<PAGE>

     As filed with the Securities and Exchange Commission on May 26, 1999
                                                     Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
                               ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                               ---------------
                               NetIQ Corporation
            (Exact name of Registrant as specified in its charter)
<TABLE>
 <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)
</TABLE>
                               ---------------

                               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)
                               ---------------

                                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)
                               ---------------

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

   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
<TABLE>
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
<CAPTION>
                                                 Proposed Maximum
    Title of Each Class of Securities to be          Aggregate         Amount of
                   Registered                    Offering Price(1)  Registration Fee
------------------------------------------------------------------------------------
<S>                                              <C>                <C>
Common Stock, $0.001 par value.................     $46,000,000         $12,778
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o) promulgated under the Securities
    Act of 1933, as amended.

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

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 MAY 26, 1999

                                        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 $     and $     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
additional shares to cover over-allotments of shares.

  Investing in the common stock involves risks. See "Risk Factors" on page 6.

<TABLE>
<CAPTION>
                                                      Underwriting
                                             Price     Discounts
                                               to         and        Proceeds
                                             Public   Commissions    to NetIQ
                                             ------   ------------   --------
<S>                                          <C>      <C>            <C>
Per Share..................................  $           $            $
Total......................................  $           $            $
</TABLE>

  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.
<PAGE>

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

                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   4
Risk Factors.............................................................   6
Forward-Looking Statements...............................................  16
Use of Proceeds..........................................................  17
Dividend Policy..........................................................  17
Capitalization...........................................................  18
Dilution.................................................................  19
Selected Consolidated Financial Statements...............................  20
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  21
Business.................................................................  32
</TABLE>
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Management.................................................................  45
Certain Transactions.......................................................  55
Principal Stockholders.....................................................  56
Description of Capital Stock...............................................  58
Shares Eligible for Future Sale............................................  61
Underwriting...............................................................  63
Notice to Canadian Residents...............................................  65
Legal Matters..............................................................  66
Experts....................................................................  66
Where To Find Other NetIQ Documents........................................  66
Index to Consolidated Financial Statements................................. F-1
</TABLE>
                                 ------------

  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.

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

  Unless otherwise indicated, all references to "NetIQ" and "we" refer to
NetIQ Corporation and its subsidiaries, including subsidiaries that may be
acquired or formed in the future.

  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.

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

                     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
<PAGE>

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

Performance and Availability Management Solutions for 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

 .    Leverages Windows NT technology by using de-facto Microsoft standards

 .    Integrates with leading systems management frameworks for best-of-breed
     Windows NT monitoring

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
provide a unique solution for managing systems and applications in distributed
Windows NT environments.

Comprehensive and Easy to Use

The NetIQ AppManager Suite is a management solution that gives an organization a
consolidated view of their entire Windows NT environment from a central, easy-
to-use console.

Scalable and Reliable

The NetIQ AppManager Suite's highly scalable architecture lets organizations
centrally manage their entire Windows NT environment in an efficient and
reliable manner, even when their server and workstation deployment numbers are
in the hundreds.

Extensive and Interoperable

The NetIQ AppManager Suite can be easily extended to monitor an organization's
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.
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read this
entire prospectus carefully.

  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 . In
addition, the information in this prospectus assumes that the initial public
offering price will be $     per share, the midpoint of the range disclosed on
the cover of this prospectus.

                               NetIQ Corporation

  We are a leading provider of performance and availability management software
for Microsoft Windows NT-based systems and applications. As use of the Windows
NT platform in distributed computing and Internet environments continues to
expand, organizations are increasingly relying on this platform to deploy
business-critical applications such as Microsoft Exchange Server, Lotus
Domino/Notes, Oracle, Citrix WinFrame, Microsoft Internet Information Server
and Microsoft SQL Server. As a result, organizations are facing new challenges
in managing their distributed Windows NT environments. Our NetIQ AppManager
Suite enables organizations to address these challenges by providing a
comprehensive and automated solution that helps optimize the performance and
availability of business-critical Windows NT-based systems and applications and
reduce associated support costs. AppManager's scalable, multi-tier architecture
supports rapid growth in the number of servers and applications deployed in
organizations' distributed Windows NT environments and provides close
integration with existing system, network and hardware management solutions. We
believe that AppManager's comprehensive functionality, coupled with its ease of
use resulting from its utilization of familiar Microsoft technology and
standards, offers a superior solution for managing systems and applications in
distributed Windows NT environments.

  Our products are used by organizations in a wide variety of industries and
computing environments. As of March 31, 1999, we licensed our AppManager
products to more than 375 customers, including AT&T, Charles Schwab & Co.,
Countrywide Home Loans, Dell Computer, EDS, General Electric, Georgia-Pacific,
Glaxo Wellcome, MCI, Microsoft, Nasdaq, NationsBank, Nordstrom Information
Systems, Pfizer, Salomon Smith Barney, Shell Services International, Southern
Company Services, the Department of Veterans Affairs and Wells Fargo Bank N.A.
We sell our products through our 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. We
have established product-based relationships with 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 objective is to be the leading provider of performance and availability
management software for Windows NT-based systems and applications. Key elements
of our strategy include enhancing our technology leadership position, targeting
enterprise-wide deployment of our AppManager products within our substantial
customer base, expanding our distribution channels, increasing our
international presence and expanding our relationships with Microsoft.

  We were incorporated in California in June 1995 and expect to complete a
reincorporation into Delaware in June 1999. 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.

                                       4
<PAGE>


                                  The Offering

<TABLE>
 <C>                                          <S>
 Common stock offered........................           shares
 Common stock to be outstanding after this
  offering...................................           shares
 Use of proceeds............................. For working capital, capital
                                              expenditures, repayment of
                                              certain indebtedness and
                                              potential strategic investments
                                              or acquisitions. See "Use of
                                              Proceeds."
 Proposed Nasdaq National Market symbol...... NTIQ
</TABLE>

  Please see "Capitalization" 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
presumed exercise of a warrant. See "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Description
of Capital Stock" 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          shares of common stock offered by NetIQ at the initial public
offering price of $       and after deducting the underwriting discounts and
commissions and estimated offering expenses.

<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.......................... $    --  $   388  $ 7,070  $ 3,420  $15,109
 Gross profit.....................      --      333    6,428    3,058   13,683
 Loss from operations.............  (1,006)  (2,397)  (3,373)  (3,081)    (590)
 Net loss.........................    (909)  (2,281)  (3,111)  (2,866)    (501)
 Basic and diluted net loss per
  share........................... $ (1.03) $ (1.07) $ (0.89) $ (0.87) $ (0.10)
 Shares used to compute basic and
  diluted net loss per share......     881    2,122    3,496    3,299    4,993
 Pro forma basic and diluted net
  loss per share..................                   $ (0.21)          $ (0.03)
 Shares used to compute pro forma
  basic and diluted net loss per
  share...........................                    14,596            16,093
</TABLE>

<TABLE>
<CAPTION>
                                                          March 31, 1999
                                                   -----------------------------
                                                                      Pro Forma
                                                   Actual  Pro Forma As Adjusted
                                                   ------- --------- -----------
                                                          (in thousands)
<S>                                                <C>     <C>       <C>
Consolidated Balance Sheet Data:
 Cash and cash equivalents........................ $11,565   $          $
 Working capital..................................   5,076
 Total assets.....................................  17,613
 Long term obligations, less current portion......     241
 Total stockholders' equity.......................   5,971
</TABLE>

                                       5
<PAGE>

                                  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 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. 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" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

  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. Any failure to increase our revenue as we
implement initiatives to expand our business could materially affect our
business, quarterly and annual operating results and financial condition. We
anticipate that our expenses will increase substantially in the foreseeable
future as we develop our technology, including continuing to integrate features
of Windows NT and third-party systems, network and hardware management products
with AppManager, expand our distribution channels and increase our sales and
marketing activities. Moreover, 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.

There are many factors, including some beyond our control, that may cause
fluctuations in our quarterly operating results.

  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. As a result, we believe that quarter-to-
quarter comparisons of our financial results are not necessarily meaningful,
and you should not rely on them as an indication of our future performance.
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
  . 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

  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

                                       6
<PAGE>

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 revenue
in that quarter could be substantially reduced. This would materially adversely
affect our operating results and financial condition.

Customer purchase patterns caused by year 2000 concerns may negatively impact
sales of our products.

  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.

Failure to maintain and enhance our competitive position could adversely affect
our business.

  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. 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 materially adversely affect our ability to sell our
products and could lead to changes in our pricing policies which could
materially adversely affect our profit margins. Competitors vary in size and in
the depth and the breadth of the products and services that they offer. Many of
our current and potential competitors have greater financial, technical,
marketing, professional services and other resources than we do. 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.

  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 IT 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

                                       7
<PAGE>

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. Certain 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.

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

  Our ability to sell our products into new markets and to increase our product
penetration into our existing markets will be impaired if we fail to
significantly expand our distribution channels, and our business, future
quarterly and annual operating results and financial condition will be
adversely affected as a result.

  Third-Party Channels. Our sales strategy requires that we establish multiple
indirect marketing channels in the United States and internationally through
value added resellers, or VARs, systems integrators and distributors and
original equipment manufacturers, or OEMs, 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 materially adversely affect our business, future quarterly
and annual operating results and financial condition. 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 our competitors, and does not require that Tech Data purchase minimum
quantities of our products. Tech Data and any of our future distributors could
give higher priority to the products of other companies than they give to our
products. As a result, any significant reduction in sales volume to any of our
current or future distribution partners could materially adversely affect our
business, future quarterly and annual operating results and financial
conditions. In addition, sales through these channels generally have lower
costs than direct sales and any significant decrease in sales through these
channels could also negatively impact our operating margins. Furthermore, our
relationships with our distribution partners may not generate enough revenue to
offset the significant resources used to develop these channels.

  Field Sales and Inside Sales. 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. Because we rely
heavily on our field

                                       8
<PAGE>

sales and inside sales organizations, any failure to expand those organizations
could limit our ability to sell our products.

If the markets for Windows NT and performance and availability management
software for Windows NT-based systems and applications do not continue to
develop as we anticipate, our business 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 business, future quarterly and annual operating
results and financial condition. 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 performance and availability 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 business, future
quarterly and annual operating results and financial condition. 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 on this platform. Many companies
have been addressing their performance and availability 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 performance and availability 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 have a materially adverse
effect on our business, future quarterly and annual operating results and
financial condition. 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

  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 such 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,
or IT, 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
business.

  Our future quarterly and annual operating results 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

                                       9
<PAGE>

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. Any
failure to manage growth could materially adversely affect 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 business and future
quarterly and annual operating results. Competition for such 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.

Any deterioration of our relationships with Microsoft could adversely affect
our business.

  Any deterioration of our relationships with Microsoft could materially
adversely affect our business, future quarterly and annual operating results
and financial condition. 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 beta testing and feedback programs to develop our
technology and enhance the features and functionality of our software.
Traditionally, Microsoft has not prohibited companies who develop software that
supports Microsoft operating systems from participating in such programs.
However, Microsoft may prohibit us from participating in such programs in the
future for competitive or other reasons. Recently, Microsoft has permitted one
of our engineers to work with its Windows NT development group at its Redmond,
Washington headquarters. Microsoft also contracts for one of our engineers to
provide support for Microsoft's use of our products. Additionally, we
participate in certain 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
beta release, however, Microsoft is under no obligation to continue to
distribute this product in the future.

We intend to expand our international operations and may encounter a number of
problems in doing so.

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

  Risks of International Operations. 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

                                       10
<PAGE>

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, that could materially
adversely affect our business, future quarterly and annual operating results
and financial condition including the following:

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

Our industry changes rapidly due to evolving technology standards and our
future success will depend on our ability to continue to meet the sophisticated
needs of our customers.

  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 business, future
quarterly and annual operating results and financial condition. 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. 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 business.

  If we are unable, for technological or other reasons, to develop and
introduce new and improved products in a timely manner, this could materially
adversely affect our business, future quarterly and annual operating results
and financial condition. 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 certain key personnel are critical to our business
and such officers and key personnel may not remain with NetIQ in the future.

  Our success will depend to a significant extent on the continued service of
our executive officers and certain other key employees, including certain
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 materially adversely affect
our business.

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

  If our current customers do not purchase additional products, this could
materially adversely affect our business and future quarterly and annual
operating results. Most of our current customers initially license a

                                       11
<PAGE>

small portion of our products for pilot programs. 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 or product liability claims asserted against us could
adversely affect our business.

  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 business and future quarterly and
annual operating results. 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 certain of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors. These delays have principally related to new versions and product
update releases. To date none of these delays has materially affected our
business. However, product errors or delays in the future could be material.
Detection of any significant errors may result in, among other things, loss of,
or delay in, market acceptance and sales of our products, diversion of
development resources, injury to our reputation, or increased service and
warranty costs. Moreover, because our products support Windows NT-based systems
and applications, any software errors or bugs in the Windows NT operating
server software or the systems and applications that our products manage may
result in errors in the performance of our software.

  In addition, 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. Our license agreements with our customers
typically contain provisions designed to limit exposure to potential product
liability claims. Certain of our licensing agreements provide that if our
products fail to perform, we will correct or issue replacement software. Our
standard license also provides that we shall not be liable for indirect or
consequential damages caused by the failure of our products. Such limitation of
liability provisions, however, may not be effective under the laws of certain
jurisdictions to the extent local laws treat certain 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.

Potential year 2000 problems with our software, third party equipment or our
internal operating systems could adversely affect our business.

  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 materially adversely affect our business, future operating
results and financial condition. While we currently believe that our software
products are generally year 2000 compliant, we may learn that certain of 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 certain cases, 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

                                       12
<PAGE>

expenses to remedy any problems that could materially adversely affect our
business. 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."

We rely heavily on our intellectual property rights, and if we cannot protect
our intellectual property rights, this could adversely affect our business.

  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 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. 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.

Third parties in the future could assert that our products infringe their
intellectual property rights, which could adversely affect our business.

  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 materially adversely affect 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." 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, our quarter ending June 30 tends to reflect the effect of the
incentive compensation structure for our sales organization, which is based, in
part, on satisfaction of fiscal year-end quotas.

Fluctuations in the value of foreign currencies could result in currency
translation 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

                                       13
<PAGE>

exchange rate fluctuations upon future quarterly and annual operating results.
We may experience currency losses in the future. To date, we have not adopted a
hedging program to protect us from risks associated with foreign currency
fluctuations.

Because we license certain of our technology from a third party, any failure to
maintain satisfactory licensing arrangements with this party could adversely
affect our business.

  We license certain technology that is incorporated in certain of our
AppManager products from Summit Software on a non-exclusive, worldwide basis.
Substantially all of our AppManager products rely on this Summit technology.
Although our agreement allows us to continue to sell products using the Summit
technology for a period of 24 months after the license terminates, our
business, operating results and financial condition could be 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."

Provisions in our charter documents and in Delaware law may inhibit potential
acquisition bids for NetIQ and prevent changes in our management.

  Certain provisions of our charter documents could discourage potential
acquisition proposals and could delay or prevent a change in control
transaction. 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. These provisions may also prevent changes
in our management. 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, certain provisions of Delaware law may inhibit
potential acquisition bids for NetIQ. We are subject to the antitakeover
provisions of Delaware law, which regulates 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."

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.

  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. The number of shares of common stock available for
sale in the public market is limited by restrictions under federal securities
law and under certain agreements that our stockholders have entered into with
the underwriters or with us. Those agreements restrict our stockholders from
selling, pledging or otherwise disposing of their shares for a period of 180
days after the date of this prospectus without the prior written consent of
Credit Suisse First Boston Corporation. However, Credit Suisse First Boston
Corporation may, in its sole discretion, release all or any portion of the
common stock from the restrictions of the lockup agreements. Credit Suisse
First Boston Corporation has no current plans to do so. Based on the 17,016,493
shares of our common stock outstanding as of March 31, 1999, which excludes the
   shares issuable upon the presumed exercise of the warrant held by Compuware,
and the          shares being sold by us in this offering, as a result of the
restrictions of federal securities law and

                                       14
<PAGE>

the agreements our stockholders have entered into with the underwriters or with
us, no shares other than the          shares offered hereby will be eligible
for sale immediately after completion of this offering. The following table
indicates approximately when the            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............................
     At various times after the effective date................
</TABLE>

  The     shares issuable upon the presumed exercise of the warrant held by
Compuware will become eligible for sales after 180 days after the effective
date. Many of the restricted shares that will become eligible for sale at the
180th date after the date of this prospectus or afterward will be subject to
certain volume limitations because they are held by affiliates of NetIQ.
Additionally, of the shares issuable upon exercise of options to purchase our
common stock outstanding as of March 31, 1999, approximately          shares
will be vested and eligible for sale on the 180th date following the completion
of this offering. For a further description of the eligibility of shares for
sale into the public market following the offering see "Shares Eligible for
Future Sale."

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 tangible
book value per share of common stock after taking into consideration the
effects of the issuance of the shares offered hereby and the presumed exercise
of the warrant to purchase     shares of common stock issued to Compuware. See
"Dilution" for a further discussion of the dilutive effects of this offering
and the assumed 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
due to a number of factors, some of which are beyond our control.

  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" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Until the need arises to use the proceeds, we plan to
invest the net proceeds in investment grade, interest-bearing securities.


                                       15
<PAGE>

                           FORWARD-LOOKING STATEMENTS

  Certain 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."

                                       16
<PAGE>

                                USE OF PROCEEDS

  We will receive net proceeds of $         from the sale of          shares of
common stock at an assumed initial public offering price of $     per share
after deducting underwriting commissions and discounts of $         and
expenses of $        .

  The principal purposes of this offering are to create a public market for our
common stock and to raise working capital. Additionally, we will use
approximately $5.0 million of the net proceeds to satisfy certain outstanding
loan obligations to Compuware. Moreover, we may use certain of 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Pending such uses, we intend to invest the net proceeds of the
initial public offering in investment grade, interest-bearing securities.

                                DIVIDEND POLICY

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

                                       17
<PAGE>

                                 CAPITALIZATION

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

  . actual
  . on a pro forma basis to reflect the automatic conversion of all
    outstanding preferred stock into common stock, the repayment of a $5.0
    million promissory note and the presumed exercise of a warrant 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             shares of common
    stock offered at an assumed initial public offering price of $       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 presumed exercise of a warrant
at a exercise price of $    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" and
"Description of Capital Stock."

  The outstanding share information excludes 4,270,007 shares of common stock
that were reserved for issuance upon exercise of stock options under the 1995
Stock Plan as of March 31, 1999, of which options to purchase 3,172,106 shares
were outstanding at such date at a per share weighted average exercise price of
$0.51. In addition, in connection with this offering, our board of directors
has approved an increase of 2,050,000 shares to be reserved under the 1995
Stock Plan and 750,000 shares to be reserved under the 1999 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
Long-term obligations, less current portion.....     241
Stockholders' equity:
 Preferred Stock, $0.001 par value, 11,100,000
  shares authorized and outstanding, actual;
  5,000,000 shares authorized, no shares
  outstanding, pro forma; 5,000,000 shares
  authorized, no shares outstanding, pro forma
  as adjusted...................................  10,955      --         --
 Common Stock, $0.001 par value, 30,000,000
  shares authorized, 5,916,493 shares
  outstanding, actual; 150,000,000 shares
  authorized,          shares outstanding, pro
  forma; 150,000,000 shares authorized,
           shares outstanding, pro forma as
  adjusted......................................   4,143
 Deferred stock-based compensation..............  (2,325)
 Accumulated deficit............................  (6,802)
                                                 -------     ---        ---
   Total stockholders' equity...................   5,971
                                                 -------     ---        ---
     Total capitalization....................... $11,356
                                                 =======     ===        ===
</TABLE>

                                       18
<PAGE>

                                    DILUTION

  The pro forma net tangible book value of NetIQ as of March 31, 1999 was
$         , or approximately $     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 presumed exercise of a warrant, the repayment of a $5.0
million promissory note and accrued interest thereon. After giving effect to
the sale of the          shares of common stock offered at an assumed initial
public offering price of $         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 $        , or approximately $         per share. This represents an
immediate increase in pro forma net tangible book value of $         per share
to existing stockholders and an immediate dilution in net tangible book value
of $         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..........................         $
    Pro forma net tangible book value per share as of March 31,
     1999..........................................................
    Increase attributable to new investors.........................
                                                                    --- ---
  Pro forma net tangible book value per share after offering.......
                                                                    ---     ---
  Dilution per share to new investors..............................         $
                                                                            ===
</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 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 $   per share.

<TABLE>
<CAPTION>
                                             Shares         Total
                                           Purchased    Consideration   Average
                                         -------------- --------------   Price
                                         Number Percent Amount Percent Per Share
                                         ------ ------- ------ ------- ---------
<S>                                      <C>    <C>     <C>    <C>     <C>
Existing stockholders...................              % $            %    $
New investors...........................
                                          ----   -----  -----   -----
  Total.................................         100.0%         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. See "Management--Incentive Stock Plans," "Description of Capital
Stock" and Notes 5 and 13 of Notes to Consolidated Financial Statements.

                                       19
<PAGE>

                      SELECTED CONSOLIDATED FINANCIAL DATA

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

<TABLE>
<CAPTION>
                                                               Nine Months
                                    Year Ended June 30,      Ended March 31,
                                  -------------------------  ----------------
                                   1996     1997     1998     1998     1999
                                  -------  -------  -------  -------  -------
                                   (in thousands, except per share data)
<S>                               <C>      <C>      <C>      <C>      <C>
Consolidated Statement of
 Operations Data:
Revenue:
 Software license................ $    --  $   369  $ 6,603  $ 3,186  $13,137
 Service.........................      --       19      467      234    1,972
                                  -------  -------  -------  -------  -------
   Total revenue.................      --      388    7,070    3,420   15,109
                                  -------  -------  -------  -------  -------
Cost of revenue:
 Software license................      --        9      235      159      532
 Service.........................      --       46      407      203      894
                                  -------  -------  -------  -------  -------
   Total cost of revenue.........      --       55      642      362    1,426
                                  -------  -------  -------  -------  -------
Gross profit.....................      --      333    6,428    3,058   13,683
Operating expenses:
 Sales and marketing.............      77    1,238    5,748    3,600    8,027
 Research and development........     665    1,003    2,192    1,462    2,652
 General and administrative......     264      479    1,611      994    2,239
 Stock-based compensation........      --       10      250       83    1,355
                                  -------  -------  -------  -------  -------
   Total operating expenses......   1,006    2,730    9,801    6,139   14,273
                                  -------  -------  -------  -------  -------
Loss from operations.............  (1,006)  (2,397)  (3,373)  (3,081)    (590)
Interest income, net.............      97      116      262      215       89
                                  -------  -------  -------  -------  -------
Net loss......................... $  (909) $(2,281) $(3,111) $(2,866) $  (501)
                                  =======  =======  =======  =======  =======
Basic and diluted net loss per
 share(1)........................ $ (1.03) $ (1.07) $ (0.89) $ (0.87) $ (0.10)
                                  =======  =======  =======  =======  =======
Shares used to compute basic and
 diluted net loss per share(1)...     881    2,122    3,496    3,299    4,993
                                  =======  =======  =======  =======  =======
Pro forma basic and diluted net
 loss per share(2)...............                   $ (0.21)          $ (0.03)
                                                    =======           =======
Shares used to compute pro forma
 basic and diluted net loss per
 share(2)........................                    14,596            16,093
                                                    =======           =======
</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.

(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.


                                       20
<PAGE>

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

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

Overview

  We develop, market and support a suite of software products, the NetIQ
AppManager Suite, that centrally manages the performance and availability of
distributed Windows NT-based systems and applications. Utilizing a centralized
console with automated monitoring, correction and reporting capabilities, our
products help optimize the performance and availability of business-critical
Windows NT systems and applications and reduce associated support costs.

  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 an
accumulated 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 agreements and, to a
lesser extent, consulting and training services. Service revenue has increased
in recent periods as the size of our installed base has 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. 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.

  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, we expect that sales through third-party
channel partners will increase in the future. 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

                                       21
<PAGE>

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
OEMs, we recognize revenue at the time these partners report to us and after
all revenue recognition criteria have been met.

  In September 1996, Compuware Corporation filed a complaint against us
alleging misappropriation of certain trade secrets, copyright infringement,
unfair competition and other claims. We reached a settlement of these claims in
January 1999 and final documentation was entered into and the claims dismissed
in March 1999. As part of the settlement in March 1999, Compuware loaned us
$5.0 million, subordinated to any 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 shares of common stock. Under the terms of the
warrant, the per share exercise price of the warrant is $        , 90% of the
per share sale price of shares sold to investors in this offering. The warrant
provides that Compuware can purchase up to a maximum number of shares equal to
the lesser of 10% of the shares sold in this offering or 2% of our common stock
assuming exercise of all outstanding options as of May 26, 1999. A portion of
the net proceeds from the offering contemplated by this prospectus will be used
to repay the loan and the accrued interest thereon, which repayment we expect
will be substantially offset by the receipt of cash proceeds from Compuware
upon the presumed exercise of the warrant. Additionally, as part of our
settlement agreement, we agreed not to recruit personnel from Compuware until
after December 31, 1999, or release any systems management software for
managing UNIX systems on or before December 31, 1999.

                                       22
<PAGE>

Historical Results of Operations

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

<TABLE>
<CAPTION>
                                             Percentage of Total Revenue
                                             ----------------------------------
                                             Year Ended        Nine Months
                                              June 30,       Ended March 31,
                                             -------------   ------------------
                                             1997    1998     1998       1999
                                             -----   -----   -------    -------
<S>                                          <C>     <C>     <C>        <C>
Consolidated Statement of Operations Data
  Revenue:
    Software license........................    95%    93%        93%        87%
    Service.................................     5      7          7         13
                                             -----   ----    -------    -------
      Total revenue.........................   100    100        100        100
                                             -----   ----    -------    -------
  Cost of revenue:
    Software license........................     2      3          5          3
    Service.................................    12      6          6          6
                                             -----   ----    -------    -------
      Total cost of revenue.................    14      9         11          9
                                             -----   ----    -------    -------
  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. 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 as well as annual maintenance
renewals. Service revenue increased as a percentage of total revenue due to the
compounding effect of our base of installed licenses.

  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%

                                       23
<PAGE>

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 the number of software licenses sold, while the percentage decline was due
to increases in sales of the AppManager Suite which do not have non-employee
commissions and/or royalty obligations.

  Cost of Service Revenue. Cost of service revenue consists primarily of
personnel costs and expenses incurred in providing on-site and telephonic
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 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 and expanding our sales infrastructure and third-party
channel partners, as well as higher commissions relating the increased software
license revenue. 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, 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. 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.

  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 expenses such as legal and
accounting. 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. Legal expenses have been a significant cost in
both

                                       24
<PAGE>

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.
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 $    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 "--Liquidity and Capital
Resources."

  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 certain
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 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.

                                       25
<PAGE>

  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 OEM
channels, and higher commissions associated with increased sales volume. 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. 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. 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 certain stock option grants and
amortized $250,000 of this amount as an expense for that year.

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

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

                                       26
<PAGE>

Quarterly Results of Operations

  The following table sets forth our unaudited quarterly results of operations
data for the seven most recent quarters ended March 31, 1999, as well as such
data expressed as a percentage of our total revenue for the periods presented.
The information in the table below should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto included elsewhere in
this prospectus. We have prepared this information on the same basis as the
Consolidated Financial Statements and the information includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. 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)
<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        16
 Research and
  development...........       76        32        42         20        22        16        52
 General and
  administrative........       47        20        30         16        13        14        16
 Stock-based
  compensation..........        0         0         6          5         9        13         6
                           ------    ------   -------     ------    ------    ------    ------
  Total operating
   expenses.............      286       130       192        100        96        99        90
                           ------    ------   -------     ------    ------    ------    ------
 Loss from operations...     (193)      (39)     (107)        (8)       (2)       (9)       (1)
 Interest income, net...       16         4         4          1         1         1         1
                           ------    ------   -------     ------    ------    ------    ------
 Net loss...............     (177)%     (35)%    (103)%       (7)%      (1)%      (8)%      (0)%
                           ======    ======   =======     ======    ======    ======    ======
--------------
 Cost of software
  license revenue, as a
  percentage of software
  license revenue.......        3%        5%        6%         2%        2%        3%        6%
 Cost of service
  revenue, as a
  percentage of service
  revenue...............       87%       87%       87%        88%       39%       61%       37%
</TABLE>

                                       27
<PAGE>

  The trends discussed in the comparisons of operating results for the nine
months ended March 31, 1998 and 1999, and fiscal 1996, 1997 and 1998 generally
apply to the comparison of results of operations for our seven most recent
quarters ended March 31, 1999, except for certain 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 due to a constant estimate of effort applied to generating that
revenue. 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 in certain of our
markets 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
may affect our quarterly operating results."

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.

                                       28
<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
from the proceeds of the public 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 result,
many companies' software and computer and communications systems may need to be
upgraded or replaced to comply with such "year 2000" requirements.

                                       29
<PAGE>

  Our Products

  In the ordinary course of our business, we test and evaluate our software
products. We believe that our software products are generally 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 certain of 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 certain cases, 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. Certain 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; communications networks such as
the Internet and private intranets; the internal systems of our customers and
suppliers; the computer and communications hardware and software systems we use
internally in the management of our business; and 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 accordingly 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/or hardware; remediation or
replacement of year 2000 non-compliant technology; validation and testing of
technologically-compliant year 2000 solutions; and implementation of year 2000
compliant systems.

  The table below provides the status and timing of such 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 completed,          September 30, 1999
    systems and services        remediation underway,
                                conducting validation and
                                testing
</TABLE>

                                       30
<PAGE>

  Inoperability of such services due to year 2000 issues could harm our
business. We have completed our assessment of the underlying systems and
hardware. Certain components have been replaced, and we are conducting
validation and testing.

  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/or our growth. We have and will continue to expense all costs
arising from year 2000 issues, funding them from working capital.

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

  See "Risk Factors--Potential year 2000 problems with our software, third
party equipment or our internal operating systems could adversely affect our
business."

  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.

                                       31
<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 certain factors,
including those set forth in "Risk Factors" and elsewhere in this prospectus.

NetIQ Overview

  We are a leading provider of performance and availability management software
for Windows NT-based systems and applications. As use of the Windows NT
platform in distributed computing and Internet environments continues to
expand, organizations are increasingly relying on this platform to deploy
business-critical applications such as Microsoft Exchange Server, Lotus
Domino/Notes, Oracle, Citrix WinFrame, Microsoft Internet Information Server
and Microsoft SQL Server. As a result, these organizations are facing new
challenges in managing their distributed Windows NT environments in order to
maintain required service levels, ensure continuous uptime and reduce support
costs. Our NetIQ AppManager Suite enables organizations to address these
challenges by centrally managing the performance of their distributed 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 coupled with its ease of
use resulting from the utilization of familiar Microsoft technology and
standards offer a superior solution for managing systems and applications in
distributed Windows NT environments.

  Our products are used by organizations in a wide variety of industries and
computing environments. As of March 31, 1999, we licensed our AppManager
products to more than 375 customers, including AT&T, Charles Schwab & Co.,
Countrywide Home Loans, Dell Computer, EDS, General Electric, Georgia-Pacific,
Glaxo Wellcome, MCI, Microsoft, Nasdaq, NationsBank, Nordstrom Information
Systems, Pfizer, Salomon Smith Barney, Shell Services International, Southern
Company Services, the Department of Veterans Affairs and Wells Fargo Bank, N.A.

Industry Background

  The Windows NT operating system is a leading platform for distributed
computing. According to International Data Corporation, or IDC, a leading IT
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 2003, or 51% of server operating
systems shipped in that year. The growth of Windows NT has been driven by the
use of this platform for applications that are increasingly business-critical
such as electronic messaging, Internet, group collaboration and database
applications. For example, organizations are increasingly deploying electronic
mail servers over the Windows NT platform. According to IDC, 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, IDC also estimates that the percentage of
electronic server software deployed on Windows NT will grow from approximately
43% in 1998 to approximately 65% in 2001. Because of their business-critical
nature, Windows NT-based 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
distributed computing and Internet environments have created a number of unique
performance and application management challenges. These challenges range from
basic tasks such as monitoring CPU 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 of the business-critical nature of the
applications being deployed on Windows NT. 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

                                       32
<PAGE>

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 the Windows NT platform. 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 IDC,
the Windows NT-based systems management market is expected to grow from $1.2
billion in 1997 to $2.8 billion by 2002. Furthermore, IDC estimates that the
distributed performance and availability management market, including Windows
NT and other platforms, is expected to grow from $774 million in 1997 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 a two-tier
architecture that does not scale well as organizations incrementally roll out
more Windows NT servers in 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 best-of-breed, Windows NT-based system management
solutions. 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 IT
    professionals can easily adopt and use
  . Advanced, scalable multi-tier architecture that supports rapid growth in
    the number of servers and applications deployed on the Windows NT
    platform with 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, correction and reporting
capabilities, our products help optimize the performance and availability of
business-critical 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

                                       33
<PAGE>

this platform. AppManager has broad functionality that enables IT professionals
to rapidly detect problems, identify the underlying source, 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. IT 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 IT professionals adopt and use AppManager more easily than
system management solutions that have been ported from non-Windows platforms.
Furthermore, as new and emerging Windows NT standards and product features
develop, we will incorporate these standards and features into AppManager.

  Multi-Tier, Scalable Architecture; Centralized Control

  AppManager's multi-tier architecture scales easily as organizations increase
their deployment of Windows NT servers and Windows NT-based applications. 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 scalable
architecture accommodates this growth and continues to enable IT 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 IT
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 IT
professionals to quickly implement AppManager and our scalable architecture
enables organizations to efficiently roll-out AppManager from limited
departmental uses to managing multiple business-critical 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.

  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 customer's IT departments where the need for
products and expertise such as 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.

                                       34
<PAGE>

Strategy

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

  Enhancing Position as a Leading Provider of Windows NT Performance and
   Availability Management Solutions

  We intend to strengthen our technology leadership position in the Windows NT
performance and availability management software market by continuing to focus
on managing business-critical 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 business-critical applications such as Microsoft's Commerce
Server.

  Target Enterprise-wide Deployment within Existing Customer Base

  As of March 31, 1999, we licensed our products to over 375 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 business-critical applications.

  Expand Distribution Channels

  We have formed relationships with VARs, system integrators, OEMs 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 performance and availability 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 OEMs. Working with our
Japanese OEMs, we have developed branded Japanese versions of our AppManager
products for each of these OEMs 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
performance and availability management solutions for Windows NT-based systems
and applications and expand our penetration of the Windows NT market. We
participate in Microsoft's beta testing and feedback programs 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.

                                       35
<PAGE>

Products and Technology

  We develop, market and support the NetIQ AppManager Suite, a leading
performance and availability management software solution for distributed
Windows NT environments. AppManager's automated monitoring, correction and
reporting features help IT 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, IT professionals can use AppManager with system and network
management framework products to share performance and event information. The
following diagram illustrates how AppManager enables IT professionals to
comprehensively manage business-critical applications, underlying operating
systems and hardware platforms 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.]

                                       36
<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
                       Edition                             auto-starts
                      (1998)                              . Tracks disk space
                                                            utilization
                     . Citrix WinFrame (1998)             . Determines if running low
                                                            on DHCP
                     . Microsoft Windows Load Balance
                       Service (1999)                      leases
                                                          . 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
                       System News Server                  for changes
                      (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 port
                       Edition (1999)                       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
                       Server (1996)                       failed
                     . 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
                                                            AppManager
   Management        . Tivoli Enterprise (1998)           . Invokes AppManager console
                                                            from
   Frameworks        . 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.

                                       37
<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.

  A Scaleable and Open Architecture

  AppManager's advanced multi-tier architecture is scalable and includes an
exception-based communication mechanism that 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 IT 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 components:

  . 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 IT 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, on an exception-basis, any relevant data or events
    collected by the running Knowledge Scripts. Users can centrally "push"
    the AppManager agents to remote systems for easy deployment.


                                       38
<PAGE>

  The following graphic illustrates the relationships among these components:


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

                                       39
<PAGE>

Customers

  As of March 31, 1999, we licensed our AppManager products to more than 375
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
  Financial Services                         Southern Company Services

                                             Williams Information Services

    Charles Schwab & Co.
                                          Manufacturing/Distribution

    Dresdner Bank AG
    Great West Life & Annuity Insurance      Aluminum Company of America
    JC Bradford & Co.                        General Electric
    NationsBank/Bank of America              Georgia-Pacific

    Northern Trust                        Pharmaceuticals/Health Care

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

                                             Mayo Foundation for Medical
  High Technology                            Education and  Research

    Dell Computer                            Merck & Co.
    Interliant                               Pfizer

    Microsoft Corporation                 Retail/Consumer Packaged Goods

    Microstrategy                            London Drugs
    NCR Corporation                          Nabisco Foods
    Network Associates                       Nordstrom Information Systems
    PeopleSoft                               Office Depot
    Siemens Business Services                Pepsi-Cola
                                             Philip Morris Europe

                                          Telecommunications

                                             BellSouth Cellular Corp.
                                             Belgacom


                                       40
<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, Singapore, 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. In certain instances, the sales process will include 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.

  VARs, System Integrators, Distributors and OEMs

  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 have also established
a network of VARs and system integrators in Europe, Latin America and Asia-
Pacific who perform marketing, sales and technical support functions in their
country or region. Each VAR 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 OEMs 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.

  Product-Based Relationships

  We have product-based relationships with 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, has standardized on
AppManager to monitor its own internal Windows NT and BackOffice deployment and
currently distributes our AppManager for WBEM Agent on its Windows 2000
operating system software. Recently, Microsoft has permitted one of our
engineers to work with its Windows NT development group at its Redmond,
Washington headquarters. Microsoft also contracts for one of our engineers to
provide support for Microsoft's use of our products. Another example of our
product-based relationship is our relationship with Compaq, whose service
organization is a worldwide reseller of AppManager.

                                       41
<PAGE>

  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 purposes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Risk Factors--Our
industry changes rapidly due to evolving technology standards..."

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

                                       42
<PAGE>

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--Failure to maintain and
enhance our competitive position...."

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

Intellectual Property

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

  We license certain technology that is incorporated in certain of our
AppManager products from Summit Software on a non-exclusive, worldwide basis.
Substantially all of our AppManager products rely on this

                                       43
<PAGE>

Summit technology. Under the terms of our license agreement, we pay certain
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 products that incorporate the Summit technology for a period of 24
months following such termination. Our license for this technology is
terminable 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.

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. See "Risk Factors--We
will need to recruit and retain additional qualified personnel..."

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 an aggregate of approximately 23,000
square feet of office space in the Santa Clara facility under the terms of a
lease expiring in July 2003. We believe our current facility will be adequate
to meet our needs for at least the next twelve months. We believe that suitable
additional facilities will be available in the future as needed on commercially
reasonable terms.

  We also lease space for sales and marketing offices in Denver, Colorado, New
York, New York, Dallas, Texas, and Fairfax, Virginia, and have international
field offices in Singapore, Sydney, Australia, London, England, Munich,
Germany, and Tokyo, Japan.

                                       44
<PAGE>

                                   MANAGEMENT

  The following table sets forth certain 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>
                                   President, Chief Executive Officer and
 Ching-Fa Hwang..............   50 Director
                                   Vice President, Finance, Chief Financial
 James A. Barth..............   56 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.

                                       45
<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 directors will be
elected each year. To implement the classified structure, prior to the
consummation of the

                                       46
<PAGE>

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. Thereafter, 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 275,000 shares of common stock with an exercise
price of $0.20 per share which vests in annual installments over three years.
Pursuant to 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 options to Alan Kaufman as a director to purchase
up to an aggregate of 100,000 shares of common stock at an exercise price of
$0.20 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 an aggregate of 75,000 shares of common stock at an exercise
price of $1.00 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, the board of directors granted non-statutory options to
purchase up to 100,000 and 120,000 shares of common stock to Her-Daw Che and
Ching-Fa Hwang, respectively, each with an exercise price of $1.00 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.


                                       47
<PAGE>

  In November 1998, we granted an option to Ying-Hon Wong in his capacity as a
director to purchase up to 80,000 shares of common stock with an exercise price
of $1.00 per share. Pursuant to 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" for additional information about a consulting
arrangement we have with one of our directors.

  Our Stock 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 Plan specifically provides for an initial automatic grant of an option to
purchase 12,500 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 12,500 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."

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. These executives are referred to
as the Named Executive Officers here and elsewhere in this prospectus. 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.

                           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         --      35,000         108
Glenn S. Winokur
 Vice President, Sales..   85,212  17,858    219,029      25,000         108
</TABLE>

                                       48
<PAGE>

Option Grants During Fiscal Year 1998

  The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during fiscal 1998,
including the potential realizable value 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 aggregate 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
1,508,500 shares to employees and directors, all under our Stock 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
pursuant to a cashless exercise procedure, to the extent authorized by the
board. Options under the Stock 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...   25,000      1.66%      $0.20    05/07/08  $  3,144 $  7,969
                    10,000      0.66%       0.20    06/22/08     1,258    3,187
Glenn S.
 Winokur.........   25,000      1.66%       0.20    06/22/08     3,144    7,969
</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 $    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..........  128,000  $20,480     25,000      170,000      $            $
Glenn S. Winokur........       --       --    126,250      103,750
</TABLE>

Incentive Stock Plans

  1995 Stock Plan

  The board of directors adopted the Stock Plan in November 1995 and our
stockholders approved the Stock Plan in April 1996. In connection with this
offering, the board of directors approved the amendment and restatement of the
Stock 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
Plan provides for the grant to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code, or the Code, and for the
grant to employees, directors and consultants of nonstatutory stock options and
stock purchase rights, or SPRs.

                                       49
<PAGE>

  Number of Shares of Common Stock Available under the Stock Plan

  As of March 31, 1999, a total of 5,950,000 shares of common stock were
authorized for issuance under the Stock Plan, of which options to acquire
3,172,106 shares were issued and outstanding as of that date. As part of the
1999 amendment and restatement of the Stock Plan, the board of directors
approved an increase of 2,050,000 shares reserved for issuance under the Stock
Plan to a total of 8,000,000. The Stock 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 fiscal 2001, equal to the lesser
of 4% of the outstanding shares of common stock on the first day of the fiscal
year, 2,000,000 shares or an amount as the board may determine.

  Administration of the Stock Plan

  The stock plan administrator, which is the board of directors or a committee
of the board, administers the Stock Plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the committee will consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The administrator
has the power to determine the terms of the options or SPRs granted, including
the exercise price, the number of shares subject to each option or SPR, 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 Plan, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the 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 Plan must be at least
equal to the fair market value of the common stock on the date of grant. With
respect to 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 Plan may not exceed 10 years.

  An optionee generally must exercise an option granted under the Stock 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.

  SPRs

  The administrator determines the exercise price of SPRs granted under the
Stock Plan. In the case of SPRs, unless the administrator determines otherwise,
the restricted stock purchase agreement entered into in connection with the
exercise of the SPR shall grant NetIQ 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 pursuant to restricted stock purchase agreements shall 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 shall lapse at a
rate that the administrator determines.

  Outside Director Options

  The Stock Plan also provides for an initial automatic grant of an option to
purchase 12,500 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 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 12,500 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

                                       50
<PAGE>

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.

  Transferability of Options and SPRs

  An optionee generally may not transfer options and SPRs granted under the
Stock Plan and only an optionee may exercise an option and SPR during his or
her lifetime.

  Adjustments upon Merger or Asset Sale

  The Stock 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 shall assume or substitute each option or SPR. If the outstanding
options or SPRs are not assumed or substituted, the administrator shall provide
notice to the optionee that he or she has the right to exercise the option or
SPR as to all of the shares subject to the option or SPR, including shares
which would not otherwise be exercisable, for a period of 15 days from the date
of the notice. The option or SPR 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 shall not
be deemed voluntary if requested by the acquiring company, within twelve months
after a change of control, the optionee shall fully vest in the right to
exercise all of the shares subject to the option or SPR, including shares which
would not otherwise be exercisable.

  Amendment and Termination of the Stock Plan

  Unless terminated sooner, the Stock Plan will terminate automatically in
2005. In addition, the administrator has the authority to amend, suspend or
terminate the Stock 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 Plan.

  1999 Employee Stock Purchase Plan

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

  Number of Shares of Common Stock Available under the Purchase Plan

  A total of 750,000 shares of common stock has been reserved for issuance
under the Purchase Plan. In addition, the Purchase Plan provides for annual
increases in the number of shares available for issuance under the 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, 1,000,000 shares or an amount as the board may determine.

  Administration of the Purchase Plan

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

  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 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

                                       51
<PAGE>

  . 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 Purchase Plan, which is intended to qualify under Section 423 of the
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 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 5,000 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 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 Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the Purchase Plan.

  Adjustments upon Merger or Asset Sale

  The 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. If the
successor corporation refuses to assume or substitute 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 Purchase Plan

  The 1999 Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the Purchase Plan at any
time, except that, subject to certain exceptions described in the Purchase
Plan, no such action may adversely affect any outstanding rights to purchase
stock under the Purchase Plan.

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 in 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

                                       52
<PAGE>

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 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, including the Named 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 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

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

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

                                       53
<PAGE>

  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 certain 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.

                                       54
<PAGE>

                              CERTAIN TRANSACTIONS

  September 1995 Series A Preferred Stock Financing. In September 1995, we sold
7,000,000 shares of Series A Preferred Stock at a per share purchase price of
$0.40. 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.................................................    1,250,000
   Direct International Limited.................................      750,000
   Wongfratris Investment Company...............................      750,000
   Ching-Fa Hwang (1)...........................................      500,000
   Her-Daw Che (2)..............................................      250,000
</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 4,100,000
shares of Series B Preferred Stock at a per share purchase price of $2.00.
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............................     1,000,000
   Sen-Tien Lee................................................       250,000
   Direct International Limited................................       150,000
   Ching-Fa Hwang (1)..........................................       150,000
   Wongfratris Investment Company..............................       145,000
   Her-Daw Che (2).............................................       100,000
   Thomas R. Kemp..............................................        40,000
</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 pursuant to a consulting arrangement under
which Mr. Wong is paid $5,000 per month that is terminable at any time.

  Change of Control Severance Agreement. We have entered into Change of Control
Severance Agreements with each of our executive officers. See "Management--
Change in Control Agreements."

  Option Grants to Directors and Certain Affiliates. In November 1995 we
granted an option exercisable for 200,000 shares of common stock to C. S. Ho,
the director of Direct International Limited, with an exercise price of $0.04
per share which vests in annual installments over four years. In May 1999 we
accelerated the vesting on this option so that Mr. Ho could purchase all of the
shares subject to this option.

  We also have issued options to purchase common stock to Messrs. Chang,
Kaufman, Cole, Che, Hwang and Wong under our Stock Plan. Pursuant to
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. "See "Director Compensation."

                                       55
<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 of our directors
     . each person or entity who
       beneficially owns more
       than 5% of our outstanding
       common stock

                                           . all directors and executive
                                             officers as a group

     . each of the Named
       Executive Officers

  Except as otherwise noted the address for each holder of more than 5% of our
common stock is c/o NetIQ Corporation, 5410 Betsy Ross Drive, Santa Clara,
California 95054. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
Percentage ownership is based on 17,016,493 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
shares immediately following the completion of this offering. The figure for
shares outstanding after completion of this offering also includes
shares issuable in connection with the assumed exercise of a warrant held by
Compuware. See "Capitalization" and "Description of Capital Stock." 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 such options for the purpose of
computing the percentage ownership of such 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.........  1,625,000       --      9.5%
 51 Jordan Place
 Palo Alto, CA 94303
Sen-Tien Lee...........................  1,500,000       --      8.8%
 29 Alley 18, Lane 325
 Chien Kung Road
 Taipei, Taiwan
 R.O.C
InveStar Burgeon Venture Capital.......  1,000,000  183,333      6.9%
 Leeware One Building
 Safe Haven Corporate Center
 Seven Mile Beach, Grand Canyon
 Cayman Islands
 British West Indies
Direct International Limited(1)........    900,000  200,000      6.4%
 Charlotte House, Charlotte St.
 P.O. Box N-341
 Nassau, Bahamas

Current Named Executive Officers and
 Directors:
Ching-Fa Hwang (2).....................  2,850,000   60,000     17.0%
Thomas R. Kemp.........................    245,500   23,750      1.6%
Glenn S. Winokur.......................    135,312   19,688        *
Her-Daw Che (3)........................  1,610,000   50,000      9.5%
Ying-Hon Wong (4)......................  1,625,000       --      9.6%
Herbert Chang (5)......................  1,000,000  183,333      6.9%
Alan W. Kaufman........................         --   25,000        *
Louis C. Cole..........................         --       --       --
All directors and executive officers as
 a group (10 persons)..................  7,512,687  361,771     45.3%
</TABLE>
---------------------
*  less than 1%

                                       56
<PAGE>

(1)  Includes 200,000 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.
(2)  Includes 50,000 shares held by Mr. Hwang's children and 600,000 shares
     held by Mr. Hwang and his wife in joint tenancy.
(3)  Includes 20,000 shares held by Austin Che, Mr. Che's son, 20,000 shares
     held by Joyce Che, Mr. Che's daughter, and 310,000 shares held by the Che
     Family Trust.
(4)  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 this 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."
(5)  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.

                                       57
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

General

  After this offering, we will be authorized to issue 150,000,000 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 an aggregate of          shares of common stock outstanding,
shares of common stock will be issuable upon exercise of outstanding options
and no shares of Preferred Stock will be issued and outstanding.

  The figure for outstanding shares of common stock upon completion of this
offering reflects the issuance of          shares of common stock in connection
with 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 $        , 90% of the per share sale price of shares
sold to investors in this offering. The warrant provides that Compuware can
purchase up to a maximum number of shares equal to the lesser of 10% of the
shares sold in this offering or 2% of our common stock assuming exercise of all
outstanding options as of May 26, 1999. 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"
for a discussion of our outstanding indebtedness to Compuware.

  The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our amended and
restated certificate of incorporation and bylaws and by the provisions of
applicable Delaware law.

  Our certificate of incorporation and bylaws contain certain 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. In such
event, 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

                                       58
<PAGE>

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 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 11,100,000 shares of common stock are entitled to certain
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
consummation 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 certain 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 expected to discourage certain types
of 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 such proposals because we believe
that the negotiation of such proposals could result in an improvement of their
terms. See "Risk Factors--Provisions in our charter documents... "

  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." 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.

                                       59
<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 ..."

Effect of Delaware Antitakeover Statute

  We are subject to Section 203 of the Delaware General Corporation Law, or the
Antitakeover Law, which regulates corporate acquisitions. The Antitakeover Law
prevents certain Delaware corporations, including those whose securities are
listed for trading on the Nasdaq National Market, 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 purposes of the Antitakeover Law, 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. In general,
the Antitakeover Law defines an "interested stockholder" as 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 Antitakeover Law 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 provisions of the
Antitakeover Law. See "Risk Factors--Provisions in our charter documents and in
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.

                                       60
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

  After this offering, we will have outstanding          shares of common stock
based upon shares outstanding at March 31, 1999, assuming no exercise of the
underwriters' over-allotment option. Excluding the          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 17,016,493 shares of common stock outstanding, all of which are
"restricted" shares under the Securities Act, excluding      shares issuable
upon the presumed exercise of the warrant held by Compuware. For more detail on
the Compuware warrant see "Capitalization," "Description of Capital Stock."

  All restricted shares are subject to lock-up agreements with the underwriters
pursuant to which the holders of the restricted shares have agreed not to sell,
pledge or otherwise dispose of such 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
17,016,493 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..........................................
  ------------------------------------------------------------------------------
     At various times after the effective date..............................
</TABLE>


  All shares issuable upon exercise of the Compuware warrant will be
"restricted" shares under the Securities Act and will become eligible after 180
days after the effective date. 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 certain volume and other resale restrictions pursuant
to Rule 144 rbecause 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          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 pursuant to Rule 144 are subject to certain 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 such shares pursuant to Rule 144(k) without regard to the limitations
described above.

  As of March 31, 1999, 5,950,000 shares were reserved for issuance under the
Stock Plan, of which options to purchase 3,172,106 shares were then
outstanding. Beginning 180 days after the effective date, approximately
         shares issuable upon the exercise of vested options will become
eligible for sale and          shares issued pursuant to restricted stock
agreements under the Stock Plan will no longer be subject to a repurchase
option and will be eligible for resale. In addition, an aggregate of
restricted shares have been issued to certain of our executive officers and
directors under the Stock Plan pursuant to the restricted stock agreements
described above. Additionally, in May 1999, our board of directors approved an
increase of 2,050,000 shares in the number of shares reserved under the Stock
Plan and a reserve of 750,000 shares for options under the 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 pursuant to restricted stock purchase agreements under the Stock Plan,
shares issued in connection with option exercises and shares reserved for
issuance under all stock

                                       61
<PAGE>

plans. Shares of common stock issued pursuant to the restricted stock
agreements under the Stock Plan or 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 certain holders of common stock and options to
purchase common stock have agreed pursuant to certain "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.

                                       62
<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.

  Subject to certain limitations, 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 pursuant to the terms of a
plan in effect on the date hereof, issuances of securities pursuant to the
exercise of employee stock options outstanding on the date hereof or the
exercise of any other stock options outstanding on the date hereof.

                                       63
<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; our past and present operations; our
past and present earnings and current financial position; 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.

                                       64
<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
pursuant to 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 (i) the purchaser is entitled under applicable
provincial securities laws to purchase common stock without the benefit of a
prospectus qualified under the securities laws, (ii) where required by law,
that the purchaser is purchasing as principal and not as agent, and (iii) 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.

                                       65
<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
certain current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, as well as certain
individual attorneys of such firm, beneficially own an aggregate of 62,500
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 hereby made to the registration
statement and the exhibits and schedules thereto. 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 of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the SEC. Such 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.

                                       66
<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 the thirteenth paragraph of Note 1)

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

To the Board of Directors and Stockholders of NetIQ Corporation:

  The accompanying consolidated financial statements are required to disclose,
pursuant to rules of the Securities and Exchange Commission, an unaudited
proforma balance sheet reflecting the exercise of certain warrants to acquire
    shares of Common Stock at an exercise price of 90% of the planned initial
public offering price whose proceeds are to be used to substantially repay a
$5,000,000 loan under a subordinated secured promissory note (See Note 3). The
above opinion is in the form that will be signed by Deloitte & Touche LLP upon
inclusion of such disclosure in the accompanying consolidated financial
statements and assuming that from May 19, 1999 to the date such information has
been included, no other events shall have occurred that would affect the
accompanying consolidated financial statements or notes thereto.

Deloitte & Touche LLP
San Jose, California
May 26, 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     $
  Accounts receivable, net of allowance
   for uncollectible accounts of $307
   and $505 in 1998 and 1999 (none in
   1997)...............................     159    4,055     4,766
  Prepaid expenses.....................       1      167       146
                                        -------  -------   -------     ----
    Total current assets...............   7,908    7,580    16,477
Property and equipment, net............     272      527     1,036
Other assets...........................      22       98       100
                                        -------  -------   -------     ----
    Total assets....................... $ 8,202  $ 8,205   $17,613     $
                                        =======  =======   =======     ====
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term debt...................... $    --  $    --   $ 5,144     $
  Accounts payable.....................     227      535     1,331
  Accrued compensation and related
   benefits............................      78      809       820
  Other liabilities....................      38      375       917
  Deferred revenue.....................      72    1,547     3,189
                                        -------  -------   -------     ----
    Total current liabilities..........     415    3,266    11,401
Long-term debt.........................      --       --       241
                                        -------  -------   -------     ----
    Total liabilities..................     415    3,266    11,642
                                        -------  -------   -------     ----
Commitments and contingencies (Note 8)

Stockholders' equity:
  Convertible preferred stock--$0.001
   (aggregate liquidation preference of
   $11,000,000); 11,100,000 shares
   authorized and outstanding, actual;
   5,000,000 shares authorized, none
   outstanding, pro forma..............  10,955   10,955    10,955
  Common stock--$0.001; 30,000,000
   shares authorized; shares
   outstanding: 1997, 4,541,375; 1998,
   4,826,750; 1999, 5,916,493, actual;
   150,000,000 shares authorized,
   shares outstanding, pro forma.......      48    1,302     4,143
  Note receivable from stockholder.....      (6)      (6)       --
  Deferred stock-based compensation....     (20)  (1,011)   (2,325)
  Accumulated deficit..................  (3,190)  (6,301)   (6,802)
                                        -------  -------   -------     ----
    Total stockholders' equity.........   7,787    4,939     5,971
                                        -------  -------   -------     ----
      Total liabilities and
       stockholders' equity............ $ 8,202  $ 8,205   $17,613     $
                                        =======  =======   =======     ====
</TABLE>

                See notes to consolidated financial statements.

                                      F-3
<PAGE>

                               NetIQ CORPORATION

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

<TABLE>
<CAPTION>
                                                                Nine Months
                                  Years Ended June 30,        Ended March 31,
                                 -------------------------  -------------------
                                  1996     1997     1998       1998      1999
                                 -------  -------  -------  ----------- -------
                                                            (Unaudited)
<S>                              <C>      <C>      <C>      <C>         <C>
Revenue:
  Software license.............  $    --  $   369  $ 6,603    $ 3,186   $13,137
  Service......................       --       19      467        234     1,972
                                 -------  -------  -------    -------   -------
    Total revenue..............       --      388    7,070      3,420    15,109
                                 -------  -------  -------    -------   -------
Cost of revenue:
  Software license.............       --        9      235        159       532
  Service......................       --       46      407        203       894
                                 -------  -------  -------    -------   -------
    Total cost of revenue......       --       55      642        362     1,426
                                 -------  -------  -------    -------   -------
Gross profit...................       --      333    6,428      3,058    13,683
Operating expenses:
  Sales and marketing..........       77    1,238    5,748      3,600     8,027
  Research and development.....      665    1,003    2,192      1,462     2,652
  General and administrative...      264      479    1,611        994     2,239
  Stock-based compensation.....       --       10      250         83     1,355
                                 -------  -------  -------    -------   -------
    Total operating expenses...    1,006    2,730    9,801      6,139    14,273
                                 -------  -------  -------    -------   -------
Loss from operations...........   (1,006)  (2,397)  (3,373)    (3,081)     (590)
Interest income (expense):
  Interest income..............       98      119      262        215       119
  Interest expense.............       (1)      (3)      --         --       (30)
                                 -------  -------  -------    -------   -------
    Interest income, net.......       97      116      262        215        89
                                 -------  -------  -------    -------   -------
Net loss.......................  $  (909) $(2,281) $(3,111)   $(2,866)  $  (501)
                                 =======  =======  =======    =======   =======
Basic and diluted net loss per
 share.........................  $ (1.03) $ (1.07) $ (0.89)   $ (0.87)  $ (0.10)
                                 =======  =======  =======    =======   =======
Shares used to compute basic
 and diluted net loss per
 share.........................      881    2,122    3,496      3,299     4,993
                                 =======  =======  =======    =======   =======
Pro forma basic and diluted net
 loss per share (Note 1).......                    $ (0.21)             $ (0.03)
                                                   =======              =======
Shares used to compute pro
 forma basic and diluted net
 loss per share (Note 1).......                     14,596               16,093
                                                   =======              =======
</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
                                                    ---------- ------- ---------  ------  ----------- ------------ -----------
<S>                                                 <C>        <C>     <C>        <C>     <C>         <C>          <C>
 July 1995--Issuance of common stock to
  founders at $0.0005 per share.........                    -- $    -- 4,150,000  $    2      $--       $    --      $    --
 September 1995--Issuance of Series A
  preferred stock at $0.40 per share,
  net of issuance costs of $14..........             7,000,000   2,786        --      --       --            --           --
 December 1995 and April 1996--issuance
  of common stock at $0.04 per share....                    --      --   174,000       7       (6)           --           --
 Net loss...............................                    --      --        --      --       --            --         (909)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, June 30, 1996.................             7,000,000   2,786 4,324,000       9       (6)           --         (909)
 May 1997--Issuance of Series B
  preferred stock at $2.00 per share,
  net of issuance costs of $31..........             4,100,000   8,169        --      --       --            --           --
 Exercise of stock options..............                    --      --   217,375       9       --            --           --
 Deferred stock-based compensation......                    --      --        --      30       --           (30)          --
 Amortization of deferred stock
  compensation..........................                    --      --        --      --       --            10           --
 Net loss...............................                    --      --        --      --       --            --       (2,281)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, June 30, 1997.................            11,100,000  10,955 4,541,375      48       (6)          (20)      (3,190)
 Exercise of stock options..............                    --      --   285,375      13       --            --           --
 Deferred stock-based compensation......                    --      --        --   1,241       --        (1,241)          --
 Amortization of deferred stock
  compensation..........................                    --      --        --      --       --           250           --
 Net loss...............................                    --      --        --      --       --            --       (3,111)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, June 30, 1998.................            11,100,000  10,955 4,826,750   1,302       (6)       (1,011)      (6,301)
 Exercise of stock options..............                    --      -- 1,177,243     178       --            --           --
 Repurchase of common stock.............                    --      --   (87,500)     (4)       6            --           --
 Deferred stock-based compensation......                    --      --        --   2,667       --        (2,667)          --
 Amortization of deferred stock
  compensation..........................                    --      --        --      --       --         1,353           --
 Net loss...............................                    --      --        --      --       --            --         (501)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, March 31, 1999................            11,100,000 $10,955 5,916,493  $4,143      $--       $(2,325)     $(6,802)
--------------------------------------------------
                                                    ========== ======= =========  ======      ===       =======      =======
<CAPTION>
                                                    Total
                                                    -------
<S>                                                 <C>
 July 1995--Issuance of common stock to
  founders at $0.0005 per share.........            $    2
 September 1995--Issuance of Series A
  preferred stock at $0.40 per share,
  net of issuance costs of $14..........             2,786
 December 1995 and April 1996--issuance
  of common stock at $0.04 per share....                 1
 Net loss...............................              (909)
                                                    -------
Balances, June 30, 1996.................             1,880
 May 1997--Issuance of Series B
  preferred stock at $2.00 per share,
  net of issuance costs of $31..........             8,169
 Exercise of stock options..............                 9
 Deferred stock-based compensation......                --
 Amortization of deferred stock
  compensation..........................                10
 Net loss...............................            (2,281)
                                                    -------
Balances, June 30, 1997.................             7,787
 Exercise of stock options..............                13
 Deferred stock-based compensation......                --
 Amortization of deferred stock
  compensation..........................               250
 Net loss...............................            (3,111)
                                                    -------
Balances, June 30, 1998.................             4,939
 Exercise of stock options..............               178
 Repurchase of common stock.............                 2
 Deferred stock-based compensation......                --
 Amortization of deferred stock
  compensation..........................             1,353
 Net loss...............................              (501)
                                                    -------
Balances, March 31, 1999................            $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 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 and the weighted average number of shares resulting from the
exercise of warrants to purchase common 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     shares of common stock at an
  exercise price of 90% of an assumed initial public offering price of $   ,
  which warrants must be exercised or expire 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. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of each
period reported, nonmonetary assets and liabilities are translated at
historical rates and revenues and expenses are translated 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, contingent upon (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 total number of shares subject to the contingent warrant outstanding
based on the number of outstanding common stock and common stock equivalents at
March 31, 1999 was 403,772. 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. In the event of an exercise of the warrants pursuant to
the filing of a registration statement, the maximum number of shares of common
stock purchased at that point shall not exceed 10% of the number of shares
registered for sale in the public offering and any residual unexpired warrants
shall become exercisable at the next public offering of the Company's common
stock. The value of such warrants will be charged to operating results in the
period they become exercisable.

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.......  7,000,000  7,000,000    $0.40     $ 2,786,304   $ 2,800,000
   Series B.......  4,100,000  4,100,000    $2.00       8,169,049     8,200,000
                   ---------- ----------              -----------   -----------
                   11,100,000 11,100,000              $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 $1.60 and $4.00 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 $0.40 and $2.00 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 $1.00 and $5.00 per share, respectively.

  . Holders of preferred stock are entitled to annual noncumulative dividends
    of $0.04 and $0.16 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 4,324,000 and 80,000 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 136,250 outstanding shares of such stock were
subject to repurchase.

  Stock-Based Compensation--In connection with options granted to purchase
common stock, the Company recorded deferred stock compensation of $30,000,
$1,241,000 and $2,667,000 in fiscal years 1997 and 1998 and the nine months
ended March 31, 1999, respectively. Such amounts represent, for employee stock
options, the difference between the exercise price and the fair value of the
Company's common stock at the date of grant, and, for non-employee options, the
deemed fair value of the option at the date of vesting. At March 31, 1999,
unvested options granted to non-employees totaled 44,427. The deferred charges
for employee options are being amortized to expense through fiscal year 2003
and the deferred charges for non employee options are

                                      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

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.

  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....................... 11,100,000
     Issuance under stock option plan................................  4,270,007
     Contingent common stock warrants outstanding....................    403,772
                                                                      ----------
       Total......................................................... 15,773,779
                                                                      ==========
</TABLE>

  Stock Option Plan--Under the Company's 1995 Stock Option Plan (the "Plan")
5,950,000 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
    $0.00)........................................  1,151,000       $0.04
                                                   ----------       -----
   Outstanding, June 30, 1996 (80,000 shares
    exercisable at $0.04).........................  1,151,000        0.04
   Granted (weighted-average fair value of
    $0.02)........................................  1,426,750        0.07
   Exercised......................................   (217,375)       0.04
   Canceled.......................................   (225,000)       0.04
                                                   ----------       -----
   Outstanding, June 30, 1997 (412,062 shares
    exercisable at $0.04).........................  2,135,375        0.06
   Granted (weighted-average fair value of
    $0.84)........................................  1,508,500        0.20
   Exercised......................................   (285,375)       0.05
   Canceled.......................................     (4,000)       0.20
                                                   ----------       -----
   Outstanding, June 30, 1998 (1,035,321 shares
    exercisable at a weighted average price of
    $0.09)........................................  3,354,500        0.13
   Granted (weighted-average fair value of
    $2.04)........................................  1,028,599        1.33
   Exercised...................................... (1,177,243)       0.15
   Canceled.......................................    (33,750)       0.20
                                                   ----------       -----
   Outstanding, March 31, 1999....................  3,172,106       $0.51
                                                   ==========       =====
</TABLE>

  At March 31, 1999, 1,097,901 shares were available under the Plan for future
grant.

                                      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


  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>
   $0.04-$0.20........  2,374,943        8.30        $0.15    601,447   $0.12
   $1.00-$2.00........    730,163        9.69         1.17    259,750    1.00
   $6.00..............     67,000        9.97         6.00      3,000    6.00
                        ---------        ----        -----    -------   -----
   $0.04-$6.00........  3,172,106        8.65        $0.51    864,197   $0.41
                        =========        ====        =====    =======   =====
</TABLE>

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

  The weighted-average fair value of the Company's stock-based awards to
employees was estimated 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
Expected volatility...............................    0     0    0         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............................ $(1.03) $ (1.07) $ (0.89)   $(0.10)
  Pro forma..............................  (1.03)   (1.07)   (0.97)    (0.27)
</TABLE>

                                      F-13
<PAGE>

                               NetIQ CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


6. Net Loss per Share

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

<TABLE>
<CAPTION>
                                                           Nine Months Ended
                                  Year Ended June 30,          March 31,
                                -------------------------  ------------------
                                 1996     1997     1998       1998      1999
                                -------  -------  -------  ----------- ------
                                                           (Unaudited)
   <S>                          <C>      <C>      <C>      <C>         <C>
   Net loss (numerator), basic
    and diluted................ $  (909) $(2,281) $(3,111)   $(2,866)  $ (501)
                                -------  -------  -------    -------   ------
   Shares (denominator):
     Weighted average common
      shares outstanding.......   3,962    4,416    4,649      4,619    5,255
     Weighted average common
      shares outstanding
      subject to repurchase....  (3,081)  (2,294)  (1,153)    (1,320)    (262)
                                -------  -------  -------    -------   ------
   Shares used in computation,
    basic and diluted..........     881    2,122    3,496      3,299    4,993
                                =======  =======  =======    =======   ======
   Net loss per share, basic
    and diluted................ $ (1.03) $ (1.07) $ (0.89)   $ (0.87)  $(0.10)
                                =======  =======  =======    =======   ======
</TABLE>

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

<TABLE>
<CAPTION>
                                                            Nine Months Ended
                                       Year Ended June 30,      March 31,
                                       -------------------- ------------------
                                        1996   1997   1998     1998      1999
                                       ------ ------ ------ ----------- ------
                                                            (Unaudited)
   <S>                                 <C>    <C>    <C>    <C>         <C>
   Convertible preferred stock........  7,000 11,100 11,100   11,100    11,100
   Shares of common stock subject to
    repurchase........................  2,729  1,573    440      714       136
   Outstanding options................  1,151  2,135  3,355    2,740     3,172
   Warrants...........................     --     --     --       --       404
                                       ------ ------ ------   ------    ------
   Total.............................. 10,880 14,808 14,895   14,554    14,812
                                       ====== ====== ======   ======    ======
</TABLE>

7. Income Taxes

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

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

                                      F-14
<PAGE>

                               NetIQ CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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


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

  For all years presented, the Company's effective tax rate differs from the
federal statutory tax rate primarily due to changes in the valuation allowance
against net deferred tax assets.

  Due to the Company's net losses, no provision for income taxes was recorded
for fiscal years 1996, 1997 and 1998 and the nine months ended March 31, 1999.

  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.

                                      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


10. Major Customers

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

11. Segment and Geographic Information

  As discussed in Note 1, the Company follows the requirements of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. As defined
in SFAS No. 131, the Company operates in one reportable segment: the design,
development, marketing, support and sales of performance and availability
management software for the Microsoft Windows NT environment. No individual
foreign country accounted for greater than 10% of total revenue or long-lived
assets in any of the periods presented. The following table summarizes total
net revenue and long-lived assets attributed to significant countries (in
thousands).
<TABLE>
<CAPTION>
                                                    Year Ended June
                                                          30,        Nine Months
                                                    ---------------- Ended March
                                                    1996 1997  1998   31, 1999
                                                    ---- ---- ------ -----------
   <S>                                              <C>  <C>  <C>    <C>
   Total net revenue:
     United States................................. $ -- $388 $6,342   $11,775
     Foreign.......................................   --   --    728     3,334
                                                    ---- ---- ------   -------
       Total net revenue*.......................... $ -- $388 $7,070   $15,109
                                                    ==== ==== ======   =======
   Long-lived assets:
     United States................................. $126 $294 $  528   $ 1,000
     Foreign.......................................   --   --     97       136
                                                    ---- ---- ------   -------
       Total long-lived assets..................... $126 $294 $  625   $ 1,136
                                                    ==== ==== ======   =======
</TABLE>
--------
* Net revenue are attributed to countries based on location of customer
  invoiced.

12. Related Party Transaction

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

13. Subsequent Events

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

  .  adoption of the 1999 Employee Stock Purchase Plan (the "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 the Company's common stock. The Company has
     initially reserved 750,000 shares of common stock under this plan, plus
     an annual increase to be added on the first day of the Company's fiscal
     year beginning July 1, 2000 equal to the lesser of (i) 1,000,000 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.

                                      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


 .  amendment of the 1995 Stock Option Plan ("Stock Plan"). The number of shares
   of common stock of the Company available for issuance under the Stock Plan
   was increased by 2,050,000 shares from 5,950,000 to 8,000,000 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)
   2,000,000 shares or (iii) an amount determined by the Company's Board of
   Directors. Additionally, the Stock Plan includes an automatic
   nondiscretionary grant mechanism that provides that options will be granted
   to non-employee directors who on the date of grant do not beneficially own
   1% or more of the total voting power of the Company's voting securities. The
   Stock Plan specifically provides for an initial automatic grant of an option
   to purchase 12,500 shares of common stock to a non-employee director who
   first becomes a director after the Company'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 12,500 shares of common
   stock on the date of the annual meeting of stockholders. However, if the
   first annual meeting following the Company'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 the Company in the State of Delaware and the associated
   exchange of one share of common stock or preferred stock of the Company for
   every share of Common Stock or preferred stock, as the case may be, of the
   Company's California predecessor. Such reincorporation and stock exchange
   will become effective prior to the effective date of the initial public
   offering contemplated by the Company, and

 .  an increase of authorized shares of common stock to 150,000,000 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 the Company.

                                      F-17
<PAGE>


          [Descriptive text accompanying NetIQ logo and awards logo]

NetIQ is a leading provider of performance and availability management solutions
for Windows NT-based systems and business-critical applications.  The NetIQ
AppManager Suite enables organizations to centrally manage the performance of
their distributed Windows NT environment, help ensure availability through
automated monitoring, correction and reporting features and help lower the total
cost of ownership.

NetIQ's technological innovation and customer acceptance has led to numerous
industry awards, including:

 .    Named Industry's Fastest Growing Windows ISV - Microsoft and CMP Media
     (1999)

 .    Codie Award Finalist for Best Enterprise Management Tool (1999)

 .    Well-Connected Award for Best Messaging Management Solution -
     Networld+Interop 98 Las Vegas (1998)

 .    CrossRoads98 A-List Award - Open Systems Advisor (1998)

 .    One of the 100 Hottest Emerging Technology Companies - Computerworld (1997)

 .    PC Week "Best of Comdex" Finalist (1997)

<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 4,150,000 shares of common stock to
     founders and directors at a purchase price per share of $0.0005.

                                      II-1
<PAGE>

  2. In December 1995 and April 1996, NetIQ issued and sold a total of
     174,000 shares of common stock to two directors at a purchase price of
     $0.04.

  3. Pursuant to NetIQ's 1995 Stock Option Plan, from inception to March 31,
     1999, we issued and sold an aggregate of 1,679,993 shares of common
     stock to certain of its employees, officers, directors and consultants.

  4. On September 14, 1995, we issued and sold 7,000,000 shares of Series A
     Preferred Stock to a total of 28 investors for an aggregate purchase
     price of $2,800,000.

  5. On May 14, 1997 we issued and sold 4,100,000 shares of Series B
     Preferred Stock to a total of 32 investors for an aggregate purchase
     price of $8,200,000.

  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.

ITEM 16. Exhibits and Financial Statement Schedules

  (a) Exhibits

<TABLE>
<CAPTION>
 Number                              Exhibit Title
 ------                              -------------
 <C>    <S>
  1.1   Form of Underwriting Agreement
  3.1A  Certificate of Incorporation of NetIQ currently in effect
  3.1B  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  Bylaws of NetIQ currently in effect
  3.2B  Bylaws of NetIQ to be in effect after the closing of the offering made
        under this Registration Statement
  4.1   Specimen Common Stock Certificate
  4.2   Registration Rights Agreement, dated May 14, 1997, by and among NetIQ
        and certain NetIQ stockholders identified therein
  5.1   Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation
 10.1   Form of Indemnification Agreement between NetIQ and each of its
        directors and executive officers
 10.2   Form of Change of Control Severance Agreements between NetIQ and each
        of its executive officers
 10.3A  Amended and Restated 1995 Stock Plan
 10.3B  Form of Stock Option Agreement under the Amended and Restated 1995
        Stock Plan
 10.3C  Form of Director Option Agreement under 1995 the Amended and Restated
        Stock Plan
 10.4A  1999 Employee Stock Purchase Plan
 10.4B  Form of Subscription Agreement under the 1999 Employee Stock Purchase
        Plan
 10.5A+ BasicScript License Agreement, dated August 27, 1996, between NetIQ and
        Henneberry Hill Technologies Corporation doing business as Summit
        Software Company
 10.5B  Amendment, dated May 21, 1999, to the BasicScript License Agreement
        between NetIQ and Henneberry Hill Technologies Corporation doing
        business as Summit Software Company
</TABLE>

                                      II-2
<PAGE>

<TABLE>
<CAPTION>
 Number                              Exhibit Title
 ------                              -------------
 <C>    <S>
 10.6+  Software Distribution Agreement, dated June 23, 1998, between NetIQ and
        Tech Data Product Management, Inc.
 10.7   Agreement of Sublease, dated July 31, 1998, between NetIQ and AMP
        Incorporated
 10.8   Confidential Settlement Agreement, dated March 10, 1999, by and between
        Compuware Corporation, NetIQ Corporation and the individuals named
        therein
 21.1   List of subsidiaries
 23.1*  Independent Auditors' Consent
 23.3   Form of Consent of Counsel (included in Exhibit 5.1)
 24.1   Power of Attorney (see Page II-4)
 27.1   Financial Data Schedule
</TABLE>
---------------------
* To be filed by amendment
+ Confidential treatment requested for portions of these agreements.

  (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 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 26th day of May, 1999.


                                      NETIQ CORPORATION

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

                               POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ching-Fa Hwang and James A. Barth and each of
them, his attorneys-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

  Pursuant to the requirements of the Securities Act of 1933, as amended, this
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>
          /s/ Ching-Fa Hwang           President, Chief Executive    May 26, 1999
______________________________________  Officer and Director
           (Ching-Fa Hwang)             (Principal Executive
                                        Officer)

          /s/ James A. Barth           Vice President, Finance       May 26, 1999
______________________________________  and Chief Financial
           (James A. Barth)             Officer (Principal
                                        Financial and Accounting
                                        Officer)

          /s/ Kuo-Wei Chang            Director                      May 26, 1999
______________________________________
           (Kuo-Wei Chang)

           /s/ Her-Daw Che             Vice President,               May 26, 1999
______________________________________  Engineering and Director
            (Her-Daw Che)

            /s/ Louis Cole             Director                      May 26, 1999
______________________________________
             (Louis Cole)

         /s/ Alan W. Kaufman           Director                      May 26, 1999
______________________________________
          (Alan W. Kaufman)

          /s/ Ying-Hon Wong            Director                      May 26, 1999
______________________________________
           (Ying-Hon Wong))
</TABLE>

                                      II-4
<PAGE>

                    INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To the Board of Directors and Stockholders of NetIQ Corporation:

  Our audits of 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 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 are required to
disclose, pursuant to rules of the Securities and Exchange Commission, an
unaudited proforma balance sheet reflecting the exercise of certain warrants to
acquire     shares of Common Stock at an exercise price of 90% of the planned
initial public offering price whose proceeds are to be used to substantially
repay a $5,000,000 loan under a subordinated secured promissory note (See Note
3). The above opinion is in the form that will be signed by Deloitte & Touche
LLP upon inclusion of such disclosure in the accompanying consolidated
financial statements and assuming that from May 19, 1999 to the date such
information has been included, no other events shall have occurred that would
affect the accompanying consolidated financial statements/schedule or notes
thereto.

Deloitte & Touche LLP
San Jose, California
May 26, 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.....   $ --      $ --        $--        $ --
                                         ====      ====        ===        ====
Year ended June 30, 1997
  Allowance for doubtful accounts.....   $ --      $ --        $--        $ --
                                         ====      ====        ===        ====
Year ended June 30, 1998
  Allowance for doubtful accounts.....   $ --      $307        $--        $307
                                         ====      ====        ===        ====
Nine months ended March 31, 1999......   $307      $198        $--        $505
                                         ====      ====        ===        ====
</TABLE>

                                      S-2
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Number                              Exhibit Title
 ------                              -------------
 <C>    <S>
  1.1   Form of Underwriting Agreement
  3.1A  Certificate of Incorporation of NetIQ currently in effect
  3.1B  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  Bylaws of NetIQ currently in effect
  3.2B  Bylaws of NetIQ to be in effect after the closing of the offering made
        under this Registration Statement
  4.1   Specimen Common Stock Certificate
  4.2   Registration Rights Agreement, dated May 14, 1997, by and among NetIQ
        and certain NetIQ stockholders identified therein
  5.1   Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation
 10.1   Form of Indemnification Agreement between NetIQ and each of its
        directors and executive officers
 10.2   Form of Change of Control Severance Agreements between NetIQ and each
        of its executive officers
 10.3A  Amended and Restated 1995 Stock Plan
 10.3B  Form of Stock Option Agreement under the Amended and Restated 1995
        Stock Plan
 10.3C  Form of Director Option Agreement under 1995 the Amended and Restated
        Stock Plan
 10.4A  1999 Employee Stock Purchase Plan
 10.4B  Form of Subscription Agreement under the 1999 Employee Stock Purchase
        Plan
 10.5A+ BasicScript License Agreement, dated August 27, 1996, between NetIQ and
        Henneberry Hill Technologies Corporation doing business as Summit
        Software Company
 10.5B  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+  Software Distribution Agreement, dated June 23, 1998, between NetIQ and
        Tech Data Product Management, Inc.
 10.7   Agreement of Sublease, dated July 31, 1998, between NetIQ and AMP
        Incorporated
 10.8   Confidential Settlement Agreement, dated March 10, 1999, by and between
        Compuware Corporation, NetIQ Corporation and the individuals named
        therein
 21.1   List of subsidiaries
 23.1*  Independent Auditors' Consent
 23.3   Form of Consent of Counsel (included in Exhibit 5.1)
 24.1   Power of Attorney (see Page II-4)
 27.1   Financial Data Schedule
</TABLE>
---------------------
* To be filed by amendment
+ Confidential treatment requested for portions of these agreements.
[{"type": "S-1", "sequence": "1", "description": "FORM S-1", "secsgml_size_bytes": 347259}]
{"company-data": {"conformed-name": "NETIQ CORP", "cik": "0001084827", "assigned-sic": "", "irs-number": "770405505", "fiscal-year-end": "0630"}, "filing-values": {"form-type": "S-1", "act": "33", "file-number": "333-79373", "film-number": "99635435"}, "business-address": {"street1": "5410 BETSY ROSS DR", "city": "SANTA CLARA", "state": "CA", "zip": "95054", "phone": "4083307000"}}
As filed with the Securities and Exchange Commission on May 26, 1999
                                                     Registration No. 333-
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                             Washington, DC 20549
                               ---------------
                                   FORM S-1
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
                               ---------------
                               NetIQ Corporation
            (Exact name of Registrant as specified in its charter)
Delaware                           7372                        77-0405505
  (State or other jurisdiction
               of                  (Primary Standard Industrial         (I.R.S. Employer
 incorporation or organization)    Classification Code Number)       Identification Number)
---------------

                               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)
                               ---------------

                                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)
                               ---------------

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

   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

------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Proposed Maximum
    Title of Each Class of Securities to be          Aggregate         Amount of
                   Registered                    Offering Price(1)  Registration Fee
------------------------------------------------------------------------------------
Common Stock, $0.001 par value.................     $46,000,000         $12,778
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the
    registration fee pursuant to Rule 457(o) promulgated under the Securities
    Act of 1933, as amended.

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

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 MAY 26, 1999

                                        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 $     and $     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
additional shares to cover over-allotments of shares.

  Investing in the common stock involves risks. See "Risk Factors" on page 6.
Underwriting
                                             Price     Discounts
                                               to         and        Proceeds
                                             Public   Commissions    to NetIQ
                                             ------   ------------   --------
Per Share..................................  $           $            $
Total......................................  $           $            $
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.
------------

                               TABLE OF CONTENTS
Page
                                                                          ----
Prospectus Summary.......................................................   4
Risk Factors.............................................................   6
Forward-Looking Statements...............................................  16
Use of Proceeds..........................................................  17
Dividend Policy..........................................................  17
Capitalization...........................................................  18
Dilution.................................................................  19
Selected Consolidated Financial Statements...............................  20
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  21
Business.................................................................  32
Page
                                                                            ----
Management.................................................................  45
Certain Transactions.......................................................  55
Principal Stockholders.....................................................  56
Description of Capital Stock...............................................  58
Shares Eligible for Future Sale............................................  61
Underwriting...............................................................  63
Notice to Canadian Residents...............................................  65
Legal Matters..............................................................  66
Experts....................................................................  66
Where To Find Other NetIQ Documents........................................  66
Index to Consolidated Financial Statements................................. F-1
------------

  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.

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

  Unless otherwise indicated, all references to "NetIQ" and "we" refer to
NetIQ Corporation and its subsidiaries, including subsidiaries that may be
acquired or formed in the future.

  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.

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

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

Performance and Availability Management Solutions for 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

 .    Leverages Windows NT technology by using de-facto Microsoft standards

 .    Integrates with leading systems management frameworks for best-of-breed
     Windows NT monitoring

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
provide a unique solution for managing systems and applications in distributed
Windows NT environments.

Comprehensive and Easy to Use

The NetIQ AppManager Suite is a management solution that gives an organization a
consolidated view of their entire Windows NT environment from a central, easy-
to-use console.

Scalable and Reliable

The NetIQ AppManager Suite's highly scalable architecture lets organizations
centrally manage their entire Windows NT environment in an efficient and
reliable manner, even when their server and workstation deployment numbers are
in the hundreds.

Extensive and Interoperable

The NetIQ AppManager Suite can be easily extended to monitor an organization's
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."]
PROSPECTUS SUMMARY

  This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read this
entire prospectus carefully.

  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 . In
addition, the information in this prospectus assumes that the initial public
offering price will be $     per share, the midpoint of the range disclosed on
the cover of this prospectus.

                               NetIQ Corporation

  We are a leading provider of performance and availability management software
for Microsoft Windows NT-based systems and applications. As use of the Windows
NT platform in distributed computing and Internet environments continues to
expand, organizations are increasingly relying on this platform to deploy
business-critical applications such as Microsoft Exchange Server, Lotus
Domino/Notes, Oracle, Citrix WinFrame, Microsoft Internet Information Server
and Microsoft SQL Server. As a result, organizations are facing new challenges
in managing their distributed Windows NT environments. Our NetIQ AppManager
Suite enables organizations to address these challenges by providing a
comprehensive and automated solution that helps optimize the performance and
availability of business-critical Windows NT-based systems and applications and
reduce associated support costs. AppManager's scalable, multi-tier architecture
supports rapid growth in the number of servers and applications deployed in
organizations' distributed Windows NT environments and provides close
integration with existing system, network and hardware management solutions. We
believe that AppManager's comprehensive functionality, coupled with its ease of
use resulting from its utilization of familiar Microsoft technology and
standards, offers a superior solution for managing systems and applications in
distributed Windows NT environments.

  Our products are used by organizations in a wide variety of industries and
computing environments. As of March 31, 1999, we licensed our AppManager
products to more than 375 customers, including AT&T, Charles Schwab & Co.,
Countrywide Home Loans, Dell Computer, EDS, General Electric, Georgia-Pacific,
Glaxo Wellcome, MCI, Microsoft, Nasdaq, NationsBank, Nordstrom Information
Systems, Pfizer, Salomon Smith Barney, Shell Services International, Southern
Company Services, the Department of Veterans Affairs and Wells Fargo Bank N.A.
We sell our products through our 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. We
have established product-based relationships with 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 objective is to be the leading provider of performance and availability
management software for Windows NT-based systems and applications. Key elements
of our strategy include enhancing our technology leadership position, targeting
enterprise-wide deployment of our AppManager products within our substantial
customer base, expanding our distribution channels, increasing our
international presence and expanding our relationships with Microsoft.

  We were incorporated in California in June 1995 and expect to complete a
reincorporation into Delaware in June 1999. 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.

                                       4
The Offering
Common stock offered........................           shares
 Common stock to be outstanding after this
  offering...................................           shares
 Use of proceeds............................. For working capital, capital
                                              expenditures, repayment of
                                              certain indebtedness and
                                              potential strategic investments
                                              or acquisitions. See "Use of
                                              Proceeds."
 Proposed Nasdaq National Market symbol...... NTIQ
Please see "Capitalization" 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
presumed exercise of a warrant. See "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Description
of Capital Stock" 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          shares of common stock offered by NetIQ at the initial public
offering price of $       and after deducting the underwriting discounts and
commissions and estimated offering expenses.
Nine Months
                                     Year Ended June 30,      Ended March 31,
                                   -------------------------  ----------------
                                    1996     1997     1998     1998     1999
                                   -------  -------  -------  -------  -------
                                    (in thousands, except per share data)
Consolidated Statement of
 Operations Data:
 Revenue.......................... $    --  $   388  $ 7,070  $ 3,420  $15,109
 Gross profit.....................      --      333    6,428    3,058   13,683
 Loss from operations.............  (1,006)  (2,397)  (3,373)  (3,081)    (590)
 Net loss.........................    (909)  (2,281)  (3,111)  (2,866)    (501)
 Basic and diluted net loss per
  share........................... $ (1.03) $ (1.07) $ (0.89) $ (0.87) $ (0.10)
 Shares used to compute basic and
  diluted net loss per share......     881    2,122    3,496    3,299    4,993
 Pro forma basic and diluted net
  loss per share..................                   $ (0.21)          $ (0.03)
 Shares used to compute pro forma
  basic and diluted net loss per
  share...........................                    14,596            16,093
March 31, 1999
                                                   -----------------------------
                                                                      Pro Forma
                                                   Actual  Pro Forma As Adjusted
                                                   ------- --------- -----------
                                                          (in thousands)
Consolidated Balance Sheet Data:
 Cash and cash equivalents........................ $11,565   $          $
 Working capital..................................   5,076
 Total assets.....................................  17,613
 Long term obligations, less current portion......     241
 Total stockholders' equity.......................   5,971
5
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 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. 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" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

  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. Any failure to increase our revenue as we
implement initiatives to expand our business could materially affect our
business, quarterly and annual operating results and financial condition. We
anticipate that our expenses will increase substantially in the foreseeable
future as we develop our technology, including continuing to integrate features
of Windows NT and third-party systems, network and hardware management products
with AppManager, expand our distribution channels and increase our sales and
marketing activities. Moreover, 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.

There are many factors, including some beyond our control, that may cause
fluctuations in our quarterly operating results.

  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. As a result, we believe that quarter-to-
quarter comparisons of our financial results are not necessarily meaningful,
and you should not rely on them as an indication of our future performance.
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
  . 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

  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

                                       6
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 revenue
in that quarter could be substantially reduced. This would materially adversely
affect our operating results and financial condition.

Customer purchase patterns caused by year 2000 concerns may negatively impact
sales of our products.

  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.

Failure to maintain and enhance our competitive position could adversely affect
our business.

  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. 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 materially adversely affect our ability to sell our
products and could lead to changes in our pricing policies which could
materially adversely affect our profit margins. Competitors vary in size and in
the depth and the breadth of the products and services that they offer. Many of
our current and potential competitors have greater financial, technical,
marketing, professional services and other resources than we do. 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.

  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 IT 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

                                       7
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. Certain 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.

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

  Our ability to sell our products into new markets and to increase our product
penetration into our existing markets will be impaired if we fail to
significantly expand our distribution channels, and our business, future
quarterly and annual operating results and financial condition will be
adversely affected as a result.

  Third-Party Channels. Our sales strategy requires that we establish multiple
indirect marketing channels in the United States and internationally through
value added resellers, or VARs, systems integrators and distributors and
original equipment manufacturers, or OEMs, 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 materially adversely affect our business, future quarterly
and annual operating results and financial condition. 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 our competitors, and does not require that Tech Data purchase minimum
quantities of our products. Tech Data and any of our future distributors could
give higher priority to the products of other companies than they give to our
products. As a result, any significant reduction in sales volume to any of our
current or future distribution partners could materially adversely affect our
business, future quarterly and annual operating results and financial
conditions. In addition, sales through these channels generally have lower
costs than direct sales and any significant decrease in sales through these
channels could also negatively impact our operating margins. Furthermore, our
relationships with our distribution partners may not generate enough revenue to
offset the significant resources used to develop these channels.

  Field Sales and Inside Sales. 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. Because we rely
heavily on our field

                                       8
sales and inside sales organizations, any failure to expand those organizations
could limit our ability to sell our products.

If the markets for Windows NT and performance and availability management
software for Windows NT-based systems and applications do not continue to
develop as we anticipate, our business 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 business, future quarterly and annual operating
results and financial condition. 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 performance and availability 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 business, future
quarterly and annual operating results and financial condition. 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 on this platform. Many companies
have been addressing their performance and availability 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 performance and availability 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 have a materially adverse
effect on our business, future quarterly and annual operating results and
financial condition. 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

  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 such 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,
or IT, 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
business.

  Our future quarterly and annual operating results 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

                                       9
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. Any
failure to manage growth could materially adversely affect 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 business and future
quarterly and annual operating results. Competition for such 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.

Any deterioration of our relationships with Microsoft could adversely affect
our business.

  Any deterioration of our relationships with Microsoft could materially
adversely affect our business, future quarterly and annual operating results
and financial condition. 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 beta testing and feedback programs to develop our
technology and enhance the features and functionality of our software.
Traditionally, Microsoft has not prohibited companies who develop software that
supports Microsoft operating systems from participating in such programs.
However, Microsoft may prohibit us from participating in such programs in the
future for competitive or other reasons. Recently, Microsoft has permitted one
of our engineers to work with its Windows NT development group at its Redmond,
Washington headquarters. Microsoft also contracts for one of our engineers to
provide support for Microsoft's use of our products. Additionally, we
participate in certain 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
beta release, however, Microsoft is under no obligation to continue to
distribute this product in the future.

We intend to expand our international operations and may encounter a number of
problems in doing so.

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

  Risks of International Operations. 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

                                       10
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, that could materially
adversely affect our business, future quarterly and annual operating results
and financial condition including the following:

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

Our industry changes rapidly due to evolving technology standards and our
future success will depend on our ability to continue to meet the sophisticated
needs of our customers.

  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 business, future
quarterly and annual operating results and financial condition. 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. 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 business.

  If we are unable, for technological or other reasons, to develop and
introduce new and improved products in a timely manner, this could materially
adversely affect our business, future quarterly and annual operating results
and financial condition. 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 certain key personnel are critical to our business
and such officers and key personnel may not remain with NetIQ in the future.

  Our success will depend to a significant extent on the continued service of
our executive officers and certain other key employees, including certain
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 materially adversely affect
our business.

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

  If our current customers do not purchase additional products, this could
materially adversely affect our business and future quarterly and annual
operating results. Most of our current customers initially license a

                                       11
small portion of our products for pilot programs. 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 or product liability claims asserted against us could
adversely affect our business.

  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 business and future quarterly and
annual operating results. 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 certain of our products and have experienced
delays in the shipment of our products during the period required to correct
these errors. These delays have principally related to new versions and product
update releases. To date none of these delays has materially affected our
business. However, product errors or delays in the future could be material.
Detection of any significant errors may result in, among other things, loss of,
or delay in, market acceptance and sales of our products, diversion of
development resources, injury to our reputation, or increased service and
warranty costs. Moreover, because our products support Windows NT-based systems
and applications, any software errors or bugs in the Windows NT operating
server software or the systems and applications that our products manage may
result in errors in the performance of our software.

  In addition, 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. Our license agreements with our customers
typically contain provisions designed to limit exposure to potential product
liability claims. Certain of our licensing agreements provide that if our
products fail to perform, we will correct or issue replacement software. Our
standard license also provides that we shall not be liable for indirect or
consequential damages caused by the failure of our products. Such limitation of
liability provisions, however, may not be effective under the laws of certain
jurisdictions to the extent local laws treat certain 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.

Potential year 2000 problems with our software, third party equipment or our
internal operating systems could adversely affect our business.

  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 materially adversely affect our business, future operating
results and financial condition. While we currently believe that our software
products are generally year 2000 compliant, we may learn that certain of 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 certain cases, 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

                                       12
expenses to remedy any problems that could materially adversely affect our
business. 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."

We rely heavily on our intellectual property rights, and if we cannot protect
our intellectual property rights, this could adversely affect our business.

  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 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. 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.

Third parties in the future could assert that our products infringe their
intellectual property rights, which could adversely affect our business.

  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 materially adversely affect 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." 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, our quarter ending June 30 tends to reflect the effect of the
incentive compensation structure for our sales organization, which is based, in
part, on satisfaction of fiscal year-end quotas.

Fluctuations in the value of foreign currencies could result in currency
translation 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

                                       13
exchange rate fluctuations upon future quarterly and annual operating results.
We may experience currency losses in the future. To date, we have not adopted a
hedging program to protect us from risks associated with foreign currency
fluctuations.

Because we license certain of our technology from a third party, any failure to
maintain satisfactory licensing arrangements with this party could adversely
affect our business.

  We license certain technology that is incorporated in certain of our
AppManager products from Summit Software on a non-exclusive, worldwide basis.
Substantially all of our AppManager products rely on this Summit technology.
Although our agreement allows us to continue to sell products using the Summit
technology for a period of 24 months after the license terminates, our
business, operating results and financial condition could be 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."

Provisions in our charter documents and in Delaware law may inhibit potential
acquisition bids for NetIQ and prevent changes in our management.

  Certain provisions of our charter documents could discourage potential
acquisition proposals and could delay or prevent a change in control
transaction. 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. These provisions may also prevent changes
in our management. 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, certain provisions of Delaware law may inhibit
potential acquisition bids for NetIQ. We are subject to the antitakeover
provisions of Delaware law, which regulates 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."

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.

  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. The number of shares of common stock available for
sale in the public market is limited by restrictions under federal securities
law and under certain agreements that our stockholders have entered into with
the underwriters or with us. Those agreements restrict our stockholders from
selling, pledging or otherwise disposing of their shares for a period of 180
days after the date of this prospectus without the prior written consent of
Credit Suisse First Boston Corporation. However, Credit Suisse First Boston
Corporation may, in its sole discretion, release all or any portion of the
common stock from the restrictions of the lockup agreements. Credit Suisse
First Boston Corporation has no current plans to do so. Based on the 17,016,493
shares of our common stock outstanding as of March 31, 1999, which excludes the
   shares issuable upon the presumed exercise of the warrant held by Compuware,
and the          shares being sold by us in this offering, as a result of the
restrictions of federal securities law and

                                       14
the agreements our stockholders have entered into with the underwriters or with
us, no shares other than the          shares offered hereby will be eligible
for sale immediately after completion of this offering. The following table
indicates approximately when the            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:
Eligibility of
                                                               Restricted Shares
                                                                  for Sale in
                                                                 Public Market
                                                               -----------------
At effective date........................................          0
     180 days after effective date............................
     At various times after the effective date................
The     shares issuable upon the presumed exercise of the warrant held by
Compuware will become eligible for sales after 180 days after the effective
date. Many of the restricted shares that will become eligible for sale at the
180th date after the date of this prospectus or afterward will be subject to
certain volume limitations because they are held by affiliates of NetIQ.
Additionally, of the shares issuable upon exercise of options to purchase our
common stock outstanding as of March 31, 1999, approximately          shares
will be vested and eligible for sale on the 180th date following the completion
of this offering. For a further description of the eligibility of shares for
sale into the public market following the offering see "Shares Eligible for
Future Sale."

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 tangible
book value per share of common stock after taking into consideration the
effects of the issuance of the shares offered hereby and the presumed exercise
of the warrant to purchase     shares of common stock issued to Compuware. See
"Dilution" for a further discussion of the dilutive effects of this offering
and the assumed 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
due to a number of factors, some of which are beyond our control.

  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" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." Until the need arises to use the proceeds, we plan to
invest the net proceeds in investment grade, interest-bearing securities.

                                       15
FORWARD-LOOKING STATEMENTS

  Certain 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."

                                       16
USE OF PROCEEDS

  We will receive net proceeds of $         from the sale of          shares of
common stock at an assumed initial public offering price of $     per share
after deducting underwriting commissions and discounts of $         and
expenses of $        .

  The principal purposes of this offering are to create a public market for our
common stock and to raise working capital. Additionally, we will use
approximately $5.0 million of the net proceeds to satisfy certain outstanding
loan obligations to Compuware. Moreover, we may use certain of 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Pending such uses, we intend to invest the net proceeds of the
initial public offering in investment grade, interest-bearing securities.

                                DIVIDEND POLICY

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

                                       17
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 the presumed exercise of a warrant 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             shares of common
    stock offered at an assumed initial public offering price of $       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 presumed exercise of a warrant
at a exercise price of $    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" and
"Description of Capital Stock."

  The outstanding share information excludes 4,270,007 shares of common stock
that were reserved for issuance upon exercise of stock options under the 1995
Stock Plan as of March 31, 1999, of which options to purchase 3,172,106 shares
were outstanding at such date at a per share weighted average exercise price of
$0.51. In addition, in connection with this offering, our board of directors
has approved an increase of 2,050,000 shares to be reserved under the 1995
Stock Plan and 750,000 shares to be reserved under the 1999 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.
March 31, 1999
                                                 ------------------------------
                                                                     Pro Forma
                                                 Actual   Pro Forma As Adjusted
                                                 -------  --------- -----------
                                                        (in thousands)
Current portion of long-term obligations........ $ 5,144
Long-term obligations, less current portion.....     241
Stockholders' equity:
 Preferred Stock, $0.001 par value, 11,100,000
  shares authorized and outstanding, actual;
  5,000,000 shares authorized, no shares
  outstanding, pro forma; 5,000,000 shares
  authorized, no shares outstanding, pro forma
  as adjusted...................................  10,955      --         --
 Common Stock, $0.001 par value, 30,000,000
  shares authorized, 5,916,493 shares
  outstanding, actual; 150,000,000 shares
  authorized,          shares outstanding, pro
  forma; 150,000,000 shares authorized,
           shares outstanding, pro forma as
  adjusted......................................   4,143
 Deferred stock-based compensation..............  (2,325)
 Accumulated deficit............................  (6,802)
                                                 -------     ---        ---
   Total stockholders' equity...................   5,971
                                                 -------     ---        ---
     Total capitalization....................... $11,356
                                                 =======     ===        ===
18
DILUTION

  The pro forma net tangible book value of NetIQ as of March 31, 1999 was
$         , or approximately $     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 presumed exercise of a warrant, the repayment of a $5.0
million promissory note and accrued interest thereon. After giving effect to
the sale of the          shares of common stock offered at an assumed initial
public offering price of $         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 $        , or approximately $         per share. This represents an
immediate increase in pro forma net tangible book value of $         per share
to existing stockholders and an immediate dilution in net tangible book value
of $         per share to new investors of common stock in this offering. The
following table illustrates this dilution on a per share basis:
Assumed public offering price per share..........................         $
    Pro forma net tangible book value per share as of March 31,
     1999..........................................................
    Increase attributable to new investors.........................
                                                                    --- ---
  Pro forma net tangible book value per share after offering.......
                                                                    ---     ---
  Dilution per share to new investors..............................         $
                                                                            ===
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 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 $   per share.
Shares         Total
                                           Purchased    Consideration   Average
                                         -------------- --------------   Price
                                         Number Percent Amount Percent Per Share
                                         ------ ------- ------ ------- ---------
Existing stockholders...................              % $            %    $
New investors...........................
                                          ----   -----  -----   -----
  Total.................................         100.0%         100.0%
                                          ====   =====  =====   =====
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. See "Management--Incentive Stock Plans," "Description of Capital
Stock" and Notes 5 and 13 of Notes to Consolidated Financial Statements.

                                       19
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.
Nine Months
                                    Year Ended June 30,      Ended March 31,
                                  -------------------------  ----------------
                                   1996     1997     1998     1998     1999
                                  -------  -------  -------  -------  -------
                                   (in thousands, except per share data)
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)........................ $ (1.03) $ (1.07) $ (0.89) $ (0.87) $ (0.10)
                                  =======  =======  =======  =======  =======
Shares used to compute basic and
 diluted net loss per share(1)...     881    2,122    3,496    3,299    4,993
                                  =======  =======  =======  =======  =======
Pro forma basic and diluted net
 loss per share(2)...............                   $ (0.21)          $ (0.03)
                                                    =======           =======
Shares used to compute pro forma
 basic and diluted net loss per
 share(2)........................                    14,596            16,093
                                                    =======           =======
June 30,
                                                  ------------------- March 31,
                                                  1996   1997   1998    1999
                                                  ----- ------ ------ ---------
                                                         (in thousands)
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
--------
(1) See Note 6 to the Consolidated Financial Statements for the determination
    of shares used in computing basic and diluted net loss per share.

(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.

                                       20
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 certain events could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors," "Business" and
elsewhere in this prospectus.

Overview

  We develop, market and support a suite of software products, the NetIQ
AppManager Suite, that centrally manages the performance and availability of
distributed Windows NT-based systems and applications. Utilizing a centralized
console with automated monitoring, correction and reporting capabilities, our
products help optimize the performance and availability of business-critical
Windows NT systems and applications and reduce associated support costs.

  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 an
accumulated 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 agreements and, to a
lesser extent, consulting and training services. Service revenue has increased
in recent periods as the size of our installed base has 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. 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.

  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, we expect that sales through third-party
channel partners will increase in the future. 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

                                       21
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
OEMs, we recognize revenue at the time these partners report to us and after
all revenue recognition criteria have been met.

  In September 1996, Compuware Corporation filed a complaint against us
alleging misappropriation of certain trade secrets, copyright infringement,
unfair competition and other claims. We reached a settlement of these claims in
January 1999 and final documentation was entered into and the claims dismissed
in March 1999. As part of the settlement in March 1999, Compuware loaned us
$5.0 million, subordinated to any 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 shares of common stock. Under the terms of the
warrant, the per share exercise price of the warrant is $        , 90% of the
per share sale price of shares sold to investors in this offering. The warrant
provides that Compuware can purchase up to a maximum number of shares equal to
the lesser of 10% of the shares sold in this offering or 2% of our common stock
assuming exercise of all outstanding options as of May 26, 1999. A portion of
the net proceeds from the offering contemplated by this prospectus will be used
to repay the loan and the accrued interest thereon, which repayment we expect
will be substantially offset by the receipt of cash proceeds from Compuware
upon the presumed exercise of the warrant. Additionally, as part of our
settlement agreement, we agreed not to recruit personnel from Compuware until
after December 31, 1999, or release any systems management software for
managing UNIX systems on or before December 31, 1999.

                                       22
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.
Percentage of Total Revenue
                                             ----------------------------------
                                             Year Ended        Nine Months
                                              June 30,       Ended March 31,
                                             -------------   ------------------
                                             1997    1998     1998       1999
                                             -----   -----   -------    -------
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
                                             -----   ----    -------    -------
  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 %
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. 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 as well as annual maintenance
renewals. Service revenue increased as a percentage of total revenue due to the
compounding effect of our base of installed licenses.

  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%

                                       23
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 the number of software licenses sold, while the percentage decline was due
to increases in sales of the AppManager Suite which do not have non-employee
commissions and/or royalty obligations.

  Cost of Service Revenue. Cost of service revenue consists primarily of
personnel costs and expenses incurred in providing on-site and telephonic
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 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 and expanding our sales infrastructure and third-party
channel partners, as well as higher commissions relating the increased software
license revenue. 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, 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. 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.

  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 expenses such as legal and
accounting. 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. Legal expenses have been a significant cost in
both

                                       24
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.
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 $    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 "--Liquidity and Capital
Resources."

  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 certain
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 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.

                                       25
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 OEM
channels, and higher commissions associated with increased sales volume. 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. 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. 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 certain stock option grants and
amortized $250,000 of this amount as an expense for that year.

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

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

                                       26
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. You should not draw any conclusions about our future
results from the results of operations for any particular quarter.
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)
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        16
 Research and
  development...........       76        32        42         20        22        16        52
 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%
27
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 certain 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 due to a constant estimate of effort applied to generating that
revenue. 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 in certain of our
markets 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
may affect our quarterly operating results."

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.

                                       28
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
from the proceeds of the public 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 result,
many companies' software and computer and communications systems may need to be
upgraded or replaced to comply with such "year 2000" requirements.

                                       29
Our Products

  In the ordinary course of our business, we test and evaluate our software
products. We believe that our software products are generally 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 certain of 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 certain cases, 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. Certain 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; communications networks such as
the Internet and private intranets; the internal systems of our customers and
suppliers; the computer and communications hardware and software systems we use
internally in the management of our business; and 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 accordingly 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/or hardware; remediation or
replacement of year 2000 non-compliant technology; validation and testing of
technologically-compliant year 2000 solutions; and implementation of year 2000
compliant systems.

  The table below provides the status and timing of such phased activities.
Impacted Systems                 Status            Targeted Implementation
        ----------------                 ------            -----------------------
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 completed,          September 30, 1999
    systems and services        remediation underway,
                                conducting validation and
                                testing
30
Inoperability of such services due to year 2000 issues could harm our
business. We have completed our assessment of the underlying systems and
hardware. Certain components have been replaced, and we are conducting
validation and testing.

  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/or our growth. We have and will continue to expense all costs
arising from year 2000 issues, funding them from working capital.

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

  See "Risk Factors--Potential year 2000 problems with our software, third
party equipment or our internal operating systems could adversely affect our
business."

  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.

                                       31
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 certain factors,
including those set forth in "Risk Factors" and elsewhere in this prospectus.

NetIQ Overview

  We are a leading provider of performance and availability management software
for Windows NT-based systems and applications. As use of the Windows NT
platform in distributed computing and Internet environments continues to
expand, organizations are increasingly relying on this platform to deploy
business-critical applications such as Microsoft Exchange Server, Lotus
Domino/Notes, Oracle, Citrix WinFrame, Microsoft Internet Information Server
and Microsoft SQL Server. As a result, these organizations are facing new
challenges in managing their distributed Windows NT environments in order to
maintain required service levels, ensure continuous uptime and reduce support
costs. Our NetIQ AppManager Suite enables organizations to address these
challenges by centrally managing the performance of their distributed 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 coupled with its ease of
use resulting from the utilization of familiar Microsoft technology and
standards offer a superior solution for managing systems and applications in
distributed Windows NT environments.

  Our products are used by organizations in a wide variety of industries and
computing environments. As of March 31, 1999, we licensed our AppManager
products to more than 375 customers, including AT&T, Charles Schwab & Co.,
Countrywide Home Loans, Dell Computer, EDS, General Electric, Georgia-Pacific,
Glaxo Wellcome, MCI, Microsoft, Nasdaq, NationsBank, Nordstrom Information
Systems, Pfizer, Salomon Smith Barney, Shell Services International, Southern
Company Services, the Department of Veterans Affairs and Wells Fargo Bank, N.A.

Industry Background

  The Windows NT operating system is a leading platform for distributed
computing. According to International Data Corporation, or IDC, a leading IT
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 2003, or 51% of server operating
systems shipped in that year. The growth of Windows NT has been driven by the
use of this platform for applications that are increasingly business-critical
such as electronic messaging, Internet, group collaboration and database
applications. For example, organizations are increasingly deploying electronic
mail servers over the Windows NT platform. According to IDC, 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, IDC also estimates that the percentage of
electronic server software deployed on Windows NT will grow from approximately
43% in 1998 to approximately 65% in 2001. Because of their business-critical
nature, Windows NT-based 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
distributed computing and Internet environments have created a number of unique
performance and application management challenges. These challenges range from
basic tasks such as monitoring CPU 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 of the business-critical nature of the
applications being deployed on Windows NT. 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

                                       32
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 the Windows NT platform. 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 IDC,
the Windows NT-based systems management market is expected to grow from $1.2
billion in 1997 to $2.8 billion by 2002. Furthermore, IDC estimates that the
distributed performance and availability management market, including Windows
NT and other platforms, is expected to grow from $774 million in 1997 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 a two-tier
architecture that does not scale well as organizations incrementally roll out
more Windows NT servers in 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 best-of-breed, Windows NT-based system management
solutions. 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 IT
    professionals can easily adopt and use
  . Advanced, scalable multi-tier architecture that supports rapid growth in
    the number of servers and applications deployed on the Windows NT
    platform with 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, correction and reporting
capabilities, our products help optimize the performance and availability of
business-critical 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

                                       33
this platform. AppManager has broad functionality that enables IT professionals
to rapidly detect problems, identify the underlying source, 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. IT 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 IT professionals adopt and use AppManager more easily than
system management solutions that have been ported from non-Windows platforms.
Furthermore, as new and emerging Windows NT standards and product features
develop, we will incorporate these standards and features into AppManager.

  Multi-Tier, Scalable Architecture; Centralized Control

  AppManager's multi-tier architecture scales easily as organizations increase
their deployment of Windows NT servers and Windows NT-based applications. 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 scalable
architecture accommodates this growth and continues to enable IT 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 IT
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 IT
professionals to quickly implement AppManager and our scalable architecture
enables organizations to efficiently roll-out AppManager from limited
departmental uses to managing multiple business-critical 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.

  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 customer's IT departments where the need for
products and expertise such as 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.

                                       34
Strategy

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

  Enhancing Position as a Leading Provider of Windows NT Performance and
   Availability Management Solutions

  We intend to strengthen our technology leadership position in the Windows NT
performance and availability management software market by continuing to focus
on managing business-critical 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 business-critical applications such as Microsoft's Commerce
Server.

  Target Enterprise-wide Deployment within Existing Customer Base

  As of March 31, 1999, we licensed our products to over 375 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 business-critical applications.

  Expand Distribution Channels

  We have formed relationships with VARs, system integrators, OEMs 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 performance and availability 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 OEMs. Working with our
Japanese OEMs, we have developed branded Japanese versions of our AppManager
products for each of these OEMs 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
performance and availability management solutions for Windows NT-based systems
and applications and expand our penetration of the Windows NT market. We
participate in Microsoft's beta testing and feedback programs 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.

                                       35
Products and Technology

  We develop, market and support the NetIQ AppManager Suite, a leading
performance and availability management software solution for distributed
Windows NT environments. AppManager's automated monitoring, correction and
reporting features help IT 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, IT professionals can use AppManager with system and network
management framework products to share performance and event information. The
following diagram illustrates how AppManager enables IT professionals to
comprehensively manage business-critical applications, underlying operating
systems and hardware platforms 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.]

                                       36
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.
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
                       Edition                             auto-starts
                      (1998)                              . Tracks disk space
                                                            utilization
                     . Citrix WinFrame (1998)             . Determines if running low
                                                            on DHCP
                     . Microsoft Windows Load Balance
                       Service (1999)                      leases
                                                          . 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
                       System News Server                  for changes
                      (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 port
                       Edition (1999)                       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
                       Server (1996)                       failed
                     . 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
                                                            AppManager
   Management        . Tivoli Enterprise (1998)           . Invokes AppManager console
                                                            from
   Frameworks        . 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
--------------------------------------------------------------------------------
* 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.

                                       37
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.

  A Scaleable and Open Architecture

  AppManager's advanced multi-tier architecture is scalable and includes an
exception-based communication mechanism that 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 IT 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 components:

  . 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 IT 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, on an exception-basis, any relevant data or events
    collected by the running Knowledge Scripts. Users can centrally "push"
    the AppManager agents to remote systems for easy deployment.

                                       38
The following graphic illustrates the relationships among these components:

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

                                       39
Customers

  As of March 31, 1999, we licensed our AppManager products to more than 375
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
  Financial Services                         Southern Company Services

                                             Williams Information Services

    Charles Schwab & Co.
                                          Manufacturing/Distribution

    Dresdner Bank AG
    Great West Life & Annuity Insurance      Aluminum Company of America
    JC Bradford & Co.                        General Electric
    NationsBank/Bank of America              Georgia-Pacific

    Northern Trust                        Pharmaceuticals/Health Care

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

                                             Mayo Foundation for Medical
  High Technology                            Education and  Research

    Dell Computer                            Merck & Co.
    Interliant                               Pfizer

    Microsoft Corporation                 Retail/Consumer Packaged Goods

    Microstrategy                            London Drugs
    NCR Corporation                          Nabisco Foods
    Network Associates                       Nordstrom Information Systems
    PeopleSoft                               Office Depot
    Siemens Business Services                Pepsi-Cola
                                             Philip Morris Europe

                                          Telecommunications

                                             BellSouth Cellular Corp.
                                             Belgacom

                                       40
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, Singapore, 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. In certain instances, the sales process will include 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.

  VARs, System Integrators, Distributors and OEMs

  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 have also established
a network of VARs and system integrators in Europe, Latin America and Asia-
Pacific who perform marketing, sales and technical support functions in their
country or region. Each VAR 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 OEMs 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.

  Product-Based Relationships

  We have product-based relationships with 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, has standardized on
AppManager to monitor its own internal Windows NT and BackOffice deployment and
currently distributes our AppManager for WBEM Agent on its Windows 2000
operating system software. Recently, Microsoft has permitted one of our
engineers to work with its Windows NT development group at its Redmond,
Washington headquarters. Microsoft also contracts for one of our engineers to
provide support for Microsoft's use of our products. Another example of our
product-based relationship is our relationship with Compaq, whose service
organization is a worldwide reseller of AppManager.

                                       41
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 purposes. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Risk Factors--Our
industry changes rapidly due to evolving technology standards..."

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

                                       42
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--Failure to maintain and
enhance our competitive position...."

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

Intellectual Property

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

  We license certain technology that is incorporated in certain of our
AppManager products from Summit Software on a non-exclusive, worldwide basis.
Substantially all of our AppManager products rely on this

                                       43
Summit technology. Under the terms of our license agreement, we pay certain
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 products that incorporate the Summit technology for a period of 24
months following such termination. Our license for this technology is
terminable 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.

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. See "Risk Factors--We
will need to recruit and retain additional qualified personnel..."

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 an aggregate of approximately 23,000
square feet of office space in the Santa Clara facility under the terms of a
lease expiring in July 2003. We believe our current facility will be adequate
to meet our needs for at least the next twelve months. We believe that suitable
additional facilities will be available in the future as needed on commercially
reasonable terms.

  We also lease space for sales and marketing offices in Denver, Colorado, New
York, New York, Dallas, Texas, and Fairfax, Virginia, and have international
field offices in Singapore, Sydney, Australia, London, England, Munich,
Germany, and Tokyo, Japan.

                                       44
MANAGEMENT

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

Executive Officers And Directors
Name                          Age                 Position
 ----                          ---                 --------
President, Chief Executive Officer and
 Ching-Fa Hwang..............   50 Director
                                   Vice President, Finance, Chief Financial
 James A. Barth..............   56 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
---------------------
(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.

                                       45
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 directors will be
elected each year. To implement the classified structure, prior to the
consummation of the

                                       46
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. Thereafter, 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 275,000 shares of common stock with an exercise
price of $0.20 per share which vests in annual installments over three years.
Pursuant to 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 options to Alan Kaufman as a director to purchase
up to an aggregate of 100,000 shares of common stock at an exercise price of
$0.20 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 an aggregate of 75,000 shares of common stock at an exercise
price of $1.00 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, the board of directors granted non-statutory options to
purchase up to 100,000 and 120,000 shares of common stock to Her-Daw Che and
Ching-Fa Hwang, respectively, each with an exercise price of $1.00 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.

                                       47
In November 1998, we granted an option to Ying-Hon Wong in his capacity as a
director to purchase up to 80,000 shares of common stock with an exercise price
of $1.00 per share. Pursuant to 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" for additional information about a consulting
arrangement we have with one of our directors.

  Our Stock 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 Plan specifically provides for an initial automatic grant of an option to
purchase 12,500 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 12,500 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."

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. These executives are referred to
as the Named Executive Officers here and elsewhere in this prospectus. 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.

                           Summary Compensation Table
Annual      Other Annual  Long Term    All Other
                           Compensation   Compensation Compensation Compensation
                         ---------------- ------------ ------------ ------------
                                                        Securities      Life
Name and Principal                                      Underlying   Insurance
Position                  Salary   Bonus  Commissions    Options      Premiums
------------------       -------- ------- ------------ ------------ ------------
Ching-Fa Hwang
 President and Chief
  Executive Officer..... $ 91,947 $    --   $     --          --        $108
Thomas R. Kemp
 Vice President,
  Marketing.............  101,919     320         --      35,000         108
Glenn S. Winokur
 Vice President, Sales..   85,212  17,858    219,029      25,000         108
48
Option Grants During Fiscal Year 1998

  The following table sets forth certain information with respect to stock
options granted to each of the Named Executive Officers during fiscal 1998,
including the potential realizable value 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 aggregate 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
1,508,500 shares to employees and directors, all under our Stock 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
pursuant to a cashless exercise procedure, to the extent authorized by the
board. Options under the Stock 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.
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%
----              ---------- ----------- --------- ---------- -------- ---------
Ching-Fa Hwang...       --        --          --          --        --       --
Thomas R. Kemp...   25,000      1.66%      $0.20    05/07/08  $  3,144 $  7,969
                    10,000      0.66%       0.20    06/22/08     1,258    3,187
Glenn S.
 Winokur.........   25,000      1.66%       0.20    06/22/08     3,144    7,969
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 $    per share, the assumed
initial public offering price, minus the per share exercise price, multiplied
by the number of shares underlying the option.
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
----                     --------- -------- ----------- ------------- ----------- -------------
Ching-Fa Hwang..........       --       --         --           --           --           --
Thomas R. Kemp..........  128,000  $20,480     25,000      170,000      $            $
Glenn S. Winokur........       --       --    126,250      103,750
Incentive Stock Plans

  1995 Stock Plan

  The board of directors adopted the Stock Plan in November 1995 and our
stockholders approved the Stock Plan in April 1996. In connection with this
offering, the board of directors approved the amendment and restatement of the
Stock 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
Plan provides for the grant to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code, or the Code, and for the
grant to employees, directors and consultants of nonstatutory stock options and
stock purchase rights, or SPRs.

                                       49
Number of Shares of Common Stock Available under the Stock Plan

  As of March 31, 1999, a total of 5,950,000 shares of common stock were
authorized for issuance under the Stock Plan, of which options to acquire
3,172,106 shares were issued and outstanding as of that date. As part of the
1999 amendment and restatement of the Stock Plan, the board of directors
approved an increase of 2,050,000 shares reserved for issuance under the Stock
Plan to a total of 8,000,000. The Stock 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 fiscal 2001, equal to the lesser
of 4% of the outstanding shares of common stock on the first day of the fiscal
year, 2,000,000 shares or an amount as the board may determine.

  Administration of the Stock Plan

  The stock plan administrator, which is the board of directors or a committee
of the board, administers the Stock Plan. In the case of options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the committee will consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The administrator
has the power to determine the terms of the options or SPRs granted, including
the exercise price, the number of shares subject to each option or SPR, 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 Plan, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the 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 Plan must be at least
equal to the fair market value of the common stock on the date of grant. With
respect to 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 Plan may not exceed 10 years.

  An optionee generally must exercise an option granted under the Stock 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.

  SPRs

  The administrator determines the exercise price of SPRs granted under the
Stock Plan. In the case of SPRs, unless the administrator determines otherwise,
the restricted stock purchase agreement entered into in connection with the
exercise of the SPR shall grant NetIQ 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 pursuant to restricted stock purchase agreements shall 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 shall lapse at a
rate that the administrator determines.

  Outside Director Options

  The Stock Plan also provides for an initial automatic grant of an option to
purchase 12,500 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 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 12,500 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

                                       50
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.

  Transferability of Options and SPRs

  An optionee generally may not transfer options and SPRs granted under the
Stock Plan and only an optionee may exercise an option and SPR during his or
her lifetime.

  Adjustments upon Merger or Asset Sale

  The Stock 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 shall assume or substitute each option or SPR. If the outstanding
options or SPRs are not assumed or substituted, the administrator shall provide
notice to the optionee that he or she has the right to exercise the option or
SPR as to all of the shares subject to the option or SPR, including shares
which would not otherwise be exercisable, for a period of 15 days from the date
of the notice. The option or SPR 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 shall not
be deemed voluntary if requested by the acquiring company, within twelve months
after a change of control, the optionee shall fully vest in the right to
exercise all of the shares subject to the option or SPR, including shares which
would not otherwise be exercisable.

  Amendment and Termination of the Stock Plan

  Unless terminated sooner, the Stock Plan will terminate automatically in
2005. In addition, the administrator has the authority to amend, suspend or
terminate the Stock 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 Plan.

  1999 Employee Stock Purchase Plan

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

  Number of Shares of Common Stock Available under the Purchase Plan

  A total of 750,000 shares of common stock has been reserved for issuance
under the Purchase Plan. In addition, the Purchase Plan provides for annual
increases in the number of shares available for issuance under the 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, 1,000,000 shares or an amount as the board may determine.

  Administration of the Purchase Plan

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

  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 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

                                       51
. 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 Purchase Plan, which is intended to qualify under Section 423 of the
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 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 5,000 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 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 Purchase Plan other
than by will, the laws of descent and distribution or as otherwise provided
under the Purchase Plan.

  Adjustments upon Merger or Asset Sale

  The 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. If the
successor corporation refuses to assume or substitute 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 Purchase Plan

  The 1999 Purchase Plan will terminate in 2009. However, the board of
directors has the authority to amend or terminate the Purchase Plan at any
time, except that, subject to certain exceptions described in the Purchase
Plan, no such action may adversely affect any outstanding rights to purchase
stock under the Purchase Plan.

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 in 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

                                       52
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 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, including the Named 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 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

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

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

                                       53
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 certain 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.

                                       54
CERTAIN TRANSACTIONS

  September 1995 Series A Preferred Stock Financing. In September 1995, we sold
7,000,000 shares of Series A Preferred Stock at a per share purchase price of
$0.40. 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:
Number of
   Name of Stockholder                                           Series A Shares
   -------------------                                           ---------------
Sen-Tien Lee.................................................    1,250,000
   Direct International Limited.................................      750,000
   Wongfratris Investment Company...............................      750,000
   Ching-Fa Hwang (1)...........................................      500,000
   Her-Daw Che (2)..............................................      250,000
---------------------
(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 4,100,000
shares of Series B Preferred Stock at a per share purchase price of $2.00.
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:
Number of
   Name of Stockholder                                           Series B Shares
   -------------------                                           ---------------
InveStar Burgeon Venture Capital............................     1,000,000
   Sen-Tien Lee................................................       250,000
   Direct International Limited................................       150,000
   Ching-Fa Hwang (1)..........................................       150,000
   Wongfratris Investment Company..............................       145,000
   Her-Daw Che (2).............................................       100,000
   Thomas R. Kemp..............................................        40,000
---------------------
(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 pursuant to a consulting arrangement under
which Mr. Wong is paid $5,000 per month that is terminable at any time.

  Change of Control Severance Agreement. We have entered into Change of Control
Severance Agreements with each of our executive officers. See "Management--
Change in Control Agreements."

  Option Grants to Directors and Certain Affiliates. In November 1995 we
granted an option exercisable for 200,000 shares of common stock to C. S. Ho,
the director of Direct International Limited, with an exercise price of $0.04
per share which vests in annual installments over four years. In May 1999 we
accelerated the vesting on this option so that Mr. Ho could purchase all of the
shares subject to this option.

  We also have issued options to purchase common stock to Messrs. Chang,
Kaufman, Cole, Che, Hwang and Wong under our Stock Plan. Pursuant to
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. "See "Director Compensation."

                                       55
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 of our directors
     . each person or entity who
       beneficially owns more
       than 5% of our outstanding
       common stock

                                           . all directors and executive
                                             officers as a group

     . each of the Named
       Executive Officers

  Except as otherwise noted the address for each holder of more than 5% of our
common stock is c/o NetIQ Corporation, 5410 Betsy Ross Drive, Santa Clara,
California 95054. Except as otherwise indicated, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of common stock held by them.
Percentage ownership is based on 17,016,493 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
shares immediately following the completion of this offering. The figure for
shares outstanding after completion of this offering also includes
shares issuable in connection with the assumed exercise of a warrant held by
Compuware. See "Capitalization" and "Description of Capital Stock." 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 such options for the purpose of
computing the percentage ownership of such 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.
Percentage of
                                                                   Shares
                                                     Number      Outstanding
                                                   of Shares  -----------------
                                          Number   Underlying  Before   After
Name and Address                         of Shares  Options   Offering Offering
----------------                         --------- ---------- -------- --------
5% Stockholders:
Wongfratris Investment Company.........  1,625,000       --      9.5%
 51 Jordan Place
 Palo Alto, CA 94303
Sen-Tien Lee...........................  1,500,000       --      8.8%
 29 Alley 18, Lane 325
 Chien Kung Road
 Taipei, Taiwan
 R.O.C
InveStar Burgeon Venture Capital.......  1,000,000  183,333      6.9%
 Leeware One Building
 Safe Haven Corporate Center
 Seven Mile Beach, Grand Canyon
 Cayman Islands
 British West Indies
Direct International Limited(1)........    900,000  200,000      6.4%
 Charlotte House, Charlotte St.
 P.O. Box N-341
 Nassau, Bahamas

Current Named Executive Officers and
 Directors:
Ching-Fa Hwang (2).....................  2,850,000   60,000     17.0%
Thomas R. Kemp.........................    245,500   23,750      1.6%
Glenn S. Winokur.......................    135,312   19,688        *
Her-Daw Che (3)........................  1,610,000   50,000      9.5%
Ying-Hon Wong (4)......................  1,625,000       --      9.6%
Herbert Chang (5)......................  1,000,000  183,333      6.9%
Alan W. Kaufman........................         --   25,000        *
Louis C. Cole..........................         --       --       --
All directors and executive officers as
 a group (10 persons)..................  7,512,687  361,771     45.3%
---------------------
*  less than 1%

                                       56
(1)  Includes 200,000 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.
(2)  Includes 50,000 shares held by Mr. Hwang's children and 600,000 shares
     held by Mr. Hwang and his wife in joint tenancy.
(3)  Includes 20,000 shares held by Austin Che, Mr. Che's son, 20,000 shares
     held by Joyce Che, Mr. Che's daughter, and 310,000 shares held by the Che
     Family Trust.
(4)  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 this 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."
(5)  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.

                                       57
DESCRIPTION OF CAPITAL STOCK

General

  After this offering, we will be authorized to issue 150,000,000 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 an aggregate of          shares of common stock outstanding,
shares of common stock will be issuable upon exercise of outstanding options
and no shares of Preferred Stock will be issued and outstanding.

  The figure for outstanding shares of common stock upon completion of this
offering reflects the issuance of          shares of common stock in connection
with 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 $        , 90% of the per share sale price of shares
sold to investors in this offering. The warrant provides that Compuware can
purchase up to a maximum number of shares equal to the lesser of 10% of the
shares sold in this offering or 2% of our common stock assuming exercise of all
outstanding options as of May 26, 1999. 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"
for a discussion of our outstanding indebtedness to Compuware.

  The following description of our capital stock does not purport to be
complete and is subject to and qualified in its entirety by our amended and
restated certificate of incorporation and bylaws and by the provisions of
applicable Delaware law.

  Our certificate of incorporation and bylaws contain certain 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. In such
event, 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

                                       58
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 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 11,100,000 shares of common stock are entitled to certain
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
consummation 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 certain 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 expected to discourage certain types
of 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 such proposals because we believe
that the negotiation of such proposals could result in an improvement of their
terms. See "Risk Factors--Provisions in our charter documents... "

  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." 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.

                                       59
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 ..."

Effect of Delaware Antitakeover Statute

  We are subject to Section 203 of the Delaware General Corporation Law, or the
Antitakeover Law, which regulates corporate acquisitions. The Antitakeover Law
prevents certain Delaware corporations, including those whose securities are
listed for trading on the Nasdaq National Market, 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 purposes of the Antitakeover Law, 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. In general,
the Antitakeover Law defines an "interested stockholder" as 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 Antitakeover Law 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 provisions of the
Antitakeover Law. See "Risk Factors--Provisions in our charter documents and in
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.

                                       60
SHARES ELIGIBLE FOR FUTURE SALE

  After this offering, we will have outstanding          shares of common stock
based upon shares outstanding at March 31, 1999, assuming no exercise of the
underwriters' over-allotment option. Excluding the          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 17,016,493 shares of common stock outstanding, all of which are
"restricted" shares under the Securities Act, excluding      shares issuable
upon the presumed exercise of the warrant held by Compuware. For more detail on
the Compuware warrant see "Capitalization," "Description of Capital Stock."

  All restricted shares are subject to lock-up agreements with the underwriters
pursuant to which the holders of the restricted shares have agreed not to sell,
pledge or otherwise dispose of such 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
17,016,493 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:
Eligibility of Restricted Shares for Sale in Public Market
             ----------------------------------------------------------
  ------------------------------------------------------------------------------
At effective date......................................................  0
  ------------------------------------------------------------------------------
     180 days after effective date..........................................
  ------------------------------------------------------------------------------
     At various times after the effective date..............................
All shares issuable upon exercise of the Compuware warrant will be
"restricted" shares under the Securities Act and will become eligible after 180
days after the effective date. 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 certain volume and other resale restrictions pursuant
to Rule 144 rbecause 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          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 pursuant to Rule 144 are subject to certain 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 such shares pursuant to Rule 144(k) without regard to the limitations
described above.

  As of March 31, 1999, 5,950,000 shares were reserved for issuance under the
Stock Plan, of which options to purchase 3,172,106 shares were then
outstanding. Beginning 180 days after the effective date, approximately
         shares issuable upon the exercise of vested options will become
eligible for sale and          shares issued pursuant to restricted stock
agreements under the Stock Plan will no longer be subject to a repurchase
option and will be eligible for resale. In addition, an aggregate of
restricted shares have been issued to certain of our executive officers and
directors under the Stock Plan pursuant to the restricted stock agreements
described above. Additionally, in May 1999, our board of directors approved an
increase of 2,050,000 shares in the number of shares reserved under the Stock
Plan and a reserve of 750,000 shares for options under the 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 pursuant to restricted stock purchase agreements under the Stock Plan,
shares issued in connection with option exercises and shares reserved for
issuance under all stock

                                       61
plans. Shares of common stock issued pursuant to the restricted stock
agreements under the Stock Plan or 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 certain holders of common stock and options to
purchase common stock have agreed pursuant to certain "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.

                                       62
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:
Number of
   Underwriter                                                          Shares
   -----------                                                         ---------
Credit Suisse First Boston Corporation.............................
   BancBoston Robertson Stephens, Inc.................................
   Hambrecht & Quist LLC..............................................
     Total............................................................
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.
Total
                                                 -----------------------------
                                            Per     Without          With
                                           share over-allotment over-allotment
                                           ----- -------------- --------------
Underwriting discounts and commissions
    paid by us...........................  $          $              $
   Expenses payable by us................  $          $              $
The underwriters have informed us that they do not expect discretionary sales
to exceed 5% of the shares of common stock being offered.

  Subject to certain limitations, 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 pursuant to the terms of a
plan in effect on the date hereof, issuances of securities pursuant to the
exercise of employee stock options outstanding on the date hereof or the
exercise of any other stock options outstanding on the date hereof.

                                       63
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; our past and present operations; our
past and present earnings and current financial position; 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.

                                       64
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
pursuant to 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 (i) the purchaser is entitled under applicable
provincial securities laws to purchase common stock without the benefit of a
prospectus qualified under the securities laws, (ii) where required by law,
that the purchaser is purchasing as principal and not as agent, and (iii) 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.

                                       65
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
certain current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, as well as certain
individual attorneys of such firm, beneficially own an aggregate of 62,500
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 hereby made to the registration
statement and the exhibits and schedules thereto. 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 of 1934, as
amended, and, in accordance therewith, will file periodic reports, proxy
statements and other information with the SEC. Such 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.

                                       66
NetIQ CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
                                                                            ----
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
F-1
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 the thirteenth paragraph of Note 1)

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

To the Board of Directors and Stockholders of NetIQ Corporation:

  The accompanying consolidated financial statements are required to disclose,
pursuant to rules of the Securities and Exchange Commission, an unaudited
proforma balance sheet reflecting the exercise of certain warrants to acquire
    shares of Common Stock at an exercise price of 90% of the planned initial
public offering price whose proceeds are to be used to substantially repay a
$5,000,000 loan under a subordinated secured promissory note (See Note 3). The
above opinion is in the form that will be signed by Deloitte & Touche LLP upon
inclusion of such disclosure in the accompanying consolidated financial
statements and assuming that from May 19, 1999 to the date such information has
been included, no other events shall have occurred that would affect the
accompanying consolidated financial statements or notes thereto.

Deloitte & Touche LLP
San Jose, California
May 26, 1999

                                      F-2
NetIQ CORPORATION

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

Stockholders' equity:
  Convertible preferred stock--$0.001
   (aggregate liquidation preference of
   $11,000,000); 11,100,000 shares
   authorized and outstanding, actual;
   5,000,000 shares authorized, none
   outstanding, pro forma..............  10,955   10,955    10,955
  Common stock--$0.001; 30,000,000
   shares authorized; shares
   outstanding: 1997, 4,541,375; 1998,
   4,826,750; 1999, 5,916,493, actual;
   150,000,000 shares authorized,
   shares outstanding, pro forma.......      48    1,302     4,143
  Note receivable from stockholder.....      (6)      (6)       --
  Deferred stock-based compensation....     (20)  (1,011)   (2,325)
  Accumulated deficit..................  (3,190)  (6,301)   (6,802)
                                        -------  -------   -------     ----
    Total stockholders' equity.........   7,787    4,939     5,971
                                        -------  -------   -------     ----
      Total liabilities and
       stockholders' equity............ $ 8,202  $ 8,205   $17,613     $
                                        =======  =======   =======     ====
See notes to consolidated financial statements.

                                      F-3
NetIQ CORPORATION

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
Nine Months
                                  Years Ended June 30,        Ended March 31,
                                 -------------------------  -------------------
                                  1996     1997     1998       1998      1999
                                 -------  -------  -------  ----------- -------
                                                            (Unaudited)
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.........................  $ (1.03) $ (1.07) $ (0.89)   $ (0.87)  $ (0.10)
                                 =======  =======  =======    =======   =======
Shares used to compute basic
 and diluted net loss per
 share.........................      881    2,122    3,496      3,299     4,993
                                 =======  =======  =======    =======   =======
Pro forma basic and diluted net
 loss per share (Note 1).......                    $ (0.21)             $ (0.03)
                                                   =======              =======
Shares used to compute pro
 forma basic and diluted net
 loss per share (Note 1).......                     14,596               16,093
                                                   =======              =======
See notes to consolidated financial statements.

                                      F-4
NetIQ CORPORATION

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (In thousands, except share amounts)
Convertible                           Note
                                                     Preferred Stock     Common Stock     Receivable    Deferred
                                                    ------------------ -----------------     from     Stock-based  Accumulated
                                                      Shares   Amount   Shares    Amount  Stockholder Compensation   Deficit
                                                    ---------- ------- ---------  ------  ----------- ------------ -----------
July 1995--Issuance of common stock to
  founders at $0.0005 per share.........                    -- $    -- 4,150,000  $    2      $--       $    --      $    --
 September 1995--Issuance of Series A
  preferred stock at $0.40 per share,
  net of issuance costs of $14..........             7,000,000   2,786        --      --       --            --           --
 December 1995 and April 1996--issuance
  of common stock at $0.04 per share....                    --      --   174,000       7       (6)           --           --
 Net loss...............................                    --      --        --      --       --            --         (909)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, June 30, 1996.................             7,000,000   2,786 4,324,000       9       (6)           --         (909)
 May 1997--Issuance of Series B
  preferred stock at $2.00 per share,
  net of issuance costs of $31..........             4,100,000   8,169        --      --       --            --           --
 Exercise of stock options..............                    --      --   217,375       9       --            --           --
 Deferred stock-based compensation......                    --      --        --      30       --           (30)          --
 Amortization of deferred stock
  compensation..........................                    --      --        --      --       --            10           --
 Net loss...............................                    --      --        --      --       --            --       (2,281)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, June 30, 1997.................            11,100,000  10,955 4,541,375      48       (6)          (20)      (3,190)
 Exercise of stock options..............                    --      --   285,375      13       --            --           --
 Deferred stock-based compensation......                    --      --        --   1,241       --        (1,241)          --
 Amortization of deferred stock
  compensation..........................                    --      --        --      --       --           250           --
 Net loss...............................                    --      --        --      --       --            --       (3,111)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, June 30, 1998.................            11,100,000  10,955 4,826,750   1,302       (6)       (1,011)      (6,301)
 Exercise of stock options..............                    --      -- 1,177,243     178       --            --           --
 Repurchase of common stock.............                    --      --   (87,500)     (4)       6            --           --
 Deferred stock-based compensation......                    --      --        --   2,667       --        (2,667)          --
 Amortization of deferred stock
  compensation..........................                    --      --        --      --       --         1,353           --
 Net loss...............................                    --      --        --      --       --            --         (501)
                                                    ---------- ------- ---------  ------      ---       -------      -------
Balances, March 31, 1999................            11,100,000 $10,955 5,916,493  $4,143      $--       $(2,325)     $(6,802)
--------------------------------------------------
                                                    ========== ======= =========  ======      ===       =======      =======
Total
                                                    -------
July 1995--Issuance of common stock to
  founders at $0.0005 per share.........            $    2
 September 1995--Issuance of Series A
  preferred stock at $0.40 per share,
  net of issuance costs of $14..........             2,786
 December 1995 and April 1996--issuance
  of common stock at $0.04 per share....                 1
 Net loss...............................              (909)
                                                    -------
Balances, June 30, 1996.................             1,880
 May 1997--Issuance of Series B
  preferred stock at $2.00 per share,
  net of issuance costs of $31..........             8,169
 Exercise of stock options..............                 9
 Deferred stock-based compensation......                --
 Amortization of deferred stock
  compensation..........................                10
 Net loss...............................            (2,281)
                                                    -------
Balances, June 30, 1997.................             7,787
 Exercise of stock options..............                13
 Deferred stock-based compensation......                --
 Amortization of deferred stock
  compensation..........................               250
 Net loss...............................            (3,111)
                                                    -------
Balances, June 30, 1998.................             4,939
 Exercise of stock options..............               178
 Repurchase of common stock.............                 2
 Deferred stock-based compensation......                --
 Amortization of deferred stock
  compensation..........................             1,353
 Net loss...............................              (501)
                                                    -------
Balances, March 31, 1999................            $5,971
--------------------------------------------------
                                                    =======
See notes to consolidated financial statements.

                                      F-5
NetIQ CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
Nine Months Ended
                                  Years Ended June 30,           March 31,
                                 -------------------------  -------------------
                                  1996     1997     1998       1998      1999
                                 -------  -------  -------  ----------- -------
                                                            (Unaudited)
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
See notes to consolidated financial statements.

                                      F-6
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
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 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 and the weighted average number of shares resulting from the
exercise of warrants to purchase common 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     shares of common stock at an
  exercise price of 90% of an assumed initial public offering price of $   ,
  which warrants must be exercised or expire 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. Accordingly, all monetary assets and
liabilities are translated at the current exchange rate at the end of each
period reported, nonmonetary assets and liabilities are translated at
historical rates and revenues and expenses are translated 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
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):
June 30,
                                                          -----------  March 31,
                                                          1997  1998     1999
                                                          ----  -----  ---------
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
                                                          ====  =====   ======
F-9
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, contingent upon (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 total number of shares subject to the contingent warrant outstanding
based on the number of outstanding common stock and common stock equivalents at
March 31, 1999 was 403,772. 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. In the event of an exercise of the warrants pursuant to
the filing of a registration statement, the maximum number of shares of common
stock purchased at that point shall not exceed 10% of the number of shares
registered for sale in the public offering and any residual unexpired warrants
shall become exercisable at the next public offering of the Company's common
stock. The value of such warrants will be charged to operating results in the
period they become exercisable.

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
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:
Aggregate
                     Shares     Shares    Price Per Amount (Net of  Liquidation
                   Designated Outstanding   Share   Issuance Costs) Preference
                   ---------- ----------- --------- --------------- -----------
Series A.......  7,000,000  7,000,000    $0.40     $ 2,786,304   $ 2,800,000
   Series B.......  4,100,000  4,100,000    $2.00       8,169,049     8,200,000
                   ---------- ----------              -----------   -----------
                   11,100,000 11,100,000              $10,955,353   $11,000,000
                   ========== ==========              ===========   ===========
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 $1.60 and $4.00 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 $0.40 and $2.00 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 $1.00 and $5.00 per share, respectively.

  . Holders of preferred stock are entitled to annual noncumulative dividends
    of $0.04 and $0.16 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 4,324,000 and 80,000 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 136,250 outstanding shares of such stock were
subject to repurchase.

  Stock-Based Compensation--In connection with options granted to purchase
common stock, the Company recorded deferred stock compensation of $30,000,
$1,241,000 and $2,667,000 in fiscal years 1997 and 1998 and the nine months
ended March 31, 1999, respectively. Such amounts represent, for employee stock
options, the difference between the exercise price and the fair value of the
Company's common stock at the date of grant, and, for non-employee options, the
deemed fair value of the option at the date of vesting. At March 31, 1999,
unvested options granted to non-employees totaled 44,427. The deferred charges
for employee options are being amortized to expense through fiscal year 2003
and the deferred charges for non employee options are

                                      F-11
NetIQ CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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.

  Common Shares Reserved for Issuance--At March 31, 1999, the Company had
reserved shares of common stock for issuance as follows:
Conversion of convertible preferred stock....................... 11,100,000
     Issuance under stock option plan................................  4,270,007
     Contingent common stock warrants outstanding....................    403,772
                                                                      ----------
       Total......................................................... 15,773,779
                                                                      ==========
Stock Option Plan--Under the Company's 1995 Stock Option Plan (the "Plan")
5,950,000 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:
Weighted-Average
                                                     Shares     Exercise Price
                                                   ----------  ----------------
Outstanding, July 1, 1995......................         --          --
   Granted (weighted-average fair value of
    $0.00)........................................  1,151,000       $0.04
                                                   ----------       -----
   Outstanding, June 30, 1996 (80,000 shares
    exercisable at $0.04).........................  1,151,000        0.04
   Granted (weighted-average fair value of
    $0.02)........................................  1,426,750        0.07
   Exercised......................................   (217,375)       0.04
   Canceled.......................................   (225,000)       0.04
                                                   ----------       -----
   Outstanding, June 30, 1997 (412,062 shares
    exercisable at $0.04).........................  2,135,375        0.06
   Granted (weighted-average fair value of
    $0.84)........................................  1,508,500        0.20
   Exercised......................................   (285,375)       0.05
   Canceled.......................................     (4,000)       0.20
                                                   ----------       -----
   Outstanding, June 30, 1998 (1,035,321 shares
    exercisable at a weighted average price of
    $0.09)........................................  3,354,500        0.13
   Granted (weighted-average fair value of
    $2.04)........................................  1,028,599        1.33
   Exercised...................................... (1,177,243)       0.15
   Canceled.......................................    (33,750)       0.20
                                                   ----------       -----
   Outstanding, March 31, 1999....................  3,172,106       $0.51
                                                   ==========       =====
At March 31, 1999, 1,097,901 shares were available under the Plan for future
grant.

                                      F-12
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 following table summarizes information concerning options outstanding as
of March 31, 1999:
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
     ---------------   ----------- ---------------- -------- --------- --------
$0.04-$0.20........  2,374,943        8.30        $0.15    601,447   $0.12
   $1.00-$2.00........    730,163        9.69         1.17    259,750    1.00
   $6.00..............     67,000        9.97         6.00      3,000    6.00
                        ---------        ----        -----    -------   -----
   $0.04-$6.00........  3,172,106        8.65        $0.51    864,197   $0.41
                        =========        ====        =====    =======   =====
Statement of Financial Accounting Standards No. 123, Accounting for Stock-
Based Compensation (SFAS 123), requires the disclosure of pro forma net income
or loss had the Company adopted the fair value method since the Company's
inception. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of the Black-Scholes option pricing model, even
though such model was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option awards. The Black-Scholes model also
requires subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values.

  The weighted-average fair value of the Company's stock-based awards to
employees was estimated assuming no dividends will be declared and the
following additional assumptions:
Year Ended      Nine Months
                                                      June 30,       Ended March
                                                   ----------------      31,
                                                   1996  1997  1998     1999
                                                   ----  ----  ----  -----------
Estimated life (in years)......................... 3.97  3.67  4.0       4.0
Expected volatility...............................    0     0    0         0
Risk-free interest rate...........................  6.0%  6.0% 5.6%      6.0%
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:
Nine Months
                                           Year Ended June 30,      Ended March
                                          ------------------------      31,
                                           1996    1997     1998       1999
                                          ------  -------  -------  -----------
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............................ $(1.03) $ (1.07) $ (0.89)   $(0.10)
  Pro forma..............................  (1.03)   (1.07)   (0.97)    (0.27)
F-13
NetIQ CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

6. Net Loss per Share

  The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands).
Nine Months Ended
                                  Year Ended June 30,          March 31,
                                -------------------------  ------------------
                                 1996     1997     1998       1998      1999
                                -------  -------  -------  ----------- ------
                                                           (Unaudited)
Net loss (numerator), basic
    and diluted................ $  (909) $(2,281) $(3,111)   $(2,866)  $ (501)
                                -------  -------  -------    -------   ------
   Shares (denominator):
     Weighted average common
      shares outstanding.......   3,962    4,416    4,649      4,619    5,255
     Weighted average common
      shares outstanding
      subject to repurchase....  (3,081)  (2,294)  (1,153)    (1,320)    (262)
                                -------  -------  -------    -------   ------
   Shares used in computation,
    basic and diluted..........     881    2,122    3,496      3,299    4,993
                                =======  =======  =======    =======   ======
   Net loss per share, basic
    and diluted................ $ (1.03) $ (1.07) $ (0.89)   $ (0.87)  $(0.10)
                                =======  =======  =======    =======   ======
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:
Nine Months Ended
                                       Year Ended June 30,      March 31,
                                       -------------------- ------------------
                                        1996   1997   1998     1998      1999
                                       ------ ------ ------ ----------- ------
                                                            (Unaudited)
Convertible preferred stock........  7,000 11,100 11,100   11,100    11,100
   Shares of common stock subject to
    repurchase........................  2,729  1,573    440      714       136
   Outstanding options................  1,151  2,135  3,355    2,740     3,172
   Warrants...........................     --     --     --       --       404
                                       ------ ------ ------   ------    ------
   Total.............................. 10,880 14,808 14,895   14,554    14,812
                                       ====== ====== ======   ======    ======
7. Income Taxes

    The Company's deferred income tax assets are comprised of the following
  (in thousands):
June 30,
                                                   ----------------  March 31,
                                                    1997     1998      1999
                                                   -------  -------  ---------
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.......................................... $    --  $    --   $    --
                                                   =======  =======   =======
F-14
NetIQ CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

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

  For all years presented, the Company's effective tax rate differs from the
federal statutory tax rate primarily due to changes in the valuation allowance
against net deferred tax assets.

  Due to the Company's net losses, no provision for income taxes was recorded
for fiscal years 1996, 1997 and 1998 and the nine months ended March 31, 1999.

  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.

                                      F-15
NetIQ CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

10. Major Customers

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

11. Segment and Geographic Information

  As discussed in Note 1, the Company follows the requirements of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. As defined
in SFAS No. 131, the Company operates in one reportable segment: the design,
development, marketing, support and sales of performance and availability
management software for the Microsoft Windows NT environment. No individual
foreign country accounted for greater than 10% of total revenue or long-lived
assets in any of the periods presented. The following table summarizes total
net revenue and long-lived assets attributed to significant countries (in
thousands).
Year Ended June
                                                          30,        Nine Months
                                                    ---------------- Ended March
                                                    1996 1997  1998   31, 1999
                                                    ---- ---- ------ -----------
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
                                                    ==== ==== ======   =======
--------
* 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 stockholders
approval, the following:

  .  adoption of the 1999 Employee Stock Purchase Plan (the "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 the Company's common stock. The Company has
     initially reserved 750,000 shares of common stock under this plan, plus
     an annual increase to be added on the first day of the Company's fiscal
     year beginning July 1, 2000 equal to the lesser of (i) 1,000,000 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.

                                      F-16
NetIQ CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

 .  amendment of the 1995 Stock Option Plan ("Stock Plan"). The number of shares
   of common stock of the Company available for issuance under the Stock Plan
   was increased by 2,050,000 shares from 5,950,000 to 8,000,000 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)
   2,000,000 shares or (iii) an amount determined by the Company's Board of
   Directors. Additionally, the Stock Plan includes an automatic
   nondiscretionary grant mechanism that provides that options will be granted
   to non-employee directors who on the date of grant do not beneficially own
   1% or more of the total voting power of the Company's voting securities. The
   Stock Plan specifically provides for an initial automatic grant of an option
   to purchase 12,500 shares of common stock to a non-employee director who
   first becomes a director after the Company'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 12,500 shares of common
   stock on the date of the annual meeting of stockholders. However, if the
   first annual meeting following the Company'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 the Company in the State of Delaware and the associated
   exchange of one share of common stock or preferred stock of the Company for
   every share of Common Stock or preferred stock, as the case may be, of the
   Company's California predecessor. Such reincorporation and stock exchange
   will become effective prior to the effective date of the initial public
   offering contemplated by the Company, and

 .  an increase of authorized shares of common stock to 150,000,000 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 the Company.

                                      F-17
[Descriptive text accompanying NetIQ logo and awards logo]

NetIQ is a leading provider of performance and availability management solutions
for Windows NT-based systems and business-critical applications.  The NetIQ
AppManager Suite enables organizations to centrally manage the performance of
their distributed Windows NT environment, help ensure availability through
automated monitoring, correction and reporting features and help lower the total
cost of ownership.

NetIQ's technological innovation and customer acceptance has led to numerous
industry awards, including:

 .    Named Industry's Fastest Growing Windows ISV - Microsoft and CMP Media
     (1999)

 .    Codie Award Finalist for Best Enterprise Management Tool (1999)

 .    Well-Connected Award for Best Messaging Management Solution -
     Networld+Interop 98 Las Vegas (1998)

 .    CrossRoads98 A-List Award - Open Systems Advisor (1998)

 .    One of the 100 Hottest Emerging Technology Companies - Computerworld (1997)

 .    PC Week "Best of Comdex" Finalist (1997)
[NetIQ LOGO APPEARS HERE]
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.
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
                                                                      =========
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 4,150,000 shares of common stock to
     founders and directors at a purchase price per share of $0.0005.

                                      II-1
2. In December 1995 and April 1996, NetIQ issued and sold a total of
     174,000 shares of common stock to two directors at a purchase price of
     $0.04.

  3. Pursuant to NetIQ's 1995 Stock Option Plan, from inception to March 31,
     1999, we issued and sold an aggregate of 1,679,993 shares of common
     stock to certain of its employees, officers, directors and consultants.

  4. On September 14, 1995, we issued and sold 7,000,000 shares of Series A
     Preferred Stock to a total of 28 investors for an aggregate purchase
     price of $2,800,000.

  5. On May 14, 1997 we issued and sold 4,100,000 shares of Series B
     Preferred Stock to a total of 32 investors for an aggregate purchase
     price of $8,200,000.

  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.

ITEM 16. Exhibits and Financial Statement Schedules

  (a) Exhibits
Number                              Exhibit Title
 ------                              -------------
1.1   Form of Underwriting Agreement
  3.1A  Certificate of Incorporation of NetIQ currently in effect
  3.1B  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  Bylaws of NetIQ currently in effect
  3.2B  Bylaws of NetIQ to be in effect after the closing of the offering made
        under this Registration Statement
  4.1   Specimen Common Stock Certificate
  4.2   Registration Rights Agreement, dated May 14, 1997, by and among NetIQ
        and certain NetIQ stockholders identified therein
  5.1   Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation
 10.1   Form of Indemnification Agreement between NetIQ and each of its
        directors and executive officers
 10.2   Form of Change of Control Severance Agreements between NetIQ and each
        of its executive officers
 10.3A  Amended and Restated 1995 Stock Plan
 10.3B  Form of Stock Option Agreement under the Amended and Restated 1995
        Stock Plan
 10.3C  Form of Director Option Agreement under 1995 the Amended and Restated
        Stock Plan
 10.4A  1999 Employee Stock Purchase Plan
 10.4B  Form of Subscription Agreement under the 1999 Employee Stock Purchase
        Plan
 10.5A+ BasicScript License Agreement, dated August 27, 1996, between NetIQ and
        Henneberry Hill Technologies Corporation doing business as Summit
        Software Company
 10.5B  Amendment, dated May 21, 1999, to the BasicScript License Agreement
        between NetIQ and Henneberry Hill Technologies Corporation doing
        business as Summit Software Company
II-2
Number                              Exhibit Title
 ------                              -------------
10.6+  Software Distribution Agreement, dated June 23, 1998, between NetIQ and
        Tech Data Product Management, Inc.
 10.7   Agreement of Sublease, dated July 31, 1998, between NetIQ and AMP
        Incorporated
 10.8   Confidential Settlement Agreement, dated March 10, 1999, by and between
        Compuware Corporation, NetIQ Corporation and the individuals named
        therein
 21.1   List of subsidiaries
 23.1*  Independent Auditors' Consent
 23.3   Form of Consent of Counsel (included in Exhibit 5.1)
 24.1   Power of Attorney (see Page II-4)
 27.1   Financial Data Schedule
---------------------
* To be filed by amendment
+ Confidential treatment requested for portions of these agreements.

  (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
SIGNATURES

  Pursuant to the requirements of the Securities Act, NetIQ Corporation has
duly caused this 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 26th day of May, 1999.

                                      NETIQ CORPORATION

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

                               POWER OF ATTORNEY

  KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Ching-Fa Hwang and James A. Barth and each of
them, his attorneys-in-fact, each with the power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement that is to be effective upon filing pursuant to
Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that such attorneys-in-fact and agents or any of them, or
his or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

  Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Name                            Title                   Date
                 ----                            -----                   ----
/s/ Ching-Fa Hwang           President, Chief Executive    May 26, 1999
______________________________________  Officer and Director
           (Ching-Fa Hwang)             (Principal Executive
                                        Officer)

          /s/ James A. Barth           Vice President, Finance       May 26, 1999
______________________________________  and Chief Financial
           (James A. Barth)             Officer (Principal
                                        Financial and Accounting
                                        Officer)

          /s/ Kuo-Wei Chang            Director                      May 26, 1999
______________________________________
           (Kuo-Wei Chang)

           /s/ Her-Daw Che             Vice President,               May 26, 1999
______________________________________  Engineering and Director
            (Her-Daw Che)

            /s/ Louis Cole             Director                      May 26, 1999
______________________________________
             (Louis Cole)

         /s/ Alan W. Kaufman           Director                      May 26, 1999
______________________________________
          (Alan W. Kaufman)

          /s/ Ying-Hon Wong            Director                      May 26, 1999
______________________________________
           (Ying-Hon Wong))
II-4
INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To the Board of Directors and Stockholders of NetIQ Corporation:

  Our audits of 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 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 are required to
disclose, pursuant to rules of the Securities and Exchange Commission, an
unaudited proforma balance sheet reflecting the exercise of certain warrants to
acquire     shares of Common Stock at an exercise price of 90% of the planned
initial public offering price whose proceeds are to be used to substantially
repay a $5,000,000 loan under a subordinated secured promissory note (See Note
3). The above opinion is in the form that will be signed by Deloitte & Touche
LLP upon inclusion of such disclosure in the accompanying consolidated
financial statements and assuming that from May 19, 1999 to the date such
information has been included, no other events shall have occurred that would
affect the accompanying consolidated financial statements/schedule or notes
thereto.

Deloitte & Touche LLP
San Jose, California
May 26, 1999

                                      S-1
SCHEDULE II
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
Balance  Charged                 Balance
                                          at     to cost                 at end
                                       Beginning   and    Deductions/end   of
                                       of Period expenses   of period    period
                                       --------- -------- -------------- -------
Year ended June 30, 1996
  Allowance for doubtful accounts.....   $ --      $ --        $--        $ --
                                         ====      ====        ===        ====
Year ended June 30, 1997
  Allowance for doubtful accounts.....   $ --      $ --        $--        $ --
                                         ====      ====        ===        ====
Year ended June 30, 1998
  Allowance for doubtful accounts.....   $ --      $307        $--        $307
                                         ====      ====        ===        ====
Nine months ended March 31, 1999......   $307      $198        $--        $505
                                         ====      ====        ===        ====
S-2
EXHIBIT INDEX
Number                              Exhibit Title
 ------                              -------------
1.1   Form of Underwriting Agreement
  3.1A  Certificate of Incorporation of NetIQ currently in effect
  3.1B  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  Bylaws of NetIQ currently in effect
  3.2B  Bylaws of NetIQ to be in effect after the closing of the offering made
        under this Registration Statement
  4.1   Specimen Common Stock Certificate
  4.2   Registration Rights Agreement, dated May 14, 1997, by and among NetIQ
        and certain NetIQ stockholders identified therein
  5.1   Form of Opinion of Wilson Sonsini Goodrich & Rosati, Professional
        Corporation
 10.1   Form of Indemnification Agreement between NetIQ and each of its
        directors and executive officers
 10.2   Form of Change of Control Severance Agreements between NetIQ and each
        of its executive officers
 10.3A  Amended and Restated 1995 Stock Plan
 10.3B  Form of Stock Option Agreement under the Amended and Restated 1995
        Stock Plan
 10.3C  Form of Director Option Agreement under 1995 the Amended and Restated
        Stock Plan
 10.4A  1999 Employee Stock Purchase Plan
 10.4B  Form of Subscription Agreement under the 1999 Employee Stock Purchase
        Plan
 10.5A+ BasicScript License Agreement, dated August 27, 1996, between NetIQ and
        Henneberry Hill Technologies Corporation doing business as Summit
        Software Company
 10.5B  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+  Software Distribution Agreement, dated June 23, 1998, between NetIQ and
        Tech Data Product Management, Inc.
 10.7   Agreement of Sublease, dated July 31, 1998, between NetIQ and AMP
        Incorporated
 10.8   Confidential Settlement Agreement, dated March 10, 1999, by and between
        Compuware Corporation, NetIQ Corporation and the individuals named
        therein
 21.1   List of subsidiaries
 23.1*  Independent Auditors' Consent
 23.3   Form of Consent of Counsel (included in Exhibit 5.1)
 24.1   Power of Attorney (see Page II-4)
 27.1   Financial Data Schedule
---------------------
* To be filed by amendment
+ Confidential treatment requested for portions of these agreements.