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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|  |  |                                                                                           
|- |  | ------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE
	SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended December 31,
	2001                                              
| 
|o |  | 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)


|                                                                |  |                                   
|--------------------------------------------------------------- |  | ----------------------------------
|Delaware                                                        |  | 77-0252226                        
|(State or other jurisdiction of
	incorporation or organization) |  | (IRS Employer
	Identification No.)
|                                                               
|10725 North De Anza Boulevard,
	Cupertino, California           |  | 95014                             
|(Address of principal executive
	offices)                       |  | (Zip Code)                        

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
þ          No
o

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.     o

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 National Market, was $54,383,028 as of March 5,
2002(1).

The number of shares of Common Stock outstanding
as of March 5, 2002 was 63,980,034.

DOCUMENTS INCORPORATED BY REFERENCE

SECTIONS OF THE REGISTRANTS DEFINITIVE
PROXY STATEMENT FOR THE REGISTRANTS ANNUAL MEETING OF
STOCKHOLDERS, TO BE HELD JUNE 5, 2002, 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 10,577,875 shares of Common Stock held
	by directors and officers and stockholders whose beneficial
	ownership exceeds five percent of the shares outstanding at
	March 5, 2002. 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 or that such person is otherwise an
	affiliate for any other purpose.



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TABLE OF CONTENTS



|             |                                                                                                  |  |  |  |  |  |  | 
|------------ | ------------------------------------------------------------------------------------------------ |  |  |  |  |  |  | 
|PART I      
|             | Item 1 -- Business.                                                                             
|             | Item 2 -- Properties.                                                                           
|             | Item 3 -- Legal Proceedings.                                                                    
|             | Item 4 -- Submission of matters to a vote of security holders.                                  
|PART II     
|             | Item 5 -- Market for registrants common equity and related stockholder matters.                
|             | Item 6 -- Selected consolidated financial data.                                                 
|             | Item 7 -- Managements discussion and analysis of financial condition and results of operations.
|             | Item 7A -- Quantitative and qualitative disclosures about market risk.                          
|             | Item 8 -- Financial Statements and Supplementary Data.                                          
|             | Item 9 -- Changes in and disagreements with accountants on accounting and financial disclosure. 
|PART III    
|             | Item 10 -- Directors and executive officers of the registrant.                                  
|             | Item 11 -- Executive compensation.                                                              
|             | Item 12 -- Security ownership of certain beneficial owners and management.                      
|             | Item 13 -- Certain relationships and related transactions.                                      
|PART IV     
|             | Item 14 -- Exhibits, financial statement schedules and reports on form 8-K.                     
|SIGNATURES  
|EXHIBIT 21.1
|EXHIBIT 23.1
|EXHIBIT 99.1



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PART I




Item 1  Business.

General

Some of the statements contained in this Annual
Report on Form 10-K are forward-looking statements,
including but not limited to those specifically identified as
such, that involve risks and uncertainties. The statements
contained in this Report on Form 10-K that are not purely
historical are forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of
the Exchange Act, including, without limitation, statements
regarding our expectations, beliefs, intentions or strategies
regarding the future. These statements involve known and unknown
risks, uncertainties and other factors, which may cause our
actual results to differ materially from those implied by the
forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as
may, will, should,
expects, plans, anticipates,
believes, estimates,
predicts, potential, or
continue or the negative of these terms or other
comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. All forward-looking
statements included in this Report on Form 10-K are based
on information available to us on the date hereof, and we assume
no obligation to update any such forward-looking statements.

NetManage, Inc. was incorporated in 1990 as a
California corporation and we reincorporated in Delaware in 1993
in conjunction with our initial public offering. References in
this annual report on Form 10-K to NetManage,
we, our, and us collectively
refer to NetManage, Inc., a Delaware corporation, its
subsidiaries and its California predecessor. Our principal
executive offices are located at 10725 North De Anza Boulevard,
Cupertino, California 95014 and our telephone number is
(408) 973-7171.

NetManage, OnWeb, Rumba, ViewNow, 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 our 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 XP, Windows 2000, Windows NT,
Windows 98, Windows 95 and Windows 3.x are registered trademarks
in the U.S. and other countries by Microsoft 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.

Overview

We develop and market software and service
solutions that allow our customers to access and leverage the
considerable investment they have in their host-based business
applications, processes and data.

Our business is primarily focused on providing a
broad spectrum of specific personal computer and network or
application server-based software and tools. These products
allow our 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 via the Internet; to create new
web-based applications that leverage the corporations
existing business processes and applications; and, to ensure the
continued operation of these solutions through the incorporation
and deployment of innovative, real-time, Internet-based support
solutions.

Our business is targeted at taking advantage of
the trend of major corporations worldwide to adopt
Business-to-Business, or B2B, or Business-to-Consumer, or B2C,
initiatives. In this market, we enable our 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, we are 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

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allow new business processes to be created in
support of corporate eBusiness B2B and B2C initiatives. We also
focus 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.


We develop and market these software solutions to
allow our customers to access and leverage applications,
business processes and data on International Business Machines,
or IBM, corporate mainframe computers, and IBM, midrange
computers such as AS/400 and on UNIX® based servers. We
also develop and market software that allows real time
application sharing on corporate networks and across the
Internet for the purposes of application support, help and
training. We provide professional support, maintenance, and
technical consultancy services to our customers in association
with the products we develop and market. We provide professional
applications and management consultancy to our customers in
association with the server-based products we deliver that allow
customers to develop and deploy new web-based applications.

Our principal products are compatible with
Microsoft Corporation, or Microsofts Windows 2000,
Windows NT, Windows 98, Windows 95, and
Windows 3.x operating systems, IBM operating systems,
Novell, Inc., or 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.

We have a range of access, publishing and
integration products. Our Host Accessproducts provide
the applications and solutions that allow end user devices,
including personal computers, and devices running web browsers,
to communicate with large centralized corporate computer
systems. Host Access products are marketed and sold under
the brand name of RUMBA® for client-side Host Accesssolutions that run on personal computers and under the
OnWeb® brand for server-side Host Accesssolutions
that deliver connectivity for web browser users without the
requirement for software on the users device other than
the browser collectively known as zero footprint
solutions. Our Host Integrationproducts provide
server-side solutions that allow the integration of multiple
host applications and business processes to create net new
applications for the web. Our Host Integrationproducts
also allow our customers to integrate existing legacy
applications with the new platform solutions such as those built
using IBMs WebSphere or BEAs WebLogic. Host
Integrationproducts are marketed and sold under the
OnWeb® brand name. We and our customers believe that we
collectively benefit from the fact that the underlying
technology employed by our server-side Host Accessand
server-side Host Integrationsolutions is the same.

Industry background

Four important industry trends have had strong
influences on our business strategy during the past three years:
(1) the rapid adoption of eBusiness and electronic trading
approaches by major corporations worldwide and the spread of
these approaches to mid-tier and mid-sized companies;
(2) the continuing development of the Internet, intranets
and extranets for delivery of mission-critical business
applications in large and mid-sized companies; (3) 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 (4) the continued mobilization
of users of personal computers and the proliferation of wireless
and handheld devices requiring corporate host access on a global
basis.

We use the term internetworking to describe the
technology of global connectivity. Internetworking had its
origins in the Internet, a worldwide network of networks that
allows communication between different organizations and
locations, each with our 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 our own computer
networks is known as an intranet to distinguish it from the
larger public Internet. When companies use internetworking
technology for connecting to their partners (i.e. 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

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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. We are 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 leverage and
augment their existing Legacy applications and draw one or more
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 communication 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 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 and now includes wireless handheld
devices, Personal Digital Assistants, or PDAs, and
Internet and Web-enabled cellular phones.

Within organizations, personal computers must
connect not only to other personal computers via Local Area
Networks, or 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 eCommerce 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. Transmission
Control Protocol/ Internet Protocol, or TCP/ IP, is the name of
the data communications protocol family that has become the de
facto networking standard application because it is an open, or
non-proprietary protocol capable of linking disparate
environments. We were 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, we have promoted standards based on our 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.

We believe 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.

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Our vision is to provide Host Accessand
Host Integrationproducts, along with solutions built
with those products 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 we continue to deliver on our
vision, we will support our customers in implementing B2E, B2B,
and B2C business solutions. We will support them in the Internet
economy, and allow both internal and external users to access
and leverage corporate applications, data and information
efficiently, and utilize business processes in a manageable,
secure and supportable way.

Products and technology

Our broad suite of products provides
organizations with cost-effective solutions for connecting
people, their computers and their businesses. Our products
extend the functionality of these organizations technology
investments by providing essential services that are not
included in desktop and network operating systems. Our solutions
are designed to streamline communication, reduce the total cost
of ownership, and increase productivity throughout an
organization.

We have been a long-time proponent of industry
standards, and we pursue partnerships and alliances with key
industry players. In addition to promoting technological
progress, these alliances help strengthen our market insight and
lead to improved customer solutions with greater value. Some of
our strategic partners include Microsoft, Intel, IBM, Novell,
Dell Computer and AT&T. All of our products are developed
around the following:



|                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| Ease of
	Use   |  | Our goal is to create host access applications
	for non-technical users and to provide straightforward tools
	allowing swift new application development. Our 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  |  | We offer an integrated suite of products and
	improved network manageability for system administrators. We are
	focused on providing managed products and built-in common
	management server support. The common characteristics of our
	product suite are intended to increase user satisfaction and
	product utilization. A well-integrated product can lower the
	cost of ownership and increase product value to the customer.                                                                                                                                                                                                                           
|                
| Functionality  |  | The depth and completeness of the applications in
	our products are designed to compete with best of class
	functionality from specialist vendors in each category.
	Eliminating multi-source product purchases with no compromise on
	advanced software functionality enhances the value proposition
	of the product offerings. We believe the economic proposition
	for the customer is enhanced by purchasing software and service
	from a single vendor.                                                                                                                                                                                                 
|                
| Supportability |  | We recognize that our customers need to
	continually reduce the cost-of-ownership associated with host
	access and host integration solutions. Unlike competitors, who
	have focused solely on improved manageability to reduce costs,
	we have also invested in the development of unique support
	tools. Our products are intended with well-integrated support
	tools that are designed to reduce the time required to resolve
	software problems, thereby reducing downtime and enhancing the
	value of our product offerings to customers. We also offer
	integrated support capabilities in the development tools we
	deliver with our OnWeb® products.

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|                          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| Adherence
	to Standards |  | The Internet is predicated upon the notion that
	any client can talk to any server, and that all Application
	Programming Interfaces, or APIs, 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. Our commitment to
	open standards ensures that the plug-and-play interoperability
	that has made the Internet successful extends to corporate
	intranets as well.

Our products include the RUMBA® and
OnWeb® product families. We also continue to market
UNIX® connectivity products under our ViewNowTM
brand. During 2001, we incorporated previously separate products
that were available under the SupportNowTM and
ManageNowTM brands into both RUMBA® and
OnWeb® as intrinsic value-added features for our customers.
Our current products include:



|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|RUMBA® for the
	Desktop |  | Connectivity software focused on connecting PCs
	to IBM mainframe and AS/400 systems and UNIX® host systems.
	RUMBA® provides state-of-the-art terminal and printer
	emulation; file sharing and file transfer solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                       
|RUMBA®
	Web-to-Host     |  | A browser-based product for fast deployment of
	host access solutions to any browser supporting ActiveX or Java.
	RUMBA® Web-to-Host deploys from virtually any Web server,
	lowering total cost of ownership by eliminating the need to
	configure individual desktops during initial installation and
	future updates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                       
|OnWeb®                  |  | Broad, robust, and highly scalable server-based
	solutions allowing customers to leverage their existing host
	applications, host based information, and host based business
	processes into new applications or presentations methods.
	OnWeb® is designed to enable application publishing on 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
	a companys existing systems. OnWeb® has a broad 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®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
	HIS2000-based development environment. This product expands the
	capability and applicability of Microsofts solutions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                       
|ViewNowTM
	for UNIX®    |  | Connectivity software allowing PCs to share files
	with UNIX host systems using Network File System, or NFS, and to
	access and run X Windows applications on UNIX hosts.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

A significant portion of our net revenues have
been derived from the sale of products that provide host access
and host integration applications for the Microsoft Windows
environment (clients and servers), and are marketed primarily to
Windows users. As a result, sales of our products might be
negatively impacted by developments adverse to Microsofts
Windows products. In addition, our strategy of developing
products based on the Windows operating environment is
substantially dependent on our ability to gain pre-release
access to, and to develop expertise in, current and future
Windows developments by Microsoft. No agreement between us and
Microsoft exists to provide pre-release access to future Window
products. No assurance can be given as to the ability of the
Company to provide, on a timely basis, products compatible with
future Windows releases.

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See Factors that May Affect Future Results
and Financial Condition  Product Development and
Competition under Item 7 below.


Our competitors could seek to expand their
product offerings by designing and selling similar or new
technology that could render our products obsolete or adversely
affect sales of our products. These developments may adversely
affect our sales of our own products either by directly
affecting customer purchasing decisions or by making potential
customers delay their purchases of our products. See
Competition below.

Sales and marketing

We participate in two primary markets, Host
Access and Host Integration. The Host Access market is made up
of a range of products that allow IT departments to provide end
users access to applications running on IBM Mainframes, iSeries
(AS/400), and Unix systems. Three primary technologies are
employed to provide the solution; these include traditional Fat
Client or Desktop solutions, Thin Client or browser-based
solutions, and Zero Footprint or Server-based solutions. Within
this market place, the trend is moving away from Desktop
solutions toward Zero Footprint solutions. We believe this
movement is primarily driven by a desire to reduce the total
cost of ownership associated with deploying these solutions. The
Host Integration market is made up of a number of products that
allow organizations to reduce costs or increase revenue by
allowing customers or business partners to interact via the
Internet, with legacy (Mainframe or AS/400) business
applications that are the backbone of their business processes.
A primary example of this kind of solution is found in call
center applications. Companies are building solutions that allow
customers to determine order status over the Internet without
involving a customer support representative. This approach
minimizes staffing costs and improves customer service
simultaneously. Our goal is to assist our customers in building
solutions that quickly transform host applications into
Web-based solutions.

We have developed products that allow our
customers to deploy solutions across a wide range of industries.
To date we have installed Host Integration solutions in over 200
companies around the world. Successful installations can be
found in government agencies, finance, health care,
manufacturing and insurance. Our products are being used to
improve business processes throughout these organizations.

To bring our products to market in the United
States, we use a combination of telesales and direct sales
personnel specifically assigned to meet the needs of major
accounts. As part of our continuing strategy to develop multiple
distribution channels, we expect to continue our 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 our indirect sales may adversely affect
our 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 we will be
able to attract or retain resellers and distributors who will be
able to market our products effectively or will be qualified to
provide timely and cost-effective customer support and service.
We ship products to resellers and distributors on a purchase
order basis, and many of our resellers and distributors carry
competing product lines. Therefore, there can be no assurance
that any reseller or distributor will continue to effectively
sell or represent our products, and the inability to recruit or
retain important resellers or distributors could adversely
affect our results of operations. See Factors That May
Affect Future Results and Financial Condition 
Marketing and Distribution under Item 7 below.

Internationally, we have sales offices in
Belgium, Brazil, Canada, France, Germany, Sweden, Israel, Italy,
Japan, Mexico, the Netherlands, Spain, and the United Kingdom.
We also utilize local distributors and resellers
internationally. We support 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 2001, 2000, and 1999 respectively, we derived
approximately 26%, 25%, and 26% of net revenues from sales,
including export sales, outside of North America (United States
and Canada). We believe that the potential international markets
for our products are substantial, based on the extent to which
Windows and internetworking products are used internationally.
Accordingly, we localize many of our products for use in the
native language of target countries. Further, we have adapted
many of our products to support computing

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standards that are unique to these countries,
such as the NEC PC in Japan. We intend to continue to
target major European and Asian countries for additional sales
and marketing activity, and to expand the use of our local sales
offices, and expand our Israel subsidiary in the support of our
international sales. For a summary of international operations
by geographic area, see Note 8 of the Notes to Consolidated
Financial Statements included herein. While we expect that
international sales will continue to account for a significant
portion of our net revenues, there can be no assurance that we
will be able to maintain or increase international market demand
for our products, or that our international distributors and
resellers will be able to effectively meet that demand.


Risks inherent in our 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, weak or unenforced international
intellectual property laws, 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 our future international sales, and consequently, on
our results of operations.

Customer support

Our domestic support organization consists of a
staff of engineers and other professionals providing support by
telephone from our facilities in Washington State;
Massachusetts; and Ottawa, Ontario, Canada. Both telephone
support and regular update releases of our products are provided
to customers that purchase an annual maintenance agreement. Our
sales and customer support organizations work together closely
to provide customer satisfaction. International customers are
supported by our personnel located in Haifa, Israel, by various
international sales offices and by local distributors and
resellers who are trained by us.

Research and development

We believe that our future success will depend on
our ability to enhance our 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, 2001, we had
approximately 124 full time employees engaged in research and
development for existing and potential new products. Our
research and development expenses for the years ended
December 31, 2001, 2000, and 1999 were $17.9 million,
$24.4 million, and $18.5 million, respectively.

Competition

The market for our 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
our position in this industry, we must continue to successfully
develop, introduce and market new products and product
enhancements on a timely and cost-effective basis. Two key
factors will contribute to the continued growth of our
marketplace: the proliferation of Microsoft Windows client
server technology, and the continued implementation of Web-based
access to corporate mainframe and midrange computer systems.

If we fail to anticipate or respond adequately to
changes in technology and customer preferences, or experience
any significant delay in product development or introduction,
our results of operations could be materially adversely
affected. The failure to develop on a timely basis new products
and product enhancements incorporating new functionality could
cause customers to delay purchase of our current products or
cause customers to purchase products from our competitors;
either of which would adversely affect our results of
operations. There can be no assurance that we will be successful
in developing new products or enhancing our existing products on
a timely basis, or that such new products or product
enhancements will achieve market acceptance.

We compete directly with providers of Windows
internetworking applications, such as Hummingbird
Communications, Ltd., Attachmate Corporation, IBM, WRQ, Inc. as
well as other major computer and

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communications systems vendors, such as Sun
Microsystems, Inc. We also compete with companies such as
Jacada, Seagull, IBM, BEA, Hewlett Packard, WebMethods,
Silverstream, and Computer Associates in the web integration
server markets. It is imperative that 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 we will be successful in our
efforts to do so.


Many of our competitors have substantially
greater financial, technical, sales, marketing, personnel, and
other resources, as well as greater name recognition and a
larger customer base, than we. Significant price competition
characterizes the market for our products and we anticipate that
we will face increasing pricing pressures from 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, we believe that
competition will persist and intensify in the future.
Accordingly, there can be no assurance that we will be able to
provide products that compare favorably with the products of our
competitors or that competitive pressures will not require us to
reduce our prices. We experienced price declines throughout
2001. Any further material reduction in the price of our
products would negatively affect gross margins as a percentage
of net revenues, and would require us to further increase
software unit sales, in order to maintain net revenues at
existing levels.

Proprietary rights

We rely on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures, and
contractual provisions to protect our proprietary rights.
However, the basic TCP/IP protocols on which our products are
based are non-proprietary, and other companies have developed
their own versions. We seeks to protect our 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 our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our products
is difficult, and while we are unable to determine the extent to
which piracy of our software products exists, software piracy
can be expected to be a persistent problem. In selling our
products, we rely 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 our
proprietary rights to as great an extent as do the laws of the
United States. There can be no assurance that our means of
protecting our proprietary rights will be adequate, or our
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
us. We have received, and may receive in the future,
communications from third parties asserting that our products
infringe, or may infringe, the proprietary rights of third
parties, seeking indemnification against such infringement or
indicating that we may be required to obtain a license or
royalty from such third parties. There can be no assurance that
any such claims would not result in protracted and costly
litigation or that additional claims will not be made in the
future, or that we will not be required to enter into a costly
license agreement.

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

Employees

As of December 31, 2001, we had a total of
470 full-time employees, of whom 238 were engaged in sales,
marketing, technical support and consulting, 91 in general
management, administration and finance, 124 in software
development and engineering and 17 in production. None of our
employees are subject to a collective bargaining agreement, and
we have not experienced any work stoppage.

The majority of our workforce is located in the
competitive employment markets of the Silicon Valley in
California; the suburban Boston area; the suburban Seattle area;
Ottawa, Ontario, Canada; and Haifa, Israel. From the latter half
of 1996 until recently, we (and prior to their acquisitions,
both FTP Software, Inc., or FTP, and Wall Data Incorporated, or
Wall Data) experienced high attrition at all levels and across
all

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functions. The attrition experienced by us was
attributable to various factors including, among others,
industry-wide demand exceeding supply for experienced
engineering and sales professionals, the effects of our
restructurings and acquisitions, and our results of operations.
Our future operating results will be dependent in part on our
ability to attract and retain our employees, and to train and
manage our management and employee base. There can be no
assurance that we will be able to manage such challenges
successfully. See item 7 Factors That May Affect
Future Results and Financial Condition  Changes in
Personnel.


Executive officers of the
registrant.

The executive officers and their ages as of
March 15, 2002 are as follows:

|                       |  |     |    |          |  |                                                                       
|---------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------------
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Zvi Alon               |  |     | 50 |          |  | Chairman of the Board, President and Chief
	Executive Officer         
|Michael R. Peckham     |  |     | 51 |          |  | Chief Financial Officer, Senior Vice President,
	Finance and Secretary
|Robert Lee             |  |     | 64 |          |  | Vice President, Human Resources                                       
|Peter R. Havart-Simkin |  |     | 49 |          |  | Senior Vice President, Worldwide Strategic
	Development               
|Michael OLeary        |  |     | 56 |          |  | Senior Vice President, Worldwide Sales                                
|David Desjardins       |  |     | 42 |          |  | Vice President, Worldwide Consulting                                  
|Charles Mawby          |  |     | 42 |          |  | Vice President, Worldwide Engineering                                 
|Bertram Rankin         |  |     | 43 |          |  | Vice President, Worldwide Marketing                                   

Zvi Alon is the founder of NetManage, Inc. and
has served as our Chairman of the Board, President and Chief
Executive Officer since our formation in 1990. 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. Mr. Alon is a board
member of easyBASE, LTD, a private company in which we have an
investment interest.

Michael R. Peckham joined us 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 us as Vice President, Human
Resources in July 2000. Prior to joining us, Mr. Lee, from
April 1999 to June 2000, 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., a manufacturer of computer disk drives,
initially as Manager of Employee Benefits and promoted to Vice
President, Human Resources in September 1997. From January 1982
until January 1990, Mr. Lee was Vice President of Human
Resources with Plantronics, Inc., a supplier of
telecommunications products. Mr. Lee holds a Bachelor of
Business Administration from Southern Methodist University in
Dallas and a Bachelor of Divinity from McCormick Presbyterian
Seminary in Chicago.

Peter R. Havart-Simkin joined us 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. Mr. Havart-Simkin came to
us as part of the FTP Software acquisition, where he had served
as Chief Technology Officer since July 1996, when FTP acquired
Firefox Communications Inc. a networking software company. Prior
to joining FTP, Mr. Havart-Simkin served with Firefox as
Vice President and Chief

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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. Mr. Simkin
studied physics and mathematics at Windsor College in the United
Kingdom. Mr. Simkin is also a Fellow of the Institute of
Sales and Marketing Management.


Mr. OLeary joined us in May, 2001 as
Senior Vice President, Worldwide Sales. Mr. OLeary is
responsible for managing all of our sales and customer support
efforts domestically and internationally. He is a 20-year
veteran software and services sales and marketing executive.
Immediately prior to joining NetManage, Mr. OLeary
served as an independent consultant from November 2000 to April
2001. He served as Vice President of Sales at Sunnyvale, CA
software maker Kintana Inc., from January 2000 to October 2000.
Mr. OLeary was Vice President of International
Operations from May 1995 to January 1999 with Intermec
Technologies Corporation, Everett, WA, a mobile networking
system manufacturer. Prior to Intermec, from July 1994 to April
1995, he was Senior Vice President of worldwide sales and
service for desktop publishing products supplier Rasterops/
Truevision, Santa Clara, Ca. Earlier he held sales and
marketing management positions with IBM and Spectra-Physics,
San Jose, CA. Mr. OLeary holds a B.S. in
Industrial Management from San Jose State University.

David P. Desjardins joined us 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 recent of
which was Chief Operating Officer, with Intera Tydac
Technologies Inc., a provider of geographic information software
and services. Mr. Desjardins studied Computer Sciences at
McGill University, Montreal and the University of Ottawa. He
also studied RIA (CMA) at Concordia University, Montreal
and the University of Calgary.

Charles Mawby joined us 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 our 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. Mr. Mawby received his Bachelor of Science from
Carleton University in Ottawa, Canada.

Bertram W. Rankin joined us in October 2000 as
Vice President, Worldwide Marketing. Prior to joining us,
Mr. Rankin was with Ricoh Silicon Valley, or 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. Mr. Rankin holds a B.A. in Economics from
Harvard University and an M.B.A. in Marketing Concepts and
Financial Management from the Stanford Graduate School of
Business.

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Item 2 
Properties.

Substantially all of our office space is leased.
We have approximately 160,000 square feet of total leased space
in North America including the primary site, a 40,000 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 that supports research and
development. Andover, MA supports the east coast of the
U.S. 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; Atlanta, GA; Austin,
TX; Miami, FL; and Vienna, VA.

Internationally, we lease approximately 33,000
square feet of office space in Haifa, Israel for the purpose of
international sales, marketing, technical support,
administration, and research and development. We also lease
sales office space in Belgium, Brazil, France, Germany, Italy,
Japan, Mexico, Spain, Sweden, the Netherlands, and the United
Kingdom. We also own an approximately 6,000 square foot office
facility in Mevaseret Zion, Israeli that is leased to a third
party through December 2004. European and Israeli real estate
obligations have been reduced through subleases, lease
terminations, and natural expirations.




Item 3  Legal
Proceedings.

On November 22, 1999, Kenneth Fisher filed a
complaint alleging violations of the False Claims Act,
31 U.S.C. § 3729 et seq.,against us,and our affiliates, Network Software Associates, Inc., or
NSA, and NetSoft, Inc. or NetSoft in the United States District
Court for the District of Columbia. The United States government
declined to pursue the action on its own behalf and, therefore,
the action is pursued by a relator, Kenneth Fisher. We first
learned of the action when we were served with the amended
complaint in May 2001. On September 5, 2001, the relator
agreed to voluntarily dismiss us from this action in exchange
for our agreement to toll applicable statutes of limitation as
to the relators claims.

On January 31, 2002, on an order of the
court following defendants successful motion to dismiss
the amended complaint, the relator filed a Second Amended
Complaint, or Complaint, in the United States District Court for
the District of Columbia against NSA and NetSoft and numerous
other defendants. The Complaint alleges that NSA, NetSoft and
the other defendants made false claims to the government to
obtain government contracts set aside for entities owned and
controlled by disadvantaged persons admitted to the
Section 8(a) Minority Small Business Development Program.
Specifically, the Complaint alleges that from 1987 to 1997 NSA,
NetSoft, and the other defendants presented false or fraudulent
claims for payment or approval to the government in violation of
31 U.S.C. § 3729(a)(1), and used false records or
statements to have claims paid or approved by the government in
violation of 31 U.S.C. § 3729(a)(2) in connection
with NSAs application and certification as a
Section 8(a) minority owned and controlled company. In
addition, the Complaint alleges that NSA, Netsoft and the other
defendants conspired to defraud the government by fraudulently
obtaining NSAs certification as a Section 8(a) entity
for alleged use by NSAs Federal Systems Division, in
violation of 31 U.S.C. § 3729(a)(3). The relator
alleges damages in excess of $30,000,000.

We did not acquire NSA until July 1997 and had no
involvement with the events alleged by the relator. However, the
relator alleges that any liabilities of NSA and Netsoft passed
to us. We and our affiliates dispute the relators
allegation. On February 19, 2002, NSA, NetSoft, and the
other defendants filed a motion to strike the Complaint. This
motion is currently pending before the court.

Moreover, we 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 known to management will
not have a material effect on our business, financial position
or results of operations.




Item 4  Submission of matters to
a vote of security holders.

Not applicable.

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PART II




Item 5  Market for
registrants common equity and related stockholder
matters.

Market price of common stock

Our common stock is traded on the Nasdaq National
Market under the symbol NETM. As of March 5, 2002, there
were 970 stockholders of record and approximately 20,687
beneficial owners of our common stock.

The high and low sales prices of our common stock
as reported on the Nasdaq National Market for each quarter of
2001 and 2000 are as follows:

|     |      |       |   |        |  |       |   |        |  |  |   |      |  |  |   |      | 
|---- | ---- | ----- | - | ------ |  | ----- | - | ------ |  |  | - | ---- |  |  | - | ---- | 
|     |      | First |   | Second |  | Third |   | Fourth
|     |      |       |   |        |  |       |   |       
|2001 |      |       |   |        |  |       |   |        |  |  |   |      |  |  |   |     
|     | High |       | $ | 2.41   |  |       | $ | 1.05   |  |  | $ | 0.81 |  |  | $ | 1.20 | 
|     | Low  |       | $ | 0.94   |  |       | $ | 0.64   |  |  | $ | 0.25 |  |  | $ | 0.25 | 
|2000 |      |       |   |        |  |       |   |        |  |  |   |      |  |  |   |     
|     | High |       | $ | 9.22   |  |       | $ | 5.41   |  |  | $ | 4.41 |  |  | $ | 2.09 | 
|     | Low  |       | $ | 4.88   |  |       | $ | 2.50   |  |  | $ | 2.03 |  |  | $ | 0.66 | 

We have not paid cash dividends on our common
stock and do not intend to pay any cash dividends in the
foreseeable future.






Item 6  Selected consolidated
financial data.


|                                                      |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                      |  |                                      
|                                                      |  | For the Years Ended December 31,     
|                                                      |  |                                      
|                                                      |  | 2001                                  |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                                      |  |                                       |         |      |  |      |         |      |  |     
|                                                      |  |                                      
|                                                      |  | (In thousands, except per share data)
|Statement of Operation Data:                          |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net revenues                                          |  | $                                     | 79,970  |      |  | $    | 104,072 |      |  | $    | 79,200  |   |  | $ | 71,727  |   |  | $ | 61,524  |  
|Loss from operations(1)                               |  | $                                     | (11,320 | )    |  | $    | (74,982 | )    |  | $    | (31,999 | ) |  | $ | (21,817 | ) |  | $ | (42,074 | )
|Net loss                                              |  | $                                     | (9,294  | )    |  | $    | (71,910 | )    |  | $    | (27,492 | ) |  | $ | (9,968  | ) |  | $ | (33,755 | )
|Net loss per share, basic and diluted                 |  | $                                     | (0.14   | )    |  | $    | (1.11   | )    |  | $    | (0.42   | ) |  | $ | (0.19   | ) |  | $ | (0.78   | )
|Weighted average common shares, basic and diluted     |  |                                       | 64,934  |      |  |      | 64,863  |      |  |      | 64,712  |   |  |   | 53,205  |   |  |   | 43,385  |  
|Balance Sheet Data:                                   |  |                                       |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents and short term
	investments |  | $                                     | 33,558  |      |  | $    | 38,050  |      |  | $    | 63,227  |   |  | $ | 105,643 |   |  | $ | 49,551  |  
|Working capital                                       |  | $                                     | 16,641  |      |  | $    | 20,293  |      |  | $    | 22,760  |   |  | $ | 98,113  |   |  | $ | 55,542  |  
|Total assets                                          |  | $                                     | 79,436  |      |  | $    | 109,981 |      |  | $    | 215,367 |   |  | $ | 201,753 |   |  | $ | 119,593 |  
|Total stockholders equity                            |  | $                                     | 40,952  |      |  | $    | 53,029  |      |  | $    | 120,193 |   |  | $ | 159,160 |   |  | $ | 96,087  |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loss from operations includes write-offs of
	in-process research and development of $1.7 million,
	$19.1 million, $9.5 million, and $20.6 million
	for the years ended December 31, 2000, 1999, 1998, and
	1997, 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.




Item 7  Managements
discussion and analysis of financial condition and results of
operations.

Some of the statements contained in this Annual
Report on Form 10-K are forward-looking statements,
including but not limited to those specifically identified as
such, that involve risks and uncertainties. The statements
contained in the Report on Form 10-K that are not purely
historical are forward-looking

12



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statements within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act,
including, without limitation, statements regarding our
expectations, beliefs, intentions or strategies regarding the
future. These statements involve known and unknown risks,
uncertainties and other factors, which may cause our actual
results to differ materially from those implied by the
forward-looking statements. In some cases, you can identify
forward-looking statements by terminology such as
may, will, should,
expects, plans, anticipates,
believes, estimates,
predicts, potential, or
continue or the negative of these terms or other
comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. All forward-looking
statements included in this Report on Form 10-K are based
on information available to us on the date hereof, and we assume
no obligation to update any such forward-looking statements.


Overview

We develop and market software applications
designed to enable our 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. We develop and
market these software solutions for UNIX®, IBM AS/400
midrange, and IBM corporate mainframe computers. We also develop
and market software that increases the productivity of corporate
call centers, and allows real-time application sharing on
corporate networks and across the Internet. We provide
professional support, maintenance, and consultancy services to
our customers in association with the product we develop and
market.

During the past several years, we have taken a
number of initiatives intended to control costs and reduce
operating expenses, including the discontinuance of several low
revenue generating products and the implementation of a
worldwide restructuring of our operations as a result of
acquisitions and prevailing market conditions.

In 2001, we focused on the core competencies of
our key business lines  Host Accessand
Host Integration  each with dedicated
development, sales, marketing, and support resources. These
products leverage the strengths and popularity of the Internet,
as well as corporate private networks, and offer features to
improve network manageability. The Host Access product line
includes our products branded Rumba and ViewNow. The Host
Integration 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 presentation, applications, and solutions. The Host
Integration product line includes our products branded OnWeb.
The Realtime Interactive Support functionality, previously sold
as the standalone product Support Now, is being incorporated
into our full line of products and adds value to the PC
Connectivity and Web Publishing Integration and Development
product offerings.

We experienced a reduction in incoming orders
from the latter half of 2000 through the third quarter of 2001,
and incoming orders did not begin to increase until the fourth
quarter of 2001. The slowdown in the North American economy, as
well as the trauma associated with the September 11, 2001
disaster, had a major influence on our customer willingness to
place new orders for our products. We experienced significant
revenue reduction in each of the quarters of 2001, compared to
the same quarter of the previous year. In some cases, customers
chose to reduce the number of desktop units at the time of
annual maintenance renewal to reflect the reduction-in-force at
their facility, or they continued to push out their buying
decision due to budget constraints. The revenue reduction
occurred both domestically and internationally. On a
year-to-year basis, the total revenue decreased 23% in 2001 from
fiscal 2000.

As a result, we took steps in fiscal 2001 to
simplify our product offerings and messaging to our customers in
2001. The result of the year-long effort resulted in the
consolidation of our products into two major product families
 Rumba and OnWeb. We expect the positive results of the
product simplification to be more apparent in fiscal 2002. Also,
steps were taken to install a compliance program to better
monitor the reporting

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of the number of installations at customer sites
in accordance with written contracts. Again, we expect the
results of this new initiative to be reflected in fiscal 2002.




| |              
| | -------------
| | Restructuring

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, we revisited
our strategy to refocus on core competencies, revised our
business plan, and our 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.

We announced a restructuring of operations on
August 3, 2000. As part of the restructuring, we reduced
our workforce by approximately 17%, consisting mostly of
engineering and customer support personnel, who were focused
primarily on our older technologies, acquired through the Wall
Data and FTP acquisitions. With the reduction in personnel,
knowledge levels with respect to certain products and our
ability to enhance and expand products acquired from Wall Data
and FTP were reduced, thus impacting future expected revenues
from these product families. In connection with the
restructuring, we 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 included
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, 2001, we had incurred costs totaling
approximately $4.6 million related to the restructuring
which required $4.6 million in cash expenditures leaving
approximately $1.0 million for future restructuring charges.

In the fourth quarter of 1999, following the
acquisitions of Wall Data and Simware, we initiated a plan to
restructure our worldwide operations in connection with the
integration of operations of these acquisitions. In connection
with this plan, we 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, $1.4 million of employee-related
expenses for employee termination costs, and $500,000 in
accounting and legal fees related to the acquisitions. We
anticipate that the execution of the restructuring actions will
require total cash expenditures of approximately
$3.8 million that are expected to be funded from internal
operations. As of December 31, 2001, we had made cash
payments totaling approximately $2.8 million related to the
restructuring.



| |                    
| | -------------------
| | Goodwill impairment

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, we determined that there was a permanent
impairment of the long-lived assets related to the acquisitions
of Wall Data and FTP. In accordance with Statement of Financial
Standards (SFAS) No. 121, we reevaluated the fair
value of these long-lived assets and intangibles using primarily
the estimated discounted cash flows method. We used the same
methodology to evaluate the fair value of our long-lived assets
and intangibles to allocate purchase price at the time of
acquisition. As a result, we wrote off $42.2 million of goodwill
and other intangibles, through a charge to operations in the
third quarter of fiscal 2000.



| |             
| | ------------
| | Acquisitions

On June 5, 2000, we completed our
acquisition of Aqueduct Software, Inc., or Aqueduct, an early
stage web-based application intelligence company. We 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. We also
hired the three

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employees of Aqueduct who subsequently left us.
The acquisition was accounted for as a purchase. The warrants
and options, none of which were exercised, expired on
December 5, 2001.


On December 29, 1999, we completed our
acquisition of Wall Data, a leader in the PC-to-IBM host
connectivity market. We 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
acquisition was accounted for as a purchase.

On December 10, 1999, we completed our
acquisition of Simware Inc., or Simware, a leading provider of
e-commerce solutions and web integration servers. We 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
acquisition was accounted for as a purchase.

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 our results of operations and
financial condition. As discussed above, we already incurred
significant restructuring charges and asset impairment in
connection with the acquisitions of Wall Data, Simware and FTP.



| |                         
| | ------------------------
| | Stock repurchase program

In prior board meetings, our Board of Directors,
or Board, had authorized the repurchase from time to time of up
to 9 million shares of our common stock through open market
purchases. In October 2001, the Board authorized the repurchase
of an additional 6 million shares of our common stock for a
cumulative authorized total of 15 million shares of common
stock. During 2001, we purchased 2,360,547 shares of our common
stock on the open market at an average purchase price of $0.79
per share for a total cost of approximately $1.9 million.
Cumulatively, as of December 31, 2001, we had purchased
9,719,612 shares of our common stock at an average price of $
1.88 per share for a total cost of approximately
$18.3 million.



| |                             
| | ----------------------------
| | Critical accounting policies

Revenue Recognition:We derive revenue from primarily two sources (1) product
revenue, which includes software license and royalty revenue,
and (2) services and support revenue which includes
software license maintenance and consulting.

We license our software products on a one and
two-year term basis or on a perpetual basis. Our two-year term
based licenses include the first year of maintenance and
support. To date such licenses have been insignificant.

We apply the provisions of Statement of Position
97-2, Software Revenue Recognition, as amended by
Statement of Position 98-9 Modification of
SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions to all transactions involving the
sale of software products and hardware transactions where the
software is not incidental.

We recognize revenue from the sale of software
licenses to end users and resellers when persuasive evidence of
an arrangement exists, the product has been delivered, the fee
is fixed and determinable and collection of the resulting
receivable is reasonably assured. Delivery generally occurs when
product is delivered to a common carrier.

Product is sold without the right of return,
except for defective product that may be returned for
replacement. To date, such returns have been insignificant.
Certain of our sales are made to domestic distributors under
agreements allowing rights of return and price protection on
unsold merchandise. Accordingly, we defer recognition of such
sales until the distributor sells the merchandise. Our
international distributors generally do not have return rights
and, as such, we generally recognize sales to international
distributors upon shipment, provided all other revenue
recognition criteria have been met.

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At the time of the transaction, we assess whether
the fee associated with our revenue transactions is fixed and
determinable and whether or not collection is reasonably
assured. We assess whether the fee is fixed and determinable
based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment
terms, we account for the fee as not being fixed and
determinable. In these cases, we recognize revenue as the fees
become due.

We assess collection based on a number of
factors, including past transaction history with the customer
and the credit-worthiness of the customer. We do not request
collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and
recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash.

For all sales, except those completed over the
Internet, we use either a binding purchase order or signed
license agreement as evidence of an arrangement. For sales over
the Internet, we use a credit card authorization as evidence of
an arrangement. Sales through our distributors are evidenced by
a master agreement governing the relationship together with
binding purchase orders on a transaction-by-transaction basis.

For arrangements with multiple elements (for
example, undelivered maintenance and support), we allocate
revenue to each component of the arrangement using the residual
value method based on vendor specific objective evidence of the
fair value of the undelivered elements. This means that we defer
revenue from the arrangement fee equivalent to the fair value of
the undelivered elements. Fair values for the ongoing
maintenance and support obligations are generally based upon
separate sales of renewals to other customers or upon renewal
rates quoted in the contracts. Fair value of services, such as
training or consulting, is based upon separate sales by us of
these services to other customers.

Our arrangements do not generally include
acceptance clauses. However, if an arrangement includes an
acceptance provision, acceptance occurs upon the earlier of
receipt of a written customer acceptance or expiration of the
acceptance period.

Service revenues are derived from software
updates for existing software products, user documentation and
technical support, generally under annual service agreements.
These revenues are recognized ratably over the terms of such
agreements. If such services are included in the initial
licensing fee, the value of the services determined based on
vendor specific objective evidence is unbundled and recognized
ratably over the related service period. Service revenues
derived from consulting and training are deferred and recognized
when the services are performed and the collectibility is deemed
probable. To date, consulting revenue has not been significant.

Sales returns and other allowances, allowance
for doubtful accounts and litigation:The preparation of financial
statements requires management to make estimates and assumptions
that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reported period. Specifically, management must make
estimates of potential future product returns related to current
period product revenue. Management analyzes historical returns,
current economic trends, and changes in customer demand and
acceptance of our products when evaluating the adequacy of the
sales returns and other allowances. Significant management
judgments and estimates must be made and used in connection with
establishing the sales returns and other allowances in any
accounting period. Material differences may result in the amount
and timing of our revenue for any period if management made
different judgments or utilized different estimates. Similarly,
management must make estimates of the collectibility of our
accounts receivables. Management specifically analyzes accounts
receivable and analyzes historical bad debts, customer
concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms when evaluating
the adequacy of the allowance for doubtful accounts. Our
accounts receivable balance was $17.8 million, net of
allowance for doubtful accounts of $2.4 million as of
December 31, 2001.

Managements current estimated range of
liability related to some of the pending litigation is based on
claims for which our management can estimate the amount and
range of loss. Because of the uncertainties related to both the
amount and range of loss on the remaining pending litigation,
the actual outcome may significantly differ from management
estimates. As additional information becomes available, we will
assess the potential liability related to the Companys
pending litigation and revise our estimates. Such revisions in

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the managements estimates of the potential
liability could materially impact our results of operation and
financial position.


Accounting for income taxes:As part of the process of preparing
our consolidated financial statements we are required to
estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual
current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as
deferred revenue, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we
believe that recovery is not likely, we must establish a
valuation allowance. To the extent we establish a valuation
allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of
operations.

Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities, and any valuation allowance recorded
against our net deferred tax assets. We have recorded a
valuation allowance of $57.0 million as of
December 31, 2001, due to uncertainties related to our
ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating losses carried forward and
foreign tax credits, before they expire. The valuation allowance
is based on our estimates of taxable income by jurisdiction in
which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results
differ from these estimates, we will adjust these estimates in
future periods.

Valuation of long-lived and intangible assets
and goodwill:We assess the impairment
of identifiable intangibles, long-lived assets and related
goodwill and enterprise level goodwill whenever events or
changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could
trigger an impairment review include the following:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | significant underperformance relative to expected
	historical or projected future operating results;                     
|
| |  | significant changes in the manner of the
	Companys use of the acquired assets or the strategy for
	our overall business;
|
| |  | significant negative industry or economic trends;
	and                                                                   
|
| |  | the Companys market capitalization relative
	to net book value.                                                         

When we determine that the carrying value of
intangibles, long-lived assets and related goodwill and
enterprise level goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment,
we measure impairment based on a projected discounted cash flow
method using a discount rate determined by management to be
commensurate with the risk inherent in our current business
model. Net intangible assets, long-lived assets, and goodwill
amounted to $17.6 million as of December 31, 2001.

In 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets became effective and as a result,
we will cease to amortize approximately $7.8 million of
goodwill. We had recorded approximately $2.7 million of
amortization on these amounts during 2001 and would have
recorded approximately $2.7 million of amortization during
2002. In lieu of amortization, we are required to perform an
initial impairment review of our goodwill in 2002 and at least
an annual impairment review thereafter.

Results of operations

We experienced a reduction in incoming orders
that began the last half of 2000 through the third quarter of
2001 and incoming orders did not begin to increase until the
fourth quarter of 2001. The slowdown in the economy, as well as
the trauma associated with the September 11, 2001 disaster,
had a major influence on our customer willingness to place new
orders for our products. We experienced significant revenue
reduction in

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each of the quarters compared to the same quarter
of the previous year. In some cases, the customers chose to
reduce the number of desktop units at the time of annual
maintenance renewal to reflect the reduction-in-force at their
facility, or they continued to push out their buying decision
due to budget constraints. The revenue reduction occurred both
domestically and internationally. On a year-to-year basis, the
total revenue decreased 23% from fiscal 2000.


At the end of the first quarter of 2001, more
aggressive steps were taken by management to further reduce our
operating expenses. During the second and third quarters, steps
were taken to reduce our headcount in all functional areas
without impacting core business that we had estimated to be
approximately 20% lower than the results of the previous year.
On a year-to-year basis the total fulltime employee headcount
was reduced 29%. In addition, excess facilities were subleased
or consolidated to reduce our monthly fixed operating cost
structure. Travel restrictions were imposed to ensure all travel
conformed to new expense guidelines. Total operating expenses,
excluding the one-time insurance recovery, research and
development write-off, restructuring, and asset impairment, on a
year-to-year basis were reduced 32% from fiscal 2000.

Because we generally ship software products
within a short period after receipt of an order, we do not have
a material backlog of unfilled orders. Our operating expense
levels are based in part on our expectations as to future
revenues and to a large extent are fixed. Operating expenses are
expected to stabilize at the levels incurred in the latter half
of 2001 and may fluctuate as a percentage of net revenues if we
develop and introduce new products. While we continue to adjust
our operations to address these issues, there can be no
assurance that net revenues or net loss will stabilize or
improve in the future.

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Year Ended December 31, 2001 Compared to
Year Ended December 31, 2000

|                                                 |                                |                       |      |       |       |        |       |       |       |   |       |       |       |   |        |       |       |   
|------------------------------------------------ | ------------------------------ | --------------------- | ---- | ----- | ----- | ------ | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ------ | ----- | ----- | --
|                                                 |                                |                       |      |       |       |       
|                                                 |                                | Year Ended            |      |       |       |       
|                                                 |                                | December 31,          |      |       |       |       
|                                                 |                                |                       |      |      
|                                                 |                                | 2001                  |      | 2000  |       | Change
|                                                 |                                |                       |      |       |       |       
|                                                 |                                |                       |      |       |       |        |       |      
|                                                 |                                |                       |      |       |       |       
|                                                 |                                | (Dollars in millions) |      |       |       |       
|Net revenues                                     |                                |                       |      |       |       |        |       |       |       |   |       |       |       |   |        |      
|                                                 | License fees                   |                       | $    | 39.4  |       |        | $     | 56.3  |       |   | $     | (16.9 | )     |   |        | (30.0 | )%   
|                                                 | Services                       |                       |      | 40.6  |       |        |       | 47.8  |       |   | $     | (7.2  | )     |   |        | (15.1 | )%   
|                                                 |                                |                       |      |       |       |        |       |       |       |   |       |       |       |   |        |      
|                                                 |                                | Total net revenues    |      |       | 80.0  |        |       |       | 104.1 |   |       | $     | (24.1 | ) |        |       | (23.2 | )%
|As a percentage of net revenues:                 |                                |                       |      |       |       |        |       |       |       |   |       |       |       |   |        |      
|                                                 | License fees                   |                       |      | 49.2  | %     |        |       | 54.1  | %     |   |       |       |       |   |        |       |      
|                                                 | Services                       |                       |      | 50.8  | %     |        |       | 45.9  | %     |   |       |       |       |   |        |       |      
|                                                 |                                |                       |      |       |       |        |       |       |       |   |       |       |       |   |        |      
|                                                 |                                | Total net revenues    |      |       | 100.0 | %      |       |       | 100.0 | % |       |       |       |   |        |       |       |   
|Gross margin                                     |                                | $                     | 76.5 |       |       | $      | 99.8  |       |       | $ | (23.3 | )     |       |   | (23.3  | )%   
|                                                 | As a percentage of net revenue |                       |      | 95.6  | %     |        |       | 95.9  | %     |   |       |       |       |   |        |       |      
|Research and development                         |                                | $                     | 17.9 |       |       | $      | 24.4  |       |       | $ | (6.5  | )     |       |   | (26.6  | )%   
|                                                 | As a percentage of net revenue |                       |      | 22.4  | %     |        |       | 23.4  | %     |   |       |       |       |   |        |       |      
|Sales and marketing                              |                                | $                     | 53.2 |       |       | $      | 71.9  |       |       | $ | (18.7 | )     |       |   | (26.0  | )%   
|                                                 | As a percentage of net revenue |                       |      | 66.5  | %     |        |       | 69.1  | %     |   |       |       |       |   |        |       |      
|General and administrative                       |                                | $                     | 10.6 |       |       | $      | 18.7  |       |       | $ | (8.1  | )     |       |   | (43.3  | )%   
|                                                 | As a percentage of net revenue |                       |      | 13.3  | %     |        |       | 18.0  | %     |   |       |       |       |   |        |       |      
|Insurance recovery                               |                                | $                     |     |       |       | $      | (3.8  | )     |       | $ | 3.8   |       |       |   | (100.0 | )%   
|                                                 | As a percentage of net revenue |                       |      | 0.0   | %     |        |       | (3.7  | )%    |   |       |       |       |   |        |       |      
|Write-off of in-process research and development |                                | $                     |     |       |       | $      | 1.7   |       |       | $ | (1.7  | )     |       |   | (100.0 | )%   
|                                                 | As a percentage of net revenue |                       |      | 0.0   | %     |        |       | 1.6   | %     |   |       |       |       |   |        |       |      
|Restructuring                                    |                                | $                     |     |       |       | $      | 5.6   |       |       | $ | (5.6  | )     |       |   | (100.0 | )%   
|                                                 | As a percentage of net revenue |                       |      | 0.0   | %     |        |       | 5.4   | %     |   |       |       |       |   |        |       |      
|Goodwill and other intangible assets impairment  |                                | $                     |     |       |       | $      | 42.2  |       |       | $ | (42.2 | )     |       |   | (100.0 | )%   
|                                                 | As a percentage of net revenue |                       |      | 0.0   | %     |        |       | 40.5  | %     |   |       |       |       |   |        |       |      
|Amortization of goodwill                         |                                | $                     | 6.1  |       |       | $      | 14.1  |       |       | $ | (8.0  | )     |       |   | (56.7  | )%   
|                                                 | As a percentage of net revenue |                       |      | 7.6   | %     |        |       | 13.5  | %     |   |       |       |       |   |        |       |      
|Interest income and other, net                   |                                | $                     | 2.1  |       |       | $      | 1.8   |       |       | $ | 0.3   |       |       |   | 16.7   | %    
|                                                 | As a percentage of net revenue |                       |      | 2.6   | %     |        |       | 1.7   | %     |   |       |       |       |   |        |       |      
|Gain on investment, net                          |                                | $                     |     |       |       | $      | 2.0   |       |       | $ | (2.0  | )     |       |   | (100.0 | )%   
|                                                 | As a percentage of net revenue |                       |      | 0.0   | %     |        |       | 1.9   | %     |   |       |       |       |   |        |       |      
|Provision for income taxes                       |                                | $                     | 0.1  |       |       | $      | 0.7   |       |       | $ | (0.6  | )     |       |   | (85.7  | )%   
|                                                 | Effective tax rate             |                       |      | NA    |       |        |       | NA    |       |   |       |       |       |   |        |       |      
|                                                 |                                |                       |      |       |       |        |       |       |       |   |       |       |       |   |        |      
|Net loss                                         |                                | $                     | (9.3 | )     |       | $      | (71.9 | )     |       | $ | 62.6  |       |       |   | (87.1  | )%   
|                                                 | As a percentage of net revenue |                       |      | (11.6 | )%    |        |       | (69.1 | )%    |   |       |       |       |   |        |       |      

Net
revenues

Historically, a majority of our net revenues have
been derived from software license fees. Service revenues have
been primarily attributable to maintenance agreements associated
with product licenses.

License fees and service revenues decreased
during the year ended December 31, 2001 as compared to the
year ended December 31, 2000. This decrease resulted from
customer decisions to cancel or postpone purchases of our
products, due to the slowing North American economy, pressures
on our average selling price, and the tragic events of
September 11, 2001. Service revenues increased as a
percentage of total revenues to just over 50% of our total net
revenues due to the proportionally larger decline in license
revenues.

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We have operations worldwide, with sales offices
located in the United States, Europe, Canada, Latin America,
Israel, and Japan. Revenues outside of North America (United
States and Canada) as a percentage of total net revenues were
approximately 26% and 25%, respectively, for the years ended
December 31, 2001 and 2000.

No customer accounted for more than 10% of net
revenues during the years ended December 31, 2001 and 2000.

Gross
margin

Cost of revenues primarily includes royalties
paid to third parties for licensed software incorporated into
our products as well as costs associated with order processing,
product packaging, documentation and software duplication, and
the amortization and write-down of acquired technology.

Gross margin decreased in absolute dollars and
remained relatively flat as a percentage of net revenues for the
year ended December 31, 2001 as compared to the year ended
2000, primarily because of cost reduction efforts related to
software procurement and distribution. Costs associated with
service revenues for the years ending December 31, 2001 and
2000 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 us, the mix of license fee
revenues versus service revenues, the mix of products sold, and
the mix of international versus domestic revenues. We typically
recognize 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
our results for the entire year.

Research and
development

Research and development expenses consist
primarily of salaries and benefits, occupancy and travel
expenses, and fees paid to outside consultants. Research and
development, or R & D, expenses decreased, in absolute
dollars and as a percentage of net revenues for 2001 as compared
to 2000, primarily as a result of the reduction in headcount of
full time employees for research and development activities.

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 we are required
to capitalize software development costs after technological
feasibility is established which we define as a working model
and further define 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. We
did not capitalize any software development costs in 2001.

Sales and
marketing

Sales and marketing expenses consist primarily of
salaries and commissions of sales, customer support, marketing,
and consulting personnel, advertising and promotional expenses,
occupancy and related costs. Sales and marketing expenses
decreased in absolute dollars and as a percentage of net
revenues for the year 2001, as compared to the year 2000,
primarily as a result of lower sales levels, the reduction in
sales and support staff of 116 fulltime employees as part of the
ongoing cost reduction efforts, and to a lesser extent, actions
as a result of our restructuring in August 2000.

General and
administrative

General and administrative expenses consist
primarily of salaries, benefits, accounting, travel, legal, and
occupancy expenses. General and administrative expenses
decreased in absolute dollars and as a percentage of

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net revenues for 2001 as compared to 2000,
primarily as a result of the reduction in administrative staff
of 13 fulltime employees as part of the ongoing cost reduction
efforts.


Insurance
recovery

During the year ended December 31, 2000, we
receive a cash payment of $3.8 million, from our insurance
companies as a reimbursement of amounts paid for legal fees and
expenses by us in prior years in connection with the settlement
of certain litigation. No such reimbursements were received in
2001.

Write-off of
in-process research and development

In connection with the acquisition of Aqueduct in
the second quarter of 2000, we 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 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 our 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 our acquisitions, see Note 3 of the accompanying Notes
to our Consolidated Financial Statements.

Restructuring

On August 3, 2000, we announced a
restructuring of our operations designed to re-focus our core
business functions and reduce operating expenses. In connection
with the restructuring, we reduced our 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 we did not plan to use and accordingly
wrote-off. For a further discussion of restructuring charges,
see Note 4 of the accompanying notes to our Consolidated
Financial Statements.

Goodwill and
other intangible assets impairment

Subsequent to our acquisition of companies, we
assess 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. Under those rules, we review
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. We evaluate any possible impairment of
long-lived assets using estimates of undiscounted future cash
flows. If an impairment loss is to be recognized, it 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 long-lived assets and intangibles using primarily the
estimated discounted future cash flows method. Management uses
other alternative valuation techniques whenever the estimate of
discounted future cash flow method is not applicable.

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 Consolidated Financial Statements),
management performed an evaluation of the recoverability of all
goodwill and other intangibles assets. Management concluded from
the results of this evaluation that a significant, permanent
impairment of goodwill and other intangibles had occurred. As a
consequence, we wrote off $42.2 million of goodwill and
other intangibles through a charge to operations in August 2000.

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During 2001, we updated our evaluation and
determined that no additional impairment charge was required for
the year-ended December 31, 2001.

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. We amortize
goodwill over estimated useful lives of two to seven years.
Amortization of goodwill and intangibles decreased in 2001,
compared to 2000, as a result of the goodwill impairment charges
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. Accumulated amortization was approximately
$21.9 million and $15.8 million at December 31,
2001 and 2000, respectively.

In 2002, Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and
Other Intangible Assets became effective and as a result,
we will cease to amortize approximately $7.8 million of
goodwill. We had recorded approximately $2.7 million of
amortization on these amounts during 2001 and would have
recorded approximately $2.7 million of amortization during
2002. In lieu of amortization, we are required to perform an
annual impairment review of our goodwill in 2002 and at least an
annual impairment review thereafter.

Interest
income and other, net

The increase in interest income and other, net
for 2001 as compared to 2000, is primarily the result of the
receipt of $1.4 million of interest income related to the
$9.3 million of income tax refunds received during the
year. This increase in interest income was offset by a reduction
of earned interest of $1.3 million on cash and investments
relating to a reduction in interest rates and reduction of our
cash balances.

There was a reduction in interest expense and
transaction losses for the 2001 year of $39,000 and $29,000,
respectively. In December 2001, we recorded as income a
previously unrecognized gain of $221,000 on marketable
securities. This gain was offset by a $133,000 loss on
marketable securities from the Wall Data acquisition in 1999.

Gain on
investment, net

In December 2000 ServiceSoft, Inc, one of our
investments, was acquired by Broadbase, a publicly traded
company. As a result, we received shares of Broadbase common
stock in exchange for our minority interest in ServiceSoft, Inc
and recognized a gain of approximately $2.0 million on our
original investment. The shares of Broadbase common stock owned
by us were classified as available-for-sale securities as of
December 31, 2000. On June 29, 2001, Broadbase was
acquired by KANA Software, Inc, or KANA, a publicly traded
company. We have recorded an unrealized loss on our holding in
KANA of approximately $1.6 million as of December 31, 2001.
This unrealized loss is based upon the change in market value
from the time of original acquisition to December 31, 2001
and is included in Accumulated other comprehensive
loss in the Equity section of our balance sheet.

Provision for
income taxes

We recorded a provision for income taxes for the
year-ended December 31, 2001 of approximately
$0.1 million, which consisted primarily of foreign income
taxes. Our effective tax rate for 2001 is less than 1% and this
is due to our current consolidated loss position. Income taxes
primarily include international withholding taxes and state
taxes.

As of December 31, 2001, we had a gross
deferred tax asset of approximately $57.0 million.
Realization of the gross deferred tax asset is dependent on our
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.

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Year Ended December 31, 2000 Compared to Year
Ended December 31, 1999

|                                                 |                                |                       |       |       |       |        |       |       |       |   |       |      |      |  |       |       |      |  
|------------------------------------------------ | ------------------------------ | --------------------- | ----- | ----- | ----- | ------ | ----- | ----- | ----- | - | ----- | ---- | ---- |  | ----- | ----- | ---- | -
|                                                 |                                |                       |       |       |       |       
|                                                 |                                | Year Ended            |       |       |       |       
|                                                 |                                | December 31,          |       |       |       |       
|                                                 |                                |                       |       |      
|                                                 |                                | 2000                  |       | 1999  |       | Change
|                                                 |                                |                       |       |       |       |       
|                                                 |                                |                       |       |       |       |        |       |      
|                                                 |                                |                       |       |       |       |       
|                                                 |                                | (Dollars in millions) |       |       |       |       
|Net revenues                                     |                                |                       |       |       |       |        |       |       |       |   |       |      |      |  |       |      
|                                                 | License fees                   |                       | $     | 56.3  |       |        | $     | 56.5  |       |   | $     | (0.2 | )    |  |       | (0.4  | )%  
|                                                 | Services                       |                       |       | 47.8  |       |        |       | 22.7  |       |   | $     | 25.1 |      |  |       | 110.6 | %   
|                                                 |                                |                       |       |       |       |        |       |       |       |   |       |      |      |  |       |      
|                                                 |                                | 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 revenue |                       |       | 95.9  | %     |        |       | 94.2  | %     |   |       |      |      |  |       |       |     
|Research and development                         |                                | $                     | 24.4  |       |       | $      | 18.5  |       |       | $ | 5.9   |      |      |  | 31.9  | %    
|                                                 | As a percentage of net revenue |                       |       | 23.4  | %     |        |       | 23.4  | %     |   |       |      |      |  |       |       |     
|Sales and marketing                              |                                | $                     | 71.9  |       |       | $      | 45.3  |       |       | $ | 26.6  |      |      |  | 58.7  | %    
|                                                 | As a percentage of net revenue |                       |       | 69.1  | %     |        |       | 57.2  | %     |   |       |      |      |  |       |       |     
|General and administrative                       |                                | $                     | 18.7  |       |       | $      | 14.1  |       |       | $ | 4.6   |      |      |  | 32.6  | %    
|                                                 | As a percentage of net revenue |                       |       | 18.0  | %     |        |       | 17.8  | %     |   |       |      |      |  |       |       |     
|Insurance recovery                               |                                | $                     | (3.8  | )     |       | $      |      |       |       | $ | (3.8  | )    |      |  | 100.0 | %    
|                                                 | As a percentage of net revenue |                       |       | (3.7  | )%    |        |       | 0.0   | %     |   |       |      |      |  |       |       |     
|Write-off of in-process research and development |                                | $                     | 1.7   |       |       | $      | 19.1  |       |       | $ | (17.4 | )    |      |  | (91.1 | )%   
|                                                 | As a percentage of net revenue |                       |       | 1.6   | %     |        |       | 24.1  | %     |   |       |      |      |  |       |       |     
|Restructuring                                    |                                | $                     | 5.6   |       |       | $      | 3.8   |       |       | $ | 1.8   |      |      |  | 47.4  | %    
|                                                 | As a percentage of net revenue |                       |       | 5.4   | %     |        |       | 4.8   | %     |   |       |      |      |  |       |       |     
|Goodwill and other intangible assets impairment  |                                | $                     | 42.2  |       |       | $      |      |       |       | $ | 42.2  |      |      |  | 100.0 | %    
|                                                 | As a percentage of net revenue |                       |       | 40.5  | %     |        |       | 0.0   | %     |   |       |      |      |  |       |       |     
|Amortization of goodwill                         |                                | $                     | 14.1  |       |       | $      | 5.7   |       |       | $ | 8.4   |      |      |  | 147.4 | %    
|                                                 | As a percentage of net revenue |                       |       | 13.6  | %     |        |       | 7.2   | %     |   |       |      |      |  |       |       |     
|Interest income and other, net                   |                                | $                     | 1.8   |       |       | $      | 4.9   |       |       | $ | (3.1  | )    |      |  | (63.3 | )%   
|                                                 | As a percentage of net revenue |                       |       | 1.8   | %     |        |       | 6.2   | %     |   |       |      |      |  |       |       |     
|Gain on investment, net                          |                                | $                     | 2.0   |       |       | $      |      |       |       | $ | 2.0   |      |      |  | 100.0 | %    
|                                                 | As a percentage of net revenue |                       |       | 1.9   | %     |        |       | 0.0   | %     |   |       |      |      |  |       |       |     
|Provision for income taxes                       |                                | $                     | 0.7   |       |       | $      | 0.4   |       |       | $ | 0.3   |      |      |  | 75.0  | %    
|                                                 | Effective tax rate             |                       |       | NA    |       |        |       | NA    |       |   |       |      |      |  |       |       |     
|                                                 |                                |                       |       |       |       |        |       |       |       |   |       |      |      |  |       |      
|Net loss                                         |                                | $                     | (71.9 | )     |       | $      | (27.5 | )     |       | $ | (44.4 | )    |      |  | 161.5 | %    
|                                                 | As a percentage of net revenue |                       |       | (69.1 | )%    |        |       | (34.7 | )%    |   |       |      |      |  |       |       |     

Net
revenues

Throughout fiscal year 2000, a majority of our
net revenues were derived from software license fees. Service
revenues related primarily to maintenance agreements associated
with product licenses.

License fees were relatively flat in absolute
dollars and decreased substantially as a percentage of total net
revenues for the year ended December 31, 2000 as compared
to the year ended December 31, 1999. License

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fees in 2000 included 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 reflected 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
reflected the addition of existing customer base as a result of
the Wall Data and Simware acquisitions.


We have 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 our product lines in the
international marketplace, and to a lesser extent, the inclusion
of results from the acquisitions of Wall Data and Simware offset
by declines in sales of our other international product
offerings. We were in the process of integrating the sales and
distribution efforts of those acquisitions during 2000.

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

Gross
margin

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 our revenue
from product to service revenue. Cost of service revenues
through December 31, 2000 and 1999 were not 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 us, the mix of license fee
revenues versus service revenues, the mix of products sold, and
the mix of international versus domestic revenues. We typically
recognize 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
our results for the entire year.

Research and
development

Research and development expenses, in absolute
dollars, have increased for 2000 as compared to 1999, primarily
as a result of increased headcount of 194 full time employees
from the acquisitions of Wall Data and Simware in the fourth
quarter of 1999.

Sales and
marketing

Sales and marketing expenses increased in
absolute dollars during 2000 as compared to 1999 primarily due
to increased headcount of 218 full time employees as a result of
the of Wall Data and Simware acquisitions in the fourth quarter
of 1999.

General and
administrative

General and administrative expenses increased in
absolute dollars for 2000 as compared to 1999, primarily due to
an increase of 41 full time employees in headcount as a result
of the of Wall Data and Simware acquisitions, in the fourth
quarter of 1999.

Insurance
recovery

During the year-ended December 31, of 2000,
we received a cash payment of $3.8 million from our
insurance companies as a reimbursement of amounts paid for legal
fees and expenses incurred by us in prior years for settlement
of certain litigation.

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Write-off of
in-process research and development

In connection with the acquisition of Aqueduct in
the second quarter of 2000, we 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, we 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. We allocate 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 our 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 our acquisitions. See Note 3 of the accompanying
Notes to Consolidated Financial Statements.

Restructuring

On August 3, 2000, we announced a
restructuring of our operations designed to re-focus our core
business functions and reduce operating expenses. In connection
with the restructuring, we reduced our 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 we did not plan to use and accordingly
wrote-off.

In the fourth quarter of 1999, following the
acquisitions of Wall Data and Simware, we initiated a plan to
restructure our worldwide operations in connection with the
integration of operations of the acquisitions. In connection
with this plan, we 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 were 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. For a further discussion of restructuring
charges, see Note 4 of the accompanying Notes to
Consolidated Financial Statements.

Goodwill and
other intangible assets impairment

In connection with the restructuring announced on
August 3, 2000, management performed an evaluation of the
recoverability of all goodwill and other intangible assets. We
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 our 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 our 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

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a consequence, we wrote off $42.2 million of
goodwill and other intangibles through a charge to operations in
August 2000.


Amortization
of goodwill

Amortization of goodwill and intangible assets
increased in 2000 compared to 1999, primarily because 2000 was
the first full year of amortization of the goodwill and
intangible assets arising from the acquisitions of Wall Data and
Simware in the fourth quarter of 1999. A goodwill impairment
charge of $42.2 million was taken in the third quarter of
2000, and a goodwill and intangible assets adjustment was taken
in the fourth quarter of 2000 to reverse $9.4 million of
overestimated liabilities assumed in the Simware and Wall Data
acquisitions.

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 was
acquired by Broadbase a company publicly traded on the Nasdaq
National Market. We recognized an approximate $2.0 million
gain on our investment in ServiceSoft, and we classified the
Broadbase shares as available-for-sale securities.

Provision for
income taxes

We 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.

Disclosures about market risk

Interest rate
risk

Our exposure to market risk for changes in
interest rates relates primarily to our investment portfolio. We
place our investments with high credit quality issuers and, by
policy, limit our amount of credit exposure to any one issuer.
As stated in our policy, we are averse to principal loss, and
seek to preserve our invested funds by limiting default risk,
liquidity risk, and territory risk.

We mitigate default and liquidity risks by
investing only in safe and high credit quality securities, and
by positioning our 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. We mitigate 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 our
cash and interest-bearing investment portfolio as of
December 31, 2001. All investments mature, by policy, in
four years or less.

|                       |                                        |                          |   |        |  |               |   |      |  |  |  |     |  
|---------------------- | -------------------------------------- | ------------------------ | - | ------ |  | ------------- | - | ---- |  |  |  | --- | -
|                       |                                        | Carrying                 |   | Market |  | Average      
|                       |                                        | Value                    |   | Value  |  | Interest Rate
|                       |                                        |                          |   |        |  |              
|                       |                                        |                         
|                       |                                        | (In millions, except for
|                       |                                        | average interest rates) 
|Investment Securities: |                                        |                          |   |        |  |               |   |      |  |  |  |    
|                       | Cash and cash equivalents  fixed rate |                          | $ | 32.8   |  |               | $ | 32.8 |  |  |  | 3.6 | %

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Foreign
currency risk

We transact business in various foreign
currencies, primarily in Europe and Israel. Prior to 2000, we
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 our
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.

We do 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. Our 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.

We did not use foreign currency forward contracts
during 2001.

Liquidity and capital resources

|                                                     |  |                    |      |      |  |   |       |  
|---------------------------------------------------- |  | ------------------ | ---- | ---- |  | - | ----- | -
|                                                     |  |                   
|                                                     |  | As of December 31,
|                                                     |  |                   
|                                                     |  | 2001               |      | 2000
|                                                     |  |                    |      |     
|                                                     |  |                   
|                                                     |  | (In millions)     
|Cash and cash equivalents                            |  | $                  | 32.8 |      |  | $ | 35.0  |  
|Short-term investments                               |  | $                  | 0.8  |      |  | $ | 3.0   |  
|Net cash provided by (used in) operating
	activities |  | $                  | (1.0 | )    |  | $ | (26.1 | )
|Net cash provided by (used in) investing
	activities |  | $                  | (0.1 | )    |  | $ | (2.6  | )
|Net cash provided by (used in) financing
	activities |  | $                  | (1.1 | )    |  | $ | 1.3   |  

Since our inception, our operations have been
financed primarily through cash provided by operations and sales
of capital stock. Our primary financing activities to date
consist of our initial and secondary stock offerings and
preferred stock issuances, which aggregated net proceeds to us
of approximately $72.5 million. We do not have a bank line
of credit.

For the year ended December 31, 2001, we
received $9.3 million in tax refunds including interest of
$1.4 million.

During the year ended December 31, 2001, our
aggregate cash and cash equivalents, short-term investments and
long-term investments decreased from $38.0 million to
$33.6 million. This decrease was due primarily to an
unrealized loss of $1.6 million in marketable securities
and our purchase of $1.9 million shares of our common stock
in the open market under the repurchase program described below.

Our principal investing activities to date have
been the purchase of short-term and long-term investments,
business acquisitions, and equipment purchases. We do not have
any specific commitments with regard to future capital
expenditures.

Net cash provided and used in financing
activities in 2001 reflects the issuance of shares under our
employee stock purchase plan and stock option plans and the
purchase of our common stock, from time to time, through open
market purchases.

At December 31, 2001, we had working capital
of $16.6 million. We believe that our current cash balances
and future operating cash flows will be sufficient to meet our
working capital and capital expenditure requirements beyond one
year.

Our Board has authorized the purchase from time
to time of up to fifteen million shares of our common stock
through open market purchases. In October 2001, the Board
authorized the repurchase of 6 million shares of our common
stock on the open market. In the twelve months ended
December 31, 2001, we repurchased 2,360,547 shares of our
common stock on the open market at an average purchase price of
$0.79 per share for a total cost of approximately
$1.9 million. During 2000, we purchased 1,004,765 shares of
our

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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, 2001, we had purchased 9,719,612 shares of our
common stock at an average price of $1.88 per share for a total
cost of approximately $18.3 million.




| |                                  
| | ---------------------------------
| | Recent accounting
	pronouncements

In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 addresses financial accounting and reporting for
the long-lived assets to be held and used, and disposed of. The
statement will be effective for financial statements issued for
fiscal years beginning after December 15, 2001. Although we
do not currently expect the adoption of SFAS No. 144 to
have a material impact on our financial statements, we will
continue to assess any impairment of long-lived assets.

In July 2001, the Financial Accounting Standards
Board issued SFAS No.s 141 and 142, Business
Combinations and Goodwill and Other
Intangibles, respectively. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS
No. 142, effective January 1, 2002, goodwill is no
longer subject to amortization over its estimated useful life.
Rather, goodwill is subject to at least an annual assessment for
impairment, applying a fair-value based test. Additionally, an
acquired intangible asset should be separately recognized if the
benefit of the intangible asset is obtained through contractual
or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the
acquirers intent to do so.

As a result of our adoption of SFAS 142, as
of January 1, 2002, we will no longer amortize goodwill.
Goodwill amortization for the year ended December 31, 2001
was approximately $2.7 million.

Factors that may affect our future results and
financial condition

Our business is subject to a number of risks and
uncertainties. You should carefully consider the risks described
below, in addition to the other information contained in this
Report and in our other filings with the SEC. The risks and
uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known
to us or that we currently deem immaterial may also affect our
business operations. If any of these risks actually occur, our
business, financial condition or results of operations could be
seriously harmed. In that event, the market price for our common
stock could decline and you may lose part or all of your
investment.



| |                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our operating results have fluctuated
	significantly in the past and may continue to do so in the
	future, which could cause our stock price to
	decline

We have experienced, and expect 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 our products;                                                                                                                                     
|
| |  | introduction or enhancements to our products and
	those of our 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 our
	products are sold;                                                                                           

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| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | impact of, or failure to enter into, strategic
	alliances to promote our products;
|
| |  | quality control of our products;                                                  
|
| |  | changes in our operating expenses;                                                
|
| |  | personnel changes; and                                                            
|
| |  | foreign currency exchange rates.                                                  

In addition, our acquisition of complementary
businesses, products or technologies may cause fluctuations in
our 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.

Since we generally ship software products within
a short period after receipt of an order, we do not typically
have a material backlog of unfilled orders, and our revenues in
any one-quarter are substantially dependent on orders booked in
that quarter and particularly in the last month of that quarter.
Our expenses are based in part on our expectations as to future
revenues and to a large extent are fixed. Therefore, we may be
unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant
shortfall of demand for our products in relation to our
expectations or any material delay of customer orders would have
an almost immediate adverse impact on our operating results and
on our ability to achieve profitability.

As a result, we believe that period-to-period
comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of
future performance. Fluctuations in our operating results have
caused, and may in the future cause us to perform below the
expectations of public market analysts and investors. If our
operating results fall below market expectations, the price of
our common stock may fall.



| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | We have not been profitable since 1995 and
	may never achieve profitability in the future

We had a net loss from operations of
approximately $11.3 million for the year ended
December 31, 2001. To date, we have not achieved
profitability on an annual basis since 1995 and we may never
obtain sufficient revenues to sustain profitability in any
future period. In addition, we cannot be certain that we can
increase profitability, particularly to the extent that we face
price competition. As a result, we will need to generate
significant revenues to attain profitability. Increasing
competition may cause our prices to decline, which would harm
our operating results. We expect our prices for our software
products to decline over the next few years. We expect to face
increased competition in markets where we sell our products,
which will make it more difficult to maintain our prices and
profit margins even if our sales volumes increase. If
anticipated increases in sales volume do not keep pace with
anticipated pricing pressures, our revenues would decline and
our business could be harmed. Despite our efforts to introduce
enhancements to our products, we may not be successful in
maintaining our pricing.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We rely significantly on third parties for
	sales of our products and our revenues could decline
	significantly with little or no notice

We rely significantly on our independent
distributors, systems integrators, and value-added resellers for
certain elements of the marketing and distribution of our
products. The agreements in place with these organizations are
generally non-exclusive, of limited duration, are terminable
with little or no notice by either party and generally do not
contain minimum purchase requirements. These distributors of our
products are not within our control and generally represent
competing product lines of other companies in addition to our
products. There can be no assurance that these organizations
will give a high priority to the marketing of our products, and
they may give a higher priority to the products of our
competitors.

Furthermore, our results of operations can also
be materially adversely affected by changes in the inventory
strategies of our resellers, which can occur rapidly and may not
be related to end-user demand. As part of our continued strategy
of selling through multiple distribution channels, we expect to
continue using

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indirect distribution channels, particularly
value-added 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 2002 and beyond, as a result of acquisitions or
increased market penetration. Any material increase in our
indirect sales as a percentage of revenues may adversely affect
our average selling prices and gross margins due to lower unit
costs that are typically charged when selling through indirect
channels. There can be no assurance that we will be able to
attract or retain resellers and distributors who will be able to
market our products effectively, will be qualified to provide
timely and cost-effective customer support and service, or will
continue to represent our products. If we are unable to recruit
or retain important resellers or distributors or if they
decrease their sales of our products, we may suffer a material
adverse effect on our business, financial condition or results
of operations.




| |                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have been notified by Nasdaq that our
	stock price has fallen below the minimum bid price listing
	requirement to maintain a listing on the Nasdaq National Market;
	the low price of our common stock may impair its
	liquidity

We received a letter dated June 5, 2001,
from the staff of the Nasdaq Stock Market, or Nasdaq, which
notified us that the minimum bid price for our common stock had
been below $1.00 per share for a period of thirty consecutive
trading days. Nasdaq advised us that we would be given a period
of ninety days within which to comply with the minimum bid price
requirement for at least ten consecutive trading days in order
to maintain a listing on the Nasdaq National Market. We were
unable to demonstrate compliance with the minimum bid
requirement during the 90-day compliance period, and
September 10, 2001 we received written notification from
Nasdaq that our common stock would be delisted on
September 18, 2001. Subsequently we received a letter from
Nasdaq dated September 27, 2001, notifying us that Nasdaq
had implemented a moratorium on the minimum bid price and market
value of public float requirements for continued listing on
Nasdaq. On September 27, 2001, Nasdaq issued a moratorium
on the minimum bid and public float requirements for continued
listing on the Nasdaq National Market until January 2, 2002
in response to the September 11, 2001 terrorist attacks and
their impact on capital markets. No additional correspondence
regarding the June 5, 2001 letter has been received by us
from Nasdaq.

However, we received a second letter from the
staff of Nasdaq dated March 21, 2002 notifying us that the
minimum bid price for our common stock has been below $1.00 per
share for a period of thirty consecutive trading days. Nasdaq
advised us that we would be given a period of ninety days within
which to comply with the minimum bid price requirement in order
to maintain the listing of our common stock on the Nasdaq
National Market.

If we are unable to demonstrate compliance with
the minimum bid price listing requirement for ten consecutive
trading days on or before June 19, 2002, Nasdaq will
provide us with written notification that our common stock will
be delisted from the Nasdaq National Market. At that time we may
appeal the staffs decision to a Nasdaq Listing
Qualification Panel. We intend to pursue all options available
to us to meet the Nasdaq listing requirements.

In addition to the $1.00 minimum bid price per
share requirement described above, the continued listing of our
common stock on the Nasdaq National Market is subject to the
maintenance of the other quantitative and qualitative
requirements set forth in the Nasdaq National Market Listing
Requirements. In particular, the Nasdaq National Market Listing
Requirements require that a company currently included in the
Nasdaq National Market meet each of the following standards to
maintain its continued listing:



| |   |                                                  
| | - | -------------------------------------------------
| |  | net tangible assets of $4,000,000;               
|
| |  | a public float of 750,000 shares;                
|
| |  | a market value of the public float of $5,000,000;
|
| |  | a minimum bid price of $1 per share;             
|
| |  | 400 round lot shareholders;                      

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| |   |                                                   
| | - | --------------------------------------------------
| |  | two market makers; and                            
|
| |  | compliance with Nasdaq corporate governance rules.

If our common stock is delisted from the Nasdaq
National Market, we may not qualify for listing our common stock
on the Nasdaq SmallCap Market. In such an event, sales of our
common stock would likely be conducted only in the
over-the-counter market or potentially in regional exchanges.
This may have a negative impact on the liquidity and the price
of our common stock, and investors may find it more difficult to
purchase or dispose of, or to obtain accurate quotations as to
the market value of, our common stock.

In addition, if our common stock is not listed on
the Nasdaq National Market and the trading price of our common
stock was to remain below $1.00 per share, trading in our common
stock would also be subject to the requirements of certain rules
promulgated under the Exchange Act which require additional
disclosures by broker-dealers in connection with any trades
involving a stock defined as a penny stock
(generally, a non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions)
such event, the additional burdens imposed upon broker-dealers
to effect transactions in our common stock could further limit
the market liquidity of our common stock and the ability of
investors to trade our common stock.

We believe that maintaining the listing of our
common stock on the Nasdaq National Market or Nasdaq SmallCap
Market would be in our best interest and in the best interest of
our stockholders. Inclusion in the Nasdaq National Market
increases liquidity and may potentially minimize the spread
between the bid and asked prices quoted
by market makers. Further, a Nasdaq National Market listing may
increase our access to capital and increase our flexibility in
responding to anticipated capital requirements. We believe that
prospective investors will view an investment in our common
stock more favorably if our shares qualify for listing on the
Nasdaq National Market or Nasdaq SmallCap Market.

We also believe that the current per share price
level of our common stock has reduced the effective
marketability of our shares of common stock because of the
reluctance of many leading brokerage firms to recommend
low-priced stock to their clients. Certain investors view
low-priced stock as speculative and unattractive. In addition, a
variety of brokerage house policies and practices tend to
discourage individual brokers within those firms from dealing in
low-priced stock. Such policies and practices pertain to the
payment of brokers commissions and to time-consuming procedures
that make the handling of low-priced stocks unattractive to
brokers from an economic standpoint.

In addition, because brokerage commissions on
low-priced stock generally represent a higher percentage of the
stock price than commissions on higher-priced stock, the current
share price of our common stock can result in individual
stockholders paying transaction costs (commissions, markups or
markdowns) that represent a higher percentage of their total
share value than would be the case if the share price were
substantially higher. This factor also may limit the willingness
of institutions to purchase our common stock at its current low
share price.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Our acquisitions may have a material
	adverse effect on our operating results and financial
	condition

We consummated several 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. These acquisitions were
motivated by various factors, including the desire to obtain new
technologies, expand and enhance our product offerings, expand
our customer base, attract key personnel, and strengthen our
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 of
	cost savings and synergies;                                                

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| |   |                                                         
| | - | --------------------------------------------------------
| |  | the loss of customers;                                  
|
| |  | undisclosed liabilities;                                
|
| |  | adverse effects on reported operating results;          
|
| |  | the amortization of acquired intangible assets;         
|
| |  | the loss of key employees; and                          
|
| |  | the difficulty of presenting a unified corporate
	image.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | We have undergone significant
	restructuring, which may have a material adverse effect on our
	operating results

In early December 1999, following our acquisition
of Wall Data and Simware, we initiated a plan to restructure our
worldwide operations in order to integrate the operations of
Wall Data and Simware. We undertook a further restructuring of
our operations, primarily in North America, in August 2000. Both
restructuring plans involved reductions in our worldwide
workforce and the consolidation of certain of our sales,
customer support, and research and development facilities. These
restructurings may not be successful and may not improve future
operating results. Completion of the restructurings may disrupt
our operations and have a material adverse effect on our
business, financial condition and results of operations. We may
also be required to implement additional restructuring plans in
the future.

The successful combination of companies requires
coordination of sales and marketing with research and
development efforts, and can be difficult to accomplish. The
integration of both Wall Data and Simware 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. We believed that factors such as the ongoing attention
and dedication of management and resources required to effect
the complete integration of both Wall Data and Simware, and the
consequent disruption in the business of all parties involved,
contributed to interruptions and loss of momentum in our
business activities. Our ability to maintain or increase
revenues from the sale of products from Wall Data and Simware on
an ongoing basis depends in part on our ability to effectively
respond to these factors.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | We may not be able to successfully make
	acquisitions of or investments in other companies or
	technologies

We have very limited experience in acquiring or
making investments in companies, technologies or services. We
regularly evaluate product and technology acquisition
opportunities and anticipate that we may make additional
acquisitions in the future if we determine that an acquisition
would further our corporate strategy. Acquisitions in our
industry are particularly difficult to assess because of the
rapidly changing technological standards in our industry. If we
make any acquisitions, we will be required to assimilate the
personnel, operations and products of the acquired business and
train, retain and motivate key personnel from the acquired
business. However, the key personnel of the acquired business
may decide not to work for us. Moreover, if the operations of an
acquired company or business do not meet our expectations, we
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 we did in the third quarter of 2000. No assurance
can be given that any acquisition by us will or will not occur,
that if an acquisition does occur, that it will not materially
and adversely affect us, or that any such acquisition will be
successful in enhancing our business.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We are dependent upon our key management
	for our future success, and few of our managers are obligated to
	stay with us

Our success depends on the efforts and abilities
of our senior management and certain other key personnel. Many
of our key employees are employed on an at-will basis. If any of
our key employees left or

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were unable to work and we were unable to find a
suitable replacement, then our business, financial condition and
results from operations could be materially harmed.




| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | We may not be able to hire and retain
	qualified employees, which would impair our ability to
	grow

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



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | We face significant competition and
	competition in our market is likely to increase and could harm
	our business

The market for our products is intensely
competitive and characterized by rapidly changing technology,
evolving industry standards, price erosion, changes in
customers needs, and frequent new product introductions.
We anticipate continued growth and competition in our industry
and the entrance of new competitors into our market, and
accordingly, the market for our products will remain intensely
competitive. We expect that competition will increase in the
near term and that our primary long-term competitors may not yet
have entered the market. Several key factors contribute to the
continued growth of our marketplace including the proliferation
of Microsoft Windows client server technology, and the continued
implementation of web-based access to corporate mainframe and
midrange computer systems. Our connectivity software products
compete with major computer and communication systems vendors,
including Microsoft, IBM, and Sun Microsystems, Inc., as well as
smaller networking software companies such as Jacada, Seagull,
and Hummingbird Communications Ltd. We also face competition
from makers of terminal emulation software such as Attachmate
Corporation, and WRQ, Inc.

Many of our current competitors have, and many of
our future competitors may have, substantially greater
financial, technical, sales, marketing and other resources, in
addition to greater name recognition and a larger customer base
than us. The market for our products is characterized by
significant price competition and we anticipate that we will
face increasing pricing pressures from our competitors in the
future. In addition, our current and future competitors may be
able to respond more quickly to new or emerging technologies and
changes in customer requirements than we can. Increased
competition could result in price reductions, fewer customer
orders, reduced gross profit margins and loss of market share,
any of which could harm our business.

Furthermore, our competitors could seek to expand
their product offerings by designing and selling products using
technology that could render obsolete or adversely affect sales
of our products. These developments may adversely affect sales
of our products either by directly affecting customer-purchasing
decisions or by causing potential customers to delay their
purchases of our products. Several of our 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. We have 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 our business,
financial condition or results of operations.

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| |                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we fail to manage technological change,
	respond to consumer demands or evolving industry standards or if
	we fail to enhance our products interoperability with the
	products of our customers, demand for our products will decrease
	and our business will suffer

From time to time many of our customers have
delayed purchase decisions due to the confusion in the
marketplace relating to rapidly changing technology and product
introductions. To maintain or improve our position in this
industry, we must successfully develop, introduce, and market
new products and product enhancements on a timely and
cost-effective basis. We have 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
us 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 our business, financial condition, and results of
operations. The failure to develop products or product
enhancements incorporating new functionality on a timely basis
could cause customers to delay purchase of our current products
or cause customers to purchase products from our competitors;
either situation would adversely affect our business, financial
condition, and results of operations. We may not be successful
in developing new products or enhancing our existing products on
a timely basis, and any new products or product enhancements
developed by us may not achieve market acceptance. In addition,
we incorporate software and other technologies owned by third
parties and as a result, we are 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.



| |                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend upon technology licensed from
	third parties, and if we do not maintain these license
	arrangements, we will not be able to ship many of our products
	and our business will be seriously harmed

Certain of our products incorporate software and
other technologies developed and maintained by third parties. We
license these technologies from third parties under agreements
with a limited duration and we may not be able to maintain these
license arrangements. If we fail to maintain our license
arrangements or find suitable replacements, we would not be able
to ship many of our products and our business would be
materially harmed. For example, we have a license agreement with
Dart Technologies for Power TCP Telnet and Power TCP VT320
for 5 years which we use in the OnWeb product line. There
can be no assurance that we would be able to replace the
functionality provided by the third party technologies currently
offered in conjunction with our products if those technologies
become unavailable to us or obsolete or incompatible with future
versions of our products or market standards.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We depend upon the compatibility of our
	products with applications operating on Microsoft Windows to
	sell our products

Substantially all of our 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 our products might be negatively impacted by
developments adverse to Microsofts Windows products. In
addition, our strategy of developing products based on the
Windows operating environment is substantially dependent on our
ability to gain pre-release access to, and to develop expertise
in, current and future Windows developments by Microsoft. If we
are unable to provide on a timely basis products compatible with
future Windows releases, our business could be harmed.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of any of our strategic
	relationships would make it more difficult to keep pace with
	evolving industry standards and to design products that appeal
	to the marketplace

Our future success depends on our ability to
maintain and enter into new strategic alliances and OEM
relationships to develop necessary products or technologies, to
expand our distribution channels or to jointly market or gain
market awareness for our products. We currently rely on
strategic relationships, such as those with Microsoft to provide
us with state of the art technology, assist us in integrating
our products with leading industry applications and help us make
use of economies of scale in manufacturing and distribution.
However,

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we do not have written agreements with many of
our strategic partners that could ensure these relationships
will continue for a significant period of time. Many of our
agreements with these partners are informal and may be
terminated by them at any time. There can be no assurance that
we will be successful in maintaining current alliances or
developing new alliances and relationships or that such
alliances and relationships will achieve their intended purposes.




| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | We may be subject to product returns,
	product liability claims and reduced sales because of defects in
	our products

Software products as complex as those offered by
us may contain undetected errors or failures when first
introduced or as new versions are released. The likelihood of
errors is higher when a new product is introduced or when new
versions or enhancements are released. Errors may also arise as
a result of defects in the products which are incorporated into
our products. There can be no assurance that, despite testing by
us 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. We may be required to devote significant
financial resources and personnel to correct any defects. Known
or unknown errors or defects that affect the operation of our
products could result in the following, any of which could have
a material adverse effect on our business, financial condition,
and results of operations:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | delay or loss or revenues;                                   
|
| |  | cancellation of a purchase order or contract due
	to defects;
|
| |  | diversion of development resources;                          
|
| |  | damage to our reputation;                                    
|
| |  | failure of our products to achieve market
	acceptance;       
|
| |  | increased service and warranty costs; and                    
|
| |  | litigation costs.                                            

Although some of our licenses with customers
contain provisions designed to limit our exposure to potential
product liability claims, these contractual limitations on
liability may not be enforceable. In addition, our product
liability insurance may not be adequate to cover our losses in
the event of a product liability claim resulting from defects in
our products and may not be available to us in the future.



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Our business depends upon licensing our
	intellectual property, and if we fail to protect our proprietary
	rights, our business could be harmed

Our ability to compete depends substantially upon
our internally developed technology. We rely primarily on a
combination of copyright and trademark laws, trade secrets,
confidentiality procedures, and contractual provisions to
protect our proprietary rights. We seek to protect our 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 our efforts to protect our
proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our products
and technology is difficult and, while we are unable to
determine the extent to which piracy of our software products
exists, software piracy can be expected to be a persistent
problem. In selling our products, we rely 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 our proprietary rights
to as great an extent as do the laws of the United States. If we
are not successful in protecting our intellectual property, our
business could be substantially harmed.

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| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | We rely upon trademarks, copyrights and
	trade secrets to protect our proprietary rights, which are only
	of limited value

There can be no assurance that our means of
protecting our proprietary rights will be adequate or that our
competitors will not independently develop similar technology.
In addition, the number of patents applied and granted for
software inventions is increasing. Despite any precautions which
we have taken:



| |   |                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | laws and contractual restrictions may not be
	sufficient to prevent misappropriation of our technology or
	deter others from developing similar technologies;                                                                              
|
| |  | other companies may claim common law trademark
	rights based upon state or foreign law which precede our federal
	registration of such marks; and                                                                                          
|
| |  | current federal laws that prohibit software
	copying provide only limited protection from software
	pirates, and effective trademark, copyright and
	trade secret protection may be unavailable or limited in certain
	foreign countries.



| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | Our pending patents may never be issued,
	and even if issued, may provide us with little
	protection

We regard the protection of patentable inventions
as important to our business. It is possible that:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our pending patent applications may not result in
	the issuance of patents;                                                                                                                               
|
| |  | our patents may not be broad enough to protect
	our proprietary rights;                                                                                                                                   
|
| |  | any issued patent could be successfully
	challenged by one or more third parties, which could result in
	our loss of the right to prevent others from exploiting the
	inventions claimed in those patents;
|
| |  | current and future competitors may independently
	develop similar technology, duplicate our products or design
	around any of our patents; and                                                            
|
| |  | effective patent protection, if any, may not be
	available in every country in which we do business.                                                                                                      

If we are not successful in asserting our patent
rights, our business could be substantially harmed. At the
present time, we have no patents pending and we have been issued
approximately 100 patents from the U.S. Patent Office.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have received notices of claims that may
	result in litigation and we may become involved in costly and
	time-consuming litigation over proprietary rights

Substantial litigation regarding intellectual
property rights exist in our industry. We expect that software
in our industry may be increasingly subject to third party
infringement claims as the number of competitors grows and the
functionality of products in different areas of the industry
overlap. Third parties may currently have, or may eventually be
issued, patents that would be infringed by our products or
technology. We cannot be certain that any of these third parties
will not make a claim of infringement against us with respect to
our products and technology. We have received, and may receive
in the future, communications from third parties asserting that
our products infringe, or may infringe, the proprietary rights
of third parties seeking indemnification against such
infringement or indicating that we may be interested in
obtaining a license from such third parties. Any claims or
actions asserted against us could result in the expenditure of
significant financial resources and the diversion of
managements time and efforts. In addition, litigation in
which we are accused of infringement may cause product shipment
delays, require us to develop non-infringing technology or
require us to enter into royalty or license agreements even
before the issue of infringement has been decided on the merits.
If any litigation were not to be resolved in our favor, we could
become subject to substantial damage claims and be prohibited
from using the technology at issue without a royalty or license
agreement. These royalty or license agreements, if required,
might not be available on acceptable terms, or at all, and could
result in significant costs and harm our business. If a
successful claim of infringement is made against us and we
cannot develop non-infringing technology or license the
infringed or similar technology on a timely and cost-effective
basis, our business could be significantly harmed.

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| |                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is subject to risks from
	international operations such as legal uncertainty, tariffs,
	trade barriers and political and economic
	instability

We derived approximately 26% of our net revenues
from sales outside of North America (United States and Canada)
during the year ended December 31, 2001. While we expect
that international sales will continue to account for a
significant portion of our net revenues, there can be no
assurance that we will be able to maintain or increase
international market demand for our products or that our
distributors will be able to effectively meet that demand. Risks
inherent in our international business activities generally
include, among others:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | unexpected changes in regulatory requirements;                                                         
|
| |  | legal uncertainty;                                                                                     
|
| |  | language barriers in business discussions;                                                             
|
| |  | cultural differences in the negotiation of
	contracts and conflict resolution;                         
|
| |  | time zone differences;                                                                                 
|
| |  | 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.                                         

Many of our customers are subject to many of the
risks described above. These factors may have an adverse effect
on our international sales and, consequently, on our business,
financial condition or results of operations.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | Terrorist attacks and threats or actual war
	could adversely affect our operating results and the price of
	our common stock

Recent terrorist attacks in the United States, as
well as future events occurring in response or connection to
them, including, without limitation, future terrorist attacks
against United States targets, rumors or threats of war, actual
conflicts involving the United States or its allies or military
may impact our operations. Any of these events could cause
consumer confidence and spending to decrease or result in
increased volatility in the U.S. and worldwide financial markets
and economy. These events also could result in economic
recession in the U.S. or abroad. Any of these occurrences could
have significant impact on our operating results, revenues and
costs and may result in the volatility of the market price for
our common stock and on the future price of our common stock.



| |                                                            
| | -----------------------------------------------------------
| | Uncertainties exist regarding our stock
	repurchase program

Previously, we announced that our board of
directors had approved the repurchase of up to
fifteen million shares of our common stock. Stock
repurchase activities are subject to certain pricing
restrictions, stock market forces, management discretion and
various regulatory requirements. As a result, there can be no

37



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assurance as to the timing and/or amount of
shares that we may repurchase under this stock repurchase
program.




| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | It may be difficult to raise needed capital
	in the future, which could significantly harm our
	business

We may require substantial additional capital to
finance our future growth and fund our ongoing operations beyond
2001. Our capital requirements will depend on many factors
including, among other things:



| |   |                                                                                        
| | - | ---------------------------------------------------------------------------------------
| |  | acceptance of and demand for our products;                                             
|
| |  | the number and timing of acquisitions and the
	cost of such acquisitions;              
|
| |  | the costs of developing new products;                                                  
|
| |  | the costs associated with our expansion; and                                           
|
| |  | the extent to which we invest in new technology
	and research and development projects.

Although our current business plan does not
foresee the need for further financing activities to fund our
operations for the foreseeable future, due to risks and
uncertainties in the marketplace as well as a potential of
pursuing further acquisitions, we may need to raise additional
capital. If we issue additional stock to raise capital, your
percentage ownership in NetManage would be reduced. Additional
financing may not be available when needed and, if such
financing is available, it may not be available on terms
favorable to us.



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Because of their significant stock
	ownership, our officers and directors can exert significant
	control over our future direction

As of March 5, 2002, our officers, directors
and entities affiliated with them, in the aggregate,
beneficially owned approximately 12.1 million shares, or
19% of our outstanding common stock. These stockholders, if
acting together, would be able to exert significant influence on
all matters requiring approval by our stockholders, including
the election of directors, the approval of mergers or other
business combination transactions or a sale of all or
substantially all of our assets.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain provisions of our stock option
	plans and our certificate of incorporation and bylaws make
	changes of control difficult even if they would be beneficial to
	stockholders

Our 1992 Stock Option Plan and our 1999
Nonstatutory Stock Option Plan provide that, in the event of a
change of control of NetManage, all options outstanding under
those plans would become fully vested and exercisable for at
least 10 days prior to the consummation of such change of
control transaction. These acceleration of vesting provisions
may have the effect of deterring an offer to purchase NetManage.

In addition, our board of directors has the
authority without any further vote or action on the part of the
stockholders to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and
restrictions of the preferred stock. This preferred stock, if it
is ever issued, may have preference over and harm the rights of
the holders of our common stock. Although the issuance of this
preferred stock will provide us with flexibility in connection
with possible acquisitions and other corporate purposes, the
issuance of the preferred stock may make it more difficult for a
third party to acquire a majority of our outstanding voting
stock. We currently have no plans to issue preferred stock.

Our certificate of incorporation and bylaws
include provisions that may have the effect of deterring an
unsolicited offer to purchase our stock. These provisions,
coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest
involving us. Furthermore, our board of directors is divided
into three classes, only one of which is elected each year.
Directors are only capable of being removed by the affirmative
vote of two thirds or greater of all classes of voting stock.
These factors may further delay or prevent a change of control.

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| |                                                                                    
| | -----------------------------------------------------------------------------------
| | We face risks from the uncertainties of
	current and future governmental regulation

We are 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 our products, increase our cost
of doing business or otherwise have an adverse effect on our
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 our 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 our ability to distribute
products outside of the United States or electronically. While
we take 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 our 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 our
business, financial condition, or results of operations.

Quarterly financial information

The following table sets forth unaudited
quarterly financial information for the 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.

We have experienced, and expect 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. Our 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 our revenues are generally recognized
in the third month of each quarter and tend to occur in the
latter half of that month. We believe that period-to-period
comparisons of our results of operations are not necessarily
meaningful and should not be relied upon as indications of
future performance.

|                                                |                            |                                       |        |        |   |        |         |         |   |        |         |         |   |        |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |      |  
|----------------------------------------------- | -------------------------- | ------------------------------------- | ------ | ------ | - | ------ | ------- | ------- | - | ------ | ------- | ------- | - | ------ | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ---- | -
|                                                |                            |                                       |        |       
|                                                |                            | 2000                                  |        | 2001  
|                                                |                            |                                       |        |       
|                                                |                            | 31-Mar                                |        | 30-Jun |   | 30-Sep |         | 31-Dec  |   | 31-Mar |         | 30-Jun  |   | 30-Sep |        | 31-Dec
|                                                |                            |                                       |        |        |   |        |         |         |   |        |         |         |   |        |        |       
|                                                |                            |                                      
|                                                |                            | (In thousands, except per share data)
|Statement of Operations Data:                   |                            |                                       |        |        |   |        |         |         |   |        |         |         |   |        |        |        |   |   |        |        |   |   |        |        |   |   |        |        |   |   |        |     
|Net revenues                                    |                            | $                                     | 27,430 |        |   | $      | 24,631  |         |   | $      | 25,719  |         |   | $      | 26,292 |        |   | $ | 21,731 |        |   | $ | 20,349 |        |   | $ | 18,094 |        |   | $ | 19,796 |     
|Gross margin                                    |                            | $                                     | 26,303 |        |   | $      | 23,445  |         |   | $      | 24,692  |         |   | $      | 25,405 |        |   | $ | 20,926 |        |   | $ | 19,347 |        |   | $ | 17,303 |        |   | $ | 18,940 |     
|                                                | Loss from operations(1)(2) |                                       | $      | (7,721 | ) |        | $       | (14,410 | ) |        | $       | (52,266 | ) |        | $      | (585   | ) |   | $      | (5,830 | ) |   | $      | (3,271 | ) |   | $      | (1,734 | ) |   | $      | (485 | )
|Net Income (loss)(3)                            |                            | $                                     | (7,402 | )      |   | $      | (13,668 | )       |   | $      | (52,066 | )       |   | $      | 1,226  |        |   | $ | (5,234 | )      |   | $ | (2,504 | )      |   | $ | (1,911 | )      |   | $ | 355    |     
|Net Income (loss) per share, basic and
	diluted |                            | $                                     | (0.12  | )      |   | $      | (0.21   | )       |   | $      | (0.80   | )       |   | $      | 0.02   |        |   | $ | (0.08  | )      |   | $ | (0.04  | )      |   | $ | (0.03  | )      |   | $ | 0.01   |     
|Weighted average common shares, basic           |                            |                                       | 64,138 |        |   |        | 64,547  |         |   |        | 66,073  |         |   |        | 66,050 |        |   |   | 65,223 |        |   |   | 65,471 |        |   |   | 64,969 |        |   |   | 64,073 |     
|Weighted average common shares, diluted         |                            |                                       | 64,138 |        |   |        | 64,547  |         |   |        | 66,073  |         |   |        | 66,188 |        |   |   | 65,223 |        |   |   | 65,471 |        |   |   | 64,969 |        |   |   | 64,268 |     



---



|    |                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------
|(1) | Loss from operations includes write-offs of
	in-process research and development of $1.7 million for the
	quarter ended June 30, 2000.
|   
|(2) | Loss from operations includes a charge for asset
	impairment of $42.2 million for the quarter ended
	September 30, 2000.              
|   
|(3) | Net income includes a credit tax provision of
	$400,000 for the quarter ended December 31, 2001.                                      

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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.

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Item 8  Financial Statements and
Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                               |                                                                                                       |      |  |    | 
|------------------------------ | ----------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                               |                                                                                                       | Page
|                               |                                                                                                       |     
|Financial Statements:          |                                                                                                       |      |  |   
|                               | Report of Independent Public Accountants                                                              |      |  | 42 | 
|                               | Consolidated Balance Sheets at December 31,
	2001 and 2000                                            |      |  | 43 | 
|                               | Consolidated Statements of Operations 
	Years ended December 31, 2001, 2000, and 1999                |      |  | 44 | 
|                               | Consolidated Statements of Other Comprehensive
	Loss  Years ended December 31, 2001, 2000, and
	1999 |      |  | 45 | 
|                               | Consolidated Statements of Stockholders
	Equity  Years ended December 31, 2001, 2000, and
	1999     |      |  | 46 | 
|                               | Consolidated Statements of Cash Flows 
	Years ended December 31, 2001, 2000, and 1999                |      |  | 47 | 
|                               | Notes to Consolidated Financial Statements                                                            |      |  | 48 | 
|Financial Statement Schedules: |                                                                                                       |      |  |   
|                               | II  Valuation and Qualifying Accounts                                                                |      |  | 72 | 

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.

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##### Table of Contents



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, 2001 and 2000, 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,
2001. 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 of
America. 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of NetManage, Inc. and our
subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in
conformity with accounting principles generally accepted in the
United States of America.

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. This schedule has been subjected to the auditing
procedures applied in our audits 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 28, 2002


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NETMANAGE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share
amounts)


|                                       |                                                                            |                                                              |                                            |          |        |        |        |          |        |         | 
|-------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------ | -------- | ------ | ------ | ------ | -------- | ------ | ------- | 
|                                       |                                                                            |                                                             
|                                       |                                                                            | December 31,                                                
|                                       |                                                                            |                                                             
|                                       |                                                                            | 2001                                                         |                                            | 2000    
|                                       |                                                                            |                                                              |                                            |         
|ASSETS                                
|                                      
|Current Assets                         |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       | Cash and cash equivalents                                                  |                                                              | $                                          | 32,766   |        |        | $      | 35,017   |       
|                                       | Short-term investments                                                     |                                                              |                                            | 792      |        |        |        | 3,033    |       
|                                       | Accounts receivable, net of allowances of $2,448
	and $4,088, respectively |                                                              |                                            | 17,794   |        |        |        | 26,081   |       
|                                       | Prepaid expenses and other current assets                                  |                                                              |                                            | 3,487    |        |        |        | 11,591   |       
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            | Total current assets                                         |                                            |          | 54,839 |        |        |          | 75,722 |        
|Property and equipment, at cost        |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       | Computer software and equipment                                            |                                                              |                                            | 9,259    |        |        |        | 10,005   |       
|                                       | Furniture and fixtures                                                     |                                                              |                                            | 6,138    |        |        |        | 6,268    |       
|                                       | Leasehold improvements                                                     |                                                              |                                            | 2,805    |        |        |        | 3,302    |       
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            |                                                              | 18,202                                     |          |        |        | 19,575 |         
|                                       | Less-accumulated depreciation                                              |                                                              |                                            | (14,319  | )      |        |        | (12,581  | )     
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            | Net property and equipment                                   |                                            |          | 3,883  |        |        |          | 6,994  |        
|Goodwill and other intangibles, net    |                                                                            |                                                              | 17,581                                     |          |        |        | 23,689 |         
|Other assets                           |                                                                            |                                                              | 3,133                                      |          |        |        | 3,576  |         
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            |                                                              | Total assets                               |          | $      | 79,436 |        |          | $      | 109,981 | 
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|LIABILITIES AND STOCKHOLDERS
	EQUITY 
|Current Liabilities:                   |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       | Accounts payable                                                           |                                                              | $                                          | 2,691    |        |        | $      | 5,050    |       
|                                       | Accrued liabilities                                                        |                                                              |                                            | 7,262    |        |        |        | 17,426   |       
|                                       | Accrued payroll and related expenses                                       |                                                              |                                            | 3,280    |        |        |        | 4,500    |       
|                                       | Deferred revenue                                                           |                                                              |                                            | 21,154   |        |        |        | 24,453   |       
|                                       | Income taxes payable                                                       |                                                              |                                            | 3,811    |        |        |        | 4,000    |       
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            |                                                              | Total current liabilities                  |          |        | 38,198 |        |          |        | 55,429  | 
|Long-term liabilities                  |                                                                            |                                                              | 286                                        |          |        |        | 1,523  |         
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            |                                                              | Total liabilities                          |          |        | 38,484 |        |          |        | 56,952  | 
|Commitments and contingencies (Note 5) |                                                                            |                                                              |                                            |          |        |        |        |         
|Stockholders equity:                  |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       | Common stock, $0.01 par value                                             |                                                              |                                            |          |        |        |        |          |       
|                                       |                                                                            | Authorized  125,000,000 shares                              |                                            |          |        |        |        |          |        |        
|                                       |                                                                            | Issued  73,699,646 and 72,625,520
	shares respectively      |                                            |          |        |        |        |          |        |        
|                                       |                                                                            | Outstanding  63,980,803 and 65,266,455
	shares respectively |                                            |          | 737    |        |        |          | 726    |        
|                                       | Treasury stock, at cost  9,719,612 and
	7,359,065 shares respectively     |                                                              |                                            | (18,267  | )      |        |        | (16,414  | )     
|                                       | Additional paid in capital                                                 |                                                              |                                            | 176,789  |        |        |        | 176,081  |       
|                                       | Accumulated deficit                                                        |                                                              |                                            | (112,668 | )      |        |        | (103,374 | )     
|                                       | Accumulated other comprehensive loss                                       |                                                              |                                            | (5,639   | )      |        |        | (3,990   | )     
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            | Total stockholders equity                                   |                                            |          | 40,952 |        |        |          | 53,029 |        
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         
|                                       |                                                                            |                                                              | Total liabilities and stockholders equity |          | $      | 79,436 |        |          | $      | 109,981 | 
|                                       |                                                                            |                                                              |                                            |          |        |        |        |         

The accompanying notes are an integral part of
these consolidated financial statements.

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NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |        |         | 
|--------------------------------------------- | ------------------------------------------------ | ------------------------ | ------- | ------ | ------ | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                              |                                                  |                         
|                                              |                                                  | Years Ended December 31,
|                                              |                                                  |                         
|                                              |                                                  | 2001                     |         | 2000   |        | 1999
|                                              |                                                  |                          |         |        |        |     
|Net Revenues:                                 |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                              | License fees                                     |                          | $       | 39,349 |        |      | $       | 56,273 |         |   | $       | 56,527 |        
|                                              | Services                                         |                          |         | 40,621 |        |      |         | 47,799 |         |   |         | 22,673 |        
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                              |                                                  | Total net revenues       |         |        | 79,970 |      |         |        | 104,072 |   |         |        | 79,200  | 
|Cost of revenues                              |                                                  |                          | 3,454   |        |        |      | 4,227   |        |         |   | 4,640   |       
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|Gross margin                                  |                                                  |                          | 76,516  |        |        |      | 99,845  |        |         |   | 74,560  |       
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                             
|Operating Expenses:                           |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                              | Research and development                         |                          |         | 17,960 |        |      |         | 24,394 |         |   |         | 18,539 |        
|                                              | Sales and marketing                              |                          |         | 53,220 |        |      |         | 71,881 |         |   |         | 45,337 |        
|                                              | General and administrative                       |                          |         | 10,579 |        |      |         | 18,740 |         |   |         | 14,107 |        
|                                              | Insurance recovery                               |                          |         |       |        |      |         | (3,816 | )       |   |         |       |        
|                                              | Write-off of in-process research and development |                          |         |       |        |      |         | 1,700  |         |   |         | 19,100 |        
|                                              | Restructuring                                    |                          |         |       |        |      |         | 5,600  |         |   |         | 3,791  |        
|                                              | Goodwill and other intangible assets impairment  |                          |         |       |        |      |         | 42,164 |         |   |         |       |        
|                                              | Amortization of goodwill                         |                          |         | 6,077  |        |      |         | 14,164 |         |   |         | 5,685  |        
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                              |                                                  | Total operating expenses |         |        | 87,836 |      |         |        | 174,827 |   |         |        | 106,559 | 
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|Loss from operations                          |                                                  |                          | (11,320 | )      |        |      | (74,982 | )      |         |   | (31,999 | )     
|Interest income and other, net                |                                                  |                          | 2,104   |        |        |      | 1,836   |        |         |   | 4,887   |       
|Gain on investment, net                       |                                                  |                          |        |        |        |      | 1,973   |        |         |   |        |       
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|Loss before income taxes                      |                                                  |                          | (9,216  | )      |        |      | (71,173 | )      |         |   | (27,112 | )     
|Provision for income taxes                    |                                                  |                          | 78      |        |        |      | 737     |        |         |   | 380     |       
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|Net loss                                      |                                                  | $                        | (9,294  | )      |        | $    | (71,910 | )      |         | $ | (27,492 | )     
|                                              |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                             
|Net Loss Per share                            |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                              | Basic                                            |                          | $       | (0.14  | )      |      | $       | (1.11  | )       |   | $       | (0.42  | )      
|                                              | Diluted                                          |                          | $       | (0.14  | )      |      | $       | (1.11  | )       |   | $       | (0.42  | )      
|                                             
|Weighted Average Common Shares &
	Equivalents |                                                  |                          |         |        |        |      |         |        |         |   |         |       
|                                              | Basic                                            |                          |         | 64,934 |        |      |         | 64,863 |         |   |         | 64,712 |        
|                                              | Diluted                                          |                          |         | 64,934 |        |      |         | 64,863 |         |   |         | 64,712 |        

The accompanying notes are an integral part of
these consolidated financial statements.

44



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NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE
LOSS

(In thousands)


|                                   |                                            |                          |         |        |   |      |         |      |   |   |         |        |  
|---------------------------------- | ------------------------------------------ | ------------------------ | ------- | ------ | - | ---- | ------- | ---- | - | - | ------- | ------ | -
|                                   |                                            |                         
|                                   |                                            | Years Ended December 31,
|                                   |                                            |                         
|                                   |                                            | 2001                     |         | 2000   |   | 1999
|                                   |                                            |                          |         |        |   |     
|Net loss                           |                                            | $                        | (9,294  | )      |   | $    | (71,910 | )    |   | $ | (27,492 | )     
|Other comprehensive income (loss): |                                            |                          |         |        |   |      |         |      |   |   |         |       
|                                   | Unrealized gain (loss) on investments, net |                          |         | (1,013 | ) |      |         |     |   |   |         | (13    | )
|                                   | Foreign currency translation adjustments   |                          |         | (636   | ) |      |         | (899 | ) |   |         | (1,462 | )
|                                   |                                            |                          |         |        |   |      |         |      |   |   |         |       
|Other comprehensive loss           |                                            | $                        | (10,943 | )      |   | $    | (72,809 | )    |   | $ | (28,967 | )     
|                                   |                                            |                          |         |        |   |      |         |      |   |   |         |       

The accompanying notes are an integral part of
these consolidated financial statements.

45



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NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(In thousands, except share amounts)


|                                                                          |  |              |            |          |  |            |     |              |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------- |  | ------------ | ---------- | -------- |  | ---------- | --- | ------------ |  | ------------- | ------- | ---- |  | ----- | ------- |  |  | - | -------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                          |  |              |            |          |  |            |     | Retained     |  | Accumulated   |         |     
|                                                                          |  | Common Stock |            |          |  | Additional |     | Earnings     |  | Other         |         |     
|                                                                          |  |              |            | Treasury |  | Paid-in    |     | (Accumulated |  | Comprehensive |         |     
|                                                                          |  | Shares       |            | Amount   |  | Stock      |     | Capital      |  | Deficit)      |         | Loss |  | Total
|                                                                          |  |              |            |          |  |            |     |              |  |               |         |      |  |      
|Balance, December 31, 1998                                                |  |              | 67,348,477 |          |  | $          | 693 |              |  | $             | (4,246  | )    |  | $     | 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 common stock options                                          |  |              | 175,787    |          |  |            | 2   |              |  |               |        |      |  |       | 302     |  |  |   |         |   |  |   |       |   |  |   | 304     |  
|Repurchase of common stock for cash                                       |  |              | (4,325,600 | )        |  |            |    |              |  |               | (11,313 | )    |  |       |        |  |  |   |         |   |  |   |       |   |  |   | (11,313 | )
|Unrealized loss on investments                                            |  |              |           |          |  |            |    |              |  |               |        |      |  |       |        |  |  |   |         |   |  |   | (13    | ) |  |   | (13     | )
|Translation adjustment                                                    |  |              |           |          |  |            |    |              |  |               |         |      |  |       |        |  |  |   |         |   |  |   | (1,462 | ) |  |   | (1,462  | )
|Net loss                                                                  |  |              |           |          |  |            |    |              |  |               |         |      |  |       |        |  |  |   | (27,492  | ) |  |   |       |   |  |   | (27,492 | )
|                                                                          |  |              |            |          |  |            |     |              |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 1999                                                |  |              | 63,807,849 |          |  |            | 701 |              |  |               | (15,559 | )    |  |       | 169,606 |  |  |   | (31,464  | ) |  |   | (3,091 | ) |  |   | 120,193 |  
|Sale of common stock under employee stock
	purchase plan                  |  |              | 707,229    |          |  |            | 7   |              |  |               |        |      |  |       | 969     |  |  |   |         |   |  |   |       |   |  |   | 976     |  
|Exercise of common 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  |  
|Sale of common stock under employee stock
	purchase plan                  |  |              | 1,072,706  |          |  |            | 11  |              |  |               |        |      |  |       | 706     |  |  |   |         |   |  |   |       |   |  |   | 717     |  
|Exercise of common stock options                                          |  |              | 2,189      |          |  |            |    |              |  |               |        |      |  |       | 2       |  |  |   |         |   |  |   |       |   |  |   | 2       |  
|Repurchase of common stock for cash                                       |  |              | (2,360,547 | )        |  |            |    |              |  |               | (1,853  | )    |  |       |        |  |  |   |         |   |  |   |       |   |  |   | (1,853  | )
|Unrealized gain (loss) on investments, net                                |  |              |           |          |  |            |    |              |  |               |        |      |  |       |        |  |  |   |         |   |  |   | (1,013 | ) |  |   | (1,013  | )
|Translation adjustment                                                    |  |              |           |          |  |            |    |              |  |               |        |      |  |       |        |  |  |   |         |   |  |   | (636   | ) |  |   | (636    | )
|Net loss                                                                  |  |              |           |          |  |            |    |              |  |               |        |      |  |       |        |  |  |   | (9,294   | ) |  |   |       |   |  |   | (9,294  | )
|                                                                          |  |              |            |          |  |            |     |              |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2001                                                |  |              | 63,980,803 |          |  | $          | 737 |              |  | $             | (18,267 | )    |  | $     | 176,789 |  |  | $ | (112,668 | ) |  | $ | (5,639 | ) |  | $ | 40,952  |  
|                                                                          |  |              |            |          |  |            |     |              |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  

The accompanying notes are an integral part of
these consolidated financial statements.

46



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##### Table of Contents



NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |         |        |        |         |  
|----------------------------------------------------- | ------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | ---------------------------------------------------------- | ---------------------------------------------------- | ----- | ------- | ------- | -------- | ------ | ------- | ------- | ------- | ------ | ------ | ------- | -
|                                                      |                                                                                            |                                                                             
|                                                      |                                                                                            | Years Ended December 31,                                                    
|                                                      |                                                                                            |                                                                             
|                                                      |                                                                                            | 2001                                                                         |                                                            | 2000                                                 |       | 1999   
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |        
|Cash Flows From Operating
	Activities:                |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|                                                      | Net loss                                                                                   |                                                                              | $                                                          | (9,294                                               | )     |         | $       | (71,910  | )      |         | $       | (27,492 | )     
|                                                      | Adjustments to reconcile net loss to net cash
	provided by (used in) operating activities: |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |         |       
|                                                      |                                                                                            | Depreciation and amortization                                                |                                                            |                                                      | 9,880 |         |         |          | 19,623 |         |         |         | 11,681 |       
|                                                      |                                                                                            | Provision for doubtful accounts and returns                                  |                                                            |                                                      | (48   | )       |         |          | 1,105  |         |         |         | 790    |       
|                                                      |                                                                                            | Write-off of in-process research and development                             |                                                            |                                                      |      |         |         |          | 1,700  |         |         |         | 19,100 |       
|                                                      |                                                                                            | Write-off of prepaid royalty, patents and
	copyrights                        |                                                            |                                                      | 31    |         |         |          |       |         |         |         |       |       
|                                                      |                                                                                            | Write-off of property, plant & equipment                                     |                                                            |                                                      | 152   |         |         |          |       |         |         |         |       |       
|                                                      |                                                                                            | Non-cash impairment charges                                                  |                                                            |                                                      |      |         |         |          | 42,164 |         |         |         |       |       
|                                                      |                                                                                            | Income tax refund                                                            |                                                            |                                                      | 7,435 |         |         |          |       |         |         |         |       |       
|                                                      |                                                                                            | Gain on exchange of marketable securities                                    |                                                            |                                                      |      |         |         |          | (1,973 | )       |         |         |       |       
|                                                      |                                                                                            | Change in operating assets and liabilities, net
	of business combinations:   |                                                            |                                                      |       |         |         |          |        |         |         |         |        |       
|                                                      |                                                                                            |                                                                              | Accounts receivable                                        |                                                      |       | 8,335   |         |          |        | 3,358   |         |         |        | 4,133  |        
|                                                      |                                                                                            |                                                                              | Prepaid expenses and other current assets                  |                                                      |       | 427     |         |          |        | 9,159   |         |         |        | (2,825 | )      
|                                                      |                                                                                            |                                                                              | Other assets                                               |                                                      |       | 443     |         |          |        | 588     |         |         |        | 1,658  |        
|                                                      |                                                                                            |                                                                              | Accounts payable                                           |                                                      |       | (2,359  | )       |          |        | (2,054  | )       |         |        | (2,483 | )      
|                                                      |                                                                                            |                                                                              | Accrued liabilities, payroll and payroll-related
	expenses |                                                      |       | (11,384 | )       |          |        | (14,174 | )       |         |        | (512   | )      
|                                                      |                                                                                            |                                                                              | Deferred revenue and other long-term liabilities           |                                                      |       | (3,299  | )       |          |        | (5,400  | )       |         |        | (3,115 | )      
|                                                      |                                                                                            |                                                                              | Income taxes payable                                       |                                                      |       | (189    | )       |          |        | (8,265  | )       |         |        | 4,063  |        
|                                                      |                                                                                            |                                                                              | Long term liabilities                                      |                                                      |       | (1,237  | )       |          |        |        |         |         |        |       |        
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|                                                      |                                                                                            |                                                                              |                                                            | Net cash provided by
	(used in) operating activities |       |         | (1,107  | )        |        |         | (26,079 | )       |        |        | 4,998   |  
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|Cash Flows From Investing
	Activities:                |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|                                                      | Purchases of short-term investments                                                        |                                                                              |                                                            | (111,830                                             | )     |         |         | (214,193 | )      |         |         | (56,861 | )     
|                                                      | Proceeds from maturities of short-term investments                                         |                                                                              |                                                            | 112,712                                              |       |         |         | 213,993  |        |         |         | 121,954 |       
|                                                      | Recognized gain on marketable securities                                                   |                                                                              |                                                            | (88                                                  | )     |         |         |         |        |         |         |        |       
|                                                      | Purchases of long-term investments                                                         |                                                                              |                                                            |                                                     |       |         |         |         |        |         |         | (23,973 | )     
|                                                      | Proceeds from maturities of long-term investments                                          |                                                                              |                                                            |                                                     |       |         |         |         |        |         |         | 53,274  |       
|                                                      | Purchases of property and equipment                                                        |                                                                              |                                                            | (844                                                 | )     |         |         | (874     | )      |         |         | (622    | )     
|                                                      | Acquisition of businesses, net of cash acquired                                            |                                                                              |                                                            |                                                     |       |         |         |         |        |         |         | (68,445 | )     
|                                                      | Purchase of equity investment carried at cost                                              |                                                                              |                                                            |                                                     |       |         |         | (1,500   | )      |         |         |        |       
|                                                      | Purchases of technology and other intangible
	assets                                       |                                                                              |                                                            |                                                     |       |         |         |         |        |         |         | (150    | )     
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|                                                      |                                                                                            |                                                                              |                                                            | Net cash provided by (used in) investing
	activities |       |         | (50     | )        |        |         | (2,574  | )       |        |        | 25,177  |  
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|Cash Flows From Financing
	Activities:                |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|                                                      | Proceeds from sale of common stock, net of
	issuance costs                                 |                                                                              |                                                            | 719                                                  |       |         |         | 2,175    |        |         |         | 1,313   |       
|                                                      | Repurchase of common stock                                                                 |                                                                              |                                                            | (1,853                                               | )     |         |         | (855     | )      |         |         | (11,313 | )     
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|                                                      |                                                                                            |                                                                              |                                                            | Net cash provided by (used in) financing
	activities |       |         | (1,134  | )        |        |         | 1,320   |         |        |        | (10,000 | )
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|Effect of exchange rate changes on cash               |                                                                                            |                                                                              | 40                                                         |                                                      |       |         | (729    | )        |        |         | (200    | )      
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|Net increase (decrease) in cash and cash
	equivalents |                                                                                            |                                                                              | (2,251                                                     | )                                                    |       |         | (28,062 | )        |        |         | 19,975  |        
|Cash and cash equivalents, beginning of year          |                                                                                            |                                                                              | 35,017                                                     |                                                      |       |         | 63,079  |          |        |         | 43,104  |        
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|Cash and cash equivalents, end of year                |                                                                                            | $                                                                            | 32,766                                                     |                                                      |       | $       | 35,017  |          |        | $       | 63,079  |        
|                                                      |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|Supplemental Cash Flow Information:                   |                                                                                            |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |        
|                                                      | Cash paid during the year for:                                                             |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |         |       
|                                                      |                                                                                            | Income taxes                                                                 |                                                            | $                                                    | 692   |         |         | $        | 871    |         |         | $       | 172    |       
|                                                      |                                                                                            | Interest                                                                     |                                                            | $                                                    | 39    |         |         | $        | 70     |         |         | $       | 182    |       
|                                                      | Non-Cash Transaction:                                                                      |                                                                              |                                                            |                                                      |       |         |         |          |        |         |         |         |       
|                                                      |                                                                                            | Issuance of shares and warrants in connection
	with the Aqueduct acquisition |                                                            | $                                                    |      |         |         | $        | 4,325  |         |         | $       |       |       

The accompanying notes are an integral part of
these consolidated financial statements.

47



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##### Table of Contents



NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Nature of
operations and organization:

We develop and market software and service
solutions that allow our customers to access and leverage the
considerable investment they have in their host-based business
applications, processes and data. Our 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 our 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 via 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 of innovative real-time Internet-based support
solutions.

We develop and market these software solutions to
allow our 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® based servers. We also provide professional support,
maintenance and technical consultancy services to our customers.

We have a range of host access, and host
integration products. Our Host Accessproducts provide
the applications and solutions that allow end-user devices
including personal computers, and devices running web browsers,
to communicate with large centralized corporate computer
systems. Host Accessproducts are marketed and sold under
the brand name of Rumba® for client-side Host Accesssolutions that run on personal computers and under the
OnWeb® brand for server-side Host Access solutions
that deliver connectivity for web browser users without the
requirement for software on the users device other than
the browser (zero footprint solutions). Our Host
Integrationproducts provide server-side solutions that
allow the integration of multiple host applications and business
process to create new applications for the web. The
Companys Host Integrationproducts also allow our
customers to integrate existing legacy applications with new
platform solutions such as those built using IBMs
WebSphere or BEAs WebLogic. Host Integration
products are marketed and sold under the OnWeb® brand name.
We and our customers derive a major benefit from the fact that
the underlying technology employed by our server-side Host
Accessand server-side Host Integrationsolutions is
the same.

2.     Summary of
significant accounting policies:

Principles of
consolidation

The consolidated financial statements include the
accounts of our Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.

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, foreign exchange contracts and
comprehensive income

The functional currency of our 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.

We currently do 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

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

rates. The principal instruments used were
forward foreign exchange contracts of which the counter-parties
were major financial institutions. There are no contracts
outstanding as of December 31, 2001.

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.



| |                          
| | -------------------------
| | Cash and cash equivalents

We consider all highly liquid investments with an
original maturity of three months or less to be cash equivalents.



| |                       
| | ----------------------
| | Short-term investments

We account for our 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, our
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 our
Consolidated Statement of Other Comprehensive Income.
Held-to-maturity securities are valued using the amortized cost
method. At December 31, 2001 and 2000, 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
dates for those instruments. The carrying value of our
short-term investments by major security type consisted of the
following as of December 31, 2001 and 2000 (in thousands):

|                                          |       |      |     |      |  |   |       |       | 
|----------------------------------------- | ----- | ---- | --- | ---- |  | - | ----- | ----- | 
|Description                               |       | 2001 |     | 2000
|                                          |       |      |     |     
|Available-for-sale securities             |       | $    | 792 |      |  | $ | 2,913 |      
|Held-to-maturity securities/time deposits |       |      | 0   |      |  |   | 120   |      
|                                          |       |      |     |      |  |   |       |      
|                                          | Total |      | $   | 792  |  |   | $     | 3,033 | 
|                                          |       |      |     |      |  |   |       |      

In December 2000 ServiceSoft, Inc., one of our
investments, was acquired by Broadbase, a publicly traded
company. As a result we received shares of Broadbase common
stock in exchange for our minority interest in ServiceSoft, Inc.
and recognized a gain of approximately $2.0 million on our
original investment. The shares of Broadbase common stock owned
by us were classified as available-for-sale securities as of
December 31, 2000. On June 29, 2001, Broadbase was
acquired by KANA Software Inc., or KANA, a publicly traded
company. We have recorded an unrealized loss on our holdings in
KANA of approximately $1.6 million as of December 31,
2001. This unrealized loss is based upon the change in market
value from the time of original acquisition to December 31,
2001 and is included in Accumulated other comprehensive
loss in the Equity section of the Companys balance
sheet.



| |                  
| | -----------------
| | Other investments

Other investments mainly consist of equity
interests in private companies with less than 20% ownership
interests. These investments are accounted for under the cost
method.

On May 4, 2000 we invested $1.5 million
in 2,822 Series B Preferred shares of stock in easyBASE,
Ltd. which is approximately 12% of the total ownership of
easyBASE, Ltd. Our Chairman and Chief Executive Officer,
Zvi Alon, also has a personal investment in easyBASE, Ltd.
He is also a member of the easyBASE, Ltd. Board of Directors.
See note 9 for subsequent events.

In May, June and December 1999 we invested a
total of $275,000 in pcFirst, Inc. On April 28, 2001
pcFirst, Inc. was purchased by fusionOne, Inc., a development
stage company, and we received 13,625 shares

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of common stock of fusionOne, Inc. Our investment
represents less than 1% of the total ownership of fusionOne, Inc.



| |                       
| | ----------------------
| | 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:

|                                |  |                                                        
|------------------------------- |  | -------------------------------------------------------
|Classification                  |  | Life                                                   
|                                |  |                                                        
|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



| |         
| | --------
| | 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 $21.9 million and $15.8
million at December 31, 2001 and 2000, respectively.

Subsequent to our acquisitions, we assess
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, we
review 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. We evaluate 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
our 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 shortfall in the level of
revenue was not a temporary condition. As a result, we revisited
our strategy to refocus itself on core competencies, revised our
business plan, and our projected future revenues for each family
of products.

Management believed it was necessary to
restructure 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, we announced a restructuring on
August 3, 2000 (see Note 4). As part of the
restructuring, we reduced our workforce by approximately 17%,
consisting mainly of Engineering and Customer support personnel
who were focused primarily on older technologies, acquired
through Wall Data and FTP acquisitions. With the reduction in
personnel, knowledge levels with respect to certain products and
our 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, we determined that there was a permanent
impairment of the long-lived assets related to the acquisitions
of Wall Data and FTP Software. We reevaluated the fair value of
these long-

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lived assets and intangibles using primarily the
estimated discounted cash flows method. Management used the same
methodology to evaluate the fair value of our long-lived assets
and intangibles to allocate purchase price at the time of
acquisition. As a result we 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 Statements of Operations as Goodwill
and other intangible assets impairment.

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



| |                                       
| | --------------------------------------
| | Accrued liabilities and
	restructuring

Accrued liabilities at December 31, 2001 and
2000 consisted of the following (in thousands):

|                              |       |      |       |       |  |   |        |        | 
|----------------------------- | ----- | ---- | ----- | ----- |  | - | ------ | ------ | 
|Description                   |       | 2001 |       | 2000 
|                              |       |      |       |      
|Costs related to acquisitions |       | $    | 0     |       |  | $ | 2,054  |       
|Restructuring (see Note 4)    |       |      | 2,591 |       |  |   | 4,997  |       
|Other accruals                |       |      | 4,671 |       |  |   | 10,375 |       
|                              |       |      |       |       |  |   |        |       
|                              | Total |      | $     | 7,262 |  |   | $      | 17,426 | 
|                              |       |      |       |       |  |   |        |       

We account 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 exit 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
we define as the development of a working model and further
define 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
changes in technology. Such costs are reported at the lower of
un-amortized 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,
software development costs that were eligible for capitalization
have not been significant, and we charged all software
development costs to research and development as incurred.



| |                              
| | -----------------------------
| | Concentrations of credit risk

Financial instruments which potentially subject
us to concentrations of credit risk consist principally of cash
investments and trade receivables. We have a cash investment
policy that limits the amount of credit exposure to any one
issuer and restricts 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 our customer base and their dispersion
across many different industries and geographies. There were no
customers that amounted for more than 10% of consolidated
revenues in 2001, 2000, and 1999.



| |                   
| | ------------------
| | 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

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2001, 2000,
and 1999, 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 420,056, 7,026,115, and 9,424,191, 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, 2001, 2000, and 1999, respectively.



| |                    
| | -------------------
| | Revenue recognition

We derive revenue from primarily two sources
(1) product revenue, which includes software license and
royalty revenue, and (2) services and support revenue which
includes software license maintenance and consulting.

We license our software products on a one and
two-year term basis or on a perpetual basis. Our two-year term
based licenses include the first year of maintenance and
support. To date such licenses have been insignificant.

We apply the provisions of Statement of
Position 97-2, Software Revenue Recognition, as
amended by Statement of Position 98-9 Modification of
SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions to all transactions involving the
sale of software products and hardware transaction where the
software is not incidental.

We recognize revenue from the sale of software
licenses to end users and resellers when persuasive evidence of
an arrangement exists, the product has been delivered, the fee
is fixed and determinable and collection of the resulting
receivable is reasonably assured. Delivery generally occurs when
product is delivered to a common carrier.

Product is sold without the right of return,
except for defective product that may be returned for
replacement. To date, such returns have been insignificant.
Certain of our sales are made to domestic distributors under
agreements allowing rights of return and price protection on
unsold merchandise. Accordingly, we defer recognition of such
sales until the distributor sells the merchandise. Our
international distributors generally do not have return rights
and, as such, we generally recognize sales to international
distributors upon shipment, provided all other revenue
recognition criteria have been met.

At the time of the transaction, we assess whether
the fee associated with our revenue transactions is fixed and
determinable and whether or not collection is reasonably
assured. We assess whether the fee is fixed and determinable
based on the payment terms associated with the transaction. If a
significant portion of a fee is due after our normal payment
terms, we account for the fee as not being fixed and
determinable. In these cases, we recognize revenue as the fees
become due.

We assess collection based on a number of
factors, including past transaction history with the customer
and the credit-worthiness of the customer. We do not request
collateral from our customers. If we determine that collection
of a fee is not reasonably assured, we defer the fee and
recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash.

For all sales, except those completed over the
Internet, we use either a binding purchase order or signed
license agreement as evidence of an arrangement. For sales over
the Internet, we use a credit card authorization as evidence of
an arrangement. Sales through our distributors are evidenced by
a master agreement governing the relationship together with
binding purchase orders on a transaction-by-transaction basis.

For arrangements with multiple elements (for
example, undelivered maintenance and support), we allocate
revenue to each component of the arrangement using the residual
value method based on vendor

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

specific objective evidence of the fair value of
the undelivered elements. This means that we defer revenue from
the arrangement fee equivalent to the fair value of the
undelivered elements. Fair values for the ongoing maintenance
and support obligations are generally based upon separate sales
of renewals to other customers or upon renewal rates quoted in
the contracts. Fair value of services, such as training or
consulting, is based upon separate sales by us of these services
to other customers.

Our arrangements do not generally include
acceptance clauses. However, if an arrangement includes an
acceptance provision, acceptance occurs upon the earlier of
receipt of a written customer acceptance or expiration of the
acceptance period.

Service revenues are derived from software
updates for existing software products, user documentation and
technical support, generally under annual service agreements.
These revenues are recognized ratably over the terms of such
agreements. If such services are included in the initial
licensing fee, the value of the services determined based on
vendor specific objective evidence is unbundled and recognized
ratably over the related service period. Service revenues
derived from consulting and training are deferred and recognized
when the services are performed and the collectibility is deemed
probable. To date, consulting revenue has not been significant.



| |                  
| | -----------------
| | Reclassifications

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



| |                                  
| | ---------------------------------
| | Recent accounting
	pronouncements

In August 2001, the Financial Accounting
Standards Board issued SFAS No. 144 Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS
No. 144 addresses financial accounting and reporting for
the long-lived assets to be held and used, and disposed of. The
statement will be effective for financial statements issued for
fiscal years beginning after December 15, 2001. Although we
do not currently expect the adoption of SFAS No. 144 to
have a material impact on our financial statements, we will
continue to assess any impairment of long-lived assets.

In July 2001, the Financial Accounting Standards
Board issued SFAS No.s 141 and 142, Business
Combinations and Goodwill and Other
Intangibles, respectively. SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under SFAS
No. 142, effective January 1, 2002, goodwill is no
longer subject to amortization over its estimated useful life.
Rather, goodwill is subject to at least an annual assessment for
impairment, applying a fair-value based test. Additionally, an
acquired intangible asset should be separately recognized if the
benefit of the intangible asset is obtained through contractual
or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the
acquirers intent to do so.

As a result of our adoption of SFAS 142, as
of January 1, 2002, we will no longer amortize goodwill.
Goodwill amortization for the year ended December 31, 2001
was approximately $2.7 million.

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Acquisitions

On June 5, 2000, we completed our
acquisition of Aqueduct Software, Inc. or Aqueduct, an early
stage web-based application intelligence company. We 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. We also
hired the three employees of Aqueduct who subsequently left us
in 2001. The acquisition was accounted for using the purchase
method of accounting, and accordingly, the results of Aqueduct
from the date of acquisition forward has been recorded in our
consolidated financial statements. The warrants and options,
none of which were exercised, expired on December 5, 2001.

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

|                                                     |  |   |       | 
|---------------------------------------------------- |  | - | ----- | 
|Value of NetManage common stock and warrants
	issued |  | $ | 4,325 | 
|Acquisition costs                                    |  |   | 311   | 
|                                                     |  |   |       | 
|                                                     |  | $ | 4,636 | 
|                                                     |  |   |       | 

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

|                                     |                     |   |       |       | 
|------------------------------------ | ------------------- | - | ----- | ----- | 
|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 | 
|                                     |                     |   |       |      

In connection with the acquisition of Aqueduct,
we 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, we completed the
acquisition of Wall Data Incorporated or Wall Data. We 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. We completed the transaction in two stages.
On November 26, 1999, we acquired approximately 89% of the
outstanding shares of Wall Data pursuant to the cash tender
offer. We 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
using the purchase method of accounting, and accordingly, the
results of Wall Data from the date of acquisition forward have
been recorded in our consolidated financial statements. As of
December 31, 2000, we had approximately $2.0 million
of acquisition-related costs for Wall Data, which was included
in accrued liabilities in our consolidated balance sheet. All
remaining expenses associated with the acquisition were recorded
and paid in 2001, and as of December 31, 2001, the balance
of the acquisition-related costs for Wall Data was $0. In
December 2000, we recorded a decrease to intangible assets of
approximately $8.3 million as a result of reversal of
liabilities we had overestimated at the acquisition date (see
note 2). The following tables reflect this adjustment.

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                       |  |   |         | 
|-------------------------------------- |  | - | ------- | 
|Cash payments pursuant to tender offer |  | $ | 94,048  | 
|Acquisition costs                      |  |   | 9,456   | 
|                                       |  |   |         | 
|                                       |  | $ | 103,504 | 
|                                       |  |   |         | 

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

|                                     |                     |   |         |         | 
|------------------------------------ | ------------------- | - | ------- | ------- | 
|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 | 
|                                     |                     |   |         |        

In connection with the acquisition of Wall Data,
we 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, trade name 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%. Both the PC-to-Host and Web-to-Host
projects were completed and released during 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 we 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. During 2001, PC-to-Host and Web-to-Host products
were completed in the time periods noted above.

We 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

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

flows to their present value. We 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 our 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 us and our 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; (1) cost of sales, (2) selling,
general and administrative expenses, and (3) 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 we 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 as if the acquisition of Wall Data had
occurred at the beginning of the period presented and at the
aggregate purchase price. The results are not necessarily
indicative of what would have occurred had the acquisition
actually been made at the beginning of the period 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 following unaudited pro forma financial 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):

|                                        |  |                   |         |  
|--------------------------------------- |  | ----------------- | ------- | -
|                                        |  | Year-Ended       
|                                        |  | December 31, 1999
|                                        |  |                  
|Revenue                                 |  | $                 | 138,706 |  
|Net loss                                |  | $                 | (70,073 | )
|Net loss per share, diluted             |  |                   | (1.08   | )
|Weighted average common shares, diluted |  |                   | 64,712  |  

On December 10, 1999, we completed our
acquisition of Simware Inc., or Simware, a leading provider of
e-commerce solutions and web integration servers. We 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. We completed the transaction in two
stages. On November 2, 1999, we acquired approximately 91%
of the outstanding shares of Simware pursuant to the cash tender
offer. We acquired the remaining outstanding shares of Simware
by means of a compulsory

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 our consolidated financial statements. As of
December 31, 2001, we 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):

|                                       |  |                   |        | 
|-------------------------------------- |  | ----------------- | ------ | 
|                                       |  | Year-Ended       
|                                       |  | December 31, 1999
|                                       |  |                  
|Cash payments pursuant to tender offer |  | $                 | 29,191 | 
|Acquisition costs                      |  |                   | 953    | 
|                                       |  |                   |        | 
|                                       |  | $                 | 30,144 | 
|                                       |  |                   |        | 

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

|                                     |                     |                   |        |        | 
|------------------------------------ | ------------------- | ----------------- | ------ | ------ | 
|                                     |                     | Year-Ended       
|                                     |                     | December 31, 1999
|                                     |                     |                  
|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 | 
|                                     |                     |                   |        |       

In connection with the acquisition of Simware, we
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. During 2001, the OnWeb 5.1 product
was released according to revised plan.

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 time we expected
to begin selling the developed products. Development costs to
complete the research and development were estimated at
approximately $1.9 million.

We 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

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. We 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 our 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 us, and our 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: (1) cost of sales; (2) selling,
general, administrative expenses; and (3) 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 as if the acquisition of Simware had
occurred at the beginning of the period 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 the period presented or
of future operations of the combined companies. The following
unaudited 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):

|                                        |  |                   |         |  
|--------------------------------------- |  | ----------------- | ------- | -
|                                        |  | Years Ended      
|                                        |  | December 31, 1999
|                                        |  |                  
|Revenue                                 |  | $                 | 88,463  |  
|Net loss                                |  | $                 | (13,558 | )
|Net loss per share, diluted             |  | $                 | (0.21   | )
|Weighted average common shares, diluted |  | $                 | 64,712  |  

4.     Restructuring
of operations

On August 3, 2000, we announced a
restructuring of our operations designed to re-focus our core
business functions and reduce operating expenses. In connection
with the restructuring, we reduced our 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

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

charges, $1.6 million of employee-related
expenses for employee terminations and an $800,000 settlement to
Verity for a software license that we no longer plan to use and
accordingly wrote-off. As of December 31, 2001, we had
incurred costs totaling approximately $4.6 million related
to the restructuring, which required $4.6 million in cash
expenditures. The remaining reserve related to this
restructuring is approximately $1.0 million and is included in
accrued liabilities.

The following table lists the components of the
August 2000 restructuring charge for the years ended
December 31, 2001 and 2000 (in thousands):

|                                                  |  |          |        |            |  |            |        |       |  |       |      |   |  |   |      |   |  |   |        |  
|------------------------------------------------- |  | -------- | ------ | ---------- |  | ---------- | ------ | ----- |  | ----- | ---- | - |  | - | ---- | - |  | - | ------ | -
|                                                  |  | Employee |        | Excess     |  | Verity     |        |       |  |      
|                                                  |  | Costs    |        | Facilities |  | Settlement |        | Other |  | Total
|                                                  |  |          |        |            |  |            |        |       |  |      
|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  |  
|Reserve utilized in year ended December 31,
	2001 |  |          | (100   | )          |  |            | (954   | )     |  |       |     |   |  |   | (73  | ) |  |   | (1,127 | )
|                                                  |  |          |        |            |  |            |        |       |  |       |      |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2001                      |  | $        |       |            |  | $          | 930    |       |  | $     |     |   |  | $ | 27   |   |  | $ | 957    |  
|                                                  |  |          |        |            |  |            |        |       |  |       |      |   |  |   |      |   |  |   |        |  

In the fourth quarter of 1999, following the
acquisitions of Wall Data and Simware, we initiated a plan to
restructure our worldwide operations in connection with the
integration of operations of the two acquired companies. In
connection with this plan, we 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. We
anticipated that the execution of the restructuring actions
would require total cash expenditures of approximately
$3.8 million that are expected to be funded from internal
operations. As of December 31, 2001, we had incurred costs
totaling approximately $ 2.8 million related to the
restructuring, which required $2.8 million in cash
expenditures. The remaining reserve related to this
restructuring is approximately $1.0 million and is included in
accrued liabilities.

The following table lists the components of the
NetManage restructuring charge from 1999 for the years ended
December 31, 2001, 2000, and 1999 (in thousands):

|                                                  |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  
|------------------------------------------------- |  | -------- | ------ | ---------- |  | ----- | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                                  |  | Employee |        | Excess     |  |       |       |      
|                                                  |  | Costs    |        | Facilities |  | Other |       | Total
|                                                  |  |          |        |            |  |       |       |      
|Reserve provided in 1999                          |  | $        | 1,448  |            |  | $     | 1,868 |       |  | $ | 475  |   |  | $ | 3,791  |  
|Reserve utilized in year ended December 31,
	1999 |  |          | (151   | )          |  |       |      |       |  |   |     |   |  |   | (151   | )
|                                                  |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  
|Balance at December 31, 1999                      |  |          | 1,297  |            |  |       | 1,868 |       |  |   | 475  |   |  |   | 3,640  |  
|Reserve utilized in year ended December 31,
	2000 |  |          | (1,297 | )          |  |       | (729  | )     |  |   | (175 | ) |  |   | (2,201 | )
|                                                  |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  
|Balance at December 31, 2000                      |  |          |       |            |  |       | 1,139 |       |  |   | 300  |   |  |   | 1,439  |  
|Reserve utilized in year ended December 31,
	2001 |  |          |       |            |  |       | (181  | )     |  |   | (300 | ) |  |   | (481   | )
|                                                  |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  
|Balance at December 31, 2001                      |  | $        |       |            |  | $     | 958   |       |  | $ |     |   |  | $ | 958    |  
|                                                  |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  

Prior to the acquisition by us, Wall Data had
initiated a plan to restructure their worldwide operations to
re-focus Wall Data on their core business functions and to
reduce operating expenses. In conjunction with the acquisition,
we recorded as an accrued liability, the remaining restructuring
accrual of approximately $0.7 million for facilities
related expenses. We anticipated that the execution of the
restructuring actions would require total cash expenditures of
approximately $0.7 million that were expected to be funded
from internal operations. As of December 31, 2001, we had
incurred costs totaling approximately $0.5 million. The

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

remaining reserve related to this restructuring
is approximately $0.2 million and is included in accrued
liabilities.

The following table lists the change in the Wall
Data restructuring charge for the years ended December 31,
2001, 2000, and 1999 (in thousands):

|                                                  |  |            |      |  
|------------------------------------------------- |  | ---------- | ---- | -
|                                                  |  | Excess    
|                                                  |  | Facilities
|                                                  |  |           
|Reserve provided in 1999                          |  |            | 712  |  
|Reserve utilized in year ended December 31,
	1999 |  |            |     |  
|                                                  |  |            |      |  
|Balance at December 31, 1999                      |  |            | 712  |  
|Reserve utilized in year ended December 31,
	2000 |  |            | (295 | )
|                                                  |  |            |      |  
|Balance at December 31, 2000                      |  |            | 417  |  
|Reserve utilized in year ended December 31,
	2001 |  |            | (206 | )
|                                                  |  |            |      |  
|Balance at December 31, 2001                      |  | $          | 211  |  
|                                                  |  |            |      |  

5.     Commitments
and contingencies

Legal
proceedings

On November 22, 1999, Kenneth Fisher filed a
complaint alleging violations of the False Claims Act,
31 U.S.C. § 3729 et seq.,against us,and in the United States District Court of the District of
Columbia our affiliates Network Software Associates, Inc. or
NSA, and NetSoft Inc., or NetSoft. The United States government
declined to pursue the action on its own behalf and, therefore,
the action is pursued by a relator, Kenneth Fisher. We and our
affiliates first learned of the action when we were served with
the amended complaint in May 2001. On September 5, 2001,
the relator agreed to voluntarily dismiss us from this action in
exchange for our agreement to toll applicable statutes of
limitation as to the relators claims.

On January 31, 2002, on an order of the
court following defendants successful motion to dismiss
the amended complaint, the relator filed a Second Amended
Complaint, or Complaint, against NSA and NetSoft, in the United
States District Court of the District of Columbia among numerous
other defendants. The Complaint alleges that NSA, NetSoft and
the other defendants made false claims to the government to
obtain government contracts set aside for entities owned and
controlled by disadvantaged persons admitted to the
Section 8(a) Minority Small Business Development Program.
Specifically, the Complaint alleges that from 1987 to 1997 NSA,
NetSoft, and the other defendants presented false or fraudulent
claims for payment or approval to the government in violation of
31 U.S.C. § 3729(a)(1), and used false records or
statements to get claims paid or approved by the government in
violation of 31 U.S.C. § 3729(a)(2) in connection with
NSAs application and certification as a Section 8(a)
minority owned and controlled company. In addition, the
Complaint alleges that NSA, Netsoft and the other defendants
conspired to defraud the government by fraudulently obtaining
NSAs certification as a Section 8(a) entity for
alleged use by NSAs Federal Systems Division, in violation
of 31 U.S.C. § 3729(a)(3). Relator alleges damages in
excess of $30,000,000.

We did not acquire NSA until July 1997 and had no
involvement with the events alleged by the relator. However, the
relator alleges that any liabilities of NSA and Netsoft passed
to us. We and our affiliates dispute the relators
allegations. On February 19, 2002, NSA, NetSoft, and the
other defendants filed a motion to strike the Complaint. This
motion is currently pending before the court.

Moreover, we 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 the above litigation and such matters
presently known to management will not have a material adverse
effect on our business, financial position or results of
operations.

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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, 2001, future
minimum rental and lease payments under operating leases are as
follows (in thousands):

|           |                         |                                                   |       |        |        | 
|---------- | ----------------------- | ------------------------------------------------- | ----- | ------ | ------ | 
|           |                         | Operating                                        
|Year       |                         | Leases                                           
|           |                         |                                                  
|2002       |                         | $                                                 | 6,309 |       
|2003       |                         |                                                   | 5,632 |       
|2004       |                         |                                                   | 3,737 |       
|2005       |                         |                                                   | 969   |       
|2006       |                         |                                                   | 826   |       
|Thereafter |                         |                                                   | 2,872 |       
|           |                         |                                                   |       |       
|           | Gross lease obligations |                                                   | $     | 20,345 |       
|           | Less sublease income    |                                                   |       | (4,944 | )     
|           |                         |                                                   |       |       
|           |                         | Total minimum obligations, net of sublease income |       | $      | 15,401 | 
|           |                         |                                                   |       |       

Rent expense was approximately $4.9 million,
$6.3 million and $3.4 million for the years ended
December 31, 2001, 2000, and 1999 respectively, net of
sublease payments.

6.     Capital
stock

Common
stock

As of December 31, 2001, we reserved the
following shares of authorized but unissued common stock:

|                             |  |      |           | 
|---------------------------- |  | ---- | --------- | 
|                             |  | 2001
|                             |  |     
|Employee stock option plans  |  |      | 6,804,362 | 
|Directors stock option plan |  |      | 680,000   | 
|Employee stock purchase plan |  |      | 1,477,255 | 
|                             |  |      |           | 
|Total shares reserved        |  |      | 8,961,617 | 
|                             |  |      |           | 

Stock
repurchase plan

Previously, our Board of Directors authorized the
purchase of up to fifteen million shares of our common stock for
possible reissue and general corporate purposes. During 2001,
2000, and 1999, we purchased 2,360,547, 1,004,765 and 4,325,600,
shares of our common stock, respectively, on the open market at
an average purchase price of $0.79, $0.85 and $2.62, per share,
respectively, for a total cost of $1.9 million,
$0.9 million, and $11.3 million, respectively.

Employee
stock option plans

In October 1999, the Board of Directors adopted
the 1999 Non-Statutory Stock Option Plan, or the 1999 Plan. The
Board of Directors authorized and reserved for the issuance of
4,000,000 shares of our 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 us. The 1999
Plan does not allow for issuance to directors of our 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

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

During 1992, we established the 1992 Employee
Stock Option Plan, or the 1992 Plan. We currently have
authorized a total of 13,000,000 shares for issuance under the
1992 Plan. In June 2001, we 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
1992 Plan at our Annual Shareholders Meeting on
May 30, 2001. The 1992 Plan provides for the grant 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 our outstanding capital stock (a 10% stockholder)); the
exercise price of non-statutory options may not be less than 85%
of such fair market value. Under 1992 Plan Stock Options
generally vest over a period of four to five years. 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).

Non-employee
directors stock option plan

In July 1993, we 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 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, we adopted the Employee Stock
Purchase Plan, or the Purchase Plan and reserved 2,400,000
shares of common stock for future issuance under the Purchase
Plan. Subsequent to the adoption of the plan we reserved an
additional 3,000,000 shares for issuance under the Purchase
Plan. Under the Purchase Plan, our 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, 2001, 2000, and 1999, 1,072,706, 707,229 and
609,185 shares were issued under the Purchase Plan,
respectively, at prices ranging from $0.71 to $0.66, $1.09 to
$1.75, and $1.24 to $1.83 per share, respectively.

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock-based
compensation plans

We account 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, our net loss per share
would have been adjusted to the following pro forma amounts (in
thousands, except per share amounts):

|                    |                   |                          |   |         |   |      |   |         |   |  |   |         |  
|------------------- | ----------------- | ------------------------ | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                    |                   |                         
|                    |                   | Years Ended December 31,
|                    |                   |                         
|                    |                   | 2001                     |   | 2000    |   | 1999
|                    |                   |                          |   |         |   |     
|Net loss:           |                   |                          |   |         |   |      |   |         |   |  |   |        
|                    | As reported       |                          | $ | (9,294  | ) |      | $ | (71,910 | ) |  | $ | (27,492 | )
|                    | Pro forma         |                          |   | (10,189 | ) |      |   | (74,357 | ) |  |   | (29,947 | )
|Net loss per share: |                   |                          |   |         |   |      |   |         |   |  |   |        
|                    | As reported       |                          | $ | (0.14   | ) |      | $ | (1.11   | ) |  | $ | (0.42   | )
|                    | Pro forma  Basic |                          |   | (0.16   | ) |      |   | (1.15   | ) |  |   | (0.46   | )

Option activity, including the acquired options,
under our stock option plans was as follows:

|                                 |                |           |           |            |   |                |           |            |   |  |      |      | 
|-------------------------------- | -------------- | --------- | --------- | ---------- | - | -------------- | --------- | ---------- | - |  | ---- | ---- | 
|                                 |                |           |           |            |   | Weighted      
|                                 |                | Options   |           | Shares     |   | Average       
|                                 |                | Available |           | Issued     |   | Exercise Price
|                                 |                |           |           |            |   |               
|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 |            |   |  | 2.26 |     
|                                 | 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 |     
|                                 | Authorized     |           |           | 1,000,000  |   |                |           |           |   |  |      |      | 
|                                 | Granted        |           |           | (1,633,827 | ) |                |           | 1,633,827  |   |  |      | 0.75 | 
|                                 | Exercised      |           |           |           |   |                |           | (2,189     | ) |  |      | 1.05 | 
|                                 | Terminated     |           |           | 2,319,657  |   |                |           | (1,862,805 | ) |  |      | 2.74 | 
|                                 |                |           |           |            |   |                |           |            |   |  |      |     
|Balance at December 31, 2001     |                |           | 7,297,299 |            |   |                | 6,794,948 |            |   |  | 2.31 |     
|                                 |                |           |           |            |   |                |           |            |   |  |      |     
|Exercisable at December 31, 1999 |                |           |          |            |   |                | 941,949   |            |   |  | 1.92 |     
|Exercisable at December 31, 2000 |                |           |          |            |   |                | 1,693,325 |            |   |  | 2.42 |     
|Exercisable at December 31, 2001 |                |           |          |            |   |                | 2,621,806 |            |   |  | 2.87 |     

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes our outstanding
options as of December 31, 2001:

|                        |  |                     |           |              |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 
|----------------------- |  | ------------------- | --------- | ------------ |  | -------------- | ---- | ----------- |  | -------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                        |  |                    
|Options Outstanding     |  | Options Exercisable
|                        |  |                    
|                        |  | Weighted            |           |              |  |               
|                        |  | Average             |           | Weighted     |  |                |      | Weighted   
|                        |  | Number              |           | Remaining    |  | Average        |      | Number      |  | Average       
|Range of Exercise Price |  | Outstanding         |           | Life (Years) |  | Exercise Price |      | Exercisable |  | Exercise Price
|                        |  |                     |           |              |  |                |      |             |  |               
|$0.25 - $ 1.28          |  |                     | 2,988,451 |              |  |                | 9.11 |             |  | $              | 0.83 |  |  |  | 492,169   |  |  | $ | 1.02 | 
|$1.72 - $ 2.12          |  |                     | 1,336,816 |              |  |                | 7.44 |             |  | $              | 1.93 |  |  |  | 819,463   |  |  | $ | 1.90 | 
|$2.16 - $ 4.13          |  |                     | 1,057,600 |              |  |                | 7.06 |             |  | $              | 2.64 |  |  |  | 613,080   |  |  | $ | 2.58 | 
|$4.41 - $10.31          |  |                     | 1,412,081 |              |  |                | 7.74 |             |  | $              | 5.57 |  |  |  | 697,094   |  |  | $ | 5.55 | 
|                        |  |                     |           |              |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 
|$0.25 - $10.31          |  |                     | 6,794,948 |              |  |                | 8.23 |             |  | $              | 2.31 |  |  |  | 2,621,806 |  |  | $ | 2.87 | 
|                        |  |                     |           |              |  |                |      |             |  |                |      |  |  |  |           |  |  |   |      | 

The weighted average fair values of options
granted during 2001, 2000 and 1999 were $0.75, $3.39 and $2.59
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 2001, 2000, and 1999:

|                        |  |                                |  |                                |  |                               
|----------------------- |  | ------------------------------ |  | ------------------------------ |  | ------------------------------
|                        |  | 2001                           |  | 2000                           |  | 1999                          
|                        |  |                                |  |                                |  |                               
|Volatility              |  | 155.54%                        |  | 116.66%                        |  | 192.45%                       
|Risk-free interest rate |  | 4.00%                          |  | 6.00%                          |  | 4.07% - 5.87%                 
|Dividend yield          |  | 0.00%                          |  | 0.00%                          |  | 0.00%                         
|Expected term           |  | 3 - 4 months
	beyond vest date |  | 3 - 4 months
	beyond vest date |  | 3 - 4 months
	beyond vest date

7.     Income
Taxes

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

|         |  |                          |         |      |  |      |         |   |  |   |         |  
|-------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2001                     |         | 2000 |  | 1999
|         |  |                          |         |      |  |     
|Domestic |  | $                        | (14,689 | )    |  | $    | (60,766 | ) |  | $ | (13,172 | )
|Foreign  |  |                          | 5,477   |      |  |      | (10,407 | ) |  |   | (13,940 | )
|         |  |                          |         |      |  |      |         |   |  |   |         |  
|         |  | $                        | (9,212  | )    |  | $    | (71,173 | ) |  | $ | (27,112 | )
|         |  |                          |         |      |  |      |         |   |  |   |         |  

64



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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of the provision for income taxes;
net of valuation allowances, are as follows (in thousands):

|                           |         |                          |    |      |    |      |     |     |     |   |     |      |     |  
|-------------------------- | ------- | ------------------------ | -- | ---- | -- | ---- | --- | --- | --- | - | --- | ---- | --- | -
|                           |         |                         
|                           |         | Years Ended December 31,
|                           |         |                         
|                           |         | 2001                     |    | 2000 |    | 1999
|                           |         |                          |    |      |    |     
|Current                    |         |                          |    |      |    |      |     |     |     |   |     |     
|                           | Federal |                          | $  |     |    |      | $   |    |     |   | $   | 8    |    
|                           | State   |                          |    | 119  |    |      |     | 78  |     |   |     | 50   |    
|                           | Foreign |                          |    | (41  | )  |      |     | 659 |     |   |     | 372  |    
|                           |         |                          |    |      |    |      |     |     |     |   |     |     
|                           |         | Total current            |    |      | 78 |      |     |     | 737 |   |     |      | 430 |  
|                           |         |                          |    |      |    |      |     |     |     |   |     |     
|Deferred                   |         |                          |    |      |    |      |     |     |     |   |     |     
|                           | Federal |                          |    |     |    |      |     |    |     |   |     | 54   |    
|                           | State   |                          |    |     |    |      |     |    |     |   |     | 26   |    
|                           | Foreign |                          |    |     |    |      |     |    |     |   |     | (130 | )  
|                           |         |                          |    |      |    |      |     |     |     |   |     |     
|                           |         | Total deferred           |    |      |   |      |     |     |    |   |     |      | (50 | )
|                           |         |                          |    |      |    |      |     |     |     |   |     |     
|Provision for income taxes |         | $                        | 78 |      |    | $    | 737 |     |     | $ | 380 |     
|                           |         |                          |    |      |    |      |     |     |     |   |     |     

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

|                                                                |                            |                          |        |      |  |      |         |     |  |   |        |     | 
|--------------------------------------------------------------- | -------------------------- | ------------------------ | ------ | ---- |  | ---- | ------- | --- |  | - | ------ | --- | 
|                                                                |                            |                         
|                                                                |                            | Years Ended December 31,
|                                                                |                            |                         
|                                                                |                            | 2001                     |        | 2000 |  | 1999
|                                                                |                            |                          |        |      |  |     
|Benefit at federal statutory rate                               |                            | $                        | (3,222 | )    |  | $    | (23,983 | )   |  | $ | (9,489 | )  
|State income taxes, net of federal tax benefits                 |                            |                          | (897   | )    |  |      | (3,608  | )   |  |   | (1,627 | )  
|Nontaxable interest income                                      |                            |                          |       |      |  |      | (31     | )   |  |   | (82    | )  
|Foreign losses benefited at a lower tax rate                    |                            |                          | 1,973  |      |  |      | 4,151   |     |  |   | 2,310  |    
|Nondeductible write-off of in-process research
	and development |                            |                          |       |      |  |      | 680     |     |  |   | 7,831  |    
|Benefit not realized                                            |                            |                          | 3,288  |      |  |      | 6,383   |     |  |   | (458   | )  
|Tax savings from foreign operations                             |                            |                          |        |      |  |      | (304    | )   |  |   |       |    
|Nondeductible book goodwill amortization                        |                            |                          | 2,646  |      |  |      | 16,866  |     |  |   | 1,378  |    
|Utilization of Canadian losses and tax credits                  |                            |                          | (4,189 | )    |  |      |        |     |  |   |       |    
|Foreign taxes                                                   |                            |                          | 291    |      |  |      | 659     |     |  |   | 372    |    
|Other permanent differences                                     |                            |                          | 188    |      |  |      | (76     | )   |  |   | 145    |    
|                                                                |                            |                          |        |      |  |      |         |     |  |   |        |    
|                                                                | Provision for income taxes |                          | $      | 78   |  |      | $       | 737 |  |   | $      | 380 | 
|                                                                |                            |                          |        |      |  |      |         |     |  |   |        |    

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                                                                                             |                          |                          |         |        |  |      |         |        |  |   |         |        | 
|-------------------------------------------------------------------------------------------- | ------------------------ | ------------------------ | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                                                             |                          |                         
|                                                                                             |                          | Years Ended December 31,
|                                                                                             |                          |                         
|                                                                                             |                          | 2001                     |         | 2000   |  | 1999
|                                                                                             |                          |                          |         |        |  |     
|Deferred revenue recognized currently for tax
	purposes                                      |                          | $                        | 114     |        |  | $    | 99      |        |  | $ | 880     |       
|Reserves and accruals not currently deductible
	for tax purposes                             |                          |                          | 2,958   |        |  |      | 4,836   |        |  |   | 4,137   |       
|Net operating loss carryforwards 
	NetManage                                                |                          |                          | 31,726  |        |  |      | 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                                                  |                          |                          | 6,722   |        |  |      | 8,723   |        |  |   | 1,684   |       
|Tax credit carry forwards  NetManage                                                        |                          |                          | 1,123   |        |  |      | 614     |        |  |   | 335     |       
|Tax credit carry forwards  FTP                                                              |                          |                          |         |        |  |      | 787     |        |  |   | 787     |       
|Tax credit carry forwards  Wall Data                                                        |                          |                          |         |        |  |      |        |        |  |   | 1,292   |       
|Tax credit carry forwards  Simware                                                          |                          |                          | 3,879   |        |  |      | 2,860   |        |  |   | 1,236   |       
|Write-off of in-process research and development,
	not currently deductible for tax purposes |                          |                          |         |        |  |      |        |        |  |   | 4,886   |       
|Depreciation and amortization                                                                |                          |                          | 5,250   |        |  |      | 309     |        |  |   | 1,683   |       
|Capitalized R&D  FTP                                                                        |                          |                          | 5,500   |        |  |      | 7,167   |        |  |   | 7,588   |       
|Amortizable intangibles not deductible for tax
	purposes                                     |                          |                          |         |        |  |      | 3,617   |        |  |   | (2,804  | )     
|Capital loss carryforward                                                                    |                          |                          |         |        |  |      |        |        |  |   | 526     |       
|Other temporary differences                                                                  |                          |                          | (247    | )      |  |      | 351     |        |  |   | (259    | )     
|                                                                                             |                          |                          |         |        |  |      |         |        |  |   |         |       
|                                                                                             | Total deferred tax asset |                          |         | 57,025 |  |      |         | 62,127 |  |   |         | 49,853 | 
|Less: Valuation allowance                                                                    |                          |                          | (57,025 | )      |  |      | (62,127 | )      |  |   | (46,648 | )     
|                                                                                             |                          |                          |         |        |  |      |         |        |  |   |         |       
|                                                                                             | Net deferred tax asset   |                          | $       |       |  |      | $       |       |  |   | $       | 3,205  | 
|                                                                                             |                          |                          |         |        |  |      |         |        |  |   |         |       

In connection with the acquisition of Wall Data
in 1999, we 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, we recorded a
valuation allowance for the entire balance of the Wall Data
deferred tax asset at the time of acquisition.

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. This is due to the large net operating loss we
have at this time. The amount of the deferred tax asset
considered realizable, however, may change if actual future
taxable income differs from estimated amounts.

At December 31, 2001, we had gross net
operating loss carry-forwards for federal income tax purposes of
approximately $79.3 million expiring at various dates
through 2021 and federal tax credit carry-forwards of
approximately $1.1 million that expire in various years through
2012. At December 31, 2001, we had foreign net operating
loss carry-forwards of approximately $39.0 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 our ability to utilize our net
operating loss carry-forward from tax periods prior to the
ownership change. Such a change in ownership occurred with
respect to our past acquisition of certain companies, including
Wall Data. Accordingly, our net operating losses and credits are
subject to these limitations.

Our 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

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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

period. During the remaining eight years, income
generated by the subsidiary will be taxed at a reduced income
tax rate of 10%.

In December 2001, our subsidiary in Israel
NetManage, Ltd. (Haifa, Israel) came to an agreement with the
tax authorities in Israel concerning the gain on the sale of
shares in NetVision in 1997. A $100,000 tax liability resulted
from this transaction.

8.     Segment
reporting

In 1998, we adopted SFAS No. 131 Disclosures
about Segments of an Enterprise and Related Information. We
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. Our chief operating decision-maker is our 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. We have 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.

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

|                               |                     |                          |   |          |   |      |   |          |   |  |   |          |  
|------------------------------ | ------------------- | ------------------------ | - | -------- | - | ---- | - | -------- | - |  | - | -------- | -
|                               |                     |                         
|                               |                     | Years Ended December 31,
|                               |                     |                         
|                               |                     | 2001                     |   | 2000     |   | 1999
|                               |                     |                          |   |          |   |     
|Revenues:                      |                     |                          |   |          |   |      |   |          |   |  |   |         
|                               | Domestic operations |                          | $ | 59,429   |   |      | $ | 77,735   |   |  | $ | 58,124   |  
|                               | European operations |                          |   | 18,511   |   |      |   | 23,391   |   |  |   | 19,252   |  
|                               | Asian operations    |                          |   | 2,030    |   |      |   | 2,946    |   |  |   | 1,794    |  
|                               |                     |                          |   |          |   |      |   |          |   |  |   |         
|                               | Consolidated        |                          | $ | 79,970   |   |      | $ | 104,072  |   |  | $ | 79,170   |  
|                               |                     |                          |   |          |   |      |   |          |   |  |   |         
|Income (Loss) from operations: |                     |                          |   |          |   |      |   |          |   |  |   |         
|                               | Domestic operations |                          | $ | (6,393   | ) |      | $ | (56,007  | ) |  | $ | (22,595  | )
|                               | European operations |                          |   | (5,046   | ) |      |   | (16,853  | ) |  |   | (9,404   | )
|                               | Asian operations    |                          |   | 119      |   |      |   | (2,123   | ) |  |   |         |  
|                               |                     |                          |   |          |   |      |   |          |   |  |   |         
|                               | Consolidated        |                          | $ | (11,320  | ) |      | $ | (74,982  | ) |  | $ | (31,999  | )
|                               |                     |                          |   |          |   |      |   |          |   |  |   |         
|Identifiable assets:           |                     |                          |   |          |   |      |   |          |   |  |   |         
|                               | Domestic operations |                          | $ | 330,933  |   |      | $ | 348,135  |   |  | $ | 268,227  |  
|                               | European operations |                          |   | 68,267   |   |      |   | 42,626   |   |  |   | 45,883   |  
|                               | Asian operations    |                          |   | 1,909    |   |      |   | 1,999    |   |  |   | 3,738    |  
|                               | Eliminations        |                          |   | (321,673 | ) |      |   | (282,779 | ) |  |   | (102,481 | )
|                               |                     |                          |   |          |   |      |   |          |   |  |   |         
|                               | Consolidated        |                          | $ | 79,436   |   |      | $ | 109,981  |   |  | $ | 215,367  |  
|                               |                     |                          |   |          |   |      |   |          |   |  |   |         

Domestic revenues include export revenues of
approximately $0.3 million, $0.5 million and
$1.0 million to Asia for the years ended December 31,
2001, 2000 and 1999 , respectively, and $2.5 million,
$2.7 million and $2.8 million to the rest of the world
for the years ended December 31, 2001, 2000 and 1999,
respectively.

67



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NETMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

There were no customers that accounted for more
than 10% of net revenues for the years ended December 31,
2001, 2000, or 1999.

9.     Subsequent
event (Unaudited)



| |                    
| | -------------------
| | Recent developments

We received a letter dated March 21, 2002,
from the staff of the Nasdaq Stock Market, or Nasdaq, which
notified us that the bid price for our common stock had been
below $1.00 per share for a period of thirty consecutive trading
days. Nasdaq advised us that we would be given a period of
ninety days within which to comply with the minimum bid price
requirement in order to maintain our listing on the Nasdaq
National Market.

If we are unable to demonstrate compliance with
the minimum bid price listing requirement for ten consecutive
trading days on or before June 19, 2002, Nasdaq will
provide us with written notification that our common stock will
be delisted. At that time we may appeal the staffs
decision to a Nasdaq Listing Qualification Panel. We intend to
pursue all options available to us to meet Nasdaq listing
requirements.

If our common stock is delisted from the Nasdaq
National Market, sales of our common stock would likely be
conducted only in the over-the-counter market or potentially in
regional exchanges. This may have a negative impact on the
liquidity and price of our common stock, and investors may find
it more difficult to purchase or dispose of, or to obtain
accurate quotations as to the market value of, our common stock.



| |                       
| | ----------------------
| | Loan to easyBase, Inc.

On December 27, 2001 we decided to
participate in a convertible bridge financing program requested
by easyBase, Inc. in November 2001. We have agreed to
participate in the transaction in the approximate amount of
$275,000 payable in two installments. The first installment
payment of $137,500 was made on January 3, 2002. The second
installment payment is scheduled for payment in April 2002.

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Item 9  Changes in and
disagreements with accountants on accounting and financial
disclosure.

None




PART III




Item 10  Directors and executive
officers of the registrant.

Our definitive Proxy Statement will be filed with
the Securities and Exchange Commission in connection with the
solicitation of proxies for our Annual Meeting of Stockholders,
to be held on June 5, 2002. Certain information required by
this item is incorporated by reference from the information
contained in the Proxy Statement under the captions 
Election of Directors and Security Ownership of
Certain Beneficial Owners and Management  Compliance
with the Reporting Requirements of Section 16(a).




Item 11  Executive
compensation.

The information required by this item is
incorporated herein by reference from the information contained
in the Proxy Statement under the caption Executive
Compensation, except for the information appearing under
the captions  Ten Year Option Repricing,
 Report of the Board of Directors on Repricing
of Options,  Report of the Compensation
Committee of the Board of Directors on Executive
Compensation and  Performance Measurement
Comparison.




Item 12  Security ownership
of certain beneficial owners and management.

The information required by this item is
incorporated herein by reference from the information contained
in our Proxy Statement under the caption Security
Ownership of Certain Beneficial Owners and Management.




Item 13  Certain
relationships and related transactions.

The information required by this item is
incorporated herein by reference from the information contained
in our Proxy Statement under the caption Certain
Transactions.




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:

|        |     |               |  |                                                                                                                     
|------- | --- | ------------- |  | --------------------------------------------------------------------------------------------------------------------
|Exhibit |     |              
|Number  |     | Exhibit Title
|        |     |              
|        | 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)

69



---



##### Table of Contents



|        |       |               |  |                                                                                                                                                                                                                                                                  
|------- | ----- | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |              
|Number  |       | Exhibit Title
|        |       |              
|        | 4.2   |               |  | Form of Common Stock certificate.(1)                                                                                                                                                                                                                             
|        | 10.1  |               |  | Form of Indemnity Agreement entered into among
	the Registrant and our 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)                                                                                                                
|        | 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.                                                                                                                                                                                   
|        | 99.1  |               |  | Letter to Arthur Andersen, LLP dated
	March 28, 2002.                                                                                                                                                                                                            
|        | 99.2  |               |  | NetManage, Inc. News Release dated June 8,
	2001.(13)                                                                                                                                                                                                            
|        | 99.3  |               |  | NetManage, Inc. News Release dated
	September 14, 2001.(14)                                                                                                                                                                                                      
|        | 99.4  |               |  | NetManage, Inc. News Release dated
	October 2, 2001.(15)                                                                                                                                                                                                         



---



|    |                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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).                                       

70



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##### Table of Contents





|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Incorporated by reference to the exhibits filed
	with the Registrants Form 10-K dated March 30, 2000.        
|    
|(13) | Incorporated by reference to Exhibits filed with
	Registrants Form 8-K filed June 13, 2001.                  
|    
|(14) | Incorporated by reference to Exhibits filed with
	Registrants Form 8-K filed September 17, 2001.             
|    
|(15) | Incorporated by reference to Exhibits filed with
	Registrants Form 8-K filed October 4, 2001.                



|  |                      
|- | ---------------------
|* | Employee Benefit Plan

(b) Reports on Form 8-K

On October 4, 2001, the Registrant filed a
Current Report on Form 8-K reporting under Item 5 that
it had been advised by the staff of The Nasdaq Stock Market,
Inc. that the minimum bid price requirement for listing on the
Nasdaq National Market would be suspended until January 2,
2002.

(c) Exhibit

The exhibit 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).

71



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##### Table of Contents



SCHEDULE II

NETMANAGE, INC.

VALUATION AND QUALIFYING ACCOUNTS

|                                                      |  |                |       |            |  |                |     |               |  |   |        |   |  |   |       | 
|----------------------------------------------------- |  | -------------- | ----- | ---------- |  | -------------- | --- | ------------- |  | - | ------ | - |  | - | ----- | 
|                                                      |  |                |       | Charged to |  |                |     |              
|                                                      |  | Balance at     |       | Revenues,  |  | Additions,     |     |              
|                                                      |  | Beginning      |       | Costs or   |  | Deductions     |     | Balance at   
|                                                      |  | of Period      |       | Expenses   |  | and Write-Offs |     | End of Period
|                                                      |  |                |       |            |  |                |     |              
|                                                      |  |               
|                                                      |  | (In thousands)
|Year ended December 31, 1999:                         |  |                |       |            |  |                |     |               |  |   |        |   |  |   |       | 
|Allowance for doubtful accounts and sales
	returns(1) |  | $              | 3,859 |            |  | $              | 790 |               |  | $ | (726   | ) |  | $ | 3,923 | 
|Year ended December 31, 2000:                         |  |                |       |            |  |                |     |               |  |   |        |   |  |   |       | 
|Allowance for doubtful accounts and sales returns     |  | $              | 3,923 |            |  | $              | 90  |               |  | $ | 75     |   |  | $ | 4,088 | 
|Year ended December 31, 2001:                         |  |                |       |            |  |                |     |               |  |   |        |   |  |   |       | 
|Allowance for doubtful accounts and sales returns     |  | $              | 4,088 |            |  | $              | (48 | )             |  | $ | (1,592 | ) |  | $ | 2,448 | 



---



|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.

|                                            |                              |            |   |          |  |          |   |            |  |               |   |         |   |  |   |       |  |  |   |       | 
|------------------------------------------- | ---------------------------- | ---------- | - | -------- |  | -------- | - | ---------- |  | ------------- | - | ------- | - |  | - | ----- |  |  | - | ----- | 
|                                            |                              | Balance at |   |          |  |          |   |            |  |              
|                                            |                              | Beginning  |   | Reserve  |  | Reserve  |   | Additions/ |  | Balance at   
|                                            |                              | of Period  |   | Provided |  | Utilized |   | Deductions |  | End of Period
|                                            |                              |            |   |          |  |          |   |            |  |              
|FTP Restructuring Reserve                   |                              |            |   |          |  |          |   |            |  |               |   |         |   |  |   |       |  |  |   |      
|                                            | Year ended December 31, 1998 |            | $ |         |  |          | $ | 16,752     |  |               | $ | (11,528 | ) |  | $ |      |  |  | $ | 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 | 
|                                            | Year ended December 31, 2001 |            | $ | 1,108    |  |          | $ |           |  |               | $ | (643    | ) |  |   |       |  |  | $ | 465   | 
|Wall Data and Simware Restructuring Reserve |                              |            |   |          |  |          |   |            |  |               |   |         |   |  |   |       |  |  |   |      
|                                            | Year ended December 31, 1999 |            | $ |         |  |          | $ | 3,791      |  |               | $ | (151    | ) |  | $ |      |  |  | $ | 3,640 | 
|                                            | Year ended December 31, 2000 |            | $ | 3,640    |  |          | $ |           |  |               | $ | (2,201  | ) |  | $ |      |  |  | $ | 1,439 | 
|                                            | Year ended December 31, 2001 |            | $ | 1,439    |  |          | $ |           |  |               | $ | (481    | ) |  |   |       |  |  | $ | 958   | 
|NetManage Restructuring Reserve             |                              |            |   |          |  |          |   |            |  |               |   |         |   |  |   |       |  |  |   |      
|                                            | Year ended December 31, 2000 |            | $ |         |  |          | $ | 5,600      |  |               | $ | (3,516  | ) |  | $ |      |  |  | $ | 2,084 | 
|                                            | Year ended December 31, 2001 |            | $ | 2,084    |  |          | $ |           |  |               | $ | (1,127  | ) |  |   |       |  |  | $ | 957   | 
|Wall Data Restructuring Reserve             |                              |            |   |          |  |          |   |            |  |               |   |         |   |  |   |       |  |  |   |      
|                                            | Year ended December 31, 1999 |            | $ |         |  |          | $ | 712        |  |               |   |         |   |  | $ |      |  |  | $ | 712   | 
|                                            | Year ended December 31, 2000 |            | $ | 712      |  |          | $ |           |  |               | $ | (295    | ) |  | $ |      |  |  | $ | 417   | 
|                                            | Year ended December 31, 2001 |            | $ | 417      |  |          | $ |           |  |               | $ | (206    | ) |  |   |       |  |  | $ | 211   | 

72



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##### Table of Contents






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 our behalf by the undersigned, thereunto duly authorized on
the 31st day of March 2002.



| |                
| | ---------------
| | 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.

|                                               |  |                                                                                                                          |  |               
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | --------------
|Signature                                      |  | Title                                                                                                                    |  | Date          
|                                               |  |                                                                                                                          |  |               
|                                              
|/s/ ZVI ALONZvi Alon                           |  | Chairman of the Board, President and
	Chief Executive Officer
	(Principal Executive Officer)                             |  | March 31, 2002
|                                              
|/s/ MICHAEL PECKHAMMichael Peckham             |  | Chief Financial Officer and Senior Vice
	President, Finance and Secretary
	(Principal Financial and
	Accounting Officer) |  | March 31, 2002
|                                              
|/s/ JOHN BOSCHJohn Bosch                       |  | Director                                                                                                                 |  | March 31, 2002
|                                              
|/s/ UZIA GALILUzia Galil                       |  | Director                                                                                                                 |  | March 31, 2002
|                                              
|/s/ SHELLEY HARRISON, PHDShelley Harrison, PhD |  | Director                                                                                                                 |  | March 31, 2002
|                                              
|/s/ DARRELL MILLERDarrell Miller               |  | Director                                                                                                                 |  | March 31, 2002
|                                              
|/s/ ABRAHAM OSTROVSKYAbraham Ostrovsky         |  | Director                                                                                                                 |  | March 31, 2002

73



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##### Table of Contents



EXHIBIT INDEX

|        |       |                         |  |                                                                                                                                                                                                                                                                  
|------- | ----- | ----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |                        
|Number  |       | Description of Document
|        |       |                        
|        | 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 our 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)                                                                                                                
|        | 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.                                                                                                                                                                                   
|        | 99.1  |                         |  | Letter to Arthur Andersen, LLP dated
	March 28, 2002                                                                                                                                                                                                             
|        | 99.2  |                         |  | NetManage, Inc. News Release dated June 8,
	2001.(13)                                                                                                                                                                                                            
|        | 99.3  |                         |  | NetManage, Inc. News Release dated
	September 14, 2001.(14)                                                                                                                                                                                                      
|        | 99.4  |                         |  | NetManage, Inc. News Release dated
	October 2, 2001.(15)                                                                                                                                                                                                         

74



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##### Table of Contents





---



|    |                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | Incorporated by reference to the exhibits filed
	with the Registrants Form 10-K dated March 30, 2000.        
|    
|(13) | Incorporated by reference to the exhibits filed
	with the Registrants Form 8-K filed June 13, 2001.          
|    
|(14) | Incorporated by reference to the exhibits filed
	with the Registrants Form 8-K filed September 17, 2001.     
|    
|(15) | Incorporated by reference to the exhibits filed
	with the Registrants Form 8-K filed October 4, 2001.        



|  |                      
|- | ---------------------
|* | Employee Benefit Plan

75