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

                                   FORM 10-K
                            ------------------------

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

                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

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

         FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

                          COMMISSION FILE NO. 0-22158

                                NETMANAGE, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                              <C>
                    DELAWARE                                        77-0252226
        (STATE OR OTHER JURISDICTION OF                           (IRS EMPLOYER
         INCORPORATION OR ORGANIZATION)                        IDENTIFICATION NO.)

         10725 NORTH DE ANZA BOULEVARD,                               95014
             CUPERTINO, CALIFORNIA                                  (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 973-7171

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01
                                   PAR VALUE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ]

     The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Common
Stock reported on the Nasdaq Stock Market, was $59,920,389 AS OF FEBRUARY 28,
2001.(1)

     THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF FEBRUARY 28, 2001
WAS 65,223,230.
                            ------------------------

                      DOCUMENTS INCORPORATED BY REFERENCE

     SECTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE
REGISTRANT'S ANNUAL MEETING OF STOCKHOLDERS, TO BE HELD MAY 30, 2001, WHICH WILL
BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS REPORT TO THE EXTENT STATED HEREIN.

---------------
(1) Excludes 17,286,919 shares of Common Stock held by directors and officers
    and stockholders whose beneficial ownership exceeds five percent of the
    shares outstanding at December 31, 2000. Exclusion of shares held by any
    person should not be construed to indicate that such person possesses the
    power, direct or indirect, to direct or cause the direction of the
    management or policies of the registrant, or that such person is controlled
    by or under common control with the registrant.

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                                     PART I

ITEM 1 -- BUSINESS.

OVERVIEW

     NetManage, Inc. (the "Company") develops and markets software and service
solutions that allow its customers to access and leverage the considerable
investment they have in their host-based business applications, processes and
data.

     The Company's business is primarily focused on providing a full spectrum of
specific personal computer and network or application server-based software and
tools. These products allow the Company's customers to access and use their
mission-critical line-of-business host applications and resources; to publish
information from existing host systems in a web presentation particularly to new
users on the Internet; to create new web-based applications that leverage the
corporation's existing business processes; and, to ensure the continued
operation of these solutions through the incorporation and deployment of
innovative real-time Internet-based support solutions.

     The Company's business is targeted at taking advantage of the trend of
major corporations worldwide to adopt Business-to-Business ("B2B") or
Business-to-Consumer ("B2C") initiatives. In this market, the Company enables
its customers to bridge between their existing access systems and technologies
(Business-to-Employee or "B2E") and those required to compete in the B2B and B2C
marketplaces. The corporate resources internal to the organization, those behind
existing B2E solutions, are the basis of any eBusiness transformation for an
existing company. Alongside these solutions, the Company is focused on providing
products that allow existing corporate business processes to be extended to
business partners in the supply and demand chains, and products that allow new
business processes to be created in support of corporate eBusiness B2B and B2C
initiatives. The Company is also focused on taking advantage of major current
industry trends: the expansion of the Internet and its adoption as the eCommerce
and eBusiness infrastructure; the continued mobilization of personal computer
users and the adoption of mobile information access and display devices; and,
the availability of broader access to corporate data and information for people
internal and external to an organization.

     The Company develops and markets these software solutions to allow its
customers to access and leverage applications, business processes and data on
IBM corporate mainframe computers and IBM midrange computers such as AS/400 and
on UNIX(R) based servers. The Company also develops and markets software that
allows real time application sharing on corporate networks and across the
Internet for the purposes of application support, help and training. The Company
provides professional support, maintenance, and technical consultancy services
to its customers in association with the products it develops and markets. The
Company provides professional applications and management consultancy to its
customers in association with the server-based products it delivers that allow
customers to develop and deploy new web-based applications.

     The Company's principal products are compatible with Microsoft
Corporation's ("Microsoft") Windows 2000, Windows NT, Windows 98, Windows 95 and
Windows 3.x platforms, International Business Machines Corporation ("IBM")
operating systems, Novell, Inc. ("Novell") operating systems and various
implementations of the industry standard UNIX operating system such as IBM's
AIX, Hewlett Packard's HP/UX, Sun Microsystems' Solaris and the open source
Linux system.

     The Company was incorporated in 1990 as a California corporation and
changed its incorporation to Delaware in 1993 in conjunction with its initial
public offering.

     The Company has a range of access, publishing and integration products. It
also has a range of support connectivity products that provide real-time visual
support in conjunction with help desk systems aimed at reducing the time and
cost of end user support. The Company's host access products provide the
applications and solutions that allow end user devices, including personal
computers, to communicate with large centralized corporate computer systems.
Host access products include the Company's current brands: the RUMBA(R),
ViewNow(TM) families, and the Chameleon(R) family. Strong publishing and
integration brands include the OnWeb(R) family and the Salvo(TM) family. The
Company's real-time visual support connectivity

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products add value to its access, publishing and integration solution offerings
and also target new market segments. Current products include SupportNow(TM)
Enterprise and the SupportNow SDK(TM) software tools that help reduce the length
and cost of support phone calls from end-users and help with end user education
and training.

     The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, among others, statements regarding the
Company's expectation that sales will grow, and it will continue to target and
expand its marketing and sales efforts in major European and Asian markets. The
Company's actual results could differ significantly from the results discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, those discussed below and in
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations," including those discussed under the heading "Factors That May
Affect Future Results and Financial Condition."

INDUSTRY BACKGROUND

     Four important industry trends have had strong influence on the Company's
business strategy during the past two years: (i) the rapid adoption of eBusiness
and electronic trading approaches by major corporations worldwide; (ii) the
continuing development of the Internet, intranets and extranets for delivery of
mission-critical business applications in large companies; (iii) an increased
desire on the part of corporations to make information stored in mainframes and
midrange computers ("legacy" systems) broadly accessible internally and
externally to their employees and business partners; and, (iv) the continued
mobilization of users of personal computers and the proliferation of wireless
and handheld devices requiring corporate host access on a global basis.

     The Company uses the term "internetworking" to describe the technology of
global connectivity. Internetworking had its origins in the Internet, a
worldwide "network of networks" which allows communication between different
organizations and locations, each with its own individual network of computers.
With the rapid development of the Internet, the breadth of the connectivity
industry has quickly expanded beyond proprietary-based solutions to Web-based
technologies and other open protocol solutions. The application of this same
internetworking technology within a company on its own computer networks is
known as an "intranet" to distinguish it from the larger public Internet. When
companies use internetworking technology for connecting to outside customers and
suppliers, it is known as an "extranet". An extranet is a network upon which all
users are known and authenticated as opposed to the Internet where the
identities of users are anonymous. Importantly, internetworking is comprised of
many different applications which must communicate with one another, each
according to its function, and which must follow certain standards or
conventions to ensure interoperability.

     The number and variety of applications and services that utilize the
internetworking infrastructure is growing rapidly -- pushed along by the
Internet and corporate eBusiness initiatives. The Company is focused on several
levels of product that utilize the internetworking infrastructure. These include
traditional host access products for corporate desktops and servers, which
provide users with the ability to communicate with corporate host systems;
products that allow organizations to transform "legacy" applications into
systems that can service external users, partners and customers -- particularly
through the Web; and, development platforms that allow organizations to
re-engineer their existing "Legacy" applications and draw one or many existing
applications and information sources together to create new applications for new
internal and external users.

     The personal computer has continued to be an important tool for
facilitating communications, information sharing, and group productivity in
large companies. As professional workers have become more mobile, there is an
accelerated effort to connect personal computers easily and reliably to
corporate networks to improve communications and organizational productivity. As
a result, the personal computer has become an important tool to connect workers
to shared repositories of information and to other people, regardless of
location, network or type of computer. Internetworking also facilitates
activities such as mobile computing by allowing users to use and to access more
effectively all of a company's computer systems from a remote

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location within the confines of an organization's security and access control
policies. As the Internet economy grows, the number of different communication
and internetworking options required by major corporations to support their
businesses, is increasing. The number and type of mobile computing and
communication devices is also increasing, now includes wireless handheld
devices, Personal Digital Assistants (PDAs), and Internet and Web-enabled
cellular phones.

     Within organizations, personal computers must connect not only to other
personal computers via Local Area Networks (LANs), but also to workstations,
servers, minicomputers and mainframes, many of which may run different operating
system software, and to different physical networks. In addition, more companies
are seeking ways to link their computer systems directly with those of vendors,
customers and other business partners to enhance the flow of information and
reduce expenses. This major move, utilizing the Internet as the internetworking
solution, is termed eBusiness or eCommerce. eBusiness covers the full migration
of business processes to the web and the sharing of those business processes
with partners. eCommerce covers the elements that allow electronic selling,
trading and transactions on the Web. These two terms are now augmented by
specific terms that incorporate the advent of the wireless Internet. eMobile or
mCommerce describes the use of a wide range of handheld, mobile and wireless
devices as a part of an overall eBusiness or eCommerce solution.

     For a network to function properly, all connected devices must follow rules
or "protocols" that govern access to the network and communication with other
devices. "TCP/IP" (Transmission Control Protocol/ Internet Protocol) is the name
of the data communications protocol family that has become the de facto
networking standard application because it is an open (non-proprietary) protocol
capable of linking disparate environments. The Company was one of the first
software vendors to deliver the TCP/IP protocol and related applications for the
Microsoft Windows platform. Selling primarily to the business user, NetManage
has promoted standards based on its implementation of TCP/IP that have been
adopted by the industry at large. The most notable example is the Windows
Sockets, or "WinSock," interface, which is used today by a wide range of Windows
internetworking software vendors including Microsoft.

     The Company believes that the open and interoperable characteristics of
internetworking technology, the use of intranets and the software that enables
them, will continue to grow within organizations. The software required to
implement an internetworking solution includes applications for the desktop, the
software that transports information over the wires, the servers at the other
end, and management support and development tools to create and administer a
network of this type. Additionally, an easy-to-use, intuitive interface can
extend the use of these software components to a non-technical audience and
facilitates adoption by such an audience.

     The Company's vision is to provide access, publishing and integration
products, and application level solutions, that greatly improve and extend the
reach of existing corporate host-centric systems -- regardless of what the
end-user devices are and regardless of where the end-user devices are located.
As the Company continues to deliver on its vision, it will enable its customers
to implement B2E, B2B, and B2C business solutions, enable them to compete in the
Internet ecomony, and allow both internal and external users to access corporate
applications, data and information efficiently, and utilize business processes
in a manageable, secure and supportable way.

PRODUCTS AND TECHNOLOGY

     The Company's comprehensive suite of products provides organizations with
cost-effective solutions for connecting people, their computers and their
businesses. The Company's products extend the functionality of these
organizations' technology investments by providing essential services that are
not included in desktop and network operating systems. The result is streamlined
communication, reductions in the total cost of ownership, and increased
productivity throughout an organization.

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     The Company has been a long-time proponent of industry standards, and it
pursues partnerships and alliances with key industry players. In addition to
promoting technological progress, these alliances help strengthen the Company's
market insight and lead to improved customer solutions with greater value. Over
time some of the Company's strategic partners include Microsoft, Intel, IBM,
Novell, Dell Computer and AT&T. All NetManage products are developed around the
following:

          Ease of Use -- The Company's goal is to create host access
     applications for non-technical users and to provide straightforward tools
     allowing swift new application development. The Company's products are
     designed to be set up on any personal computer or network server in a few
     minutes. For many corporate users, the cost of training, installation, and
     support can exceed software acquisition costs. Ease of use can reduce these
     costs. Moreover, ease of use increases product utilization, thereby
     enhancing product value to the customer.

          Manageability -- NetManage offers an integrated suite of products and
     improved network manageability for system administrators. NetManage is
     focused on providing managed products and built-in common management server
     support. The common characteristics of the product suite are to increase
     user satisfaction and product utilization. A well-integrated product lowers
     the cost of ownership and increases product value to the customer.

          Functionality -- The depth and completeness of the applications in
     NetManage products are designed to compete with "best of class"
     functionality from specialist vendors in each category. The value
     proposition of NetManage's product offerings is enhanced by eliminating
     multi-source product purchases with no compromise on advanced software
     functionality. The economic proposition for the customer is enhanced by
     purchasing software and service from a single vendor.

          Supportability -- NetManage recognizes that its customers need to
     reduce continually the cost-of-ownership associated with access, publishing
     and integration software. Unlike competitors, who have focused solely on
     improved manageability to reduce costs, NetManage has also invested in the
     development of unique support tools. Products are designed with
     well-integrated support tools that reduce the time required to resolve
     software problems and reduce downtime, significantly enhancing the value of
     NetManage's product offerings to customers.

          Adherence to Standards -- The foundation of the Internet is predicated
     upon the notion that any client can talk to any server, and that all
     Application Programming Interfaces (APIs) and protocols are published as
     free open standards. In the corporate computing environment, it is
     impossible to guarantee a common set of software on every client and every
     server. NetManage's commitment to open standards ensures that the
     plug-and-play interoperability that has made the Internet successful
     extends to corporate intranets as well.

     The Company's best-known products include the ViewNow(TM), SupportNow(TM),
OnWeb(R) and RUMBA(R), product families. During 2000 the Company acquired
Aqueduct Inc., a developer of application management and monitoring technology,
and will be incorporating Aqueduct's powerful application tools to significantly
enhance the Company's forthcoming management server products under the
ManageNow(TM) brand. The Company's currently available products include:

ViewNow(TM) Windows Edition      ViewNow(TM)Windows Edition provides Microsoft
                                 Windows users with a complete set of
                                 high-performance connectivity software focused
                                 on access to UNIX(R)hosts providing powerful
                                 management facilities for centralized
                                 configuration, deployment and control, as well
                                 as built-in real-time support capabilities.

ViewNow(TM) InterDrive(R) NFS    Client and server applications which provide
                                 network users with access to printers,
                                 directories and file systems on network
                                 servers, a server product allowing users to
                                 share applications, information and devices as
                                 if connected directly to a desktop, and a
                                 gateway product linking standard windows
                                 desktops to UNIX(R)file sharing systems.

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SupportNow(TM) SDK               Comprehensive software developer tool that
                                 enables programmers to add real-time
                                 application and workgroup sharing capability,
                                 using standard Internet technology, to any
                                 Microsoft Windows 95/98/NT application

SupportNow(TM) Enterprise        Interactive, real-time, visual support solution
                                 that brings the users' desktop to the support
                                 representative and reduces the length of time
                                 spent on a support incident. It provides
                                 independent software vendors ("ISVs") a way to
                                 offer faster and more effective technical
                                 support to their customers via interactive
                                 sessions.

SupportNow(TM) Server            Comprehensive real-time support server offering
                                 SupportNow(TM)Call Queue Management,
                                 conferencing, backend help desk
                                 integration, firewall and proxy services.

OnWeb(R)                         Comprehensive, robust and highly scalable
                                 server-based solution allowing customers to
                                 leverage their existing host applications, host
                                 based information and host based business
                                 processes into new applications or presentation
                                 methods. OnWeb provides application publishing
                                 to the web, the ability to selectively combine
                                 information from more than one back-end system
                                 resource for web presentation, and the ability
                                 to add new business process or business logic
                                 to augment that provided by a company's
                                 existing systems. OnWeb has a complete range of
                                 back-end connectors allowing access to host
                                 applications and services, a powerful optimized
                                 development environment called OnWeb Designer,
                                 and a range of information publishers allowing
                                 presentations such as HTML, WML, XML, COM and
                                 Java Beans.

OnWeb(R) TI                      A member of the OnWeb family specially
                                 developed as part of an agreement with
                                 Microsoft to provide additional host access
                                 services to Microsoft's Host Integration Server
                                 2000 (HIS2000). OnWeb's back-end connectors and
                                 design environment allow a wide range of
                                 existing systems to be presented as COM/MTS
                                 transactions to Microsoft's HIS2000 based
                                 development environment expanding substantially
                                 the capability and applicability of Microsoft's
                                 solutions.

RUMBA(R) Office                  Complete connectivity software focused on
                                 connecting PCs to IBM mainframe and AS/400
                                 systems. RUMBA(R)Office provides state-
                                 of-the-art terminal and printer emulation; file
                                 sharing and file transfer solutions.

RUMBA(R) Web-to-Host             A browser-based solution for fast deployment of
                                 host access solutions to any browser supporting
                                 ActiveX or Java. RUMBA(R)Web-to-Host deploys
                                 from virtually any Web server, lowering Total
                                 Cost of Ownership (TCO) by eliminating the need
                                 to configure individual desktops during initial
                                 installation and future updates.

     Substantially all of the Company's net revenues have been derived from the
sale of products that provide access, publishing and integration applications
for the Microsoft Windows environment, and are marketed primarily to Windows
users. As a result, sales of the Company's products might be negatively impacted
by developments adverse to Microsoft's Windows products. In addition, the
Company's strategy of developing products based on the Windows operating
environment is substantially dependent on its ability to gain pre-release access
to, and to develop expertise in, current and future Windows developments by
Microsoft. No

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assurance can be given as to the ability of the Company to provide on a timely
basis products compatible with future Windows releases. See "Factors that May
Affect Future Results and Financial Condition -- Product Development and
Competition" under Item 7 below.

     The Company's competitors could seek to expand their product offerings by
designing and selling similar or new technology that could render the Company's
products obsolete or adversely affect sales of the Company's products. These
developments may adversely affect the Company's sales of its own products either
by directly affecting customer purchasing decisions or by making potential
customers delay their purchases of the Company's products. See "Competition"
below.

     NetManage, ViewNow, Rumba, OnWeb, OnNet, Chameleon UNIXLink, Chameleon
HostLink, OpSession, SupportNow, NS/Portfolio, NS/ Router, InterDrive, the
NetManage logo and the lizard logo are trademarks or registered trademarks of
NetManage, Inc. or its wholly owned subsidiaries in the United States and other
countries. UNIX is a registered trademark in the U.S. and other countries,
licensed exclusively through X/Open Company Limited. Windows 2000, Windows NT,
Windows 98, Windows 95 and Windows 3.x are registered trademarks in the U.S. and
other countries by Micosoft Corporation. AS/400 is a registered trademark in the
U.S. and other countries of International Business Machines Corporation. All
other trademarks are the property of their respective owners.

SALES AND MARKETING

     The Company's products are designed to meet the needs of corporate
end-users, network administrators, system administrators, MIS (Management
Information Systems) managers, and line-of-business managers. The Company,
through its host access products, targets three key market segments: 1)
connecting users of communication devices to UNIX, midrange (including IBM
AS/400) and mainframe systems; 2) allowing customers with these three types of
host systems to publish and re-engineer their applications for the Internet
economy; and 3) the Web. NetManage's goal is to allow customers to access,
publish and integrate their corporate information from anywhere on their global
business network, and to make that information available to employees, customers
and partners in a secure and manageable way. Realtime support solutions extend
NetManage's core connectivity strengths and are designed to foster better
one-to-one relationships with customers by adding the element of human
interaction to the Internet. The Company's realtime support products and
services improve customer support and augment the sales process for the
independent software vendor (ISV) and corporate marketplaces.

     The Company is organized to solve the critical network and internetworking
software application needs of corporations in a wide range of industries. From
education and government to finance and manufacturing, the Company's products
are being used to streamline communications throughout organizations.

     In the United States, the Company uses a combination of direct sales with
telemarketing support, assisted by designated personnel specifically assigned to
meet the needs of major accounts. As part of its continuing strategy to develop
multiple distribution channels, the Company expects to continue its use of
indirect channels, such as resellers, particularly value added resellers and
systems integrators, distributors and original equipment manufacturers, both in
the United States and internationally. Any material increase in the Company's
indirect sales may adversely affect the Company's average selling prices and
gross margins due to the lower unit costs that are typically charged when
selling through indirect channels. There can be no assurance that the Company
will be able to attract resellers and distributors who will be able to market
the Company's products effectively or will be qualified to provide timely and
cost-effective customer support and service. The Company ships products to
resellers and distributors on a purchase order basis, and many of the Company's
resellers and distributors carry competing product lines. Therefore, there can
be no assurance that any reseller or distributor will continue to represent the
Company's products, and the inability to recruit or retain important resellers
or distributors could adversely affect the Company's results of operations. See
"Factors That May Affect Future Results and Financial Condition -- Marketing and
Distribution" under Item 7 below.

     Internationally, the Company has sales offices in Belgium, Brazil, Canada,
France, Germany, Sweden, Israel, Italy, Japan, Mexico, the Netherlands, Spain,
and the United Kingdom. The Company also utilizes

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local distributors internationally. The Company supports the sales activity of
these sales offices and distributors in target countries through localization of
products and sales material, local training, and participation in local trade
shows.

     In 2000, 1999, and 1998 respectively, the Company derived approximately
25%, 26%, and 26% of net revenues from international sales, including export
sales. The Company believes that the potential international markets for its
products are substantial, based on the extent to which Windows and
internetworking products are used internationally. Accordingly, the Company
localizes many of its products for use in the native language of target
countries. Further, the Company has adapted many of its products to support
computing standards that are unique to these countries, such as the NEC PC in
Japan. The Company intends to continue to target major European and Asian
countries for additional sales and marketing activity, and to expand the use of
its local sales offices and its Israel subsidiary in the support of its
international sales. For a summary of international operations by geographic
area, see Note 8 of the Notes to Consolidated Financial Statements included
herein. While the Company expects that international sales will continue to
account for a significant portion of its net revenues, there can be no assurance
that the Company will be able to maintain or increase international market
demand for the Company's products, or the Company's international distributors
will be able to effectively meet that demand.

     Risks inherent in the Company's international business activities generally
include unexpected changes in regulatory requirements, tariffs, and other trade
barriers, costs and risks of localizing products for foreign countries, longer
accounts receivable payment cycles, difficulties in managing international
operations, currency fluctuations, potentially adverse tax consequences,
repatriation of earnings, and the burdens of complying with a wide variety of
foreign laws. There can be no assurance that such factors will not have an
adverse effect on the Company's future international sales, and consequently, on
the Company's results of operations.

CUSTOMER SUPPORT

     The Company's domestic support organization consists of an experienced
staff of engineers and other professionals providing support by telephone from
the Company's facilities in Washington State; Massachusetts; and Ottawa,
Ontario, Canada. Both telephone support and regular update releases of the
Company's products are provided to customers who purchase an annual maintenance
agreement. The sales and the customer support organizations at NetManage work
together closely to provide customer satisfaction. International customers are
supported by Company personnel located in Haifa, Israel and by various
international sales offices as well as local distributors who are trained by the
Company.

RESEARCH AND DEVELOPMENT

     The Company believes that its future success will depend on its ability to
enhance its existing products and to develop and introduce new products related
to PC connectivity and host access publishing and integration solutions which
address the B2B, B2C and B2E markets. As of December 31, 2000, the Company had
approximately 180 full time employees engaged in research and development for
existing and potential new products. The Company's research and development
expenses for the years ended December 31, 2000, 1999, and 1998 were $24.4
million, $18.5 million, and $18.9 million, respectively.

COMPETITION

     The market for the Company's products is intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
changes in customers' needs and frequent new product introductions. To maintain
or improve its position in this industry, the Company must continue to
successfully develop, introduce and market new products and product enhancements
on a timely and cost-effective basis. Several key factors will contribute to the
continued growth of the Company's marketplace: the proliferation of Microsoft
Windows client; server technology; and the continued implementation of Web-based
access to corporate mainframe and midrange computer systems.

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     Any failure by the Company to anticipate or respond adequately to changes
in technology and customer preferences, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's results of operations. The failure to develop on a timely basis new
products and product enhancements incorporating new functionality could cause
customers to delay purchase of the Company's current products or cause customers
to purchase products from the Company's competitors; either situation would
adversely affect the Company's results of operations. There can be no assurance
that the Company will be successful in developing new products or enhancing its
existing products on a timely basis, or that such new products or product
enhancements will achieve market acceptance.

     The Company competes directly with providers of Windows internetworking
applications, such as Hummingbird Communications, Ltd., Attachmate Corporation,
IBM, WRQ, Inc., Microsoft and Novell, as well as other major computer and
communications systems vendors, such as Sun Microsystems, Inc. It also competes
with companies such as IBM, BEA, Hewlett Packard, WebMethods, Silverstream, and
Computer Associates in the web integration server markets. In the real-time
support market it competes with companies such as Symantec Corporation. It is
imperative that the Company's development efforts remain competitive in this
marketplace, particularly given that the market is rapidly evolving, and subject
to rapid technological change. There is no assurance that the Company will be
successful in its efforts to do so.

     Many of the Company's competitors have substantially greater financial,
technical, sales, marketing, and other resources, as well as greater name
recognition and a larger customer base, than the Company. The market for the
Company's products is characterized by significant price competition, and the
Company anticipates that it will face increasing pricing pressures from current
competitors in the future. Moreover, given that there are low barriers to entry
into the software market, the market is rapidly evolving and subject to rapid
technological change, the Company believes that competition will persist and
intensify in the future. Accordingly, there can be no assurance that the Company
will be able to provide products that compare favorably with the products of the
Company's competitors or that competitive pressures will not require the Company
to reduce its prices. During 2000, the Company has continued to experience price
declines. Any further material reduction in the price of the Company's products
would negatively affect gross margins as a percentage of net revenues and would
require the Company to further increase software unit sales in order to maintain
net revenues at existing levels.

PROPRIETARY RIGHTS

     The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, and contractual provisions to
protect its proprietary rights. However, the basic TCP/IP protocols on which the
Company's products are based are non-proprietary, and other companies have
developed their own versions. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection, and to a lesser extent, patent laws.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult, and while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In selling its products, the
Company relies primarily on "shrink-wrap" or "click-wrap" licenses that are not
signed by licensees, and may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to as great an extent as do the laws of the
United States. There can be no assurance that the Company's means of protecting
its proprietary rights will be adequate, or the Company's competitors will not
independently develop similar technology. In addition, the number of patents
applied for and granted for software inventions is increasing. Consequently,
there is a growing risk of third parties asserting patent claims against the
Company. The Company has received, and may receive in the future, communications
from third parties asserting that the Company's products infringe, or may
infringe, the proprietary rights of third parties, seeking indemnification
against such infringement or indicating that the Company may be interested in
obtaining a license or royalty from such third parties. There can be no
assurance that any of such claims would not result in

                                        8
<PAGE>   10

protracted and costly litigation or that additional claims will not be made in
the future or that the Company will not be required to enter into a costly
license agreement.

     The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position within the industry than are the various legal means of protecting its
technology.

EMPLOYEES

     As of December 31, 2000, the Company had a total of 660 full-time
employees, of whom 354 were engaged in sales, marketing, technical support and
consulting, 104 in general management, administration and finance, 180 in
software development and engineering, and 22 in production. None of the
Company's employees are subject to a collective bargaining agreement, and the
Company has not experienced any work stoppage.

     The majority of the Company's employee workforce is located in the
extremely competitive employment markets of the Silicon Valley in California;
North Andover, Massachusetts; Kirkland and Bellingham, Washington; Ottawa,
Ontario, Canada; and Haifa, Israel. During 2000, 1999, and 1998, the Company
experienced high attrition at all levels and across all functions of the
Company. The attrition experienced by the Company was attributable to various
factors including, among others, industry-wide demand exceeding supply for
experienced engineering and sales professionals and the effects of the Company's
2000, 1999, and 1998 restructurings and acquisitions, and results of operations.
Managing employee attrition, integrating acquired operations and products and
expanding both the geographic area of its customer base and operations have
resulted in substantial demands on the Company's management resources. The
Company's future operating results will be dependent in part on its ability to
attract, retain its employees, and to train, manage its management and employee
base. There can be no assurance that the Company will be able to manage such
challenges successfully. See "Factors That May Affect Future Results and
Financial Condition -- Changes in Personnel" under Item 7 below.

                                        9
<PAGE>   11

EXECUTIVE OFFICERS OF THE REGISTRANT

     The executive officers of the Company and their ages as of March 15, 2001
are as follows:

<TABLE>
<CAPTION>
                NAME                   AGE                           POSITION
                ----                   ---                           --------
<S>                                    <C>    <C>
Zvi Alon.............................  49     Chairman of the Board, President and Chief Executive
                                              Officer
Michael R. Peckham...................  50     Chief Financial Officer, Senior Vice President,
                                              Finance and Secretary
Robert Lee...........................  63     Vice President, Human Resources
Peter R. Havart-Simkin...............  48     Senior Vice President, Worldwide Strategic Development
                                              and New Business
David Desjardins.....................  41     Vice President, Worldwide Consulting
Charles Mawby........................  41     Vice President, Worldwide Engineering
Bertram Rankin.......................  42     Vice President, Worldwide Marketing
</TABLE>

     Zvi Alon is the founder of the Company and has served as its Chairman of
the Board, President and Chief Executive Officer since the Company's formation.
From 1986 to 1989, Mr. Alon was the President of Halley Systems, a manufacturer
of networking equipment including bridges and routers. He also has served as
Manager, Standard Product Line at Sytek, Inc., a networking company, and Manager
of the Strategic Business Group for Architecture, Graphics and Data
Communications at Intel Corporation, a semiconductor manufacturer. Mr. Alon
received a B.S. degree in electrical engineering from the Technion-Israel
Institute of Technology in Haifa, Israel. Mr. Alon is the son-in-law of Mr. Uzia
Galil, a director of the Company.

     Michael R. Peckham joined the Company in November 1999 as Senior Vice
President, Finance, Chief Financial Officer, and Secretary. From February 1993
until November 1999, Mr. Peckham was Vice President, Finance and Administration
for Simware Inc., an international software development company. Prior to that
he served as Chief Financial Officer for NORR Partnership Limited, architects
and engineers from June 1987 to February 1993. Mr. Peckham holds a Bachelor of
Commerce (Honors Degree) from the University of Ottawa. Mr. Peckham is also a
Chartered Accountant.

     Robert Lee joined the Company as Vice President, Human Resources in July
2000. Prior to joining NetManage, Mr. Lee served as an independent consultant in
the human resources field working on assignments for both private and public
organizations in a range of industries. From February 1990 to March 1999, Mr.
Lee worked for Seagate Technology, Inc. initially as Manager of Employee
Benefits and promoted to Vice President, Human Resources in September 1997.
Seagate is a manufacturer of computer disk drives. From January 1982 until
January 1990, Mr. Lee was Vice President of Human Resources with Plantronics,
Inc., a supplier of telecommunications products.

     Peter R. Havart-Simkin joined the Company in August 1998 and became Senior
Vice President of Marketing in January 1999. In November 1999 he was appointed
as Senior Vice President, Worldwide Strategic Development and New Business. Mr.
Havart-Simkin came to the Company from FTP, where he had served as Chief
Technology Officer since July 1996, when FTP acquired Firefox Communications
Inc. ("Firefox"), a networking software company. Prior to joining FTP, Mr.
Havart-Simkin served with Firefox as Vice President and Chief Technical Officer
from January 1994 to July 1996, and as Vice President of Marketing and Product
Strategy from 1989 until January 1994. One of the founders of Firefox, Mr.
Havart-Simkin also served as a director of Firefox from 1989 to February 1995.
Before that time, Mr. Havart-Simkin held sales and marketing positions with a
number of hardware and software companies over a 20-year period.

     David P. Desjardins joined the Company in November 1999 as part of the
acquisition of Simware. Mr. Desjardins was appointed Vice President, Worldwide
Consulting in January 2001 after acting as Vice President, OnWeb since March
2000. While with Simware, Mr. Desjardins was appointed Vice President, Solutions
Group in June 1998 after acting as Director, Solutions Group since joining
Simware in January 1997. From November 1995 until December 1997, Mr. Desjardins
was Vice President Operations for Appian Interactive Corporation, a software
company selling web-publishing solutions. Mr. Desjardins served as an
independent systems and technology consultant on large-scale projects in the
energy industry from April 1994 until September 1997. From February 1993 to
March 1994 Mr. Desjardins held various positions, the most

                                        10
<PAGE>   12

recent of which was Chief Operating Officer, with Intera Tydac Technologies
Inc., a provider of geographic information software and services.

     Charles Mawby joined the Company in November 1999 as part of the
acquisition of Simware. Mr. Mawby was appointed Vice President, Worldwide
Engineering in October 2000 after serving as Vice President of Engineering for
NetManage's eSolutions group. Mr. Mawby was with Simware from October 1997 to
October 1999, serving as Manager of New Products and Director of Development.
Prior to that, he was the Director of Integration Services at Systems Xcellence,
Inc., a software development and integration company, from January 1997 to
October 1997. From April 1994 until December 1996, Mr. Mawby was President of
TechNode Inc., a software company focused on the development and marketing of
systems management products for use in terrestrial and wireless networks based
on scaleable agent technology developed by Mr. Mawby. Prior to that he served as
Vice President of Operations and Engineering for Remuera Corporation from
September 1988 to August 1991, and as President of Remuera Research &
Development (Canada) Inc. from September 1991 to March 1994.

     Bertram W. Rankin joined the Company in October 2000 as Vice President,
Worldwide Marketing. Prior to joining NetManage, Mr. Rankin was with Ricoh
Silicon Valley ("RSV"), a division of Ricoh Company Ltd. from July 1998 until
September 2000. RSV developed and sold a line of information management
solutions. While with RSV, Mr. Rankin was appointed General Manager in November
1999 after acting as Vice President of Marketing from July 1998. From October
1995 to June 1998, Mr. Rankin was Vice-President of Marketing with MindWorks
Corporation, a developer of networked document management software. Mr. Rankin
served as Director of Product Marketing with Xerox Corporation from September
1992 to September 1995.

ITEM 2 -- PROPERTIES.

     Substantially all of the Company's office space is leased. The Company has
165,000 square feet of total leased space in North America including the
Company's primary site, a 39,000 square foot headquarters building in Cupertino,
CA. This location supports executive, legal, finance, human resources,
marketing, sales, and administration. Other primary sites are located in
Kirkland, WA which supports sales, technical support and marketing and
Bellingham, WA which supports research and development. North Andover, MA
supports the east coast with sales and technical support. Ottawa, Ontario,
Canada supports the consulting and research and development groups primarily for
the OnWeb product line. North American real estate lease obligations have been
reduced through subleases, lease terminations, and natural expiration. Regional
sales offices are located in New York, NY; Irvine, CA ; Austin, TX; Miami, FL;
and Vienna, VA.

     Internationally, the Company leases approximately 32,000 square feet in
Haifa, Israel for the purpose of international sales, marketing and technical
support, administration, and product development. The Company also leases sales
office space in Belgium, Brazil, France, Germany, Italy, Japan, Mexico, the
Netherlands, and the United Kingdom. European and Israel real estate obligations
have been reduced through subleases, lease terminations, and natural
expirations.

ITEM 3 -- LEGAL PROCEEDINGS.

     On May 21, 1999, Verity filed a complaint against the Company alleging
claims for breach of contract, contractual and tortious breach of the implied
covenant of good faith and fair dealing, fraud, negligent misrepresentation,
conspiracy, and indemnification. The complaint arose out of the sale by FTP of
certain technology to Verity. Verity claimed that FTP's representations and
warranties regarding its ownership of the technology sold were inaccurate,
especially insofar as a third party claimed ownership of the technology. Verity
sought compensatory and punitive damages in an unspecified amount, and
attorneys' fees. The action was pending in the Superior Court for the County of
Santa Clara. The Company answered the complaint denying the allegations and
raising several affirmative defenses, among them that it had secured a release
from the third party of any claims it might have otherwise had against Verity
regarding ownership of the technology. However, NetManage decided to settle the
matter on August 15, 2000 by agreeing to secure license and distribution rights
for 100,000 copies of Verity software for $800,000.

                                        11
<PAGE>   13

     On October 10, 1997, a shareholder derivative action was filed in the
United States District Court for the Northern District of California against
nine present and former officers and directors of the Company. Sucher v. Alon et
al., No. C-98-203-CRB. The complaint alleged that the defendants violated
various fiduciary duties to the Company; the Company is named as a nominal
defendant. The complaint was predicated on the factual allegations contained in
the Head and Molinari class action complaints, and sought an unspecified amount
of damages. On November 6, 1998, the court dismissed the complaint without leave
to amend on the grounds that plaintiffs had failed to make a pre-litigation
demand on the Company's board of directors. Plaintiff filed a notice of appeal
to the U. S. Court of Appeals for the Ninth Circuit. An agreement in principle
had been reached to settle the derivative case. In January of 2001, the Court
gave final approval of the settlement. This matter was settled, with no
admission of guilt, for a cash payment of $100,000 by NetManage's insurance
carriers.

     On January 9, 1997, a securities class action complaint, Head, et al. v.
Netmanage, Inc., et al., No. 07763295, was filed in the Superior Court of
California, Santa Clara County, against the Company and certain of its directors
and current and former officers. On January 10, 1997, the same plaintiffs filed
a securities class action complaint, Head, et al. v. NetManage, Inc., et al.,
No. C-97-4385-CRB, in the United States District Court for the Northern District
of California, against the same defendants. Both complaints alleged that,
between July 25, 1995 and January 11, 1996 the defendants made false or
misleading statements of material fact about the Company's prospects and failed
to follow generally accepted accounting principles. The state court complaint
asserted claims under California state law; the federal court complaint asserted
claims under the federal securities law. On March 21, 1997, a securities class
action complaint, Interactive Data Systems, Inc., et al. v. Netmanage Inc., et
al.,No. CV764945, was filed in the Superior Court of California, Santa Clara
County, against the Company and certain of its directors and officers. On June
19, 1997, one of the plaintiffs in that action filed a securities class action
complaint, Molinari v. NetManage, Inc., et al., No. C-98-202-CRB, in the United
States District Court for the Northern District of California against the same
defendants. Both complaints alleged that, between April 18, 1996 and July 18,
1996, the defendants made false or misleading statements of material fact about
the Company's prospects. On September 19, 1997, a class action substantially
similar to the Head action was filed, Beasley v. NetManage, Inc., et
al.,C-98-1794 CRB (N.D. Cal.), seeking an unspecified amount of damages. The
federal court certified the purported class. On December 30, 1998, the federal
court granted without leave to amend the defendant's motion to dismiss the
second amended complaint in the Head federal action. Plaintiffs filed a notice
of appeal to the U.S. Court of Appeals for the Ninth Circuit. On February 2,
1999, the federal court dismissed with prejudice the Beasley action pursuant to
its order in the Head action. The individual cases of Head, Molinari, Beasley,&
Interactive Data were consolidated into NetManage I (federal claims) and
NetManage II (state claims). In November 2000, all were collectively settled,
with no admission of guilt, for a cash payment of $5.1 million by NetManage's
insurance carriers.

     On March 14, 1996, a securities class action complaint, Greeble v. FTP
Software, Inc., et al., No 96-10544, was filed in the United States District
Court for the District of Massachusetts against FTP and certain of its former
officers and directors. The complaint alleged that between July 14, 1995 and
January 3, 1996, defendants violated the federal securities laws by making false
and misleading statements of material fact about FTP's prospects and financial
statements. NetManage acquired FTP in August 1998. On September 24, 1998, the
district court granted defendants' motion for partial summary judgment and
granted without leave to amend defendants' renewed motion to dismiss the
complaint. Plaintiffs filed a notice of appeal. Oral argument on the appeal was
held on June 9, 1999. By order dated October 8, 1999, the United States Court of
Appeals for the First Circuit affirmed the district court's dismissal.
Plaintiffs time to petition for review by the United States Supreme Court
expired and as a result the case has been closed.

     In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, was filed in the United States
District Court for the Northern District of California against Firefox
Communications Inc. ("Firefox") and certain of its former officers and
directors. FTP acquired Firefox in July 1996. The complaint alleged that,
between July 20, 1995 and January 2, 1996, the defendants violated the federal
securities laws by making false or misleading statements about Firefox's
operations and financial results. On May 8, 1997, the district court granted
defendants' motion to dismiss

                                        12
<PAGE>   14

without leave to amend. Plaintiffs filed a notice of appeal. Oral argument on
the appeal was held on September 14, 1998. On November 1, 1999, the Court of
Appeals for the Ninth Circuit issued an order vacating the judgment of the
district court and remanded the case back to the district court for
reconsideration in light of its recently issued landmark decision in the
securities litigation case of Janas v. McCraken (In re Silicon Graphics Inc.).
After remand, the Company renewed its motion to dismiss. On March 22, 2000, a
hearing on motion to dismiss was held by the district court. The district court
again dismissed the complaint without leave to amend. The plaintiffs again filed
a notice of appeal in the Ninth Circuit. The Company is awaiting the results of
oral arguments held in the Ninth Circuit on March 20, 2001. The Company believes
the case is without merit and intends to defend it vigorously.

     As the outcome of any case cannot be reasonably determined, the Company is
unable to make any assurance as to whether the result in a case will have a
material or adverse effect on the Company's financial position or results of
operations. Moreover, the Company may be contingently liable with respect to
certain asserted and unasserted claims that arise during the normal course of
business. In the opinion of management, the outcome of such matters presently
known to management will not have a material adverse effect on the Company's
business, financial position or results of operations.

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

     Not applicable.

                                        13
<PAGE>   15

                                    PART II

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

     The Company's common stock is traded on the Nasdaq National Market under
the symbol NETM. As of February 28, 2001, there were 932 stockholders of record
and approximately 30,200 beneficial owners of the Company's common stock.

     The high and low closing sales prices of the Company's common stock as
reported on the Nasdaq National Market for each quarter of 2000 and 1999 are as
follows:

<TABLE>
<CAPTION>
                                                     FIRST    SECOND    THIRD    FOURTH
                                                     -----    ------    -----    ------
<S>                                                  <C>      <C>       <C>      <C>
2000
  High.............................................  $9.22    $5.41     $4.41    $2.09
  Low..............................................  $4.88    $2.50     $2.03    $0.66
1999
  High.............................................  $3.25    $2.75     $2.53    $6.56
  Low..............................................  $1.88    $2.06     $2.00    $1.97
</TABLE>

     The Company has not paid cash dividends on its common stock and does not
intend to pay any cash dividends in the foreseeable future.

ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA.

<TABLE>
<CAPTION>
                                                  FOR THE YEARS ENDED DECEMBER 31,
                                      --------------------------------------------------------
                                        2000        1999        1998        1997        1996
                                      --------    --------    --------    --------    --------
                                               (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................  $104,072    $ 79,200    $ 71,727    $ 61,524    $104,596
Loss from operations(1).............  $(74,982)   $(31,999)   $(21,817)   $(42,074)   $(13,653)
Net loss............................  $(71,910)   $(27,492)   $ (9,968)   $(33,755)   $ (5,705)
Net loss per share, basic and
  diluted...........................  $  (1.11)   $  (0.42)   $  (0.19)   $  (0.78)   $  (0.13)
Weighted average common shares,
  basic and diluted.................    64,863      64,712      53,205      43,385      42,341
BALANCE SHEET DATA:
Cash and cash equivalents and short
  term investments..................  $ 38,050    $ 63,227    $105,643    $ 49,551    $ 66,092
Working capital.....................  $ 20,293    $ 22,760    $ 98,113    $ 55,542    $ 71,668
Total assets........................  $109,981    $215,367    $201,753    $119,593    $152,529
Total stockholders' equity..........  $ 53,029    $120,193    $159,160    $ 96,087    $129,291
</TABLE>

---------------
(1) Loss from operations includes write-offs of in-process research and
    development of $1.7 million, $19.1 million, $9.5 million, $20.6 million, and
    $13.4 million for the years ended December 31, 2000, 1999, 1998, 1997, and
    1996, respectively. Additionally, loss from operations includes
    restructuring charges of $5.6 million, $3.8 million, $7.0 million and $5.2
    million for the years ended December 31, 2000, 1999, 1998 and 1997. Also,
    loss from operations includes an asset impairment charge of approximately
    $42.2 million and an insurance recovery of $3.8 million for the year ended
    December 31, 2000. (See further discussion in "Management's Discussion and
    Analysis of Financial Condition and Results of Operations")

                                        14
<PAGE>   16

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

     This Annual Report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. Forward-looking statements include assumptions
regarding expected revenues from products recently introduced or acquired as a
result of recent acquisitions of other companies, expected changes in operating
expenses and capital spending, the Company's expectation that sales will
increase, the Company's expectation that research and development will remain
flat, sales and marketing expenses will increase as a result of the Company's
acquisition of FTP in 1998, and the Company's acquisitions of Wall Data and
Simware in 1999, and Aqueduct in 2000. The Company's actual results could differ
materially from the results discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, among other things,
a realization in the future that the markets for the Company's products,
including but not limited to Rumba, ViewNow, OnWeb and SupportNow could grow
more slowly than the Company or market analysts believe, or the Company will not
be able to compete effectively in those markets. In addition, there is no
assurance that the Company's products for real-time customer support over the
Internet will receive customer acceptance, that the Company will not suffer
increased competitive pressures, that buying decisions by the Company's
customers will not be adversely influenced by the actions of the Company's
competitors or other market factors, that the Company will be able to realize
new business opportunities that may exist as a result of the acquisition of Wall
Data, Simware, or Aqueduct, that the Company will be able to execute on its
revised business plan in a manner that will allow it to improve its financial
position, or that economic difficulties in the United States and Asia,
particularly Japan, will not adversely affect sales of the Company's products in
that region. The timely completion of the Company's restructuring of operations
described below is dependent upon a number of factors, including risks
associated with the integration of the remaining operations of Wall Data,
Simware, and Aqueduct, the Company's ability to complete the integration of the
operations and technologies of Wall Data, Simware and Aqueduct in a timely,
efficient and cost-effective manner. Additional factors that could affect the
Company's business, financial condition and results of operations include those
discussed below under "Factors That May Affect Future Results and Financial
Condition." The following discussion should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.

OVERVIEW

     The Company develops and markets software applications that allow its
customers to implement host computer access from a range of internal or external
desktop or web-based client computers, to publish information from existing
host-centric applications to Internet and web-based client computer users, and
to create new applications that leverage existing host applications and data
sources. The Company develops and markets these software solutions for UNIX(R),
IBM AS/400 midrange and IBM corporate mainframe computers. The Company also
develops and markets software that increases the productivity of corporate call
centers, and allows real-time application sharing on corporate networks and
across the Internet. The Company provides professional support, maintenance and
consultancy services to its customers in association with the products it
develops and markets.

     In the first six months of 2000, revenues, primarily from the Wall Data and
FTP products fell short of the level of revenues anticipated prior to the
acquisitions. In management's judgment, this short-fall in the level of revenue
was not a temporary condition. As a result, the Company revisited its strategy
to refocus itself on core competencies, revised its business plan, and its
projected future revenues for each family of products. Management believed it
was necessary to restructure the Company and reduce operating expenses in line
with the revised anticipated level of revenues, which were expected to be less
than or comparable to revenues generated during the first half of fiscal 2000.

     As a result, the Company announced a restructuring on August 3, 2000. As
part of the restructuring, the Company reduced its workforce by approximately
17%, consisting mostly of Engineering and Customer Support personnel who were
focussed primarily on the Company's older technologies, acquired through the
Wall Data and FTP acquisitions. With the reduction in personnel, knowledge
levels with respect to certain products and the Company's ability to enhance and
expand products acquired from Wall Data and FTP was reduced, thus impacting
future expected revenues from these product families. In connection with the

                                        15
<PAGE>   17

restructuring, the Company also made provisions for reductions in office space,
related overhead expenses, and the write-down of certain assets. The total
amount of the restructuring charge was $5.6 million. The restructuring charge
includes approximately $3.0 million of estimated expenses for facilities-related
charges and $1.6 million of employee-related expenses for employee terminations.
As of December 31, 2000 the Company had incurred costs totaling approximately
$3.6 million related to the restructuring which required $3.6 million in cash
expenditures.

     Based on management's analysis of revised product directions, revenue
forecasts and undiscounted future cash flows, taking into account the estimated
impact on product development and customer support resulting from the reductions
in personnel, the Company determined that there was a permanent impairment of
the long-lived assets related to the acquisitions of Wall Data and FTP Software.
In accordance with Statement of Financial Standards (SFAS) No. 121, the Company
reevaluated the fair value of these long-lived assets and intangibles using
primarily the estimated discounted cash flows method. Management used the same
methodology to evaluate the fair value of its long-lived assets and intangibles
to allocate purchase price at the time of acquisition. As a result the Company
wrote off $42.2 million of goodwill and other intangibles, through a charge to
operations in the third quarter of fiscal 2000.

     On June 5, 2000, the Company completed its acquisition of Aqueduct
Software, Inc. ("Aqueduct"), an early stage web-based application intelligence
company. The Company issued 1,121,495 shares of NetManage common stock and
issued warrants and options to purchase an additional 727,237 shares for all the
outstanding stock of Aqueduct including the retirement of $2.2 million of notes
payable and accrued interest. The Company also hired the three employees of
Aqueduct. The acquisition was accounted for as a purchase.

     In the fourth quarter of 2000, the Company determined that it had
overestimated the liabilities assumed in the FTP and Wall Data acquisitions by
approximately $9.4 million. The Company reversed these liabilities against the
remaining goodwill and other intangibles acquired.

     In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge includes approximately $1.9 million of
estimated expenses for facilities-related charges associated with the
consolidation of redundant operations, $1.4 million of employee-related expenses
for employee termination costs, and $500,000 in accounting and legal fees
related to the acquisitions. The Company anticipates that the execution of the
restructuring actions will require total cash expenditures of approximately $3.8
million, which is expected to be funded from internal operations. As of December
31, 2000, the Company had made cash payments totaling approximately $2.4 million
related to the restructuring.

     On December 29, 1999, the Company completed its acquisition of Wall Data
Incorporated ("Wall Data"), a leader in the PC-to-IBM host connectivity market.
The Company acquired a total of 10,203,344 outstanding shares of Wall Data
common stock and paid cash to qualifying Wall Data option holders and employee
stock purchase plan participants pursuant to a cash tender offer of $9.00 per
common share. Total aggregate payments pursuant to the cash tender offer
amounted to approximately $94.0 million. The Company completed the transaction
in two stages. On November 26, 1999, the Company acquired approximately 89% of
the outstanding shares of Wall Data pursuant to the cash tender offer. The
Company acquired the remaining outstanding shares of Wall Data by means of a
merger completed in accordance with Washington law on December 29, 1999. The
acquisition was accounted for as a purchase.

     On December 10, 1999, the Company completed its acquisition of Simware Inc.
("Simware"), a leading provider of e-commerce solutions and web integration
servers. The Company acquired a total of 7,503,372 shares of Simware common
stock and paid cash to qualifying Simware option holders and employee stock
purchase plan participants pursuant to a cash tender offer of $3.75 per common
share. Total aggregate payments pursuant to the cash tender offer amounted to
approximately $29.2 million. The Company completed the transaction in two
stages. On November 2, 1999, the Company acquired approximately 91% of the
outstanding shares of Simware pursuant to the cash tender offer. The Company
acquired the remaining outstanding shares of Simware by means of a compulsory
acquisition completed in accordance with Canadian law on December 10, 1999. The
acquisition was accounted for as a purchase.

                                        16
<PAGE>   18

     In December 1998, the Company sold its equity interest in NetVision Ltd.
("NetVision"), an Internet service provider in Israel, for $17 million, and
recognized a gain of $11.7 million.

     On August 27, 1998, the Company acquired all of the outstanding common
stock of FTP in exchange for NetManage stock for an aggregate purchase price of
$78.3 million. The acquisition was accounted for as a purchase. In late August
1998, following the acquisition of FTP, the Company initiated a plan to
restructure its worldwide operations as a result of current business conditions
and in connection with the integration of the operations of FTP. In connection
with this plan, the Company recorded a $7.0 million charge to operating expenses
in 1998. The restructuring charge includes approximately $5.5 million of
estimated expenses for the write-off of excess equipment and leasehold
improvements as NetManage facilities are downsized or closed, facilities-related
expenses associated with the consolidation of redundant operations, and $1.5
million of employee-related expenses for employee terminations. Additionally,
prior to the acquisition of FTP by the Company, FTP recorded a restructuring
charge. The remaining restructuring liability of $9.7 million as of the date of
acquisition was assumed by the Company in connection with the acquisition. As of
December 31, 2000, the restructuring has been substantially completed with the
exception of certain lease obligations. See Note 4 of Notes to Consolidated
Financial Statements.

     As described in detail below, under the heading "Factors That May Affect
Future Results and Financial Condition," acquisitions involve a number of risks,
including risks relating to the integration of the acquired company's
operations, personnel, and products. There can be no assurance that the
integration of previously acquired companies, or the integration of any future
acquisition(s), will be accomplished successfully, and the failure to accomplish
effectively any of these integration's could have a material adverse effect on
NetManage's results of operations and financial condition. As discussed above,
the Company already incurred significant restructuring charges and asset
impairment in connection with the acquisition of Wall Data and FTP.

     The Company's Board of Directors authorized the repurchase from time to
time of up to 9 million shares of the Company's common stock through open market
purchases. On January 2, 2001, the Company purchased 43,640 shares of its common
stock on the open market at an average purchase price of $0.996 per share for a
total cost of approximately $43,500. During 2000, the Company purchased
1,004,765 shares of its common stock on the open market at an average purchase
price of $0.85 per share for a total cost of approximately $0.9 million.
Cumulatively, as of December 31, 2000, the Company has purchased 7,359,065
shares of its common stock at an average price of $2.23 per share for a total
cost of approximately $16.4 million.

RESULTS OF OPERATIONS

     During the past several years, the Company has taken several initiatives
intended to control costs and reduce operating expenses, including the
discontinuance of several low revenue generating products, and implementing
worldwide restructuring of its operations as a result of acquisitions and
prevailing market conditions.

     Recently the Company has initiated other restructuring plans as a result of
the acquisitions of Wall Data, Simware, and Aqueduct including the restructuring
plan of $5.6 million announced on August 3, 2000. For most of 2000, the Company
focused on the core competencies of its key business lines -- the PC
Connectivity product line, the Web Publishing, Integration and Development
product line, and the Realtime Interactive Support product line -- each with
dedicated development, sales, marketing, and support resources. The PC
Connectivity product line provides the technology to make the connection between
personal computers and large corporate computers possible. These products
leverage the strengths and popularity of the Internet, as well as corporate
private networks, and offer features to improve network manageability. The Web
Publishing, Integration and Development product line provides the technology to
allow customers to leverage the investment they have in existing host based
systems, applications and business processes for new web-based presentations,
applications and solutions. The Publishing, Integration and Development product
line includes the company's latest product branded OnWeb. The Realtime
Interactive Support products add value to the PC Connectivity and Web
Publishing, Integration and Development product offerings, and are also targeted
at

                                        17
<PAGE>   19

new market segments. Products included SupportNow Enterprise and SupportNow
SDK -- real-time software tools that help reduce the length of support phone
calls from end-users and augment application help and training.

     For the year ended December 31, 2000 as compared to the prior year, the
Company experienced an increase in net revenues and, an increase in net loss.
The increase in net revenues is primarily attributable to an increase in
maintenance revenues as a result of the inclusion of revenues from the recent
acquisitions of Wall Data, Simware, and Aqueduct. The Company continues to
experience pricing pressures on its products. There can be no assurance that
revenues will increase at the same rate, or at all, in future periods. See
"Factors That May Affect Future Results and Financial Condition -- Marketing and
Distribution" below.

     Because the Company generally ships software products within a short period
after receipt of an order, the Company does not have a material backlog of
unfilled orders, and revenues in any one quarter are substantially dependent on
orders booked in that quarter. The Company's operating expense levels are based
in part on the Company's expectations as to future revenues and to a large
extent are fixed. Operating expenses, excluding the write-off of in-process
research and development, amortization and impairment of goodwill and
restructuring charges, have increased in absolute dollars and have fluctuated as
a percentage of revenues for the year ended December 31, 2000 compared to 1999
primarily as a result of the inclusion of the operations of Wall Data, Simware,
and Aqueduct. Operating expenses are expected to increase as a result of the
acquisitions of Wall Data, Simware and Aqueduct but may fluctuate as a
percentage of net revenues as the Company completes its integration of Wall
Data, Simware, and Aqueduct into its operations and develops and introduces new
products which may contribute more significantly to revenue. While the Company
continues to adjust its operations to address these issues, there can be no
assurance that net revenues or net income will stabilize or improve in the
future.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                             DECEMBER 31,          CHANGE
                                                           ----------------    ---------------
                                                            2000      1999       $         %
                                                           ------    ------    ------    -----
                                                                  (DOLLARS IN MILLIONS)
<S>                                                        <C>       <C>       <C>       <C>
Net revenues:
  License fees.........................................    $ 56.3    $ 56.5    $ (0.2)    (0.4)%
  Services.............................................      47.8      22.7      25.1    110.8%
                                                           ------    ------    ------
          Total net revenues...........................    $104.1    $ 79.2    $ 24.9     31.4%
As a percentage of net revenues:
  License fees.........................................      54.1%     71.3%
  Services.............................................      45.9%     28.7%
                                                           ------    ------
          Total net revenues...........................     100.0%    100.0%
Gross margin...........................................    $ 99.8    $ 74.6    $ 25.2     33.9%
  As a percentage of net revenues......................      95.9%     94.2%
Research and development...............................    $ 24.4    $ 18.5    $  5.9     31.6%
  As a percentage of net revenues......................      23.4%     23.4%
Sales and marketing....................................    $ 71.9    $ 45.3    $ 26.6     58.5%
  As a percentage of net revenues......................      69.1%     57.2%
General and administrative.............................    $ 18.7    $ 14.1    $  4.6     32.8%
  As a percentage of net revenues......................      18.0%     17.8%
Insurance recovery.....................................    $ (3.8)             $ (3.8)   100.0%
  As a percentage of net revenues......................      (3.7%)
Write-off of in-process research and development.......    $  1.7    $ 19.1    $(17.4)   (91.1)%
  As a percentage of net revenues......................       1.6%     24.1%
Restructuring charge...................................    $  5.6    $  3.8    $  1.8     47.7%
  As a percentage of net revenues......................       5.4%      4.8%
</TABLE>

                                        18
<PAGE>   20

<TABLE>
<CAPTION>
                                                              YEAR ENDED
                                                             DECEMBER 31,          CHANGE
                                                           ----------------    ---------------
                                                            2000      1999       $         %
                                                           ------    ------    ------    -----
                                                                  (DOLLARS IN MILLIONS)
<S>                                                        <C>       <C>       <C>       <C>
Goodwill impairment....................................    $ 42.2              $ 42.2    100.0%
  As a percentage of net revenues......................      40.5%
Amortization of goodwill...............................    $ 14.1    $  5.7    $  8.4    149.1%
  As a percentage of net revenues......................      13.6%      7.2%
Interest income and other, net.........................    $  1.8    $  4.9    $ (3.1)   (62.4)%
  As a percentage of net revenues......................       1.8%      6.2%
Gain on investment, net................................    $  2.0              $  2.0    100.0%
  As a percentage of net revenues......................       1.9%
Provision for income taxes.............................    $  0.7    $  0.4    $  0.3     93.9%
  Effective tax rate...................................        NA        NA
Net loss...............................................    $(71.9)   $(27.5)   $(44.4)   161.6%
  As a percentage of net revenues......................     (69.1%)   (34.7%)
</TABLE>

  Net Revenues

     Though fiscal year 2000, a majority of the Company's net revenues have been
derived from software license fees. Service revenues have been primarily
attributable to maintenance agreements associated with product licenses.

     License fees remained relatively flat in absolute dollars and decreased
substantially as a percentage of total net revenues during the year ended
December 31, 2000 as compared to the year ended December 31, 1999. License fees
in 2000 include a full year's license fee revenue for Wall Data and Simware
versus the inclusion of two months of Simware's revenues and one month of Wall
Data's revenues in 1999. License fees in 2000 reflect the replacement of
historical product revenue with products from the acquired companies. The
increase in service revenues in absolute dollars and as a percentage of total
net revenues for the year ended December 31, 2000 as compared to 1999 primarily
reflects the addition of existing customer base as a result of the Wall Data and
Simware acquisitions.

     The Company has operations worldwide with sales offices located in the
United States, Europe, Canada, Latin America, Israel, and Japan. International
revenues as a percentage of total net revenues were approximately 25% and 26%,
respectively, for the years ended December 31, 2000 and 1999. International
revenues as a percentage of total net revenues were relatively unchanged due to
the integration of FTP products, particularly in Europe, with the Company's
product lines in the international marketplace, and to a lesser extent, the
inclusion of results from the recent acquisitions of Wall Data and Simware
offset by declines in sales of the Company's other international product
offerings. The Company is currently in the process of integrating the sales and
distribution efforts of these recent acquisitions.

     Software license fees are generally recognized as revenue upon shipment if
the fee is considered fixed and determinable, the arrangement does not include
significant customization of the software, and collectibility is probable.
Allowances for returns and doubtful accounts are provided based on historical
rates of returns and write-offs. Certain of the Company's sales to distributors
are under agreements providing rights of return and price protection on unsold
merchandise. Accordingly, the Company defers recognition of such sales until the
merchandise is sold by the distributor.

     The Company provides ongoing maintenance and support to its customers,
generally under annual service agreements. Maintenance and support is comprised
of software updates for existing products and telephone support. Service
revenues are recognized on a pro-rata basis over the terms of such agreements.
The Company provides training and consulting services to its customers. Revenue
from such services is recognized as the related services are performed and has
not been material to date. The Company expects that revenues generated from such
training and consulting services will increase in the future.

                                        19
<PAGE>   21

     No customer accounted for more than 10% of net revenues during the years
ended December 31, 2000 and 1999.

  Gross margin

     Cost of revenues primarily includes royalties paid to third parties for
licensed software incorporated into the Company's products, costs associated
with product packaging, documentation and software duplication, and the
amortization and write-down of purchased software. Gross margin, in absolute
dollars and as a percentage of net revenues, increased between the years ended
December 31, 2000 and 1999 primarily as a result of the change in the mix of
products sold and the shift of the Company's revenue from product to service
revenue. Cost of service revenues through December 31, 2000 and 1999 have not
been material and are not reported separately.

     Gross margin as a percentage of net revenues may fluctuate in the future
due to increased price competition, the mix of distribution channels used by the
Company, the mix of license fee revenues versus service revenues, the mix of
products sold, and the mix of international versus domestic revenues. The
Company typically recognizes higher gross margins on direct sales than on sales
through indirect channels of distribution, which carry lower margins. In 2000,
products acquired with Wall Data, which are sold through lower margin indirect
channels, were included in the Company's results for the entire year.

  Research and development

     Research and development ("R&D") expenses consist primarily of salaries and
benefits, occupancy and travel expenses, and fees paid to outside consultants.
R&D expenses, in absolute dollars, have increased for 2000 as compared to 1999,
primarily as a result of increased headcount from the acquisitions of Wall Data
and Simware in the fourth quarter of 1999. The Company expects that R&D spending
in absolute dollars will increase in 2001 but, as a percentage of revenues, will
fluctuate depending on future revenue levels, acquisitions and licensing of
technology.

     Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," under which the Company is
required to capitalize software development costs after technological
feasibility is established, which the Company defines as a working model and
further defines as a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in technology. Costs that
do not qualify for capitalization are charged to R&D expense when incurred.

  Sales and marketing

     Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, consulting personnel, advertising
and promotional expenses, customer service and support costs. S&M expenses
increased in absolute dollars during 2000 as compared to 1999 primarily due to
increased headcount as a result of the of Wall Data and Simware acquisitions in
the fourth quarter of 1999. The Company expects that S&M expenses during 2001,
as a percentage of total net revenues, will fluctuate depending on future
revenue levels.

  General and administrative

     General and administrative ("G&A") expenses increased in absolute dollars
for 2000 as compared to 1999, primarily due to an increase in headcount as a
result of the of Wall Data and Simware acquisitions, in the fourth quarter of
1999.

                                        20
<PAGE>   22

  Insurance recovery

     During the first quarter and third quarter of 2000, the Company received a
cash payment of $2.5 million and $1.3 million, respectively, from it's insurance
companies as a reimbursement of amounts paid for legal fees and expenses by the
Company substantially in prior years in connection with settlement of certain
litigation.

  Write-off of in-process research and development

     In connection with the acquisition of Aqueduct in the second quarter of
2000, the Company allocated $1.7 million of the purchase price to in-process
research and development projects. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete projects. At
the date of acquisition, the development of these projects had not yet reached
technological feasibility, and the research and development in progress had no
alternative future uses. Accordingly, these costs were expensed as of the
acquisition date.

     In connection with the acquisitions of Wall Data and Simware in the fourth
quarter of 1999, the Company acquired total intangible assets and purchased
technology of $92.2 million. Of this amount, $19.1 million was reflected as a
charge to operations in the fourth quarter of 1999, for the write-off of
in-process research and development that had not reached technological
feasibility, and in management's opinion, had no probable alternative future
use. The Company allocates values to in-process research and development based
on an assessment of research and development projects. The values assigned to
those assets are limited to significant research projects for which
technological feasibility had not been established. This allocation represents
the estimated fair value based on the risk adjusted cash flow of incomplete
projects. The value was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the cash flows from the projects and discounting the net cash flows to their
present value.

     The nature of the efforts to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing, coding, and testing activities that are necessary to
establish that the products can be produced to meet the Company's design
requirements, including functions, features, and technical and economic
performance requirements. For a further discussion of write-off of in-process
research and development as it relates to the Company's acquisitions, see Note 3
of the accompanying Notes to the Company's Consolidated Financial Statements.

  Restructuring charge

     On August 3, 2000, the Company announced a restructuring of its operations
designed to re-focus the Company on core business functions and reduce operating
expenses. In connection with the restructuring, the Company reduced its
workforce by approximately 17% and made provisions for reductions in office
space, related overhead expenses, and the write-down of certain assets. The
total amount of the restructuring charge was $5.6 million, which primarily
consisted of approximately $3.0 million of estimated expenses for facilities-
related charges, $1.6 million of employee-related expenses for employee
terminations and an $800,000 settlement to Verity for a software license that
the Company does not plan to use and accordingly has written-off.

     In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge included approximately $1.9 million of
estimated expenses for facilities-related charges associated with the
consolidation of redundant operations, the write-off of excess equipment,
leasehold improvements as facilities are downsized or closed, $1.4 million of
employee-related expenses for employee terminations, and $500,000 in accounting
and legal fees related to the acquisitions.

                                        21
<PAGE>   23

  Goodwill impairment

     In connection with the restructuring announced on August 3, 2000 (see
overview section of "Management's Discussion and Analysis of Financial Condition
and results of Operations" and Notes 2 and 4 of the accompanying Notes to the
Company's Consolidated Financial Statement), management performed an evaluation
of the recoverability of all assets of FTP and Wall Data. The Company evaluated
possible impairment of long-lived assets using estimates of undiscounted future
cash flows. Impairment loss to be recognized is measured as the amount by which
the carrying amount of the assets exceeds the fair value of the asset.
Management evaluated the fair value of its long-lived assets and intangibles
using primarily the estimated discounted future cash flows method. Management
used the same methodology to evaluate the fair value of its long-lived assets
and intangibles to allocate purchase price at the time of acquisition.
Management concluded from the results of this evaluation that a significant,
permanent impairment of goodwill and other intangibles had occurred. As a
consequence, the Company wrote off $42.2 million of goodwill and other
intangibles through a charge to operations in August 2000.

  Amortization of goodwill

     Goodwill is an intangible asset that represents the excess of the purchase
price of an acquired company over the estimated fair value of its net
identifiable assets. Goodwill is amortized over its estimated useful life of
five to seven years. Amortization of goodwill increased in 2000 compared to
1999, primarily because 2000 was the first full year of amortization of the
goodwill arising from the acquisitions of Wall Data and Simware in the fourth
quarter of 1999. The Company expects amortization of goodwill to decrease next
year as a result of the goodwill impairment charge of $42.2 million taken in the
third quarter of 2000, and the goodwill and intangible assets adjustment to
reverse $9.4 million of overestimated liabilities assumed in the FTP, and Wall
Data acquisitions recorded in the fourth quarter of 2000.

  Interest income and other, net

     The decrease in interest income and other, net for 2000 as compared to
1999, is primarily the result of a net decrease in cash balances and investments
as a result of the acquisition of Wall Data and Simware in the fourth quarter of
1999.

  Gain on Investment, net

     On December 18, 2000, ServiceSoft, Inc. was acquired by Broadbase, Inc., a
company publicly traded on NASDAQ. The Company recognized approximately $2.0
million gain on its investment in ServiceSoft and classified the Broadbase
shares in the available-for-sale securities.

  Provision for income taxes

     The Company recorded a provision for income taxes for the year ended
December 31, 2000 of approximately $0.7 million, which consisted primarily of
foreign income taxes.

     At December 31, 2000, the Company had a gross deferred tax asset of
approximately $62.1 million. Realization of the gross deferred tax asset is
dependent on the Company generating sufficient future taxable income. Currently,
management believes that it is likely the gross deferred tax asset may not be
realized and, therefore, has fully reserved the gross deferred tax asset. The
amount of the gross deferred tax asset, however, could be adjusted in the near
term if actual future taxable income differs from estimated amounts.

                                        22
<PAGE>   24

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
                                                             YEAR ENDED
                                                            DECEMBER 31,           CHANGE
                                                          ----------------    ----------------
                                                           1999      1998       $         %
                                                          ------    ------    ------    ------
                                                                 (DOLLARS IN MILLIONS)
<S>                                                       <C>       <C>       <C>       <C>
Net revenues:
  License fees..........................................  $ 56.5    $ 55.1    $  1.4       2.5%
  Services..............................................    22.7      16.6       6.1      36.7%
                                                          ------    ------    ------
          Total net revenues............................  $ 79.2    $ 71.7    $  7.5      10.5%
As a percentage of net revenues:
  License fees..........................................    71.3%     76.8%
  Services..............................................    28.7%     23.2%
                                                          ------    ------
          Total net revenues............................   100.0%    100.0%
Gross margin............................................  $ 74.6    $ 68.3    $  6.3       9.2%
  As a percentage of net revenues.......................    94.2%     95.2%
Research and development................................  $ 18.5    $ 18.9    $ (0.4)     (2.1)%
  As a percentage of net revenues.......................    23.4%     26.4%
Sales and marketing.....................................  $ 45.3    $ 39.5    $  5.8      14.7%
  As a percentage of net revenues.......................    57.2%     55.1%
General and administrative..............................  $ 14.1    $ 12.4    $  1.7      13.7%
  As a percentage of net revenues.......................    17.8%     17.3%
Write-off of in-process research and development........  $ 19.1    $  9.5    $  9.6     101.1%
  As a percentage of net revenues.......................    24.1%     13.2%
Restructuring charge....................................  $  3.8    $  7.0    $ (3.2)    (45.7)%
  As a percentage of net revenues.......................     4.8%      9.7%
Amortization of goodwill................................  $  5.7    $  2.8    $  2.9     103.6%
  As a percentage of net revenues.......................     7.2%      3.9%
Interest income.........................................  $  4.9    $  3.5    $  1.4      40.0%
  As a percentage of net revenues.......................     6.2%      4.9%
Equity in income of unconsolidated affiliate............  $   --    $  1.0    $ (1.0)   (100.0)%
  As a percentage of net revenues.......................      NA       1.4%
Gain on sale of investment in unconsolidated
  affiliate.............................................  $   --    $ 11.7    $(11.7)      100%
  As a percentage of net revenues.......................      NA      16.3%
Provision for income taxes..............................  $   .4    $  4.4    $ (4.0)    (90.9)%
  Effective tax rate....................................      NA        NA
Net loss................................................  $(27.5)   $(10.0)   $(17.5)    175.0%
  As a percentage of net revenues.......................   (34.7)%   (13.9)%
</TABLE>

  Net Revenues

     License fees increased in absolute dollars but decreased as a percentage of
total net revenues during the year ended December 31, 1999 as compared to the
year ended December 31, 1998. The increase in license fees was primarily
attributable to the inclusion of FTP's revenues for the full fiscal year 1999
and inclusion of two months of Simware's revenues and one month of Wall Data's
revenues in 1999. The increase in service revenues in absolute dollars and as a
percentage of total net revenues for the year ended December 31, 1999 as
compared to 1998, primarily reflects the growth in the customer base.

     International revenues as a percentage of total net revenues were
approximately 26% for the years ended December 31, 1999 and 1998. International
revenues as a percentage of total net revenues were relatively unchanged due to
the integration of FTP products, particularly in Europe, with the Company's
product lines in the international marketplace, and to a lesser extent, the
inclusion of results from the recent acquisitions of Wall Data and Simware,
offset by declines in sales of the Company's other international product
offerings.

                                        23
<PAGE>   25

     No customer accounted for more than 10% of net revenues during the years
ended December 31, 1999 and 1998.

  Gross margin

     Gross margin, in absolute dollars, increased between the years ended
December 31, 1999 and 1998, and gross margin, as a percentage of net revenues,
decreased between the years ended December 31, 1999 and 1998 primarily as a
result of the change in the mix of products sold and lower average margins of
the Company's FTP products sold through indirect channels of distribution offset
by cost savings obtained from the outsourcing of manufacturing activities,
beginning in the third quarter of 1998. Cost of service revenues through
December 31, 1999 has not been material and is not reported separately.

     The Company typically recognizes higher gross margins on direct sales than
on sales through indirect channels of distribution, which carry lower margins.
In 1999, FTP's products, which are sold through lower margin indirect channels,
were included in the Company's results for the entire year.

  Research and development

     R&D expenses in absolute dollars remained relatively constant for 1999 as
compared to 1998, and as a percentage of total net revenues had decreased
slightly for 1999 as compared to 1998, primarily as a result of cost savings,
particularly in R&D salaries and benefits, associated with the reduction in
headcount from a restructuring plan announced in the third quarter of 1998,
offset by the inclusion of R&D expenses from the acquisitions of Wall Data and
Simware.

  Sales and marketing

     S&M expenses increased in absolute dollars and as a percentage of net
revenues during 1999 as compared to 1998, as the Company launched new products,
which were based on the integration of the technologies of FTP with those of the
Company. These efforts required additional advertising and promotion activities.
In addition, the inclusion of Simware's and Wall Data's results in the fourth
quarter also contributed to the increase of S&M expenses.

  General and administrative

     G&A expenses increased slightly in absolute dollars and as a percentage of
sales for 1999 as compared to 1998, as a result of including Wall Data's and
Simware's G&A expenses from the date of acquisition forward, and the inclusion
of a $1.8 million dollar cash settlement of a lawsuit in the third quarter of
1999, offset by the reductions in G&A expenses as a result of a restructuring
plan announced in August 1998. The Company also recorded a restructuring charge
in the fourth quarter of 1999.

  Write-off of in-process research and development

     In connection with the acquisitions of Wall Data and Simware in the fourth
quarter of 1999 and the acquisition of FTP during the third quarter of 1998, the
Company acquired total intangible assets and purchased technology of $92.2
million in 1999 and $28.1 million in 1998. Of this amount, $19.1 million in 1999
and $9.5 million in 1998 were reflected as a charge to operations for the
write-off of in-process research and development that had not reached
technological feasibility, and in management's opinion, had no probable
alternative future use. These charges were reflected in the Company's
Consolidated Statements of Operations for the years ended December 31, 1999 and
1998, respectively.

  Restructuring charge

     In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge included approximately $1.9 million of
estimated expenses for facilities-

                                        24
<PAGE>   26

related charges associated with the consolidation of redundant operations and
the write-off of excess equipment and leasehold improvements as facilities are
downsized or closed, $1.4 million of employee-related expenses for employee
terminations, and $500,000 in accounting and legal fees related to the
acquisitions. The Company anticipated that the execution of the restructuring
actions would require total cash expenditures of approximately $3.8 million,
which was expected to be funded from internal operations. As of December 31,
1999, the Company had made cash payments totaling approximately $0.2 million
related to the restructuring.

     In late August 1998, following the acquisition of FTP, the Company
initiated a plan to restructure its worldwide operations as a result of business
conditions and in connection with the integration of the operations of FTP. In
connection with this plan, the Company recorded a $7.0 million charge to
operating expenses in 1998. The restructuring charge included approximately $5.5
million of estimated expenses for the write-off of excess equipment and
leasehold improvements as NetManage facilities were downsized or closed,
facilities-related expenses associated with the consolidation of redundant
operations, and $1.5 million of employee-related expenses for employee
terminations. Additionally, prior to the acquisition of FTP by the Company, FTP
recorded a restructuring charge. The remaining restructuring liability of $9.7
million as of the date of acquisition was assumed by the Company in connection
with the acquisition. The two restructuring plans included a reduction in the
Company's worldwide workforce, reduction of office space, and the closure of
four domestic locations, all of FTP's international facilities, and additional
NetManage international locations. The reduction in work force involved
approximately 150 employees. Asset related write-offs primarily related to
leasehold improvements, computers, and communications equipment which were no
longer used when facilities were closed or downsized, and headcount was reduced.
The Company completed the majority of the restructuring actions by the end of
1998.

  Amortization of goodwill

     Amortization of goodwill increased primarily in 1999 compared to 1998, as
this was the first full year of amortization of the goodwill arising from the
acquisition of FTP that occurred in August 1998.

  Interest income

     The increase in interest income for 1999 as compared to 1998 is primarily
the result of an increase in cash balances and investments, as a result of the
acquisition of FTP, offset by reductions of cash in the fourth quarter by the
cash tender offers for Wall Data and Simware.

  Equity in income of unconsolidated affiliate and gain on investment in
unconsolidated affiliate

     The Company's ownership interest in NetVision, prior to its sale in
December 1998, was approximately 32%. In connection with this ownership
interest, the Company recorded equity in income of unconsolidated affiliate of
$1.0 million, which is included in the accompanying Consolidated Statement of
Operations for the year ended December 31, 1998. In December 1998, the Company
sold its equity interest in NetVision for $17.0 million. In connection with this
transaction, the Company recorded a gain on the sale of its NetVision stock of
$11.7 million, which is included in the accompanying Consolidated Statement of
Operations for the year ended December 31, 1998.

  Provision for income taxes

     The Company recorded a provision for income taxes for the year ended
December 31, 1999 of approximately $0.4 million, which consisted primarily of
foreign income taxes.

     The Company recorded a provision for income taxes for the year ended
December 31, 1998 of approximately $4.4 million, which consisted primarily of
foreign taxes for the gain realized on the sale of its interest in NetVision,
and an increase to the valuation allowance against the Company's deferred tax
asset.

                                        25
<PAGE>   27

DISCLOSURES ABOUT MARKET RISK

  Interest rate risk

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, liquidity risk, and territory risk.

     The Company mitigates default and liquidity risks by investing in only safe
and high credit quality securities, and by positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
mitigates territory risk by only allowing up to 25% of the portfolio to be
placed outside of the United States.

     The table below presents the carrying value, market value and related
weighted average interest rates for the Company's cash and interest-bearing
investment portfolio as of December 31, 2000. All investments mature, by policy,
in four years or less.

<TABLE>
<CAPTION>
                                                        CARRYING    MARKET       AVERAGE
                                                         VALUE      VALUE     INTEREST RATE
                                                        --------    ------    -------------
                                                             (IN MILLIONS, EXCEPT FOR
                                                              AVERAGE INTEREST RATES)
<S>                                                     <C>         <C>       <C>
Investment Securities:
  Cash and cash equivalents -- fixed rate.............   $35.0      $35.0          5.8%
  Short-term investments -- fixed rate................     3.0        3.0          5.8%
                                                         -----      -----          ---
          Total interest bearing instruments..........   $38.0      $38.0          5.8%
                                                         =====      =====          ===
</TABLE>

  Foreign currency risk

     The Company transacts business in various foreign currencies, primarily in
Europe and Israel. Prior to 2000, the Company had established a foreign currency
hedging program, utilizing foreign currency forward exchange contracts ("forward
contracts") to hedge certain foreign currency exposures in certain European
countries. Under the program, increases or decreases in the Company's foreign
currency transactions were partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of short-term earnings volatility.
The Company does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period were marked-to-market with unrealized
gains and losses included in interest income and, thus, were recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts matured, the realized gains and losses were recorded and were included
in net income (loss) as a component of interest income. The Company's ultimate
realized gain or loss with respect to currency fluctuations depended upon the
currency exchange rates and other factors in effect as the contracts mature.

     The Company did not use foreign currency forward contracts during 2000.

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
                                                             AS OF DECEMBER 31,
                                                             ------------------
                                                              2000       1999
                                                             -------    -------
                                                               (IN MILLIONS)
<S>                                                          <C>        <C>
Cash and cash equivalents..................................  $ 35.0     $ 63.1
Short-term investments.....................................  $  3.0     $  0.1
Net cash provided by (used in) operating activities........  $(26.1)    $  5.0
Net cash provided by (used in) investing activities........  $ (2.6)    $ 25.2
Net cash provided by (used in) financing activities........  $  1.3     $(10.0)
</TABLE>

     Since the Company's inception, growth has been financed primarily through
cash provided by operations and sales of capital stock. The Company's primary
financing activities to date consist of its initial and

                                        26
<PAGE>   28

secondary stock offerings and preferred stock issuances, which aggregated net
proceeds to the Company of approximately $72.5 million. The Company does not
have a bank line of credit.

     In March 2001, the Company received a $5.1 million income tax refund
relating to a $10.9 million net operating loss incurred in 1997, which was
carried back to 1994. The refund amount included $863,000 of interest income.
The tax refund, net of interest income, was included in other receivables in the
amount of $4.2 million as of December 31, 2000.

     During the year ended December 31, 2000, the Company's aggregate cash and
cash equivalents, short-term investments and long-term investments decreased
from $63.2 million to $38.0 million. This decrease was due primarily to
operating losses, restructuring charges, and the Company's purchase of $0.9
million of its common stock in the open market under the repurchase program
described below.

     The Company's principal investing activities to date have been the purchase
of short-term and long-term investments, business acquisitions, and equipment
purchases. The Company does not have any specific commitments with regard to
future capital expenditures.

     Net cash provided by financing activities in 2000 reflects proceeds from
the sale of common stock under the Company's employee stock purchase plan and
stock option plans.

     At December 31, 2000, the Company had working capital of $20.3 million. The
Company believes that its current cash balances and future operating cash flows
will be sufficient to meet the Company's working capital and capital expenditure
requirements beyond one year.

     The Company's Board of Directors has authorized the purchase from time to
time of up to 9 million shares of the Company's common stock through open market
purchases. On January 2, 2001, the Company purchased 43,640 shares of its common
stock on the open market at an average purchase price of $0.996 per share for a
total cost of approximately $43,500. During 2000, the Company purchased
1,004,765 shares of its common stock on the open market at an average purchase
price of $0.85 per share for a total cost of approximately $0.9 million.
Cumulatively, as of December 31, 2000, the Company has purchased 7,359,065
shares of its common stock at an average price of $2.23 per share for a total
cost of approximately $16.4 million.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS

     The Company has experienced, and expects to experience in future periods,
significant fluctuations in operating results that may be caused by many factors
including, among others, general economic conditions, in particular the recent
slowdown of purchases of information technology due to current economic
conditions in North America, demand for the Company's products, introduction or
enhancements of products by the Company or its competitors, technological
changes in computer networking, competitive pricing pressures, market acceptance
of new products, customer order deferrals in anticipation of new products and
product enhancements, the size and timing of individual product orders, mix of
international and domestic revenues, mix of distribution channels through which
the Company's products are sold, impact of, or failure to enter into, strategic
alliances to promote the Company's products, quality control of products,
changes in the Company's operating expenses, personnel changes and foreign
currency exchange rates. In addition, the Company's acquisition of complementary
businesses, products or technologies may cause fluctuations in operating results
due to in-process research and development charges, the amortization of acquired
intangible assets, and integration costs such as those recorded in connection
with the acquisitions of FTP, Wall Data, Simware, and Aqueduct.

     Because the Company generally ships software products within a short period
after receipt of an order, the Company typically does not have a material
backlog of unfilled orders, and revenues in any one quarter are substantially
dependent on orders booked in that quarter and particularly in the last month of
that quarter. The Company's expense levels are based in part on its expectations
as to future revenues and to a large extent are fixed. Therefore, the Company
may be unable to adjust spending in a timely manner to compensate for any

                                        27
<PAGE>   29

unexpected revenue shortfall. Accordingly, any significant shortfall of demand
in relation to the Company's expectations or any material delay of customer
orders would have an almost immediate adverse impact on the Company's operating
results and on the Company's ability to achieve profitability.

     Based on the foregoing, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance.

RESTRUCTURING; INTEGRATION OF OPERATIONS OF WALL DATA, SIMWARE AND AQUEDUCT

     In early December 1999, following its acquisition of Wall Data and Simware,
the Company initiated a plan to restructure its worldwide operations in
connection with the need to integrate the operations of Wall Data and Simware.
The Company undertook a further restructuring of its operations, primarily in
North America in August 2000. The restructuring related primarily to former Wall
Data operations. Both restructuring plans involved reductions in the Company's
worldwide workforce and the consolidation of certain of the Company's sales,
customer support, and research and development facilities. No assurance can be
given that these restructurings will prove to be successful, that future
operating results will improve, or that the completion of the restructurings
will not disrupt the Company's operations and have a material adverse effect on
its business, financial condition and results of operations. Further, we cannot
assure you that additional reorganizations of the Company's operations will not
be required in the future.

     The successful combination of companies requires coordination of sales and
marketing with research and development efforts, and may be difficult to
accomplish. The integration of both Wall Data and Simware has involved
geographically separated organizations (in suburban Kirkland, Washington;
Boston, Massachusetts; Cupertino and Irvine, California; Ottawa, Ontario,
Canada; and Haifa, Israel), and personnel with diverse business backgrounds and
corporate cultures. The Company believes that factors such as the ongoing
attention and dedication of management, resources required to effect the
complete integration of both Wall Data and Simware, resulting from the
announcement and consummation of the acquisition, and the consequent disruption
in the business of these companies, have contributed to interruptions and loss
of momentum in their business activities. The Company's ability to maintain or
increase revenues from the sale of products from Wall Data and Simware on an
ongoing basis will depend in part on its ability to effectively respond to these
factors.

RISKS OF ACQUISITIONS

     The Company's merger and acquisition transactions, including the
acquisitions of Wall Data and Simware in the fourth quarter of 1999, and the
acquisition of Aqueduct in the second quarter of 2000, have been motivated by
various factors, including the desire to obtain new technologies, expand and
enhance the Company's product offerings, expand the Company's customer base,
attract key personnel, and strengthen the Company's presence in the
international and OEM marketplaces. Product and technology acquisitions entail
numerous risks, including the diversion of management's attention away from
day-to-day operations, difficulties in the assimilation of acquired operations
and personnel (such as sales, engineering, and customer support), the
integration of acquired products with existing product lines, the failure to
realize anticipated benefits in terms of cost savings and synergies, undisclosed
liabilities, adverse short-term effects on reported operating results, the
amortization of acquired intangible assets, the potential loss of key employees
from acquired companies, and the difficulty of presenting a unified corporate
image.

     The Company regularly evaluates product and technology acquisition
opportunities and anticipates that it may make additional acquisitions in the
future if it determines that an acquisition would further its corporate
strategy. No assurance can be given that any acquisition by the Company will or
will not occur, that if an acquisition does occur, that it will not materially
and adversely affect the Company, or that any such acquisition will be
successful in enhancing the Company's business. If the operations of an acquired
company or business do not meet the Company's expectations, the Company may be
required to restructure the acquired business, or write-off the value of some or
all of the assets of the acquired business as the Company did in the third
quarter of 2000.

                                        28
<PAGE>   30

CHANGES IN PERSONNEL

     The majority of the Company's employee workforce is located in the
extremely competitive employment markets of Silicon Valley and Orange County in
California; the suburban Boston area; the suburban Seattle area; Ottawa,
Ontario, Canada; and Haifa, Israel. Since the latter half of 1996, the Company
(and, prior to their acquisitions, both FTP and Wall Data) experienced high
attrition at all levels and across all functions of the Company. The attrition
experienced by the Company was attributable to various factors including, among
others, industry-wide demand exceeding supply for experienced engineering and
sales professionals, the effects of the Company's restructurings and
acquisitions and the Company's results of operations. Managing employee
attrition, integrating acquired operations and products, and expanding both the
geographic areas of its customer base and operations have resulted in
substantial demands on the Company's management resources, increased the
difficulty of hiring, training, and assimilating new employees. Any failure of
the Company to retain and attract qualified employees or to train or manage its
management and employee base could have a material adverse effect on its
business, financial condition and results of operations.

PRODUCT DEVELOPMENT AND COMPETITION

     The market for the Company's products is intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
changes in customers' needs and frequent new product introductions. From time to
time over the past three years, many customers have delayed purchase decisions
due to the confusion in the marketplace relating to rapidly changing technology
and product introductions. To maintain or improve its position in this industry,
the Company must successfully develop, introduce, and market new products and
product enhancements on a timely and cost-effective basis. The Company has
experienced difficulty from time to time in developing and introducing new
products and enhancing existing products, in a manner which satisfies customer
requirements and changing market demands. Any further failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
could have a material adverse effect on the Company's business, financial
condition, and results of operations. The failure to develop on a timely basis
products or product enhancements incorporating new functionality could cause
customers to delay purchase of the Company's current products or cause customers
to purchase products from the Company's competitors; either situation would
adversely affect the Company's business, financial condition, and results of
operations. There can be no assurance that the Company will be successful in
developing new products or enhancing its existing products on a timely basis, or
that such new products or product enhancements will achieve market acceptance.

     Because certain of the Company's products incorporate software and other
technologies developed and maintained by third parties, the Company is, to a
certain extent, dependent upon such third parties' ability to enhance their
current products, to develop new products that will meet changing customer needs
on a timely and cost-effective basis, and to respond to emerging industry
standards and other technological changes. There can be no assurance that the
Company would be able to replace the functionality provided by the third party
technologies currently offered in conjunction with its products if those
technologies become unavailable to it or obsolete or incompatible with future
versions of the Company's products or market standards. For example,
substantially all of NetManage's net revenues have been derived from the sales
of products that provide internetworking applications for the Microsoft Windows
environment and are marketed primarily to Windows users. As a result, sales of
certain of the Company's products might be negatively impacted by developments
adverse to Microsoft's Windows products. In addition, the Company's strategy of
developing products based on the Windows operating environment is substantially
dependent on its ability to gain pre-release access to, and to develop expertise
in, current and future Windows developments by Microsoft. No assurance can be
given as to the ability of the Company to provide on a timely basis products
compatible with future Windows releases.

     The Company's ability to internally develop new products and product
enhancements is dependent upon its ability to attract and retain qualified
employees. See "Changes in Personnel" above. In addition to internal development
of new products and technologies, the future success of the Company may depend
on the ability of the Company to enter into and implement strategic alliances
and OEM relationships to develop necessary
                                        29
<PAGE>   31

products or technologies, to expand the Company's distribution channels or to
jointly market or gain market awareness for the Company's products. There can be
no assurance that the Company will be successful in identifying or developing
such alliances and relationships or that such alliances and relationships will
achieve their intended purposes.

     Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products or
product enhancements after commencement of commercial shipments, which could
result in loss of or delay in market acceptance. Such loss or delay could have a
material adverse effect on the Company's business, financial condition, and
results of operations.

     The Company's connectivity software products compete with major computer
and communication systems vendors, including Microsoft, IBM, Novell and Sun
Microsystems, Inc., as well as smaller networking software companies such as
Hummingbird Communications Ltd.. The Company also faces competition from makers
of terminal emulation software such as Attachmate Corporation, and WRQ, Inc..
Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name or
product recognition and a larger customer base, than the Company. The market for
the Company's products is characterized by significant price competition and the
Company anticipates that it will face increasing pricing pressures from its
current and new competitors in the future. Moreover, given that there are low
barriers to entry into the software market and that the market is rapidly
evolving and subject to rapid technological change, the Company believes that
competition will persist and intensify in the future. There can be no assurance
that the Company will be able to provide new products that compare favorably
with the new products of the Company's competitors or that competitive pressures
will not require the Company to reduce its prices. The Company has experienced
price declines for its products since 1997. Any further material reduction in
the prices of the Company's products would require the Company to increase unit
sales in order to maintain revenues at existing levels. There can be no
assurance that the Company will be successful in doing so.

     The Company's competitors could seek to expand their product offerings by
designing and selling products using technology that could render obsolete or
adversely affect sales of the Company's products. These developments may
adversely affect the Company's sales of its own products either by directly
affecting customer purchasing decisions or by causing potential customers to
delay their purchases of the Company's products. Several of the Company's
competitors have developed proprietary networking applications and certain of
such vendors, including Novell, provide a TCP/IP protocol suite in their
products at little or no additional cost. In particular, Microsoft has embedded
a TCP/IP protocol suite in its Windows 95, Windows 98, Windows 2000, Windows ME,
and Windows NT operating systems. The Company has products which are similar to
connectivity products marketed by Microsoft. Microsoft is expected to increase
development of such products, which could have a material adverse effect on the
Company's business, financial condition or results of operations.

MARKETING AND DISTRIBUTION

     Historically, the Company has relied significantly on its independent
distributors, systems integrators and value-added resellers for certain elements
of the marketing and distribution of its products. The agreements in place with
these organizations are generally non-exclusive. These organizations are not
within the control of the Company, may represent other product lines in addition
to those of the Company and are not obligated to purchase products from the
Company. There can be no assurance that such organizations will give a high
priority to the marketing of the Company's products, and such organizations may
give a higher priority to other products, which may include those of the
Company's competitors. Actions of this nature by such organizations could result
in a lower sales effort being applied to the Company's products and a consequent
reduction in the Company's operating results. The Company's results of
operations can also be materially adversely affected by changes in the inventory
strategies of its resellers, which can occur rapidly and may not be related to
end-user demand. As part of its continued strategy of selling through multiple
distribution channels, the Company expects to continue its use of indirect
distribution channels, particularly value-added
                                        30
<PAGE>   32

resellers and system integrators, in addition to distributors and original
equipment manufacturers. Indirect sales may grow as a percentage of both
domestic and total net revenues during 2001 and beyond, as a result of
acquisitions or to increased market penetration. Any material increase in the
Company's indirect sales as a percentage of revenues may adversely affect the
Company's average selling prices and gross margins due to the lower unit costs
that are typically charged when selling through indirect channels. There can be
no assurance that the Company will be able to attract or retain resellers and
distributors who will be able to market the Company's products effectively, will
be qualified to provide timely and cost-effective customer support and service,
or will continue to represent the Company's products, and any inability on the
part of the Company to recruit or retain important resellers or distributors
could adversely affect the Company's business, financial condition or results of
operations.

PROPRIETARY RIGHTS

     The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, and contractual provisions to
protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection, and, to a lesser extent, patent laws.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. Policing unauthorized
use of the Company's products is difficult and, while the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In selling its products, the
Company relies primarily on "shrink-wrap" and "click-wrap" licenses that are not
signed by licensees and, therefore, may be unenforceable under the laws of
certain jurisdictions. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as do the laws of
the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate or that the Company's
competitors will not independently develop similar technology. In addition, the
number of patents applied and granted for software inventions is increasing.
Consequently, there is a growing risk of third parties asserting patent claims
against the Company. The Company has received, and may receive in the future,
communications from third parties asserting that the Company's products
infringe, or may infringe, the proprietary rights of third parties, seeking
indemnification against such infringement or indicating that the Company may be
interested in obtaining a license from such third parties. There can be no
assurance that any of such claims would not result in protracted and costly
litigation.

     If any claims or actions were to be asserted against the Company, and it
were required to seek a license of a third party's intellectual property, there
can no assurance that it would be able to acquire such a license on reasonable
terms or at all, and no prediction can be made about the effect that such a
license might have on its business, financial condition or results of
operations. Should litigation with respect to any such claim commence, such
litigation could be extremely expensive and time consuming, and could materially
adversely affect the Company's business, financial condition and results of
operations regardless of the outcome of the litigation.

GLOBAL MARKET RISKS

     The Company derived approximately 25% of net revenues from international
sales during the year ended December 31, 2000. While the Company expects that
international sales will continue to account for a significant portion of its
net revenues, there can be no assurance that the Company will be able to
maintain or increase international market demand for the Company's products or
that the Company's distributors will be able to effectively meet that demand.
Risks inherent in the Company's international business activities generally
include unexpected changes in regulatory requirements, the limitations imposed
by U.S. export laws (see "Government Regulation and Legal Uncertainties" below),
changes in markets caused by a variety of political, social and economic
factors, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment cycles,
difficulties in managing international operations, currency exchange rate
fluctuations, potentially adverse tax consequences, repatriation of earnings,
and the burdens of complying with a wide variety of foreign laws. There can be
no assurance that such factors will not

                                        31
<PAGE>   33

have an adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition or results of
operations. Additionally, the recent slowdown in North America of purchases of
information technology due to current economic conditions will affect the
Company's ability to generate revenues and profit, and could adversely affect
the Company's financial condition and results of operations.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

     The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that various laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products, increase the Company's cost of
doing business or otherwise have an adverse effect on its business, financial
condition or results of operations. Moreover, the applicability to the Internet
of existing laws governing issues such as property ownership, libel and personal
privacy is uncertain. Further, due to the encryption technology contained in
certain of the Company's products, such products are subject to U.S. export
controls. There can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not limit the Company's
ability to distribute products outside of the United States or electronically.
While the Company takes precautions against unlawful exportation, there can be
no assurance that inadvertent violations will not occur, and the global nature
of the Internet makes it virtually impossible to effectively control the
distribution of the Company's products. In addition, future federal or state
legislation or regulation may further limit levels of encryption or
authentication technology. Any such export restriction, new legislation or
regulation or unlawful exportation could have a material adverse effect on the
Company's business, financial condition, or results of operations.

                                        32
<PAGE>   34

QUARTERLY FINANCIAL INFORMATION

     The following table sets forth unaudited quarterly financial information
for the Company's last eight quarters. This unaudited information has been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, includes all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of the
information for the periods presented.

     The Company has experienced, and expects to experience in future periods,
significant fluctuations in operating results that may be caused by many
factors, including, among others, those described above within "Factors That May
Affect Future Results and Financial Condition." The Company's future revenues
and results of operations could be subject to significant volatility and may
also be unpredictable due to shipment patterns typical of the software industry.
A significant percentage of the Company's revenues are generally recognized in
the third month of each quarter and tend to occur in the latter half of that
month. The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance.

<TABLE>
<CAPTION>
                                                              1999                                      2000
                                             ---------------------------------------   ---------------------------------------
                                             MAR. 31   JUNE 30   SEPT. 30   DEC. 31    MAR. 31   JUNE 30    SEPT. 30   DEC. 31
                                             -------   -------   --------   --------   -------   --------   --------   -------
                                                                   (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                          <C>       <C>       <C>        <C>        <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...............................  $17,354   $18,353   $17,646    $ 25,847   $27,430   $ 24,631   $ 25,719   $26,292
Gross margin...............................   16,382    17,397    16,797      23,984    26,303     23,445     24,692    25,405
  Loss from operations(1)(2)...............   (2,159)   (2,718)   (1,012)    (26,110)   (7,721)   (14,410)   (52,266)     (585)
Net income (loss)..........................   (1,036)   (1,234)      819     (26,041)   (7,402)   (13,668)   (52,066)    1,226
Net income (loss) per share, basic and
  diluted..................................  $ (0.02)  $ (0.02)  $  0.01    $  (0.41)  $ (0.12)  $  (0.21)  $  (0.80)  $  0.02
Weighted average common shares, basic......   66,784    64,785    63,743      63,633    64,138     64,547     66,073    66,050
Weighted average common shares, diluted....   66,784    64,785    65,190      63,633    64,138     64,547     66,073    66,188
</TABLE>

---------------
(1) Loss from operations includes write-offs of in-process research and
    development of $1.7 million and $19.1 million for the quarters ended June
    30, 2000, and December 31, 1999, respectively.

(2) Loss from operations includes a charge for asset impairment of $42.2 million
    for the quarter ended September 30, 2000.

  Litigation

     The Company and certain of its subsidiaries are currently parties to class
action lawsuits filed by holders or former holders of each company's common
stock. See Note 5 of the accompanying Notes to the Consolidated Financial
Statements. There can be no assurance that the Company or its subsidiaries will
be able to prevail in the lawsuits or that adverse outcomes in one or more of
these proceedings will not have a material adverse effect on the Company's
business, results of operations or financial condition.

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

     The information required by Item 7A is incorporated by reference from the
section entitled "Disclosures about Market Risk" found above, under Item 7,
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."

                                        33
<PAGE>   35

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Financial Statements:
  Report of Independent Public Accountants..................   35
  Consolidated Balance Sheets at December 31, 2000 and
     1999...................................................   36
  Consolidated Statements of Operations -- Years ended
     December 31, 2000, 1999 and 1998.......................   37
  Consolidated Statements of Other Comprehensive
     Loss -- Years ended December 31, 2000, 1999 and 1998...   38
  Consolidated Statements of Stockholders' Equity -- Years
     ended December 31, 2000, 1999 and 1998.................   39
  Consolidated Statements of Cash Flows -- Years ended
     December 31, 2000, 1999 and 1998.......................   40
  Notes to Consolidated Financial Statements................   41
Financial Statement Schedules:
  II--Valuation and Qualifying Accounts.....................   68
</TABLE>

     All other schedules are omitted because they are not required or the
required information is shown in the accompanying consolidated financial
statements or notes thereto.

                                        34
<PAGE>   36

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To NetManage, Inc.:

     We have audited the accompanying consolidated balance sheets of NetManage,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, other comprehensive loss,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

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

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

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements, and in
our opinion, fairly states in all material respects the financial data required
to be set forth therein in relation to the basic financial statements taken as a
whole.

                                          ARTHUR ANDERSEN LLP

San Jose, California
January 26, 2001

                                        35
<PAGE>   37

                                NETMANAGE, INC.

                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000         1999
                                                              ---------    --------
<S>                                                           <C>          <C>
Current Assets:
  Cash and cash equivalents.................................  $  35,017    $ 63,079
  Short-term investments....................................      3,033         148
  Accounts receivable, less allowances of $4,088 and $3,923,
     respectively...........................................     26,081      30,544
  Prepaid expenses and other current assets.................     11,591      20,497
                                                              ---------    --------
          Total current assets..............................     75,722     114,268
                                                              ---------    --------
Property and equipment, at cost:
  Computer software and equipment...........................     10,005      10,315
  Furniture and fixtures....................................      6,268       6,310
  Leasehold improvements....................................      3,302       3,433
                                                              ---------    --------
                                                                 19,575      20,058
  Less -- Accumulated depreciation..........................    (12,581)     (8,473)
                                                              ---------    --------
     Net property and equipment.............................      6,994      11,585
                                                              ---------    --------
Goodwill and other intangibles, net.........................     23,689      86,040
Other assets................................................      3,576       3,474
                                                              ---------    --------
                                                              $ 109,981    $215,367
                                                              =========    ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Accounts payable..........................................  $   5,050    $  7,104
  Accrued liabilities.......................................     17,426      39,760
  Accrued payroll and payroll-related expenses..............      4,500       4,669
  Deferred revenue..........................................     24,453      27,710
  Income taxes payable......................................      4,000      12,265
                                                              ---------    --------
          Total current liabilities.........................     55,429      91,508
                                                              ---------    --------
Long-term liabilities.......................................      1,523       3,666
                                                              ---------    --------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
  Common stock, $0.01 par value --
     Authorized -- 125,000,000 shares
     Issued -- 72,625,520 and 70,162,149 shares,
      respectively
     Outstanding -- 65,266,455 and 63,807,849 shares,
      respectively..........................................        726         701
  Treasury stock, at cost -- 7,359,065 and 6,354,300 shares,
     respectively...........................................    (16,414)    (15,559)
  Additional paid-in capital................................    176,081     169,606
  Accumulated deficit.......................................   (103,374)    (31,464)
  Accumulated other comprehensive loss......................     (3,990)     (3,091)
                                                              ---------    --------
          Total stockholders' equity........................     53,029     120,193
                                                              ---------    --------
                                                              $ 109,981    $215,367
                                                              =========    ========
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        36
<PAGE>   38

                                NETMANAGE, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                             --------------------------------
                                                               2000        1999        1998
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
NET REVENUES:
  License fees.............................................  $ 56,273    $ 56,527    $ 55,114
  Services.................................................    47,799      22,673      16,613
                                                             --------    --------    --------
          Total net revenues...............................   104,072      79,200      71,727
cost of revenues...........................................     4,227       4,640       3,416
                                                             --------    --------    --------
Gross margin...............................................    99,845      74,560      68,311
                                                             --------    --------    --------
OPERATING EXPENSES:
  Research and development.................................    24,394      18,539      18,882
  Sales and marketing......................................    71,881      45,337      39,453
  General and administrative...............................    18,740      14,107      12,445
  Insurance recovery.......................................    (3,816)         --          --
  Write-off of in-process research and development.........     1,700      19,100       9,500
  Restructuring charge.....................................     5,600       3,791       7,031
  Goodwill impairment......................................    42,164          --          --
  Amortization of goodwill.................................    14,164       5,685       2,817
                                                             --------    --------    --------
          Total operating expenses.........................   174,827     106,559      90,128
                                                             --------    --------    --------
Loss from operations.......................................   (74,982)    (31,999)    (21,817)
Interest income and other, net.............................     1,836       4,887       3,474
Gain on investment, net....................................     1,973          --          --
Equity in income of unconsolidated affiliate...............        --          --       1,027
Gain on sale of investment in unconsolidated affiliate.....        --          --      11,748
                                                             --------    --------    --------
Loss before income taxes...................................   (71,173)    (27,112)     (5,568)
Provision for income taxes.................................       737         380       4,400
                                                             --------    --------    --------
Net Loss...................................................  $(71,910)   $(27,492)   $ (9,968)
                                                             ========    ========    ========
NET LOSS PER SHARE:
  Basic....................................................  $  (1.11)   $  (0.42)   $  (0.19)
  Diluted..................................................  $  (1.11)   $  (0.42)   $  (0.19)
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
  Basic....................................................    64,863      64,712      53,205
  Diluted..................................................    64,863      64,712      53,205
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        37
<PAGE>   39

                                NETMANAGE, INC.

              CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31,
                                                              -------------------------------
                                                                2000        1999       1998
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
Net loss....................................................  $(71,910)   $(27,492)   $(9,968)
Other comprehensive income (loss):
  Unrealized loss on investments............................        --         (13)        --
  Foreign currency translation adjustments..................      (899)     (1,462)       295
                                                              --------    --------    -------
Other comprehensive loss....................................  $(72,809)   $(28,967)   $(9,673)
                                                              ========    ========    =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        38
<PAGE>   40

                                NETMANAGE, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                       RETAINED      ACCUMULATED
                                          COMMON STOCK                  ADDITIONAL     EARNINGS         OTHER
                                       -------------------   TREASURY    PAID-IN     (ACCUMULATED   COMPREHENSIVE
                                         SHARES     AMOUNT    STOCK      CAPITAL       DEFICIT)         LOSS         TOTAL
                                       ----------   ------   --------   ----------   ------------   -------------   -------
<S>                                    <C>          <C>      <C>        <C>          <C>            <C>             <C>
BALANCE, DECEMBER 31, 1997...........  43,752,930    $438          --    $ 91,564     $   5,996        $(1,911)     $96,087
Sale of common stock under employee
  stock purchase plan................     519,698       5          --         964            --             --          969
Exercise of stock options Common
  stock issued in....................     337,909       3          --         618            --             --          621
  Connection with FTP acquisition....  24,766,640     247          --      74,042            --             --       74,289
Issuance of NetManage options in
  exchange for FTP options...........          --      --      (4,246)      1,113            --             --        1,113
Repurchase of common stock for
  cash...............................  (2,028,700)     --          --          --            --             --       (4,246)
Translation adjustment...............          --      --          --          --            --            295          295
Net loss.............................          --      --      (4,246)         --        (9,968)            --        9,968)
                                       ----------    ----    --------    --------     ---------        -------      -------
BALANCE, DECEMBER 31, 1998...........  67,348,477     693          --     168,301        (3,972)        (1,616)     159,160
Sale of common stock under employee
  stock purchase plan................     609,185       6          --       1,003            --             --        1,009
Exercise of stock options............     175,787       2     (11,313)        302            --             --          304
Repurchase of common stock for
  cash...............................  (4,325,600)     --      (4,246)         --            --             --      (11,313)
Unrealized loss on investments.......          --      --                      --            --            (13)         (13)
Translation adjustment...............          --      --     (15,559)         --            --         (1,462)      (1,462)
Net loss.............................          --      --     (15,559)         --       (27,492)            --      (27,492)
                                       ----------    ----    --------    --------     ---------        -------      -------
BALANCE, DECEMBER 31, 1999...........  63,807,849     701          --     169,606       (31,464)        (3,091)     120,193
Sale of common stock under employee
  stock purchase plan................     707,229       7          --         969            --             --          976
Exercise of stock options............     634,647       7          --       1,192            --             --        1,199
Common stock and warrants issued in
  Connection with Aqueduct
  acquisition........................   1,121,495      11          --       4,314            --             --        4,325
Repurchase of common stock for
  cash...............................  (1,004,765)     --        (855)         --            --             --         (855)
Translation adjustment...............          --      --          --          --            --           (899)        (899)
Net loss.............................          --      --          --          --       (71,910)            --      (71,910)
                                       ----------    ----    --------    --------     ---------        -------      -------
BALANCE, DECEMBER 31, 2000...........  65,266,455    $726    $(16,414)   $176,081     $(103,374)       $(3,990)     $53,029
                                       ==========    ====    ========    ========     =========        =======      =======
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        39
<PAGE>   41

                                NETMANAGE, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              2000         1999        1998
                                                            ---------    --------    --------
<S>                                                         <C>          <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss................................................  $ (71,910)   $(27,492)   $ (9,968)
  Adjustments to reconcile net loss to net cash provided
     by (used in) operating activities:
     Depreciation and amortization........................     19,623      11,681      10,060
     Provision for doubtful accounts and returns..........      1,105         790         378
     Equity in income of unconsolidated affiliate.........         --          --      (1,027)
     Gain on sale of investment in unconsolidated
       affiliate..........................................         --          --     (11,748)
     Write-off of in-process research and development.....      1,700      19,100       9,500
     Non-cash impairment charges..........................     42,164          --       1,511
     Gain on exchange of marketable securities............     (1,973)         --          --
     Change in operating assets and liabilities, net of
       business combinations:
       Accounts receivable................................      3,358       4,133      (2,603)
       Prepaid expenses and other current assets..........      9,159      (2,825)      6,763
       Other assets.......................................        588       1,658      (5,252)
       Accounts payable...................................     (2,054)     (2,483)     (1,228)
       Accrued liabilities, payroll and payroll-related
          expenses........................................    (14,174)       (512)     (5,935)
       Deferred revenue and other long-term liabilities...     (5,400)     (3,115)         70
       Income taxes payable...............................     (8,265)      4,063         833
                                                            ---------    --------    --------
          Net cash provided by (used in) operating
            activities....................................    (26,079)      4,998      (8,646)
                                                            ---------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of short-term investments.....................   (214,193)    (56,861)    (96,628)
  Proceeds from maturities of short-term investments......    213,993     121,954      95,586
  Purchases of long-term investments......................         --     (23,973)    (37,915)
  Proceeds from maturities of long-term investments.......         --      53,274      35,935
  Proceeds from sale of investment in unconsolidated
     affiliate............................................         --          --      17,000
  Purchases of property and equipment.....................       (874)       (622)     (1,115)
  Acquisition of businesses, net of cash acquired.........         --     (68,445)     29,157
  Purchase of equity investment carried at cost...........     (1,500)         --          --
  Purchases of technology and other intangible assets.....         --        (150)         --
  Investment in unconsolidated affiliate..................         --          --         (33)
                                                            ---------    --------    --------
          Net cash provided by (used in) investing
            activities....................................     (2,574)     25,177      41,987
                                                            ---------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of common stock, net of issuance
     costs................................................      2,175       1,313       1,590
  Repurchase of common stock..............................       (855)    (11,313)     (4,246)
                                                            ---------    --------    --------
          Net cash provided by (used in) financing
            activities....................................      1,320     (10,000)     (2,656)
                                                            ---------    --------    --------
Effect of exchange rate changes on cash...................       (729)       (200)       (287)
                                                            ---------    --------    --------
Net increase (decrease) in cash and cash equivalents......    (28,062)     19,975      30,398
Cash and cash equivalents, beginning of year..............     63,079      43,104      12,706
                                                            ---------    --------    --------
Cash and cash equivalents, end of year....................  $  35,017    $ 63,079    $ 43,104
                                                            =========    ========    ========
SUPPLEMENTAL CASH FLOW INFORMATION:
  Cash paid during the year for:
     Income taxes.........................................  $     871    $    172    $     71
     Interest.............................................  $      70    $    182    $     67
  Non-Cash Transaction:
     Issuance of shares and warrants in connection with
       Aqueduct acquisition...............................  $   4,325
</TABLE>

  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                        40
<PAGE>   42

                                NETMANAGE, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 1. NATURE OF OPERATIONS AND ORGANIZATION:

     NetManage, Inc. (the "Company") develops and markets software and service
solutions that allow its customers to access and leverage the considerable
investment they have in their host-based business applications, processes and
data. The Company's business is primarily focused on providing a full spectrum
of specific personal computer and network or application server-based software
and tools. These products allow the Company's customers to access and use their
mission-critical line-of-business host applications and resources: to publish
information from existing host systems in a web presentation particularly to new
users on the Internet; to create new web-based applications that leverage the
corporation's existing business processes; and, to ensure the continued
operation of these solutions through the incorporation and deployment of
innovative real-time Internet-based support solutions.

     The Company develops and markets these software solutions to allow its
customers to access and leverage applications, business processes and data on
IBM corporate mainframe computers, IBM midrange computers such as AS/400, and on
UNIX(R) based servers. The Company also develops and markets software that
allows real-time application sharing on corporate networks and across the
Internet for the purposes of application support, help and training. The Company
provides professional support, maintenance and technical consultancy services to
its customers.

     The Company has a range of access, publishing, and integration products. It
also has a range of support connectivity products that provide real-time visual
support in conjunction with help desk systems aimed at reducing the time and
cost of end-user support. The Company's host access products provide the
applications and solutions that allow end-user devices, including personal
computers, to communicate with large centralized corporate computer systems.
Host access products include RUMBA(R), and ViewNow(TM)families. Current
publishing and integration brands include the OnWeb(R) family. The Company's
real-time visual support connectivity products add value to its access,
publishing and integration solution offerings, and also target new market
segments. Also SupportNow(TM)software tools help reduce the length and cost of
support phone calls from end-users, and help with end-user education and
training.

 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

  Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated. The Company's investment in NetVision, Ltd. ("NetVision")
was accounted for using the equity method prior to its sale in December 1998
(see Note 3).

  Use of Estimates

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

  Foreign Currency Translation and Foreign Exchange Contracts

     The functional currency of the Company's foreign subsidiaries is the local
currency. Gains and losses resulting from the translation of the foreign
subsidiaries' financial statements are reported as a separate component of
stockholders' equity.

                                        41
<PAGE>   43
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company currently does not enter into financial instruments for either
trading or speculative purposes. Historically, financial instruments were used
to reduce the impact of changes in foreign currency exchange rates. The
principal instruments used were forward foreign exchange contracts of which the
counter-parties were major financial institutions. As of December 31, 2000 the
difference between the contract amounts and fair value was immaterial.

     Comprehensive Income is comprised of net income (loss) and other
comprehensive earnings such as foreign currency translation gain/loss and
unrealized gains or losses on marketable securities.

  Revenue Recognition

     The Company's revenues are derived from the sale of software licenses and
related services, which include maintenance and support, consulting, and
training services. License fees are earned under software license agreements to
end-users and resellers and are generally recognized as revenue upon delivery of
the software if collection of the resulting receivable is probable, the fee is
fixed and determinable, and vendor-specific objective evidence exists to
allocate the total fee to all delivered and undelivered elements of the
arrangement. If vendor-specific objective evidence does not exist to allocate
the total fee to all delivered and undelivered elements of the arrangement,
revenue is deferred until such evidence does exist for undelivered elements, or
until all elements are delivered, whichever is earlier. Such undelivered
elements in these arrangements typically consist of services. The Company offers
its customers a 30-day right of return on sales and records an estimate of such
returns at the time of product delivery based on historical experience. To date,
such returns have been insignificant. Certain of the Company's sales are made to
domestic distributors under agreements allowing rights of return and price
protection on unsold merchandise. The Company defers recognition of such sales
until the merchandise is sold by the distributor. The Company's international
distributors generally do not have return rights and, as such, the Company
generally recognizes sales to international distributors upon delivery if all
other revenue recognition criteria described above have been met.

     Service revenues are derived from system updates for existing software
products, user documentation and technical support, generally under annual
service agreements, are recognized ratably over the terms of such agreements. If
such services are included in the initial licensing fee, the value of the
services is unbundled and recognized ratably over the related service period.
Service revenues derived from consulting and training are recognized when the
services are performed and the collectibility is deemed probable.

     The Company has recognized revenue in accordance with Statement of Position
(SOP) 97-2, "Software Revenue Recognition". Additionally, effective January 1,
2000, the Company recognized revenue in accordance with SOP 98-9, "Modification
of SOP 97-2, "Software Revenue Recognition."

  Cash and Cash Equivalents

     The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

  Short-term Investments

     The Company accounts for its investments under the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Under SFAS No. 115, the Company's
investments are currently classified as available-for-sale and held-to-maturity
securities and are reported at fair value, with unrealized gains and losses, net
of tax, reported in the Company's Consolidated Statement of Other Comprehensive
Income. Held-to-maturity securities are valued using the amortized cost method.
At December 31, 2000 and 1999, the fair value of the time deposit investments
approximated amortized cost and, as such, gross unrealized holding gains and
losses were not material. The fair value of the available-for-sale securities
was determined based on quoted market prices at the reporting

                                        42
<PAGE>   44
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

dates for those instruments. The carrying value of the Company's short-term
investments by major security type consisted of the following as of December 31,
2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                        DESCRIPTION                            2000     1999
                        -----------                           ------    ----
<S>                                                           <C>       <C>
Available-for-sale securities...............................  $2,913    $ --
Held-to-maturity securities/time deposits...................     120     148
                                                              ------    ----
          Total.............................................  $3,033    $148
                                                              ======    ====
</TABLE>

     On December 18, 2000 ServiceSoft was acquired by Broadbase, a publically
traded company on NASDAQ. The Company recognized approximately $2.0 million gain
on its investment in ServiceSoft and classified the Broadbase shares received in
the transaction as available-for-sale securities.

  Other Investments

     On May 4, 2000 the Company invested $1.5 million in 2,822 Series B
Preferred shares of stock in easyBASE, Ltd. The Chairman and Chief Executive
Officer of the Company, Zvi Alon, also has a personal investment in easyBASE,
Ltd.

  Property and Equipment

     Property and equipment are recorded at cost. Improvements, renewals and
extraordinary repairs that extend the lives of the asset are capitalized, other
repairs and maintenance are expensed. Depreciation is computed using the
straight-line method over the following estimated useful lives:

<TABLE>
<CAPTION>
           CLASSIFICATION                              LIFE
           --------------                              ----
<S>                                    <C>
Computer software and equipment......  2 to 3 years
Furniture and fixtures...............  5 years
Leasehold improvements...............  Shorter of the lease term or the
                                       estimated useful life
</TABLE>

  Goodwill

     Goodwill and other intangible assets acquired are being amortized on a
straight-line basis over their estimated useful lives ranging from two to seven
years. Accumulated amortization was approximately $25.8 million and $11.6
million at December 31, 2000 and 1999, respectively.

     Subsequent to its acquisitions, the Company assesses long-lived assets
acquired for impairment under Financial Accounting Standards Board's (FASB)
Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
Under those rules, the Company reviews long-lived assets and certain
identifiable intangibles to be held and used for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates possible impairment of long-lived assets
using estimates of undiscounted future cash flows. Impairment loss to be
recognized is measured as the amount by which the carrying amount of the asset
exceeds the fair value of the asset. Management evaluates the fair value of its
long-lived assets and intangibles using primarily the estimated discounted
future cash flows method. Management uses other alternative valuation techniques
whenever the estimated discounted future cash flows method is not applicable.

     In the first six months of 2000, revenues, primarily from the Wall Data and
FTP products, fell short of the level of revenues anticipated prior to the
acquisitions. In management's judgment this short-fall in the level of revenue
was not a temporary condition. As a result, the Company revisited its strategy
to refocus itself on core competencies, revised its business plan, and its
projected future revenues for each family of products.

                                        43
<PAGE>   45
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Management believed it was necessary to restructure the Company and reduce
operating expenses expected to be less than or in line with the revised
anticipated level of revenues, which were comparable to revenues generated
during the first half of fiscal 2000.

     As a result, the Company announced a restructuring on August 3, 2000 (see
Note 4). As part of the restructuring, the Company reduced its workforce by
approximately 17%, consisting mainly of Engineering and Customer support
personnel who were focussed primarily on the Company's older technologies,
acquired through Wall Data and FTP acquisitions. With the reduction in
personnel, knowledge levels with respect to certain products and the Company's
ability to enhance and expand product acquired from Wall Data and FTP was
reduced, thus impacting future expected revenues from these product families.

     Based on management's analysis of revised product directions, revenue
forecasts and undiscounted future cash flows, taking into account the estimated
impact on product development and customer support resulting from the reductions
in personnel, the Company determined that there was a permanent impairment of
the long-lived assets related to the acquisitions of Wall Data and FTP Software.
The Company reevaluated the fair value of these long-lived assets and
intangibles using primarily the estimated discounted cash flows method.
Management used the same methodology to evaluate the fair value of its
long-lived assets and intangibles to allocate purchase price at the time of
acquisition. As a result the Company wrote off $42.2 million of goodwill and
other intangibles through a charge to operations in the third quarter of fiscal
2000. This has been reflected in the accompanying Consolidated Statement of
Operations as a "Goodwill Impairment".

     In the fourth quarter of 2000, the Company determined that it had
overestimated the liabilities assumed in the FTP and Wall Data acquisition by
$9.4 million. The Company reversed this amount by reducing the remaining
goodwill and other intangibles acquired.

  Accrued Liabilities and Restructuring

     The Company's accrued liabilities at December 31, 2000 and 1999 consisted
of the following (in thousands):

<TABLE>
<CAPTION>
                       DESCRIPTION                          2000       1999
                       -----------                         -------    -------
<S>                                                        <C>        <C>
Costs related to acquisitions............................  $ 2,054    $15,871
Restructuring (see Note 4)...............................    4,997      7,798
Other accruals...........................................   10,375     16,091
                                                           -------    -------
          Total..........................................  $17,426    $39,760
                                                           =======    =======
</TABLE>

     The Company accounts for restructuring charges under the provisions of
Emerging Issues Task Force (EITF) No. 94-3 "Liability Recognition for Certain
Employee Termination benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)" and Staff Accounting Bulletin (SAB)
No. 100 regarding the accounting for and disclosure of certain expenses commonly
reported in connection with exist activities and business combinations.

  Software Development Costs

     Software development costs are accounted for in accordance with SFAS No.
86, "Accounting for Computer Software to be Sold, Leased or Otherwise Marketed,"
under which capitalization of software development costs begins upon the
establishment of technological feasibility of the product, which the Company
defines as the development of a working model and further defines as the
development of a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and

                                        44
<PAGE>   46
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

changes in technology. Such costs are reported at the lower of unamortized cost
or net realizable value. Amortization of purchased software is generally
computed on a straight-line basis over one to five years or, if less, the
estimated remaining economic life of the underlying products. To date, internal
software development costs that were eligible for capitalization have not been
significant, and the Company has charged all software development costs to
research and development as incurred.

     For the years ended December 31, 2000, 1999, and 1998, approximately $0.1
million, $0.1 million and $0.1 million, respectively, is included in the
accompanying Consolidated Statements of Operations in cost of revenues for the
amortization of software purchased and capitalized.

  Concentrations of Credit Risk

     Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has cash investment policies that limit the amount of
credit exposure to any one issuer and restrict placement of these investments to
issuers evaluated as credit worthy. Concentrations of credit risk with respect
to trade receivables are limited due to the large number of customers comprising
the Company's customer base and their dispersion across many different
industries and geographies.

  Net Loss Per Share

     Basic net loss per share data has been computed using the weighted average
number of shares of common stock outstanding during the periods. Diluted net
loss per share data has been computed using the weighted average number of
shares of common stock and dilutive potential common shares. Potential common
shares include dilutive shares issuable upon the exercise of outstanding common
stock options computed using the treasury stock method. For the years ended
December 31, 2000, 1999, and 1998, the number of shares used in the computation
of diluted earnings per share were the same as those used for the computation of
basic earnings per share. Potentially dilutive securities of 7,026,115,
9,424,191, and 5,444,330, were not included in the computation of diluted
earnings per common share because to do so would have been antidilutive for the
years ended December 31, 2000, 1999 and 1998, respectively.

  New Accounting Standards

     In March 2000, the Financial Accounting Standard Board, or FASB, issued
interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation", an interpretation of Accounting Principles Board, or APB, Opinion
No. 25. This interpretation provides guidance regarding the application of APB
No. 25 to stock compensation involving employees. This interpretation was
effective July 1, 2000 and did not have a material effect on the Company's
consolidated financial position, result of operations, or cash flows.

     In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" (SAB 101) which provides guidance related
to revenue recognition based on interpretations and practices followed by the
SEC. The Company adopted SAB 101 in the fourth quarter of its fiscal 2000. The
adoption of this statement did not have a material effect on the Company's
consolidated financial position, results of operations, or cash flows.

     In June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value and requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. In June 2000, SFAS No. 133 was amended by SFAS No. 138,
"Accounting for Certain Derivative

                                        45
<PAGE>   47
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Instruments and Certain Hedging Activities", which amended or modified certain
issues discussed in SFAS No. 133. SFAS No. 138 is also effective for all fiscal
years beginning after June 15, 2000. The The Company does not expect the
adoption of SFAS No. 133 and SFAS No. 138 to have a material impact on its
financial statements.

  Reclassifications

     Certain reclassifications were made to prior year amounts to conform to
current year presentation.

 3. ACQUISITIONS

     On June 5, 2000, the Company completed its acquisition of Aqueduct
Software, Inc.. ("Aqueduct"), an early stage web-based application intelligence
company. The Company issued 1,121,495 shares of NetManage common stock and
issued warrants and options to purchase an additional 727,237 shares for all the
outstanding stock of Aqueduct including the retirement of $2.2 million of notes
payable and accrued interest. The Company also hired the three employees of
Aqueduct. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of Aqueduct from the date of
acquisition forward have been recorded in the Company's consolidated financial
statements.

     The aggregate purchase price for the acquisition of Aqueduct was computed
as follows (in thousands):

<TABLE>
<S>                                                           <C>
Value of NetManage common stock and warrants issued.........  $4,325
Acquisition costs...........................................     311
                                                              ------
                                                              $4,636
                                                              ======
</TABLE>

     The purchase price is allocated as follows (in thousands):

<TABLE>
<S>                                                           <C>
Cash and investments........................................  $    4
Other current and non-current assets........................      12
Equipment...................................................      28
Intangible assets...........................................   2,979
In-process research and development.........................   1,700
Liabilities assumed.........................................     (87)
                                                              ------
     Net assets acquired....................................  $4,636
                                                              ======
</TABLE>

     In connection with the acquisition of Aqueduct, the Company allocated $1.7
million of the purchase price to in-process research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete projects. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date. The remaining
intangibles of $3.0 million, consisting of goodwill, developed technology,
assembled work force are included in goodwill and other intangibles in the
accompanying balance sheets, and are being amortized over their estimated useful
lives of five years.

     On December 29, 1999, the Company completed its acquisition of Wall Data
Incorporated ("Wall Data"). The Company acquired a total of 10,203,344
outstanding shares of Wall Data common stock and paid cash to qualifying Wall
Data option holders and employee stock purchase plan participants pursuant to a
cash tender offer of $9.00 per common share. Total aggregate payments pursuant
to the cash tender offer amounted to approximately $94.0 million. The Company
completed the transaction in two stages. On November 26, 1999, the Company
acquired approximately 89% of the outstanding shares of Wall Data pursuant to
the cash tender offer. The Company acquired the remaining outstanding shares of
Wall Data by means of a merger completed in accordance with Washington law on
December 29, 1999. The acquisition was accounted for

                                        46
<PAGE>   48
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

using the purchase method of accounting and, accordingly, the results of Wall
Data from the date of acquisition forward have been recorded in the Company's
consolidated financial statements. As of December 31, 2000, the Company had
approximately $2.0 million of acquisition-related costs for Wall Data which are
included in accrued liabilities in the Company's consolidated balance sheet. In
December 2000, the Company recorded a decrease to intangible assets of
approximately $8.3 million as a result of the excess liabilities assumed
reversal (see note 2). The following tables reflect this adjustment.

     The aggregate purchase price for the acquisition of Wall Data was computed
as follows (in thousands):

<TABLE>
<S>                                                         <C>
Cash payments pursuant to tender offer....................  $ 94,048
Acquisition costs.........................................     9,456
                                                            --------
                                                            $103,504
                                                            ========
</TABLE>

     The purchase price is allocated as follows (in thousands):

<TABLE>
<S>                                                         <C>
Cash and investments......................................  $ 48,597
Other current and non-current assets......................    15,374
Equipment.................................................     6,763
Intangible assets.........................................    45,571
In-process research and development.......................    12,400
Liabilities assumed, as adjusted..........................   (25,201)
                                                            --------
     Net assets acquired..................................  $103,504
                                                            ========
</TABLE>

     In connection with the acquisition of Wall Data, the Company allocated
$12.4 million of the purchase price to in-process research and development
projects. This allocation represents the estimated fair value based on
risk-adjusted cash flows related to the incomplete projects. At the date of
acquisition, the development of these projects had not yet reached technological
feasibility, and the research and development in progress had no alternative
future uses. Accordingly, these costs were expensed as of the acquisition date.
The remaining intangibles of $54.9 million, consisting of goodwill, developed
technology, installed customer base, tradename and assembled work force, are
included in goodwill and other intangibles in the accompanying balance sheets,
and are being amortized over their estimated useful lives of five years.

     As of the acquisition date, Wall Data's significant ongoing research and
development projects included next-generation versions of current technologies
and development of new web-to-host and PC-to-host product technologies. At the
time of the acquisition, these projects had estimated completion percentages of
approximately 15% to 90%, estimated technology lives of five to seven years, and
projected product introduction dates of early to mid 2000.

     As a result of the reduction in staff as part of the restructuring in
August 2000, a number of product development projects were impacted and product
introductions delayed. As of December 31, 2000, the PC-to-host and web-to-host
projects had estimated completion percentages of approximately 75% to 95% with
remaining projected product introduction dates to mid 2001.

     The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally related to the
completion of all planning, designing, coding, and testing activities that are
necessary to establish that the developmental products can be produced to meet
their design requirements, including functions, features, and technical and
economic performance requirements. Anticipated completion dates ranged from 3 to
6 months, at which times the Company expected to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$2.4 million. As of December 31, 2000, anticipated completion dates remained in
the range of 3 to 6 months. Development costs to complete the R&D were estimated
at approximately $1.0 million

                                        47
<PAGE>   49
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The Company allocated value to the in-process research and development
based on an assessment of the research and development projects. The value
assigned to these assets was limited to significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of Wall
Data's next-generation technologies and products. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The Company
used discount rates of 20% to 30% for the calculation of present value of cash
flows. The discount rates used for the in-process technologies was higher than
the Company's weighted average cost of capital due to the risk of realizing cash
flows from projects that had yet to reach technological feasibility.

     The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors at the time of the acquisition.
Future revenue estimates at the time of the acquisition were aggregated into
three product categories: Web-to-host, PC-to-host, and Rumba tools/other.
Web-to-host product revenues were estimated to increase at a compound annual
rate of approximately 68% for fiscal years 1999 through 2002, stabilizing at a
10% growth after 2002. All other product revenues were assumed to decline
steadily as customers migrate to next-generation technologies.

     Operating expenses used in the valuation analysis of Wall Data included:
(i) cost of sales, (ii) selling, general and administrative expenses, and (iii)
research and development expenses. Operating expenses were estimated based on
data provided by management. Due to purchasing power increases and general
economies of scale, estimated operating expense as a percentage of revenues were
expected to decrease after the acquisition.

     With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Wall Data prior to
the close of the acquisition. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.

     Because these projects were not successfully developed, the sales and
profitability of the combined company have been adversely affected since the
acquisition. Additionally, the value of other acquired intangible assets has
become impaired. As a result the Company wrote off $32.2 million of goodwill and
other intangibles through a charge to operations in the third quarter of fiscal
2000 (see Note 2).

     The following unaudited pro forma financial information shows the results
of operations for the years ended December 31, 1999 and 1998 as if the
acquisition of Wall Data had occurred at the beginning of the periods presented
and at the same aggregate purchase price. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma financial data for the year
ended December 31, 1999 combines the Company's results for the year ended
December 31, 1999 with the results of Wall Data for the period from February 1,
1999 through the date of acquisition. The pro forma financial data for 1998
combines the Company's results of operations for the year ended December 31,
1998 with Wall Data's results of operations for the year ended January 31, 1999.
The following unaudited pro forma financial

                                        48
<PAGE>   50
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

data includes the straight-line amortization of intangibles over a period of
five to seven years and excludes the charge for in-process research and
development (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                         ------------------------
                                                            1999          1998
                                                         ----------    ----------
<S>                                                      <C>           <C>
Revenue................................................   $138,706      $224,539
Net loss...............................................   $(70,073)     $(14,429)
Net loss per share, diluted............................   $  (1.08)     $  (0.28)
Weighted average common shares, diluted................     64,712        53,205
</TABLE>

     On December 10, 1999, the Company completed its acquisition of Simware Inc.
("Simware"), a leading provider of e-commerce solutions and web integration
servers. The Company acquired a total of 7,503,372 shares of Simware common
stock and paid cash to qualifying Simware option holders and employee stock
purchase plan participants pursuant to a cash tender offer of $3.75 per common
share. The Company completed the transaction in two stages. On November 2, 1999,
the Company acquired approximately 91% of the outstanding shares of Simware
pursuant to the cash tender offer. The Company acquired the remaining
outstanding shares of Simware by means of a compulsory acquisition completed in
accordance with Canadian law on December 10, 1999. The acquisition was accounted
for using the purchase method of accounting and, accordingly, the results of
Simware from the date of acquisition forward have been recorded in the Company's
consolidated financial statements. As of December 31, 2000, the Company had no
acquisition costs for Simware in accrued liabilities in the Company's
consolidated balance sheet.

     The aggregate purchase price for the acquisition of Simware was computed as
follows (in thousands):

<TABLE>
<S>                                                          <C>
Cash payments pursuant to tender offer.....................  $29,191
Acquisition costs..........................................      953
                                                             -------
                                                             $30,144
                                                             =======
</TABLE>

     The purchase price is allocated as follows (in thousands):

<TABLE>
<S>                                                          <C>
Cash and investments.......................................  $ 2,188
Other current and non-current assets.......................    6,512
Equipment..................................................    1,170
Intangible assets..........................................   18,166
In-process research and development........................    6,700
Liabilities assumed........................................   (4,592)
                                                             -------
     Net assets acquired...................................  $30,144
                                                             =======
</TABLE>

     In connection with the acquisition of Simware, the Company allocated $6.7
million of the purchase price to in-process research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete projects. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date. The remaining
intangibles of $18.2 million, consisting of goodwill, developed technology, and
assembled work force are included in goodwill and other intangibles in the
accompanying balance sheets and are being amortized over their estimated useful
lives of five years.

     As of the acquisition date, Simware's significant ongoing research and
development projects included next-generation versions of current technologies
and development of new web-based product technologies. At the time of the
acquisition, these projects had an estimated aggregate completion percentage of
approximately 50%; estimated technology lives of five to seven years; and
projected product introduction dates of mid to late 2000.

                                        49
<PAGE>   51
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, coding, and testing activities that are
necessary to establish that the developmental products can be produced to meet
their design requirements, including functions, features, technical, and
economic performance requirements. Anticipated completion dates ranged from 6 to
12 months, at which times the Company expected to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$1.9 million.

     The Company allocated value to the in-process research and development
based on an assessment of the research and development projects. The value
assigned to these assets was limited to significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of Simware's
next-generation technologies and products. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The Company
used a discount rate of 20% for the calculation of present value of cash flows.
The discount rate used for the in-process technology was higher than the
Company's weighted average cost of capital due to the risk of realizing cash
flows from projects that had yet to reach technological feasibility.

     The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology, the nature, expected timing of new product
introductions by the Company, and its competitors. Future revenue estimates were
aggregated into four product categories: Salvo, A2B/Sim, Rexxware, and Other.
Salvo-based product revenues were estimated to increase at a compound annual
rate of approximately 77% for fiscal years 1999 through 2002, stabilizing at 20%
growth after 2002. All other product revenues were assumed to decline steadily
as customers are converted to Simware's next-generation technologies.

     Operating expenses used in the valuation analysis of Simware included; (i)
cost of sales, (ii) selling, general, administrative expenses, and (iii)
research and development expenses. Operating expenses were estimated based on
data provided by management. Due to purchasing power increases and general
economies of scale, estimated operating expense as a percentage of revenues were
expected to decrease after the acquisition.

     With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Simware prior to
the close of the acquisition. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.

     If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.

     The following unaudited pro forma financial information shows the results
of operations for the years ended December 31, 1999 and 1998 as if the
acquisition of Simware had occurred at the beginning of the periods presented
and at the same aggregate purchase price. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma financial data for the year
ended December 31, 1999 combines the Company's results for the year ended
December 31, 1999 with the results of Simware for the period from February 1,
1999 through the date of acquisition. The pro forma financial data for 1998
combine the Company's results of operations for the year ended December 31, 1998
with Simware's results of operations for the year ended January 31, 1999. The
following unaudited pro forma financial data

                                        50
<PAGE>   52
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

include the straight-line amortization of intangibles over a period of five to
seven years and excludes the charge for in-process research and development (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                         ------------------------
                                                            1999          1998
                                                         ----------    ----------
<S>                                                      <C>           <C>
Revenue................................................   $ 88,463      $ 85,522
Net loss...............................................   $(13,558)     $(11,979)
Net loss per share, diluted............................   $  (0.21)     $  (0.23)
Weighted average common shares, diluted................     64,712        53,205
</TABLE>

     On August 27, 1998, the Company acquired all of the outstanding shares of
common stock of FTP Software, Inc. ("FTP"). Each outstanding share of the common
stock of FTP, and each associated junior preferred stock purchase right, was
converted into 0.72767 of a share of the Company's common stock. Outstanding FTP
options were converted into options to purchase shares of the Company's common
stock at the same conversion rate, with appropriate corresponding changes to the
exercise price. As a result, 34,035,463 shares of FTP common stock outstanding
immediately prior to the merger were converted into approximately 24,766,640
shares of the Company's common stock and options to acquire approximately
5,587,528 shares of FTP common stock were assumed by the Company and converted
into options to purchase approximately 4,065,351 shares of the Company's common
stock. The total purchase price for the acquisition was approximately $78.3
million. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of FTP from the date of acquisition
forward have been recorded in the Company's consolidated financial statements.
In August 1999, the Company recorded an increase to goodwill of approximately
$2.7 million as a result of an increase to the Company's FTP related
restructuring accrual (see Note 4). The following tables reflect this
adjustment.

     The aggregate purchase price for the acquisition of FTP is computed as
follows (in thousands):

<TABLE>
<S>                                                          <C>
Value of NetManage common stock issued.....................  $74,042
Vale of options assumed....................................    1,113
Acquisition cost...........................................    3,157
                                                             -------
                                                             $78,312
                                                             =======
</TABLE>

     The purchase price is allocated as follows (in thousands):

<TABLE>
<S>                                                          <C>
Cash and investments.......................................  $61,249
Other current assets.......................................   10,138
Equipment..................................................    5,838
Intangible assets, as adjusted.............................   21,306
In-process research and development........................    9,500
Current liabilities assumed, including FTP related
  restructuring accrual, as adjusted.......................  (29,719)
                                                             -------
     Net assets acquired...................................  $78,312
                                                             =======
</TABLE>

     In December 2000, the Company recorded a decrease to intangible assets of
approximately $1.1 million as a result of the excess liabilities assumed
reversal (see Note 2).

     In connection with the acquisition of FTP, the Company allocated $9.5
million of the purchase price to in-process research and development projects.
The Company used an independent third-party appraiser to assess and allocate a
value to the in-process research and development. This allocation represents the
estimated fair value based on risk-adjusted cash flows related to the incomplete
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the

                                        51
<PAGE>   53
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

acquisition date. The remaining intangibles of $18.6 million, consisting of
goodwill and developed technology, are included in goodwill and other
intangibles in the accompanying balance sheets and are being amortized over
their estimated useful lives of five to seven years.

     As of the acquisition date, FTP's significant ongoing research and
development projects included next-generation versions and development of new
product technologies. At the time of the acquisition, these projects had
estimated completion percentages ranging from 58% to 74%, estimated technology
lives of five to seven years, and projected product introduction dates between
the end of 1998 and the first six months of 1999. The nature of the efforts
required to develop the acquired in-process technology into commercially viable
products principally relate to the completion of all planning, designing,
coding, and testing activities that are necessary to establish that the products
can be produced to meet their design requirements, including functions,
features, and technical and economic performance requirements.

     The Company allocated value to the in-process research and development
based on an assessment of the research and development projects. The value
assigned to these assets was limited to significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of FTP's
next-generation technologies and products. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The Company
used a discount rate of 20% for the calculation of present value of cash flows.
The discount rate used for the in-process technology was higher than the
Company's weighted average cost of capital due to the risk of realizing cash
flows from projects that had yet to reach technological feasibility.

     The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors at the time of the acquisition.
Future revenue estimates at the time of the acquisition were aggregated into
four product categories: 16-bit, 32-bit, Web-based, and other. Web-based product
revenues were estimated to increase at a compound annual rate of approximately
50% for fiscal years 1999 through 2002, stabilizing at 10% growth after 2002.

     Operating expenses used in the valuation analysis of FTP included: (i) cost
of sales; (ii) selling, general, and administrative expenses; and (iii) research
and development expenses. Operating expenses were estimated based on data
provided by management. Due to purchasing power increases and general economies
of scale, estimated operating expense as a percentage of revenues were expected
to decrease after the acquisition.

     Because these projects were not successfully developed, the sales and
profitability of the combined company have been adversely affected since the
acquisition. Additionally, the value of other acquired intangible assets has
become partially impaired. As a result the Company wrote off $10.0 million of
goodwill and other intangibles through a charge to operations in the third
quarter of fiscal 2000 (see Note 2).

     The following unaudited pro forma financial information shows the results
of operations for the year ended December 31, 1998 as if the acquisition of FTP
had occurred at the beginning of the periods presented and at the same aggregate
purchase price. The results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of each of the
respective periods presented or of future operations of the combined companies.
The pro forma financial data for the year ended December 31, 1998 combines the
Company's results for the year ended December 31, 1998 with the results of FTP
for the period from January 1, 1998 through the date of acquisition (August 26,
1998.) The following unaudited

                                        52
<PAGE>   54
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

pro forma financial data include the straight-line amortization of intangibles
over a period of five to seven years and excludes the charge for in-process
research and development (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                          DECEMBER 31,
                                                              1998
                                                          ------------
<S>                                                       <C>
Revenue.................................................    $ 96,545
Net loss................................................    $(11,319)
Net loss per share, diluted.............................    $  (0.18)
Weighted average common shares, diluted.................      61,940
</TABLE>

     In December 1998, the Company sold its equity interest in NetVision for
$17.0 million. The Company's ownership interest prior to the sale was
approximately 32%. In connection with this transaction, the Company recorded a
gain on the sale of stock by NetVision of $11.7 million, which is included in
the accompanying Consolidated Statement of Operations for the year ended
December 31, 1998.

 4. RESTRUCTURING OF OPERATIONS

     On August 3, 2000, the Company announced a restructuring of its operations
designed to re-focus the Company on core business functions and reduce operating
expenses. In connection with the restructuring, the Company reduced its
workforce by approximately 17% and made provisions for reductions in office
space, related overhead expenses and the write down of certain assets (see Note
2). The total amount of the restructuring charge was $5.6 million. The
restructuring charge includes primarily approximately $3.0 million of estimated
expenses for facilities-related charges, $1.6 million of employee-related
expenses for employee terminations and an $800,000 settlement to Verity for a
software license that the Company does not plan to use and accordingly has
written-off. As of December 31, 2000, the Company had incurred costs totaling
approximately $3.6 million related to the restructuring, which required $3.6
million in cash expenditures. The remaining reserve related to this
restructuring was approximately $2.0 million which is included in accrued
liabilities.

     The following table lists the components of the August 2000 NetManage
restructuring charge for the year ended December 31, 2000 (in thousands):

<TABLE>
<CAPTION>
                                              EMPLOYEE      EXCESS        VERITY
                                               COSTS      FACILITIES    SETTLEMENT    OTHER    TOTAL
                                              --------    ----------    ----------    -----    ------
<S>                                           <C>         <C>           <C>           <C>      <C>
Initial reserve established.................   $1,600       $3,000         $800       $200     $5,600
Reserve utilized in
  year ended December 31, 2000..............   (1,500)      (1,116)        (800)      (100)    (3,516)
                                               ------       ------         ----       ----     ------
Balance at December 31, 2000................   $  100       $1,884         $ --       $100     $2,084
                                               ======       ======         ====       ====     ======
</TABLE>

     In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the two acquired companies. In
connection with this plan, the Company recorded a $3.8 million charge to
operating expenses in 1999. The restructuring charge includes approximately $1.9
million of estimated expenses for facilities-related charges associated with the
consolidation of redundant operations and $1.4 million of employee-related
expenses for employee terminations. The Company anticipates that the execution
of the restructuring actions will require total cash expenditures of
approximately $3.8 million, which is expected to be funded from internal
operations. As of December 31, 2000, the Company had incurred costs totaling
approximately $ 2.4 million related to the restructuring, which required $2.4
million in cash expenditures.

                                        53
<PAGE>   55
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table lists the components of the NetManage restructuring
charge from 1999 for the years ended December 31, 2000 and 1999 (in thousands):

<TABLE>
<CAPTION>
                                                       EMPLOYEE      EXCESS
                                                        COSTS      FACILITIES    OTHER     TOTAL
                                                       --------    ----------    -----    -------
<S>                                                    <C>         <C>           <C>      <C>
Reserve provided in 1999.............................  $ 1,448       $1,868      $ 475    $ 3,791
Reserve utilized in 1999.............................     (151)          --         --       (151)
                                                       -------       ------      -----    -------
Balance at December 31, 1999.........................    1,297        1,868        475      3,640
Reserve utilized in 2000.............................   (1,297)        (729)      (175)    (2,202)
                                                       -------       ------      -----    -------
Balance at December 31, 2000.........................  $    --       $1,139      $(299)   $ 1,438
                                                       =======       ======      =====    =======
</TABLE>

     In late August 1998, following the acquisition of FTP, the Company
initiated a plan to restructure its worldwide operations as a result of business
conditions and in connection with the integration of the operations of FTP. In
connection with this plan, the Company recorded a $7.0 million charge to
operating expenses in 1998. The restructuring charge includes approximately $5.5
million of estimated expenses for the write-off of excess equipment and
leasehold improvements as NetManage facilities are downsized or closed,
facilities-related expenses associated with the consolidation of redundant
operations and $1.5 million of employee-related expenses for employee
terminations. Additionally, prior to the acquisition of FTP by the Company, FTP
recorded a restructuring charge. The remaining restructuring liability of $9.7
million as of the date of acquisition was assumed by the Company in connection
with the acquisition. The two restructuring plans included a reduction in the
Company's worldwide workforce, reduction of office space, and the closure of
four domestic locations, all of FTP's international facilities, and additional
NetManage international locations. The reduction in force involved approximately
150 employees. Asset related write-offs primarily relate to leasehold
improvements, computers, and communications equipment which would no longer be
used when facilities were closed or downsized and headcount was reduced. The
Company completed the majority of the restructuring actions by the end of 1998.
The Company anticipated that the execution of the restructuring actions would
require total cash expenditures of approximately $13.7 million, which was
expected to be funded from internal operations. As of December 31, 1999, the
Company had incurred costs totaling approximately $16.9 million related to the
restructuring, which required $13.3 million in cash expenditures. On September
30, 1999, the Company increased the FTP restructuring reserve by $2.7 million
which, after an evaluation of the restructuring charges and actions taken since
the initial restructuring charge was taken, was determined to be the increase
necessary for anticipated continued restructuring activities. The increase
relates to lease commitments for FTP facilities which the Company has been
unable to extricate itself from the lease or find suitable sublease tenants. As
the additional reserve relates to FTP facilities and the closure of those
facilities was initiated prior to the acquisition of FTP, the increase to the
restructuring reserve was recorded as part of an adjustment to the FTP purchase
price allocation resulting in additional goodwill (see Note 3). At December 31,
2000, the remaining FTP reserve related to this restructuring plan was
approximately $1.4 million.

                                        54
<PAGE>   56
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table lists the components of the NetManage restructuring
charge from 1998 for the years ended December 31, 2000, 1999, and 1998 (in
thousands) are reflected below:

<TABLE>
<CAPTION>
                                                     EMPLOYEE    EXCESS       EXCESS
                                                      COSTS      ASSETS     FACILITIES     TOTAL
                                                     --------    -------    ----------    --------
<S>                                                  <C>         <C>        <C>           <C>
Reserve provided in 1998...........................  $ 7,284     $ 2,674     $ 6,794      $ 16,752
Reserve utilized in 1998...........................   (6,693)     (1,585)     (3,250)      (11,588)
                                                     -------     -------     -------      --------
Balance at December 31, 1998.......................      591       1,089       3,544         5,224
Reserve utilized in 1999...........................     (591)     (1,089)     (3,744)       (5,424)
Addition to reserve recorded as adjustment to FTP
  purchase price allocation........................       --          --       2,722         2,722
                                                     -------     -------     -------      --------
Balance at December 31, 1999.......................                   --       2,522         2,522
Reserve utilized in 2000...........................                           (1,414)       (1,414)
                                                     -------     -------     -------      --------
Balance at December 31, 2000.......................  $    --     $    --     $ 1,108      $  1,108
                                                     =======     =======     =======      ========
</TABLE>

 5. COMMITMENTS AND CONTINGENCIES

  Legal Proceedings

     On May 21, 1999, Verity filed a complaint against the Company alleging
claims for breach of contract, contractual and tortious breach of the implied
covenant of good faith and fair dealing, fraud, negligent misrepresentation,
conspiracy, and indemnification. The complaint arose out of the sale by FTP of
certain technology to Verity. Verity claimed that FTP's representations and
warranties regarding its ownership of the technology sold were inaccurate,
especially insofar as a third party claimed ownership of the technology. Verity
sought compensatory and punitive damages in an unspecified amount, and
attorneys' fees. The action was pending in the Superior Court for the County of
Santa Clara. The Company answered the complaint denying the allegations and
raising several affirmative defenses, among them that it had secured a release
from the third party of any claims it might have otherwise had against Verity
regarding ownership of the technology. However, NetManage decided to settle the
matter on August 15, 2000 by agreeing to secure license and distribution rights
for 100,000 copies of Verity software for $800,000.

     On October 10, 1997, a shareholder derivative action was filed in the
United States District Court for the Northern District of California against
nine present and former officers and directors of the Company. Sucher v. Alon et
al., No. C-98-203-CRB. The complaint alleged that the defendants violated
various fiduciary duties to the Company; the Company is named as a nominal
defendant. The complaint was predicated on the factual allegations contained in
the Head and Molinari class action complaints, and sought an unspecified amount
of damages. On November 6, 1998, the court dismissed the complaint without leave
to amend on the grounds that plaintiffs had failed to make a pre-litigation
demand on the Company's board of directors. Plaintiff filed a notice of appeal
to the U.S. Court of Appeals for the Ninth Circuit. An agreement in principle
had been reached to settle the derivative case. In January of 2001, the Court
gave final approval of the settlement. This matter was settled, with no
admission of guilt, for a cash payment of $100,000 by NetManage's insurance
carriers.

     On January 9, 1997, a securities class action complaint, Head, et al. v.
Netmanage, Inc., et al., No. 07763295, was filed in the Superior Court of
California, Santa Clara County, against the Company and certain of its directors
and current and former officers. On January 10, 1997, the same plaintiffs filed
a securities class action complaint, Head, et al. v. NetManage, Inc., et al.,
No. C-97-4385-CRB, in the United States District Court for the Northern District
of California, against the same defendants. Both complaints alleged that,
between July 25, 1995 and January 11, 1996 the defendants made false or
misleading statements of material fact about the Company's prospects and failed
to follow generally accepted accounting principles. The state court complaint
asserted claims under California state law; the federal court complaint asserted

                                        55
<PAGE>   57
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

claims under the federal securities law. On March 21, 1997, a securities class
action complaint, Interactive Data Systems, Inc., et al. v. Netmanage Inc., et
al., No. CV764945, was filed in the Superior Court of California, Santa Clara
County, against the Company and certain of its directors and officers. On June
19, 1997, one of the plaintiffs in that action filed a securities class action
complaint, Molinari v. NetManage, Inc., et al., No. C-98-202-CRB, in the United
States District Court for the Northern District of California against the same
defendants. Both complaints alleged that, between April 18, 1996 and July 18,
1996, the defendants made false or misleading statements of material fact about
the Company's prospects. On September 19, 1997, a class action substantially
similar to the Head action was filed, Beasley v. NetManage, Inc., et
al.,C-98-1794 CRB (N.D. Cal.), seeking an unspecified amount of damages. The
federal court certified the purported class. On December 30, 1998, the federal
court granted without leave to amend the defendant's motion to dismiss the
second amended complaint in the Head federal action. Plaintiffs filed a notice
of appeal to the U.S. Court of Appeals for the Ninth Circuit. On February 2,
1999, the federal court dismissed with prejudice the Beasley action pursuant to
its order in the Head action. The individual cases of Head, Molinari, Beasley,&
Interactive Data were consolidated into NetManage I (federal claims) and
NetManage II (state claims). In November 2000, all were collectively settled for
a cash payment of $5.1 million by NetManage's insurance carriers.

     On March 14, 1996, a securities class action complaint, Greeble v. FTP
Software, Inc., et al., No 96-10544, was filed in the United States District
Court for the District of Massachusetts against FTP and certain of its former
officers and directors. The complaint alleged that between July 14, 1995 and
January 3, 1996, defendants violated the federal securities laws by making false
and misleading statements of material fact about FTP's prospects and financial
statements. NetManage acquired FTP in August 1998. On September 24, 1998, the
district court granted defendants' motion for partial summary judgment and
granted without leave to amend defendants' renewed motion to dismiss the
complaint. Plaintiffs filed a notice of appeal. Oral argument on the appeal was
held on June 9, 1999. By order dated October 8, 1999, the United States Court of
Appeals for the First Circuit affirmed the district court's dismissal.
Plaintiffs time to petition for review by the United States Supreme Court
expired and as a result the case has been closed.

     In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, was filed in the United States
District Court for the Northern District of California against Firefox
Communications Inc. ("Firefox") and certain of its former officers and
directors. FTP acquired Firefox in July 1996. The complaint alleged that,
between July 20, 1995 and January 2, 1996, the defendants violated the federal
securities laws by making false or misleading statements about Firefox's
operations and financial results. On May 8, 1997, the district court granted
defendants' motion to dismiss without leave to amend. Plaintiffs filed a notice
of appeal. Oral argument on the appeal was held on September 14, 1998. On
November 1, 1999, the Court of Appeals for the Ninth Circuit issued an order
vacating the judgment of the district court and remanded the case back to the
district court for reconsideration in light of its recently issued landmark
decision in the securities litigation case of Janas v. McCraken (In re Silicon
Graphics Inc.). After remand, the Company renewed its motion to dismiss. On
March 22, 2000, a hearing on motion to dismiss was held by the district court.
The district court again dismissed the complaint without leave to amend. The
plaintiffs again filed a notice of appeal in the Ninth Circuit. The Company is
awaiting the results of oral arguments held in the Ninth Circuit on March 20,
2001. The Company believes the case is without merit and intends to defend it
vigorously.

     As the outcome of any case cannot be reasonably determined, the Company is
unable to make any assurance as to whether the result in a case will have a
material or adverse effect on the Company's financial position or results of
operations. Moreover, the Company may be contingently liable with respect to
certain asserted and unasserted claims that arise during the normal course of
business. In the opinion of management, the outcome of such matters presently
known to management will not have a material adverse effect on the Company's
business, financial position or results of operations.

                                        56
<PAGE>   58
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  Leases

     Facilities and equipment are leased under non-cancelable operating leases
expiring on various dates through the year 2011. As of December 31, 2000, future
minimum rental and lease payments under operating leases are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                             OPERATING
                           YEAR                               LEASES
                           ----                              ---------
<S>                                                          <C>
2001.......................................................   $ 4,967
2002.......................................................     4,625
2003.......................................................     4,640
2004.......................................................     3,451
2005.......................................................       911
Thereafter.................................................     2,491
                                                              -------
          Total minimum obligations, net of sublease
            payments.......................................   $21,085
                                                              -------
</TABLE>

     Rent expense was approximately $6.3 million, $3.4 million, and $2.4 million
for the years ended December 31, 2000, 1999 and 1998, respectively, net of
sublease payments.

 6. CAPITAL STOCK

  Common Stock

     As of December 31, 2000, the Company has reserved the following shares of
authorized but unissued common stock:

<TABLE>
<S>                                                         <C>
Employee stock option plans...............................  5,493,926
Directors' stock option plan..............................    659,835
Employee stock purchase plan..............................    550,966
                                                            ---------
                                                            6,704,727
                                                            =========
</TABLE>

  Stock Repurchase Plan

     Previously, the Company's Board of Directors authorized the purchase of up
to 9 million shares of the Company's common stock for general corporate
purposes. During 2000, 1999 and 1998, the Company purchased 1,004,765,
4,325,600, and 2,028,700 shares of its common stock, respectively, on the open
market at an average purchase price of $0.85, $2.62, and $2.09 per share,
respectively, for a total cost of $0.9 million, $11.3 million, and $4.2 million,
respectively.

  Employee Stock Option Plans

     In October 1999, the Board of Directors adopted the 1999 Non-Statutory
Stock Option Plan (the "1999 Plan"). The Board of Directors authorized and
reserved for the issuance of 4,000,000 shares of the Company's common stock. The
1999 Plan provides for the grant of non-qualified stock options for employees.
Options may not be granted to officers and directors, except as an essential
inducement to an officer entering into an employment agreement regarding his or
her initial service with the Company. The 1999 Plan does not allow for issuance
to directors of the Company. The exercise price of stock options issued under
the 1999 Plan is established by the 1999 Plan Administrator, which is a
committee of the Board of Directors. Options granted under the 1999 Plan become
exercisable at a rate of 25% of the shares subject to the option at the end of
the first year and 1/48 of the shares subject to the option at the end of each
calendar month thereafter. The maximum term of a stock option under the 1999
Plan is 10 years.

                                        57
<PAGE>   59
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     During 1992, the Company established the 1992 Employee Stock Option Plan
(the "1992 Plan"). The Company currently has authorized a total of 12,000,000
shares for issuance under the 1992 Plan. In June 2000, the Company filed a
registration statement authorizing an additional 2,200,000 shares for issuance
under the 1992 Plan after the approval of an amendment to the 1992 Plan at the
Company's Annual Shareholders' Meeting on May 31, 2000. The 1992 Plan provides
for the grant by the Company of incentive stock options to employees and
officers and non-statutory stock options to employees, officers, directors and
consultants. The exercise price of incentive stock options may not be less than
100% of the fair market value of the common stock on the date of grant (110% of
such fair market value in the case of a grant to a holder of more than 10% of
the voting power of the Company's outstanding capital stock (a "10%
stockholder")); the exercise price of non-statutory options may not be less than
85% of such fair market value. Up until mid-1997, options granted under the 1992
Plan generally were scheduled to become exercisable at a rate of one-fourth of
the shares subject to the option at the end of the first year and 1/48 of the
shares subject to the option at the end of each calendar month thereafter. From
mid-1997 until September 1998, options granted under the 1992 Plan for new hires
generally were scheduled to become exercisable at a rate of one-fifth of the
shares subject to the option at the end of the first year and 1/60 of the shares
subject to the option at the end of each calendar month thereafter. Beginning in
September 1998, options granted under the 1992 Plan become exercisable at a rate
of one-fourth of the shares subject to the option at the end of the first year
and 1/48 of the shares subject to the option at the end of each calendar month
thereafter. The maximum term of a stock option under the 1992 Plan is 10 years
(five years in the case of an incentive option granted to a 10% stockholder).

     In connection with the acquisition of FTP, the Company assumed options to
purchase shares of FTP's common stock held by employees of FTP and its
subsidiaries (the "Assumed FTP Options"). Pursuant to the FTP merger, these
options were converted into options to purchase shares of NetManage common stock
at the FTP merger exchange rate, with appropriate adjustments to the exercise
price. The assumed FTP Options were granted under, and continue to be governed
by the plans under which they were originally granted. The options generally
vest over three to four years and have a maximum term of ten years. No
additional options will be granted pursuant to any of the FTP stock option
plans.

     The Company also assumed certain options granted to former employees of
acquired companies acquired (the "Acquired Options"). The Acquired Options were
assumed by the Company outside of the Plan, but all are administered as if
assumed under the Plan. All of the Acquired Options have been adjusted to
effectuate the conversion under the Agreements and Plans of Reorganization
between the Company and the companies acquired. Certain of the Acquired Options
became immediately exercisable under the original terms of the option
agreements. The remaining Acquired Options continue to vest under the original
vesting schedule over a four-year period. No additional options will be granted
under any of the acquired companies' plans.

     In October 1998, the Company's Board of Directors approved an option
exchange program pursuant to which all directors and employees of the Company
were given the opportunity to exchange any or all of their existing options for
new options covering a number of shares of the Company's common stock determined
under a formula that took into account the original number of shares, term and
vesting schedule of the existing options, at an exercise price of $1.00 per
share (being the fair market value of the Company's common stock on the grant
date of the new options). The new options become exercisable at a rate of
one-fourth of the shares subject to the option at the end of the first year and
1/36of the remaining shares subject to the option at the end of each calendar
month thereafter, and have a term of 10 years from the date of grant. Pursuant
to this exchange offer, options covering an aggregate of 3,020,421 shares of the
Company's common stock, with exercise prices ranging from $1.00 to $43.64 per
share, were exchanged for options covering an aggregate of 2,196,612 shares of
the Company's common stock.

     In September 1997 and January 1997 , upon approval by the Company's Board
of Directors, the Company repriced 1,703,624 and 3,451,079, options
respectively, originally issued at prices ranging from $3.25

                                        58
<PAGE>   60
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to $6.00 and $6.63 to $21.25, respectively. The options were repriced at the
then current market value of the Company's common stock of $3.06 for the
September 1997 repricing and $6.00 for the January 1997 repricing.

  Non-Employee Directors' Stock Option Plan

     In July 1993, the Company adopted the 1993 Directors' Stock Option Plan
(the "Directors' Plan") and reserved 800,000 shares of common stock for issuance
thereunder. Under the Directors' Plan, options may be granted only to
non-employee directors of the Company at an exercise price of 100% of the fair
market value of the stock on the date of grant. Options granted under the
Directors' Plan become exercisable at a rate of one-fourth of the shares subject
to the option at the end of the first year and 1/48 of the shares subject to the
option at the end of each calendar month thereafter. The maximum term of a stock
option under the Directors' Plan is 10 years.

  Employee Stock Purchase Plan

     In July 1993, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 2,400,000 shares of common stock for future
issuance under the Purchase Plan. In June 2000, the Company filed a registration
statement authorizing an additional 1,000,000 shares for issuance under the 1992
Plan after the approval of an amendment to the Purchase Plan at the Company's
Annual Shareholders' Meeting on May 31, 2000. Under the Purchase Plan, the
Company's employees, subject to certain restrictions, may purchase shares of
common stock at a price per share that is equal to 85% of the lower of the fair
market value of the common stock on the commencement date of each offering
period or the relevant purchase date. For the years ended December 31, 2000,
1999 and 1998 , 707,229, 609,185 and 519,698 shares were issued under the
Purchase Plan, respectively, at prices ranging from $1.09 to $1.75, $1.24 to
$1.83 and $1.28 to $2.87 per share, respectively

  Stock-Based Compensation Plans

     The Company accounts for the above plans under Accounting Principles Board
Opinion ("APB") No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net loss per share
would have been adjusted to the following pro forma amounts (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2000        1999        1998
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Net loss:
  As reported......................................  $(71,910)   $(27,492)   $ (9,968)
  Pro forma........................................   (74,357)    (29,947)    (12,922)
Net loss per share:
  As reported......................................  $  (1.11)   $  (0.42)   $  (0.19)
  Pro forma -- Basic...............................     (1.15)      (0.46)      (0.24)
</TABLE>

     Because the method of accounting prescribed by SFAS No. 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
effect of compensation cost may not be representative of that to be expected in
future years.

                                        59
<PAGE>   61
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Option activity, including the Acquired Options, under the Company's stock
option plans was as follows:

<TABLE>
<CAPTION>
                                                                               WEIGHTED
                                                 OPTIONS                       AVERAGE
                                                AVAILABLE       SHARES      EXERCISE PRICE
                                                ----------    ----------    --------------
<S>                                             <C>           <C>           <C>
Balance at December 31, 1997..................   4,622,371     3,613,521         3.00
  Authorized..................................   1,470,875            --
  Granted.....................................  (9,623,317)    9,623,317         3.89
  Exercised...................................          --      (337,909)        1.81
  Terminated..................................   7,454,599    (7,454,599)        4.96
                                                ----------    ----------
Balance at December 31, 1998..................   3,924,528     5,444,330         1.96
  Authorized..................................   4,000,000            --
  Granted.....................................  (6,532,393)    6,532,393         3.21
  Exercised...................................          --      (175,787)        2.23
  Terminated..................................   1,725,495    (1,725,495)        1.96
  Terminated FTP..............................          --      (651,250)        3.86
                                                ----------    ----------
Balance at December 31, 1999..................   3,117,630     9,424,191         2.66
  Authorized..................................   1,000,000            --
  Granted.....................................  (3,285,967)    3,285,967         3.39
  Exercised...................................          --      (904,237)        1.69
  Terminated..................................   4,779,806    (4,779,806)        3.13
                                                ----------    ----------
Balance at December 31, 2000..................   5,611,469     7,026,115         2.42
                                                ==========    ==========
Exercisable at December 31, 1998..............          --       640,862         4.61
Exercisable at December 31, 1999..............          --       941,949         1.92
Exercisable at December 31, 2000..............          --     1,693,325         2.42
</TABLE>

     The following table summarizes the Company's outstanding options as of
December 31, 2000:

<TABLE>
<CAPTION>
                       OPTIONS OUTSTANDING
-----------------------------------------------------------------       OPTIONS EXERCISABLE
                                  WEIGHTED                          ----------------------------
                                  AVERAGE            WEIGHTED                        WEIGHTED
                                 REMAINING           AVERAGE                         AVERAGE
   RANGE OF       NUMBER            LIFE             EXERCISE         NUMBER         EXERCISE
EXERCISE PRICE  OUTSTANDING       (YEARS)             PRICE         EXERCISABLE       PRICE
--------------  -----------   ----------------   ----------------   -----------   --------------
<S>             <C>           <C>                <C>                <C>           <C>
$ .75 - $ 1.28..  1,756,008         8.88              $ .97            364,119        $1.00
$1.72 - $ 2.12..  1,761,964         9.59              $1.97            588,549        $1.93
$2.16 - $ 4.13..  1,568,282         6.88              $2.80            457,292        $2.89
$4.41 - $10.31..  1,939,861         8.65              $5.38            283,365        $4.49
                 ---------                                           ---------
$ .75 - $10.31..  7,026,115         9.36              $2.84          1,693,325        $2.42
                 =========                                           =========
</TABLE>

                                        60
<PAGE>   62
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The weighted average fair values of options granted during 2000, 1999 and
1998 were $3.39, $2.59, and $1.19 per share, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing method with the following weighted average assumptions used for
grants in 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                           2000              1999              1998
                                     ----------------  ----------------  ----------------
<S>                                  <C>               <C>               <C>
Volatility.........................      116.66%           192.45%           207.25%
Risk-free interest rate............       6.00%         4.64% - 5.95%     4.07% - 5.87%
Dividend yield.....................       0.00%             0.00%             0.00%
Expected term......................    3 - 4 months      3 - 4 months      3 - 4 months
                                     beyond vest date  beyond vest date  beyond vest date
</TABLE>

 7. INCOME TAXES

     The provision for income taxes is based upon loss before income taxes as
follows (in thousands):

<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                     --------------------------------
                                                       2000        1999        1998
                                                     --------    --------    --------
<S>                                                  <C>         <C>         <C>
Domestic...........................................  $(60,766)   $(13,172)   $(12,128)
Foreign............................................   (10,407)    (13,940)      6,560
                                                     --------    --------    --------
                                                     $(71,173)   $(27,112)   $ (5,568)
                                                     ========    ========    ========
</TABLE>

     The components of the provision for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                                             --------------------------
                                                             2000      1999      1998
                                                             -----    ------    -------
<S>                                                          <C>      <C>       <C>
Current
  Federal..................................................  $ --     $   8     $   --
  State....................................................    78        50          2
  Foreign..................................................   659       372      2,400
                                                             ----     -----     ------
          Total current....................................   737       430      2,402
                                                             ----     -----     ------
Deferred
  Federal..................................................    --        54      1,978
  State....................................................    --        26         20
  Foreign..................................................    --      (130)        --
                                                             ----     -----     ------
          Total deferred...................................    --       (50)     1,998
                                                             ----     -----     ------
Provision for income taxes.................................  $737     $ 380     $4,400
                                                             ====     =====     ======
</TABLE>

                                        61
<PAGE>   63
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The provision for income taxes differs from the amounts which would result
by applying the applicable statutory federal income tax rate to income before
taxes, as follows (in thousands):

<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                       ------------------------------
                                                         2000       1999       1998
                                                       --------    -------    -------
<S>                                                    <C>         <C>        <C>
Benefit at federal statutory rate....................  $(23,983)   $(9,489)   $(1,949)
State income taxes, net of federal tax benefit.......    (3,608)    (1,627)      (320)
Nontaxable interest income...........................       (31)       (82)      (469)
Foreign losses benefited at a lower tax rate.........     4,151      2,310         --
Nondeductible write-off of in-process research and
  development........................................       680      7,831      3,895
Benefit not realized.................................     6,383       (458)     1,123
Tax savings from foreign operations..................      (304)        --         --
Nondeductible book goodwill amortization.............    16,866      1,378         --
Other permanent differences..........................       155        137         58
Foreign taxes........................................       659        372      2,400
Other................................................      (231)         8       (338)
                                                       --------    -------    -------
  Provision for income taxes.........................  $    737    $   380    $ 4,400
                                                       ========    =======    =======
</TABLE>

     The components of the net deferred income tax asset are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         --------------------
                                                           2000        1999
                                                         --------    --------
<S>                                                      <C>         <C>
Deferred revenue recognized currently for tax
  purposes.............................................  $     99    $    880
Reserves and accruals not currently deductible for tax
  purposes.............................................     4,836       4,137
Net operating loss carryforwards -- NetManage..........     2,215       5,142
Net operating loss carryforwards -- FTP................    16,751       9,500
Net operating loss carryforwards -- Wall Data..........    13,798      13,240
Net operating loss carryforwards -- Simware............     8,723       1,684
Tax credit carryforwards -- NetManage..................       614         335
Tax credit carryforwards -- FTP........................       787         787
Tax credit carryforwards -- Wall Data..................        --       1,292
Tax credit carryforwards -- Simware....................     2,860       1,236
Write-off of in-process research and development, not
  currently deductible for tax purposes................        --       4,886
Depreciation and amortization..........................       309       1,683
Capitalized R&D -- FTP.................................     7,167       7,588
Amortizable intangibles not deductible for tax
  purposes.............................................     3,617      (2,804)
Capital loss carryforward..............................        --         526
Other temporary differences............................       351        (259)
                                                         --------    --------
          Total deferred tax asset.....................    62,127      49,853
Less: Valuation allowance..............................   (62,127)    (46,648)
                                                         --------    --------
          Net deferred tax asset.......................  $     --    $  3,205
                                                         ========    ========
</TABLE>

     In connection with the acquisition of Wall Data in 1999, the Company
assumed Wall Data's deferred tax asset of $16.8 million. Realization of Wall
Data's deferred tax asset is dependent upon generating sufficient future taxable
income in specific tax jurisdictions. Due to the uncertainty as to whether the
deferred tax asset may be realized, the Company recorded a valuation allowance
for the entire balance of the Wall Data deferred tax asset at the time of
acquisition.
                                        62
<PAGE>   64
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     Currently, management believes it is more likely than not that the net
deferred tax asset will not be realized and, accordingly, has recorded a
valuation allowance for the entire balance. The amount of the deferred tax asset
considered realizable, however, may change if actual future taxable income
differs from estimated amounts.

     At December 31, 2000, the Company had gross net operating loss
carryforwards for federal income tax purposes of approximately $82.0 million
expiring at various dates through 2020 and federal tax credit carryforwards of
approximately $1.4 million which expire in various years through 2012. At
December 31, 2000, the Company had foreign net operating loss carryforwards of
approximately $34.5 million available to offset future taxable income in several
foreign jurisdictions. In accordance with certain provisions of the Internal
Revenue Code, as amended, a change in ownership of greater than 50% of a company
within a three year period results in an annual limitation on the Company's
ability to utilize its net operating loss carryforward from tax periods prior to
the ownership change. Such a change in ownership occurred with respect to the
Company's past acquisition of certain companies, including Wall Data.
Accordingly, the net operating losses and credits of the Company are subject to
these limitations.

     The Company's subsidiary in Haifa, Israel has a ten-year tax holiday, which
commenced January 1, 1995. During the first two years of the tax holiday, the
subsidiary was exempt from taxation on income generated during that period.
During the remaining eight years, income generated by the subsidiary will be
taxed at a reduced income tax rate of 10%. There was no impact on the net loss
for the years ended December 31, 2000, 1999 and 1998.

 8. SEGMENT REPORTING

     In 1998, the Company adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The Company concluded that it operates in
three operating segments: web integration and publishing, PC connectivity, and
real-time support. An operating segment is defined as a component of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision-maker is its chief executive officer. The web integration and
publishing market segment develops, markets and supports software products that
access host information systems and allow the information to be integrated and
published using web technology. The PC connectivity segment develops, markets
and supports software products that provide the technology to make the
connection between personal computers and large corporate computers possible.
The real-time support segment develops, markets and supports software products
that reduce the time and resource requirements for end-user support. The Company
has aggregated these three segments for reporting purposes as they have similar
economic characteristics and are similar with respect to the nature of their
products, the nature of their production processes, the type of customer that
their products are sold to and the methods used to distribute their products.

                                        63
<PAGE>   65
                                NETMANAGE, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

     The following table presents a summary of operations by geographic area (in
thousands):

<TABLE>
<CAPTION>
                                                        YEARS ENDED DECEMBER 31,
                                                   ----------------------------------
                                                     2000         1999         1998
                                                   ---------    ---------    --------
<S>                                                <C>          <C>          <C>
Revenues:
  Domestic operations............................  $  77,735    $  58,124    $ 53,144
  European operations............................     23,391       19,252      16,845
  Asian operations...............................      2,946        1,794       1,738
                                                   ---------    ---------    --------
  Consolidated...................................  $ 104,072    $  79,200    $ 71,727
                                                   =========    =========    ========
Income from operations:
  Domestic operations............................  $ (56,007)   $ (22,595)   $(14,500)
  European operations............................    (16,853)      (9,404)     (7,202)
  Asian operations...............................     (2,123)          --        (115)
                                                   ---------    ---------    --------
  Consolidated...................................  $ (74,982)   $ (31,999)   $(21,817)
                                                   =========    =========    ========
Identifiable assets:
  Domestic operations............................  $ 348,135    $ 268,227    $203,214
  European operations............................     42,626       45,883      77,928
  Asian operations...............................         --        3,738       1,952
  Eliminations...................................   (282,779)    (102,481)    (81,341)
                                                   ---------    ---------    --------
  Consolidated...................................  $ 109,981    $ 215,367    $201,753
                                                   =========    =========    ========
</TABLE>

     Domestic revenues include export revenues of approximately $0.5 million,
$1.0 million, and $0.4 million to Asia for the years ended December 31, 2000,
1999 and 1998, respectively, and $2.7 million, $2.8 million, and $1.6 million to
the rest of the world for the years ended December 31, 2000, 1999, and 1998,
respectively. Loss from operations is allocated amongst the regions based on
revenues per region.

     There were no customers that accounted for more than 10% of net revenues
for the years ended December 31, 2000, 1999, or 1998.

 9. SUBSEQUENT EVENT (UNAUDITED)

     In March 2001, the Company received a $5.1 million income tax refund
relating to a $10.9 million net operating loss incurred in 1997, which was
carried back to 1994. The refund amount included $863,000 of interest income.
The tax refund, net of interest income, was included in other receivables in the
amount of $4.2 million as of December 31, 2000.

                                        64
<PAGE>   66

[ITEM 9. & PART III, ITEMS 10-13 MISSING?]

                                    PART IV

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

     (a) The following documents are filed as part of this Report on Form 10-K:

FINANCIAL STATEMENTS:

     See Index to Consolidated Financial Statements at Item 8 on page 32 of this
Report.

FINANCIAL STATEMENT SCHEDULE:

     See Index to Consolidated Financial Statements at Item 8 on page 32 of this
Report

EXHIBITS:

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            EXHIBIT TITLE
    -------                           -------------
    <C>        <S>
     3.1       Certificate of Incorporation of the Registrant.(1)
     3.2       Form of Certificate of Amendment of Certificate of
               Incorporation of the Registrant.(2)
     3.3       Bylaws of the Registrant.(1)
     4.1       Amended Stock Rights Agreement, among the Registrant and the
               parties named therein, dated as of March 12, 1993.(1)
     4.2       Form of Common Stock certificate.(1)
    10.1       Form of Indemnity Agreement entered into among the
               Registrant and its directors and officers.(1)
    10.2*      Registrant's 1992 Stock Option Plan, as amended, including
               forms of option agreements.(1)
    10.3*      Registrant's 1993 Non-Employee Directors Stock Option Plan,
               including form of option agreements.(1)
    10.4*      Registrant's 1993 Employee Stock Purchase Plan, including
               form of offering document.(1)
    10.5       Lease between the Registrant and Stevens Creek Office Center
               Associates, dated as of November 30, 1992.(1)
    10.6       Lease between the Registrant and Beim & James Properties
               III, dated January 3, 1994.(3)
    10.7       Lease between the Registrant and Cupertino Industrial
               Associates, dated September 30, 1994.(4)
    10.8       Lease between the Registrant and the Flatley Company, dated
               January 30, 1995.(5)
    10.9       Lease between the Registrant and Cupertino Brown Investment,
               dated April 28, 1995.(6)
    10.10      Agreement between NetManage, Ltd., Elron Electronic
               Industries, Ltd., and NetVision, Ltd., dated July 1,
               1995.(6)
    10.11      Agreement and Plan of Reorganization among the Registrant,
               NetManage Acquisition Corporation, Syzygy Communications,
               Inc. and the Designated Shareholders, dated October 16,
               1995.(6)
    10.12      Agreement and Plan of Reorganization among the Registrant,
               NetManage Acquisition Corporation and AGE Logic, Inc., dated
               November 17, 1995.(6)
    10.13      Stock Purchase Agreement by and among the Registrant,
               Network Software Associates, Inc. a California corporation,
               NetSoft, a California corporation, holders of securities of
               NSA and holders of securities of NetSoft, dated as of July
               8, 1997.(7)
</TABLE>

                                        65
<PAGE>   67

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                            EXHIBIT TITLE
    -------                           -------------
    <C>        <S>
    10.14      Agreement and Plan of Reorganization by and among the
               Registrant, Amanda Acquisition Corp. and FTP Software, Inc.,
               dated as of June 15, 1998, as amended as of June 30, 1998
               and July 14, 1998.(8)
    10.15      Acquisition Agreement by and among Registrant, NetManage Bid
               Co., Preston Delaware Acquisition Corporation and Simware
               Inc., dated as of September 26, 1999.(9)
    10.16      Agreement and Plan of Merger by and among Registrant,
               NetManage Acquisition Corporation and Wall Data
               Incorporated, dated October 20, 1999.(10)
    10.17      Lease between Totem Skyline Associates III as Landlord and
               Wall Data Incorporated as Tenant dated as of December 2,
               1993 and Sublease between Wall Data Incorporated as Landlord
               and Totem Skyline Associates III as Tenant dated as of
               December 2, 1993.(11)
    10.18*     Registrant's 1999 Non-Statutory Stock Option Plan, including
               form of option agreements.(12)
    21.1       Subsidiaries of the Registrant.
    23.1       Consent of Independent Public Accountants.
    24.1       Power of Attorney. Reference is made to the signature page
               to this Form 10-K.
</TABLE>

---------------
 (1) Incorporated by reference to the Exhibits filed with the Registrant's
     Registration Statement on Form S-1 (No. 33-66460) dated July 24, 1993, as
     amended, which became effective September 20, 1993.

 (2) Incorporated by reference to the Exhibits filed with the Registrant's
     Registration Statement on Form S-4 (No. 333-59101) dated July 17, 1998 (the
     "Form S-4").

 (3) Incorporated by reference to the Exhibits filed with the Registrant's
     Registration Statement on Form S-1 (No. 33-74364) dated January 24, 1994,
     as amended, which became effective February 10, 1994.

 (4) Incorporated by reference to the Exhibits filed with the Registrant's Form
     10-Q for the quarter ended September 30, 1994.

 (5) Incorporated by reference to the Exhibits filed with the Registrant's Form
     10-Q for the quarter ended March 31, 1995.

 (6) Incorporated by reference to the Exhibits filed with the Registrant's Form
     10-K for the year ended December 31, 1995.

 (7) Incorporated by reference to the Exhibits filed with the Registrant's Form
     8-K dated July 29, 1997.

 (8) Incorporated by reference to Annex A to the Joint Proxy
     Statement/Prospectus included in the Form S-4.

 (9) Incorporated by reference to the Exhibits filed with the Registrant's Form
     8-K dated December 23, 1999.

(10) Incorporated by reference to the Exhibits filed with the Registrant's Form
     8-K dated January 12, 2000.

(11) Incorporated by reference to the Exhibits filed with Wall Data Incorporated
     Form 10-K dated March 30, 1995.

(12) Registrant's 1999 Non-Statutory Stock Option Plan, including form of option
     agreements.

 *   Employee Benefit Plan

                                        66
<PAGE>   68

     (b) Reports on Form 8-K

     A Current Report on Form 8-K/A was filed by the Company on January 13, 2000
amending its Report on Form 8-K dated December 23, 1999, to amend the
description of the acquisition of Simware, Inc. and to include certain financial
statements of Simware, Inc. and pro forma combined financial statements for the
Company and Simware, Inc.

     A Current Report on Form 8-K/A was filed by the Company on February 14,
2000 amending its Report on Form 8-K dated January 12, 1999, to amend the
description of the acquisition of Wall Data Incorporated and to include certain
financial statements of Wall Data Incorporated and pro forma combined financial
statements for the Company and Wall Data Incorporated.

     (c) Exhibits

     The exhibits required by this Item are listed under Item 14(a).

     (d) Financial Statement Schedules

     The financial statement schedule required by this Item is listed under Item
14(a).

                                        67
<PAGE>   69

                                                                     SCHEDULE II

                                NETMANAGE, INC.

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                               BALANCE AT       CHARGED TO         ADDITIONS/     BALANCE AT
                                              BEGINNING OF       REVENUES,       DEDUCTIONS AND     END OF
                                                 PERIOD      COSTS OR EXPENSES     WRITE-OFFS       PERIOD
                                              ------------   -----------------   --------------   ----------
<S>                                           <C>            <C>                 <C>              <C>
Year ended December 31, 1998:
  Allowance for doubtful accounts and sales
     returns................................     $1,375            $378              $2,106         $3,859
Year ended December 31, 1999:
  Allowance for doubtful accounts and sales
     returns................................     $3,859            $790              $ (726)        $3,923
Year ended December 31, 2000:
  Allowance for doubtful accounts and sales
     returns................................     $3,923            $ 90              $   75         $4,088
</TABLE>

---------------
(1) The allowance for doubtful accounts and sales returns includes a reserve for
    doubtful accounts of $2,746,000 which was assumed as part of the acquisition
    of FTP.

(2) The allowance for doubtful accounts and sales returns includes reserves for
    doubtful accounts, in aggregate, of $1,908,000 which were assumed as part of
    the acquisitions of Wall Data and Simware.

<TABLE>
<CAPTION>
                                               BALANCE AT                                       BALANCE AT
                                              BEGINNING OF   RESERVE    RESERVE    ADDITIONS/     END OF
                                                 PERIOD      PROVIDED   UTILIZED   DEDUCTIONS     PERIOD
                                              ------------   --------   --------   ----------   ----------
<S>                                           <C>            <C>        <C>        <C>          <C>
FTP Restructuring Reserve:
  Year ended December 31, 1998..............     $   --      $16,752    $(11,588)    $   --       $5,224
  Year ended December 31, 1999..............     $5,224      $    --    $ (5,424)    $2,722       $2,522
  Year ended December 31, 2000..............     $2,522      $    --    $ (1,414)    $   --       $1,108

Wall Data and Simware Restructuring Reserve:
  Year ended December 31, 1999..............     $   --      $ 3,791    $   (151)    $   --       $3,640
  Year ended December 31, 2000..............     $3,640      $    --    $ (2,202)    $   --       $1,438

NetManage Restructuring Reserve:
  Year ended December 31, 2000..............     $   --      $ 5,600    $ (3,516)    $   --       $2,084
</TABLE>

                                        68
<PAGE>   70

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 30th day of March 2001.

                                          NETMANAGE, INC.

                                          By          /s/ ZVI ALON

                                            ------------------------------------
                                                          Zvi Alon
                                              Chairman of the Board, President
                                                and Chief Executive Officer

                               POWER OF ATTORNEY

     Each person whose signature appears below constitutes and appoints ZVI ALON
and MICHAEL PECKHAM his or her true and lawful attorneys-in-fact and agents,
each acting alone, with the power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any amendments to this Form 10-K Annual Report, and to file the same, with
exhibits thereto and other documents in connections therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                      SIGNATURE                                     TITLE                    DATE
                      ---------                                     -----                    ----
<S>                                                      <C>                            <C>
                    /s/ ZVI ALON                           Chairman of the Board,       March 30, 2001
-----------------------------------------------------        President and Chief
                      Zvi Alon                                Executive Officer
                                                            (Principal Executive
                                                                  Officer)

                 /s/ MICHAEL PECKHAM                     Chief Financial Officer and     March 30,2001
-----------------------------------------------------      Senior Vice President,
                   Michael Peckham                          Finance and Secretary
                                                          (Principal Financial and
                                                             Accounting Officer)

                   /s/ JOHN BOSCH                                 Director              March 30, 2001
-----------------------------------------------------
                     John Bosch

                   /s/ UZIA GALIL                                 Director              March 30, 2001
-----------------------------------------------------
                     Uzia Galil

              /s/ SHELLEY HARRISON, PHD                           Director              March 30, 2001
-----------------------------------------------------
                Shelley Harrison, PhD

                 /s/ DARRELL MILLER                               Director              March 30, 2001
-----------------------------------------------------
                   Darrell Miller

                /s/ ABRAHAM OSTROVSKY                             Director              March 30, 2001
-----------------------------------------------------
                  Abraham Ostrovsky
</TABLE>

                                        69
<PAGE>   71

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                                                                         SEQUENTIALLY
EXHIBIT                                                                    NUMBERED
NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
-------                      -----------------------                     ------------
<C>        <S>                                                           <C>
  3.1      Certificate of Incorporation of the Registrant.(1)
  3.2      Form of Certificate of Amendment of Certificate of
           Incorporation of the Registrant.(2)
  3.3      Bylaws of the Registrant.(1)
  4.1      Amended Stock Rights Agreement, among the Registrant and the
           parties named therein, dated as of March 12, 1993.(1)
  4.2      Form of Common Stock certificate.(1)
 10.1      Form of Indemnity Agreement entered into among the
           Registrant and its directors and officers.(1)
 10.2*     Registrant's 1992 Stock Option Plan, as amended, including
           forms of option agreements.(1)
 10.3*     Registrant's 1993 Non-Employee Directors Stock Option Plan,
           including form of option agreements.(1)
 10.4*     Registrant's 1993 Employee Stock Purchase Plan, including
           form of offering document.(1)
 10.5      Lease between the Registrant and Stevens Creek Office Center
           Associates, dated as of November 30, 1992.(1)
 10.6      Lease between the Registrant and Beim & James Properties
           III, dated January 3, 1994.(3)
 10.7      Lease between the Registrant and Cupertino Industrial
           Associates, dated September 30, 1994.(4)
 10.8      Lease between the Registrant and the Flatley Company, dated
           January 30, 1995.(5)
 10.9      Lease between the Registrant and Cupertino Brown Investment,
           dated April 28, 1995.(6)
 10.10     Agreement between NetManage, Ltd., Elron Electronic
           Industries, Ltd., and NetVision, Ltd., dated July 1,
           1995.(6)
 10.11     Agreement and Plan of Reorganization among the Registrant,
           NetManage Acquisition Corporation, Syzygy Communications,
           Inc. and the Designated Shareholders, dated October 16,
           1995.(6)
 10.12     Agreement and Plan of Reorganization among the Registrant,
           NetManage Acquisition Corporation and AGE Logic, Inc., dated
           November 17, 1995.(6)
 10.13     Stock Purchase Agreement by and among the Registrant,
           Network Software Associates, Inc. a California corporation,
           NetSoft, a California corporation, holders of securities of
           NSA and holders of securities of NetSoft, dated as of July
           8, 1997.(7)
 10.14     Agreement and Plan of Reorganization by and among the
           Registrant, Amanda Acquisition Corp. and FTP Software, Inc.,
           dated as of June 15, 1998, as amended as of June 30, 1998
           and July 14, 1998.(8)
 10.15     Acquisition Agreement by and among Registrant, NetManage Bid
           Co., Preston Delaware Acquisition Corporation and Simware
           Inc., dated as of September 26, 1999.(9)
 10.16     Agreement and Plan of Merger by and among Registrant,
           NetManage Acquisition Corporation and Wall Data
           Incorporated, dated October 20, 1999.(10)
</TABLE>

                                        70
<PAGE>   72

<TABLE>
<CAPTION>
                                                                         SEQUENTIALLY
EXHIBIT                                                                    NUMBERED
NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
-------                      -----------------------                     ------------
<C>        <S>                                                           <C>
 10.17     Lease between Totem Skyline Associates III as Landlord and
           Wall Data Incorporated as Tenant dated as of December 2,
           1993 and Sublease between Wall Data Incorporated as Landlord
           and Totem Skyline Associates III as Tenant dated as of
           December 2, 1993.(11)
 10.18*    Registrant's 1999 Non-Statutory Stock Option Plan, including
           form of option agreements.(12)
 21.1      Subsidiaries of the Registrant.
 23.1      Consent of Independent Public Accountants.
 24.1      Power of Attorney. Reference is made to the signature page
           to this Form 10-K.
</TABLE>

---------------
 (1) Incorporated by reference to the Exhibits filed with the Registrant's
     Registration Statement on Form S-1 (No. 33-66460) dated July 24, 1993, as
     amended, which became effective September 20, 1993.

 (2) Incorporated by reference to the Exhibits filed with the Registrant's
     Registration Statement on Form S-4 (No. 333-59101) dated July 17, 1998 (the
     "Form S-4").

 (3) Incorporated by reference to the Exhibits filed with the Registrant's
     Registration Statement on Form S-1 (No. 33-74364) dated January 24, 1994,
     as amended, which became effective February 10, 1994.

 (4) Incorporated by reference to the Exhibits filed with the Registrant's Form
     10-Q for the quarter ended September 30, 1994.

 (5) Incorporated by reference to the Exhibits filed with the Registrant's Form
     10-Q for the quarter ended March 31, 1995.

 (6) Incorporated by reference to the Exhibits filed with the Registrant's Form
     10-K for the year ended December 31, 1995.

 (7) Incorporated by reference to the Exhibits filed with the Registrant's Form
     8-K dated July 29, 1997.

 (8) Incorporated by reference to Annex A to the Joint Proxy
     Statement/Prospectus included in the Form S-4.

 (9) Incorporated by reference to the Exhibits filed with the Registrant's Form
     8-K dated December 23, 1999.

(10) Incorporated by reference to the Exhibits filed with the Registrant's Form
     8-K dated January 12, 2000.

(11) Incorporated by reference to the Exhibits filed with Wall Data Incorporated
     Form 10-K dated March 30, 1995.

(12) Registrant's 1999 Non-Statutory Stock Option Plan, including form of option
     agreements.

  *  Employee Benefit Plan

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