE XI

CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------

The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the Corporation is insolvent, to be
receivers, of and for the Corporation when:

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<PAGE>

(i) at any meeting held for the election of directors the stockholders
are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon
qualification of their successors; or

(ii) the business of the Corporation is suffering or is threatened with
irreparable injury because the directors are so divided respecting
the management of the affairs of the Corporation that the required
vote for action by the board of directors cannot be obtained and
the stockholders are unable to terminate this division; or

(iii) the Corporation has abandoned its business and has failed within a
reasonable time to take steps to dissolve, liquidate or distribute
its assets.

11.2 DUTIES OF CUSTODIAN
-------------------

The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the Corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.

ARTICLE XII

LOANS TO OFFICERS
-----------------

The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiaries, including any officer or employee who is a Director of the
Corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the Corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Bylaw shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the Corporation at common law
or under any statute.

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<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the use in this Amendment No. 1 to Registration Statement No.
333-79373 of NetIQ Corporation on Form S-1 of our report dated May 19, 1999
( , 1999 as to Note 13), appearing in the Prospectus, which is part of this
Registration Statement, and of our report dated May 19, 1999 relating to the
financial statement schedule appearing elsewhere in this Registration
Statement.

We also consent to the reference to us under the heading "Experts" in such
Prospectus.

San Jose, California

June , 1999

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

The accompanying consolidated financial statements included herein reflect
the approval by the Company's stockholders of the Company's two-for-three
reverse stock split of the Company's common and preferred stock as described in
Note 13 to the consolidated financial statements. The above consent is in the
form that will be signed by Deloitte & Touche LLP upon the effectiveness of
such event assuming that from May 19, 1999 to the effective date of such event,
no other events shall have occurred that would affect the accompanying
consolidated financial statements or notes thereto.

Deloitte & Touche LLP

San Jose, California

June 28, 1999