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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
| 
|  |  | For the fiscal year ended December 31,
    2002                                             
| 
|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



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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(Address of principal executive
    offices) |  | 95014(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.    þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Securities Exchange Act of
1934).    Yes o         No þ

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 $29,267,300 as of June 30,
2002(1).

The number of shares of Common Stock outstanding
as of January 31, 2003 was 8,646,029.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
Proxy Statement to be delivered to stockholders for the
registrants annual meeting of stockholders to be held on
May 30, 2003, which is expected to be filed on or before
April 30, 2003 with the Securities and Exchange Commission,
are incorporated by reference into Part III of this report.

(1) Excludes 1,496,465 shares of Common
Stock held by directors and officers and stockholders whose
beneficial ownership exceeds five percent of the shares
outstanding at June 30, 2002. Exclusion of shares held by
any person should not be construed to indicate that such persons
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



|                                              |                                                                                                            |  |  |  |  |  |  | 
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|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 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 and related stockholder matters.
|                                              | Item 13 -- Certain relationships and related transactions.                                                
|PART IV                                      
|SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
|EXHIBIT 3.3                                  
|EXHIBIT 21.1                                 
|EXHIBIT 23.1                                 



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TABLE OF CONTENTS

|               |  |                                                                                                     |    |      |    | 
|-------------- |  | --------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                     |    | Page
|               |  |                                                                                                     |    |     
|PART I        
|Item 1        |  | Business                                                                                            |    |      | 2  | 
|Item 2        |  | Properties                                                                                          |    |      | 12 | 
|Item 3        |  | Legal proceedings                                                                                   |    |      | 13 | 
|Item 4        |  | Submission of matters to a vote of security
    holders                                             |    |      | 13 | 
|PART II       
|Item 5        |  | Market for registrants common equity and
    related stockholder matters                           |    |      | 13 | 
|Item 6        |  | Selected financial data                                                                             |    |      | 14 | 
|Item 7        |  | Managements discussion and analysis of
    financial condition and results of operations           |    |      | 16 | 
|Item 7A       |  | Quantitative and qualitative disclosures about
    market risk                                      |    |      | 42 | 
|Item 8        |  | Financial statements and supplementary data                                                         |    |      | 43 | 
|Item 9        |  | Changes in and disagreements with accountants on
    accounting and financial disclosure            |    |      | 78 | 
|PART III      
|Item 10       |  | Directors and executive officers of the registrant                                                  |    |      | 78 | 
|Item 11       |  | Executive compensation                                                                              |    |      | 78 | 
|Item 12       |  | Security ownership of certain beneficial owners
    and management and related stockholders matters |    |      | 78 | 
|Item 13       |  | Certain relationships and related transactions                                                      |    |      | 79 | 
|Item 14       |  | Controls and procedures                                                                             |    |      | 79 | 
|PART IV       
|Item 15       |  | Exhibits, financial statement schedule and
    reports on Form 8-K                                  |    |      | 79 | 
|SIGNATURES     |  |                                                                                                     | 84 |     
|CERTIFICATIONS |  |                                                                                                     | 85 |     

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PART I

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 Annual 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, including
those described in this report under the caption factors
that may affect our future results and financial
condition. 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 Annual 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.




Item 1 
Business.

General

NetManage, Inc. was incorporated in 1990 as a
California corporation and we reincorporated in Delaware in 1993
in connection 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.

NetManage®, OnWeb®, RUMBA®,
ViewNow®, OnNet®, Chameleon®, SupportNow®,
InterDrive®, the NetManage logo, NetManage partner logo and
the lizard logo are registered trademarks, registered service
marks, trademarks or service marks of NetManage, Inc., its
subsidiaries and its affiliates in the United States and/or
other countries. UNIX is a registered trademark in the United
States and other countries, licensed exclusively through X/Open
Company Limited. Windows and ActiveX are registered trademarks
in the United States and other countries of Microsoft
Corporation. AIX and AS/400 are registered trademarks in the
United States and other countries of International Business
Machines Corporation (IBM). Java is a trademark of Sun
Microsystems, Inc. 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 their
considerable investment in 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 (B2B), or Business-to-Consumer (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
generally the system of record for the business and are
therefore 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

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partners in the supply and demand chains, and
products that allow new business processes to be created in
support of corporate eBusiness B2B and B2C initiatives. 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 IBM corporate mainframe
computers, and IBM, midrange computers such as AS/400 and on
UNIX-based servers. 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 consultation 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, Windows .NET, Windows XP, Windows 2000, Windows NT,
Windows 98, Windows 95, and Windows 3.x operating systems; IBM
mainframe and mid-range host operating systems, Novell,
Inc.s, network operating systems and various
implementations of the industry standard UNIX operating system
such as IBMs AIX, Hewlett-Packard Companys (HP)
HP/UX, Sun Microsystems, Inc.s (Sun) Solaris, and
the open source Linux system.

Our Host Access products allow the
applications and solutions that enable end-user devices,
including personal computers, and devices running web browsers,
to communicate with large centralized corporate computer systems
and the applications that are hosted on them. Our Host
Access products are marketed and sold under the brand name
of RUMBA for client-side solutions that run on personal
computers and under the OnWeb brand for server-side solutions
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 Integration products provide
server-side solutions that allow the integration of multiple
host applications and business processes to create new
applications for the web. Our Host Integration products
also allow our customers to integrate existing legacy
applications with new platform solutions such as those built
using IBMs WebSphere, BEA Systems (BEA) WebLogic or
Microsofts .NET. Host Integration products are
marketed and sold under the OnWeb brand name. We believe our
customers benefit from the fact that the underlying technology
employed by our server-side Host Access and server-side
Host Integration solutions 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 business
processes and 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 their own individual network of computers.
With the rapid development of the Internet, the breadth of the
connectivity industry has quickly expanded beyond
proprietary-based solutions to Web-based technologies and other
open protocol solutions. The application of this same
internetworking technology within a company on its own computer
networks is known as an intranet to distinguish it from the
larger public Internet. When companies use internetworking
technology for connecting to 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. In
addition to this, we provide products that allow access to and
use of existing business processes and transactions for
customers using application server development platforms such as
IBMs WebSphere, BEAs WebLogic and
Microsofts .NET. These products are referred to as
connectors or adaptors and allow legacy
applications to be presented as new technologies in formats such
as Web Services.

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 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 PDAs, 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 are connected to different
physical networks. In addition, more companies are seeking ways
to link their computer systems directly with those of vendors,
customers and other business partners to enhance the flow of
information and reduce expenses. This major move, utilizing the
Internet as the internetworking solution, is termed eBusiness or
eCommerce. eBusiness covers the full migration of business
processes to the web and the sharing of those business processes
with partners. eCommerce covers the elements that allow
electronic selling, trading and transactions on the Web. These
two terms are now augmented by specific terms that incorporate
the advent of the wireless Internet. eMobile or mCommerce
describes the use of a wide range of handheld, mobile and
wireless devices as a part of an overall eBusiness or eCommerce
solution.

For a network to function properly, all connected
devices must follow rules or protocols that govern access to the
network and communication with other devices. 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

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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.


Our vision is to provide Host Access and
Host Integration products, 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 are designed to 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 Corporation and AT&T
Corporation. 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 as little as 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. 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 our competitors
    who have focused solely on improved manageability to reduce
    costs, we have also invested in the development of highly
    specialized support tools. Our products are designed with
    well-integrated support tools that are designed to reduce the
    time required to resolve                                                                                             

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|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                         |  | 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.                                                                                                                                                                                                                                                                                          
|                        
| 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 APIs, and protocols are published as
    free open standards. In the corporate computing environment, it
    is impossible to guarantee a common set of software on every
    client and every server. 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 select UNIX connectivity
products under our ViewNow brand. 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 can be deployed from virtually any
    Web server that can lower 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 presentation methods. OnWeb
    is designed to enable application publishing on the web, the
    selective combination of information from more than one back-end
    system resource for web presentation, and the addition of new
    business process or business logic to augment a companys
    existing systems. OnWeb can also present transactions from
    existing systems as programmatic objects that can be called and
    used by other server solutions such as those from IBM, BEA and
    Microsoft. 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.
|                                           
|OnWebTI                                     |  | 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. OnWebTI can also be
    utilized to expand the legacy integration capability of
    Microsofts BizTalk eCommerce solution.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                           
|ViewNow X Server and ViewNow InterDrive NFS |  | 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 has
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

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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. We have no agreement with
Microsoft giving us pre-release access to future Window
products. No assurance can be given as to our ability to
provide, on a timely basis, products compatible with future
Windows releases. For a summary of net revenues for 2002, 2001,
and 2000 for host access and host integration, see Note 9
of the Notes to Consolidated Financial Statements included
herein.


Some of our newer OnWeb products have been
developed to run on the UNIX operating system, including Linux
and Solaris and are marketed primarily to the Fortune 1000
companies running UNIX platforms as their servers. As a result,
sales of our products might be negatively impacted by
developments adverse to the UNIX operating system or
developments in the Open Source community based around Linux
adverse to our own Linux-based products. In addition, our
strategy of developing products based on the UNIX operating
environment is substantially dependent on our ability to gain
pre-release access to, and to develop expertise in, current and
future UNIX developments by Sun, IBM, HP and others. No
agreement between a developer of UNIX operating systems and us
exists to provide pre-release access to future UNIX products. No
assurance can be given as to our ability to provide, on a timely
basis, products compatible with future UNIX releases.

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 the 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, we believe the trend is 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
simultaneously minimizes staffing costs and improves customer
service. 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, as well as companies in the
finance, health care, manufacturing and insurance industries.
Our products are designed 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-

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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 our future results and financial condition under
Item 7 below.


Internationally, we have sales offices in
Belgium, Brazil, Canada, France, Germany, Sweden, Israel, Italy,
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 2002, 2001, and 2000 respectively, we derived
approximately 28%, 29%, and 28% of net revenues from 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, UNIX and
internetworking products are used internationally. Accordingly,
we localize many of our products for use in the native language
of target countries. We intend to continue to target major
European countries for additional sales and marketing activity,
and expand our Israel subsidiary in the support of our
international sales. For a summary of international operations
by geographic area, see Note 9 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 the State of Washington and
Ottawa, Ontario, Canada. Both telephone support and regular
update releases of our products are provided to customers that
purchase an annual or multi-year 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 host access and host
integration solutions, which address the B2B, B2C, and B2E
markets. Our research and development expenses for the years
ended December 31, 2002, 2001, and 2000 were
$13.1 million, $18.0 million, and $24.5 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. Three key
factors will contribute to the continued growth of our
marketplace: the proliferation of Microsoft Windows client server

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technology, the proliferation of the use of the
UNIX operating system  particularly the UNIX Open
Source version, 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 IBM, Attachmate
Corporation, WRQ, Inc. and Hummingbird Ltd. as well as other
major PC connectivity vendors. We also compete with companies
such as Jacada Ltd., Seagull Holding NV, IBM, BEA, and Computer
Associates International, Inc. in the web integration server
markets. It is imperative that our 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 do. 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, and 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
2002. Any further material reduction in the price of our
products would continue to 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 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
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.

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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, 2002, we had a total of
350 full-time employees, of whom 168 were engaged in sales,
marketing, technical support and consulting, 78 in general
management, administration and finance, 93 in software
development and engineering and 11 in production. None of our
employees are subject to a collective bargaining agreement, and
we have not experienced any work stoppage.

On January 30, 2003 we announced a
restructuring of NetManage in response to the sluggish North
America and European economies. We believe it was necessary to
refocus our operations and reduce our operating expenses to
bring them in line with our revised anticipated revenue levels.
As part of the restructuring, we reduced our workforce by more
than 20% and expect to record a restructuring charge under SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, in first quarter of 2003. For further
discussion please see Note 11 of the Notes to Consolidated
Financial Statements.

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 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 key 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.

Executive officers of the registrant

The executive officers, their ages and their
positions as of February 21, 2003 are as follows:

|                       |  |     |    |          |  |                                                                          
|---------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Zvi Alon               |  |     | 51 |          |  | Chairman of the Board, President and Chief
    Executive Officer         
|Michael R. Peckham     |  |     | 52 |          |  | Chief Financial Officer, Senior Vice President,
    Finance and Secretary
|Ido Hardonag           |  |     | 42 |          |  | Senior Vice President, Worldwide Research and
    Development            
|Peter R. Havart-Simkin |  |     | 50 |          |  | Senior Vice President, Worldwide Strategic
    Development               
|Michael OLeary        |  |     | 57 |          |  | Senior Vice President, Worldwide Sales                                   
|David Desjardins       |  |     | 43 |          |  | Vice President, Worldwide Consulting                                     
|Robert Lee             |  |     | 65 |          |  | Vice President, Human Resources                                          
|Charles Mawby          |  |     | 43 |          |  | Vice President, Worldwide Engineering                                    
|Bertram Rankin         |  |     | 44 |          |  | Vice President, Worldwide Marketing                                      
|Steve Mitchell         |  |     | 49 |          |  | General Counsel                                                          

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 former 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.

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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 in Ottawa, Canada.
Mr. Peckham is also a Chartered Accountant in the Province
of Ontario, Canada.

Ido Hardonag re-joined us in October 2002 as
Senior Vice President, Research and Development.
Mr. Hardonag is responsible for worldwide engineering and
was previously employed by NetManage from July 1992 to January
2000 in several engineering management positions, the most
recent as Vice President, Research and Development. He comes to
NetManage from TeleKnowledge Group, a start-up company in Israel
where he served as Vice President, Research and Development from
January 2000 to September 2001. He was responsible for core
product development, new product releases and customer-related
projects for its Total e-billing product. Mr. Hardonag
received a B.S. in computer science from Tel-Aviv University in
Tel-Aviv, Israel and a M.S. in computer science from the
University of Southern California.

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
NetManage 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 Technical Officer from
January 1994 to July 1996, and as Vice President of Marketing
and Product Strategy from August 1989 until January 1994. One of
the founders of Firefox, Mr. Havart-Simkin also served as a
director of Firefox from August 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. Havart-Simkin studied physics and
mathematics at Windsor College in the United Kingdom.
Mr. Havart-Simkin is also a Fellow of the Institute of
Sales and Marketing Management and a registered consultant in
Information Technology.

Michael 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 software maker
Kintana Inc., in Sunnyvale, California 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, 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, California. Previously, he held sales and marketing
management positions with IBM and Spectra-Physics, San Jose,
California. 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.

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

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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 and a Bachelor of Divinity from
McCormick Presbyterian Seminary in Chicago.


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 from
November 1999 to October 2000. 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 Stanford University Graduate School of
Business.

Steve Mitchell joined us in October 2002 as
General Counsel. Prior to joining us, Mr. Mitchell served
from January 1990 to July 2002 in increasingly responsible
positions for Hitachi Data Systems Corporation (Hitachi), a
supplier of large and medium scale servers and data storage
devices. While with Hitachi, Mr. Mitchell was President and
Chief Operating Officer from June 2001 to April 2002 and Vice
President, General Counsel and Secretary from October 2000 to
June 2001 of its subsidiary, Hitachi Innovative Solutions
Corporation, a systems integrator and CRM software implementer.
From January 1990 until October 2000, Mr. Mitchell held a
number of responsible legal positions at Hitachi and assisted
with patent infringement litigation and other legal matters.
Mr. Mitchell initiated his career with sales and contracts
management positions with Sears, Radionix Corp., and Fujitsu
America, Inc. Mr. Mitchell holds a B.S. in Organizational
Psychology from the University of San Francisco and a J.D. from
the Monterey College of Law. Mr. Mitchell is admitted to
practice law in California and before the U.S. Supreme
Court.




Item 2 
Properties.

Substantially all of our office space is leased.
We have approximately 161,000 square feet of total leased space
in North America including our 40,000 square foot headquarters
building in Cupertino, California. This location supports
executive, legal, finance, human resources, marketing, sales,
and administration. Other primary sites are located in Kirkland,
Washington, which supports sales, technical support, and
marketing, and Bellingham, Washington that supports research and
development. Andover, Massachusetts 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 since. Since
December 31, 2001, our North American real estate lease
obligations have been reduced through subleases, lease
terminations, and natural expiration. Regional sales offices are
located in New York, New York; Austin, Texas; and Reston,
Virginia.

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Internationally, we lease approximately 31,000
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,
Mexico, Spain, Sweden, the Netherlands, and the United Kingdom.
We also own an approximately 6,000 square foot office facility
in Mevaseret Zion, Israel that is leased to a third party
through December 2004. Since December 31, 2001, 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 of the District of
Columbia. We acquired NSA and NetSoft in 1997. The United States
government declined to pursue the action on its own behalf and,
therefore, the action was pursued by 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,
Mr. Fisher agreed to voluntarily dismiss NetManage from
this action in exchange for our agreement to suspend applicable
statutes of limitation as to Mr. Fishers claims.

On January 31, 2002, on an order of the
court following defendants successful motion to dismiss
the May 2001 amended complaint, Mr. Fisher filed a Second
Amended Complaint, or Second Complaint, in the United States
District Court of the District of Columbia against NSA and
NetSoft among numerous other defendants. On May 13, 2002,
on an order of the court following defendants successful
motion to strike the Second Complaint, Mr. Fisher filed a
Third Amended Complaint, or Complaint, in the United States
District Court of the District of Columbia against NSA and
NetSoft 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). We did not acquire NSA until July
1997 and had no involvement with the events alleged by
Mr. Fisher. However, Mr. Fisher alleges that any
liabilities of NSA and Netsoft passed to us. Mr. Fisher
alleges damages in excess of $30,000,000. On May 31, 2002,
NSA and NetSoft and the other defendants answered the complaint
and filed a motion to strike the complaint. We, and our
affiliates, vigorously dispute Mr. Fishers
allegations.

In addition, we may be contingently liable with
respect to certain asserted and unasserted claims that arise
during the normal course of business.






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

Not applicable.




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 NETME. As of January 31, 2003,
there were 1,176 stockholders of record and approximately 19,415
beneficial owners of our common stock.

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On August 28, 2002, our stockholders
approved a one-for-seven reverse split of our common stock for
stockholders of record on July 15, 2002. The reverse stock
split became effective at the close of business on
September 3, 2002. The following table of high and low
closing sales prices of our common stock has been adjusted to
reflect the reverse stock split. The high and low closing sales
prices of our common stock as reported on the Nasdaq National
Market for each quarter of 2002 and 2001 were as follows:

|     |      |       |   |        |  |       |   |        |  |  |   |      |  |  |   |      | 
|---- | ---- | ----- | - | ------ |  | ----- | - | ------ |  |  | - | ---- |  |  | - | ---- | 
|     |      | First |   | Second |  | Third |   | Fourth
|     |      |       |   |        |  |       |   |       
|2002 |      |       |   |        |  |       |   |        |  |  |   |      |  |  |   |     
|     | High |       | $ | 9.03   |  |       | $ | 6.79   |  |  | $ | 5.25 |  |  | $ | 2.94 | 
|     | Low  |       |   | 5.25   |  |       |   | 3.85   |  |  |   | 0.83 |  |  |   | 0.81 | 
|2001 |      |       |   |        |  |       |   |        |  |  |   |      |  |  |   |     
|     | High |       | $ | 16.84  |  |       | $ | 7.35   |  |  | $ | 5.67 |  |  | $ | 8.40 | 
|     | Low  |       |   | 6.56   |  |       |   | 4.48   |  |  |   | 1.75 |  |  |   | 1.75 | 

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




Item 6  Selected financial
data.

The following selected consolidated financial
data should be read in conjunction with our consolidated
financial statements. The information set forth below is not
necessarily indicative of results of future operations and
should be read in conjunction with Item 7,
Managements discussion and analysis of financial
condition and results of operations and the consolidated
financial statements and notes to those financial statements
included in Item 8 of this Form 10-K. The selected
financial data for 2001, 2000, and 1999 contains certain
financial information that has been restated. See Note 10
of the Notes to Consolidated Financial Statements for further
discussion of this matter.

|                                                         |  |                                  |         |                                       |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                         |  |                                 
|                                                         |  | For the Years Ended December 31,
|                                                         |  |                                 
|                                                         |  | 2002                             |         | 2001                                  |  | 2000 |         | 1999 |  | 1998
|                                                         |  |                                  |         |                                       |  |      |         |      |  |     
|                                                         |  |                                  |         |                                       |  |     
|                                                         |  |                                  |         | (in thousands, except per share data) |  |     
|Statement of Operations Data:(1)                         |  |                                  |         |                                       |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Net revenues                                             |  | $                                | 65,689  |                                       |  | $    | 79,249  |      |  | $    | 102,653 |   |  | $ | 78,256  |   |  | $ | 71,727  |  
|Loss from operations(2)                                  |  |                                  | (16,941 | )                                     |  |      | (11,942 | )    |  |      | (75,363 | ) |  |   | (32,956 | ) |  |   | (21,817 | )
|Net loss                                                 |  |                                  | (21,994 | )                                     |  |      | (12,269 | )    |  |      | (71,473 | ) |  |   | (28,449 | ) |  |   | (9,968  | )
|Net loss per share, basic and diluted(3)                 |  | $                                | (2.46   | )                                     |  | $    | (1.32   | )    |  | $    | (7.71   | ) |  | $ | (2.87   | ) |  | $ | (1.31   | )
|Weighted average common shares, basic and
    diluted(3) |  |                                  | 8,927   |                                       |  |      | 9,276   |      |  |      | 9,266   |   |  |   | 9,245   |   |  |   | 7,601   |  
|                                                        
|Balance Sheet Data:                                      |  |                                  |         |                                       |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents and short term
    investments |  | $                                | 24,094  |                                       |  | $    | 33,830  |      |  | $    | 38,320  |   |  | $ | 63,227  |   |  | $ | 105,643 |  
|Working capital                                          |  |                                  | 9,789   |                                       |  |      | 18,626  |      |  |      | 20,750  |   |  |   | 22,160  |   |  |   | 98,113  |  
|Total assets                                             |  |                                  | 53,238  |                                       |  |      | 75,646  |      |  |      | 108,662 |   |  |   | 214,767 |   |  |   | 201,753 |  
|Total stockholders equity                               |  |                                  | 16,087  |                                       |  |      | 38,588  |      |  |      | 51,904  |   |  |   | 119,750 |   |  |   | 159,160 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As discussed in Note 3 of the Notes to
    Consolidated Financial Statements, we acquired Aqueduct
    Software, Inc., Wall Data Incorporated, Simware Inc., and FTP
    Software, Inc. in 2000, 1999, 1999, and 1998, respectively.                                                                                                                                                                                                                                                                                                                             
|   
|(2) | Loss from operations includes write-offs of
    in-process research and development of $1.7 million,
    $19.1 million, and $9.5 million for the years ended
    December 31, 2000, 1999, and 1998, respectively.
    Additionally, loss from operations includes restructuring
    charges of $4.7 million, $5.6 million,
    $3.8 million, and $7.0 million for the years ended
    December 31, 2002, 2000, 1999, and 1998, respectively.
    Also, loss from operations includes asset impairment charges of
    approximately $5.6 million and $39.8 million

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|    |                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | for the years ended December 31, 2002 and
    2000, respectively 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.                                                      
|   
|(3) | All share and per share data has been
    retroactively adjusted to give effect to our one-for-seven
    reverse stock split. The reverse stock split was approved by our
    stockholders on August 28, 2002 for stockholders of record
    on July 15, 2002 and became effective at the close of
    business on September 3, 2002.

15



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|         |                                                                                           
|-------- | ------------------------------------------------------------------------------------------
|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 this Annual 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, including
those described in this report under the caption factors
that may affect our future results and financial
conditions. 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 Annual 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.

The accompanying managements discussion and
analysis of financial condition and results of operations give
effect to the restatement of the consolidated financial
statements for the years ended December 31, 2001 and 2000
as described in Note 10 of the Consolidated Financial
Statements.

Overview

We develop and market software and service
solutions that are designed to enable 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 are designed to
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. We have operations worldwide with offices located in
the United States, Canada, Israel, Europe and Latin America.

Our software solutions 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 the A/S 400
series and on UNIX based servers. We also develop and market
software that is designed to allow 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 consultation
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 are designed to allow
customers to develop and deploy new web-based applications.

Our principal products are compatible with
Microsoft Corporations, or Microsofts Windows XP,
Windows 2000, Windows NT, Windows 98, Windows 95, and Windows
3.x 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
Companys HP/UX, Sun Microsystems Inc.s
Solaris, and the open source Linux system.

In 2002, we focused on the core competencies of
our key business lines  Host Access and
Host Integration  each with dedicated
development, sales, marketing, and support resources. The Host
Access product line includes our products branded RUMBA and
ViewNow. The Host Integration product line includes our products
branded OnWeb. The Real-time Interactive Support functionality,
previously sold as

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the standalone product SupportNow, is being
incorporated into our full line of products and adds value to
our Host Access and Host Integration product offerings.




| |                                                
| | -----------------------------------------------
| | Application of critical accounting
    policies

Our discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
conformity with accounting principles generally accepted in the
United States of America. Our preparation of these consolidated
financial statements requires us to make judgments and estimates
that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of net
revenues and expenses during the reporting period. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from such estimates
under different assumptions or conditions. The following
summarizes our critical accounting policies used in preparing
our consolidated financial statements:

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 two-year term licenses have been
insignificant. We apply the provisions of the American Institute
of Certified Public Accountants (AICPA) Statement of Position
(SOP) 97-2, Software Revenue Recognition, and related
amendments and interpretations to all transactions involving the
sale of software products and to 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. We give rebates to customers
on a limited basis. These rebates are presented in our
Consolidated Statement of Operations as a reduction of revenue.

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 collectability 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 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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specific objective evidence (VSOE) 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 providing our
customers with 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 VSOE 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 collectability is deemed probable. To date,
consulting revenue has not been significant.

Allowance for doubtful accounts, sales returns
and rebates:In establishing our sales
return and rebate allowance, we must make estimates of potential
future product returns related to current period product
revenue, including analyzing historical returns, current
economic trends, and changes in customer demand and acceptance
of our products. We apply a significant number of judgments in
connection with assessing the collectability of our accounts
receivable. We analyze historical bad debts, customer
concentrations, customer credit-worthiness, current economic
trends and changes in our customer payment terms. Our accounts
receivable balance was $18.3 million and
$17.8 million, net of our allowance for doubtful accounts
of $0.8 million and $2.4 million as of
December 31, 2002 and 2001, respectively.

If we were to assume that our future product
returns were changed to the upper end or lower end of the range
we developed in the course of formulating our estimate, the
estimate of future returns as of December 31, 2002 would
range from $0.1 million to $0.2 million. In each of
the years in the three-year period ended 2002, our actual
returns have not deviated significantly from our estimates. Our
actual product returns for 2002 and 2001 were $0.9 million
and $0.6 million, respectively. If we were to change our
estimate of future product returns to the high end of the range,
there would be no material impact on our liquidity or capital
resources. The estimates for returns represented approximately
0.2%, 0.2%, and 0.4% of our gross revenues, or approximately
$0.2 million, $0.2 million, and $0.4 million for
2002, 2001, and 2000, respectively.

In preparing our financial statements for the
year ended December 31, 2002, we estimated rebate reserves
for the few distributors who receive rebates. Our rebate
reserves for 2002 were $0.1 million. For the year ended
December 31, 2001, rebate reserves were insignificant and
were included in product returns and not separately recorded.

Restructuring reserves:We accrue for restructuring costs when
we make a commitment to a firm exit plan that specifically
identifies all significant actions to be taken in conjunction
with our response to a change in our strategic plan, product
demand, expense structure or other factors. We reassess our
prior restructuring accruals on a quarterly basis to reflect
changes in the costs of our restructuring activities, and we
record new restructuring accruals as commitments are made.
Estimates are based on anticipated costs of such restructuring
activities and are subject to change. Our combined restructuring
reserves balance was $4.6 million and $2.6 million as
of December 31, 2002 and 2001, respectively. See
Note 2 of the Notes to Consolidated Financial Statements
concerning the adoption of SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities for
further discussion of accounting for restructuring activities
after December 31, 2002.

On January 30, 2003 we announced a
restructuring of NetManage in response to the sluggish North
America and European economies. We believe it was necessary to
refocus our operations and reduce our operating expenses to
bring them in line with our revised anticipated revenue levels.
We anticipate a reduction in our workforce by more than 20% and
expect to record a restructuring charge as required by SFAS
No. 146, Accounting for Costs Associated with Exit or
Disposal Activities, in the first quarter of 2003. For
further discussion please see Note 11 to the Notes to
Consolidated Financial Statements.

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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 Consolidated
Statement of Operations.

Significant 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. As of December 31, 2002, we had a
net deferred tax asset of approximately $76.6 million,
consisting primarily of net operating losses and foreign tax
credit carryforwards. Realization of such carryforwards before
they expire is dependent on our generating sufficient future
taxable income. We recorded a valuation allowance for the entire
balance of the net deferred tax assets at December 31, 2002
due to uncertainties related to our ability to utilize the
carryforwards 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 believe that the
accounting estimate related to asset impairment is a
critical accounting estimate because: (1) it is
highly susceptible to change from period to period as it
requires us to make assumptions about future revenues over the
life of our software products and services; and (2) the
impact that recognizing an impairment has on the assets reported
on our Consolidated Balance Sheet and the net loss reported in
our Consolidated Statement of Operations could be material.

Our assumptions about future revenues and sales
volumes require significant judgment because actual sales prices
and volumes have fluctuated significantly in the past and are
expected to continue to do so. In estimating future revenues, we
use our sales performance, planned levels of product
development, planned new product launches, our internal budgets
and industry market estimates of planned market size and growth
rates to assist us.

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 and at a minimum annually. SFAS No. 142,
Goodwill and Other Intangible Assets requires that if the
sum of the future discounted cash flows expected to result from
a companys individual reporting unit is less than the
reported value of the individual reporting unit, an asset
impairment charge must be recognized in the financial
statements. The amount of the impairment is calculated by
subtracting the fair value of the asset from the reported value
of the asset. 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. Upon adoption of SFAS No. 142 on
January 1, 2002, we reclassified the net carrying amount of
assembled workforce of $224,000 to goodwill and ceased
amortization of goodwill.

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 our use of
    the acquired assets or the strategy for our overall business;
|
| |  | significant negative industry or economic trends;
    and                                                        
|
| |  | our market capitalization relative to net book
    value.                                                        

We operate in two markets, Host Access and Host
Integration. In the Host Access market, we estimate that our
future cash flows will increase substantially over the next few
years primarily as a result of reducing costs to bring them in
line with comparative cost structures for mature markets. Actual
sales have declined

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approximately 18% on average over the last two
years, and we anticipate further declines as the market
continues to mature. In our Host Integration market, we
anticipate revenue growth based on a combination of industry
growth estimates, new products and enhancements to existing
products and greater penetration of our substantial customer
base. We also estimate that our expenses will decline faster
than the decline in projected net revenues and therefore will
decrease as a percentage of net revenues over the next five
years.


We reviewed our Host Access and Host Integration
reporting units for impairment at December 31, 2002. The
indicated fair value of the goodwill and intangible assets
pertaining to our Host Access business was substantially greater
than the carrying value, which had been reduced from its
original recorded value, in large part due to an impairment
charge taken in 2000 against these assets. We anticipate that
the overall size of the Host Integration market will not be as
large as we initially forecast. As a result we reduced our
growth estimate of projected future revenues from this market,
which reduced our anticipated discounted cash flows as well. We
determined that the fair value of our assets related to the Host
Integration market were less than the recorded value of those
assets. Consequently, we determined that an asset impairment in
the amount of $4.9 million had occurred as of
December 31, 2002 and recorded a charge in our Consolidated
Statement of Operations in the fourth quarter of 2002. In
addition, we recorded an impairment of developed technology of
$0.7 million in the fourth quarter of 2002.

Acquisitions

We have acquired a number of companies over the
last several years. These acquisitions have allowed us to expand
our existing customer base, obtain recurring revenue streams
derived primarily from existing maintenance contracts, and to
acquire intellectual property.

On June 5, 2000, we completed our
acquisition of Aqueduct Software, Inc., or Aqueduct, an early
stage web-based application intelligence company. We issued
160,214 shares of NetManage common stock and issued
warrants and options to purchase an additional
103,891 shares for all the outstanding stock of Aqueduct.
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 all 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
all outstanding 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 our 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 integrations could have a material
adverse effect on our results of operations and financial
condition. As discussed below, we already incurred significant
restructuring charges and asset impairment in connection with
the acquisitions of Wall Data and Simware.

Restructurings

During the past several years, we have undertaken
a number of initiatives intended to control costs and reduce
operating expenses, including the discontinuance of several low
revenue-generating products and the

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implementation of worldwide restructurings of our
operations as a result of acquisitions and prevailing market
conditions.


In fiscal 2002, we continued to experience a
reduction in revenues, which we believe related primarily to the
worsening North American and European economies. Customers are
postponing or canceling decisions to purchase technology
products because of uncertainties within their own businesses.
We believed it was necessary to refocus our operations and
reduce our operating expenses to bring them more in line with
our revised anticipated revenue levels. Consequently, on
August 8, 2002, we announced a restructuring of our
operations designed to re-align our core business functions and
reduce operating expenses. As part of the restructuring, we
reduced our workforce by approximately 26% and recorded a
$4.6 million charge to operating expenses in the third
quarter of 2002. The restructuring charge included approximately
$2.6 million of expenses related to facilities no longer
needed for company operations, and $2.0 million of employee
and other-related expenses for employee terminations. We
anticipate that the execution of the restructuring actions will
require total cash expenditures of $4.4 million, which is
expected to be funded from internal operations and existing cash
balances. As of December 31, 2002, we had incurred costs
totaling $1.3 million related to the restructuring, which
required $1.2 million in cash expenditures, leaving a
remaining restructuring liability of approximately
$3.3 million.

In the first six months of 2000, revenues
primarily from the Wall Data 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 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. Consequently, we announced a restructuring
of operations on August 3, 2000 and reduced our workforce
by approximately 17% consisting mostly of engineering and
customer support personnel, who were focused primarily on 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, which
included approximately $3.0 million of estimated expenses
for facilities-related charges, $1.6 million of
employee-related expenses for employee terminations,
approximately $200,000 in other equipment and professional
service costs, and an $800,000 settlement to Verity Inc. for a
software license that we no longer planned to use. As of
December 31, 2002, we had incurred costs totaling
approximately $5.1 million related to the restructuring and
recorded a reduction in the original estimate of
$0.3 million. The remaining restructuring reserve of
approximately $0.2 million is included in accrued
liabilities.

In the fourth quarter of 1999, following the
acquisitions of Wall Data and Simware, NetManage initiated a
plan to restructure its worldwide operations in connection with
the integration of operations of the two acquired companies. In
connection with this plan, 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, $1.4 million of employee-related
expenses for employee terminations across all functions, and
$0.5 million of other miscellaneous expenses. We
anticipated that the execution of the restructuring actions
would require total cash expenditures of approximately
$3.6 million that are expected to be funded from internal
operations. As of December 31, 2002, we had made cash
payments totaling approximately $3.3 million and recorded a
reduction in the original estimate of $0.1 million related
to the restructuring, leaving a balance of approximately
$0.4 million included in accrued liabilities.

On January 30, 2003 we announced a
restructuring of NetManage in response to the sluggish North
America and European economies. We believe it was necessary to
refocus our operations and reduce our operating expenses to
bring them in line with our revised anticipated revenue levels.
We anticipate a reduction in our workforce by more than 20% and
expect to record a restructuring charge as required by SFAS
No. 146,

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Accounting for Costs Associated with Exit or
Disposal Activities, in the first
quarter of 2003. For further discussion please see Note 11
to the Notes to Consolidated Financial Statements.


As described in detail below, under the heading
Factors that may affect our future results and financial
condition, 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 companies we have acquired has involved
geographically separated organizations, and personnel with
diverse business backgrounds and corporate cultures. We believe
that factors such as the ongoing attention and dedication of
management and resources required to affect the complete
integration of acquired companies, and the consequent disruption
in the business of all parties involved, may contribute to
interruptions and loss momentum in our business activities. Our
ability to maintain or increase revenues from the sale of
products from companies we have acquired on an ongoing basis
depends in part on our ability to effectively respond to these
factors.

Other
intangible assets impairment

In 2000, based on our 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. As a result, we wrote off
$39.8 million consisting of $30.9 million of goodwill
and $8.9 million of other intangibles, through a charge to
operations in the third quarter of fiscal 2000.

In 2002, based on our 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 developed technology related to the
acquisition of Aqueduct Software, Inc. As a result, we wrote off
$0.7 million of developed technology through a charge to
operations in the fourth quarter of fiscal 2002. We also
determined that there was a permanent impairment in the goodwill
arising on the acquisition of Simware, and we wrote off
$4.9 million through a charge to operations in the fourth
quarter of 2002.

Reverse stock
split

On August 28, 2002, our stockholders
approved a one-for-seven reverse stock split of our common stock
for stockholders of record on July 15, 2002, which became
effective at the close of business on September 3, 2002.

Stock
repurchase program

Our Board of Directors has authorized the
repurchase from time to time of up to 2,142,857 shares of
our common stock through open market purchases. During 2002, we
purchased 616,401 shares of our common stock on the open market
at an average purchase price of $3.83 per share for a total
cost of approximately $2.4 million. Cumulatively, as of
December 31, 2002, we had repurchased 2,004,917 shares of
our common stock at an average price of $10.29 per share
for a total cost of approximately $20.6 million.

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Year ended December 31, 2002 compared to
year ended December 31, 2001

This selected financial data for fiscal year 2002
and 2001 contains certain financial information (in millions)
that has been restated for 2001 (see Note 10 of the Notes
to Consolidated Financial Statements for further discussion of
this matter):

|                                                         |                                |                         |       |               |       |        |       |       |       |   |       |      |       |   |        |       |       |   
|-------------------------------------------------------- | ------------------------------ | ----------------------- | ----- | ------------- | ----- | ------ | ----- | ----- | ----- | - | ----- | ---- | ----- | - | ------ | ----- | ----- | --
|                                                         |                                |                         |       |               |       |       
|                                                         |                                | Year Ended December 31, |       |               |       |       
|                                                         |                                |                         |       |              
|                                                         |                                | 2002                    |       | 2001          |       | Change
|                                                         |                                |                         |       |               |       |       
|                                                         |                                |                         |       |               |       |        |       |      
|                                                         |                                |                         |       | (As restated) |       |        |       |      
|Net revenues                                             |                                |                         |       |               |       |        |       |       |       |   |       |      |       |   |        |      
|                                                         | License fees                   |                         | $     | 31.4          |       |        | $     | 39.0  |       |   | $     | (7.6 | )     |   |        | (19.5 | )%   
|                                                         | Services                       |                         |       | 34.3          |       |        |       | 40.2  |       |   |       | (5.9 | )     |   |        | (14.7 | )%   
|                                                         |                                |                         |       |               |       |        |       |       |       |   |       |      |       |   |        |      
|                                                         |                                | Total net revenues      |       |               | 65.7  |        |       |       | 79.2  |   |       |      | (13.5 | ) |        |       | (17.0 | )%
|As a percentage of net revenues:                         |                                |                         |       |               |       |        |       |       |       |   |       |      |       |   |        |      
|                                                         | License fees                   |                         |       | 47.8          | %     |        |       | 49.2  | %     |   |       |      |       |   |        |       |      
|                                                         | Services                       |                         |       | 52.2          | %     |        |       | 50.8  | %     |   |       |      |       |   |        |       |      
|                                                         |                                |                         |       |               |       |        |       |       |       |   |       |      |       |   |        |      
|                                                         |                                | Total net revenues      |       |               | 100.0 | %      |       |       | 100.0 | % |       |      |       |   |        |       |       |   
|                                                         |                                |                         |       |               |       |        |       |       |       |   |       |      |       |   |        |      
|Gross margin                                             |                                | $                       | 57.1  |               |       | $      | 67.7  |       |       | $ | (10.6 | )    |       |   | (15.7  | )%   
|                                                         | As a percentage of net revenue |                         |       | 87.0          | %     |        |       | 85.5  | %     |   |       |      |       |   |        |       |      
|Research and development                                 |                                | $                       | 13.1  |               |       | $      | 18.0  |       |       | $ | (4.9  | )    |       |   | (27.2  | )%   
|                                                         | As a percentage of net revenue |                         |       | 19.9          | %     |        |       | 22.7  | %     |   |       |      |       |   |        |       |      
|Sales and marketing                                      |                                | $                       | 35.4  |               |       | $      | 45.4  |       |       | $ | (10.0 | )    |       |   | (22.0  | )%   
|                                                         | As a percentage of net revenue |                         |       | 53.9          | %     |        |       | 57.3  | %     |   |       |      |       |   |        |       |      
|General and administrative                               |                                | $                       | 12.2  |               |       | $      | 10.3  |       |       | $ | 1.9   |      |       |   | 18.4   | %    
|                                                         | As a percentage of net revenue |                         |       | 18.6          | %     |        |       | 13.0  | %     |   |       |      |       |   |        |       |      
|Restructuring charges                                    |                                | $                       | 4.7   |               |       | $      |      |       |       | $ | 4.7   |      |       |   | 100.0  | %    
|                                                         | As a percentage of net revenue |                         |       | 7.2           | %     |        |       | 0.0   | %     |   |       |      |       |   |        |       |      
|Goodwill and other intangible assets impairment          |                                | $                       | 5.6   |               |       | $      |      |       |       | $ | 5.6   |      |       |   | 100.0  | %    
|                                                         | As a percentage of net revenue |                         |       | 8.5           | %     |        |       | 0.0   | %     |   |       |      |       |   |        |       |      
|Amortization of goodwill and other intangible
    assets |                                | $                       | 3.1   |               |       | $      | 6.0   |       |       | $ | (2.9  | )    |       |   | (48.3  | )%   
|                                                         | As a percentage of net revenue |                         |       | 4.7           | %     |        |       | 7.5   | %     |   |       |      |       |   |        |       |      
|Loss on investments, net                                 |                                | $                       | (2.8  | )             |       | $      | (1.8  | )     |       | $ | (1.0  | )    |       |   | (55.6  | )%   
|                                                         | As a percentage of net revenue |                         |       | (4.3          | )%    |        |       | (2.3  | )%    |   |       |      |       |   |        |       |      
|Interest income and other, net                           |                                | $                       | 0.4   |               |       | $      | 2.6   |       |       | $ | (2.2  | )    |       |   | (84.6  | )%   
|                                                         | As a percentage of net revenue |                         |       | 0.6           | %     |        |       | 3.3   | %     |   |       |      |       |   |        |       |      
|Foreign currency transaction losses                      |                                | $                       | (1.5  | )             |       | $      | (0.4  | )     |       | $ | (1.1  | )    |       |   | (275.0 | )%   
|                                                         | As a percentage of net revenue |                         |       | (2.3          | )%    |        |       | (0.5  | )%    |   |       |      |       |   |        |       |      
|Provision for income taxes                               |                                | $                       | 1.1   |               |       | $      | 0.7   |       |       | $ | 0.4   |      |       |   | 57.1   | %    
|                                                         | Effective tax rate             |                         |       | NA            |       |        |       | NA    |       |   |       |      |       |   |        |       |      
|                                                         |                                |                         |       |               |       |        |       |       |       |   |       |      |       |   |        |      
|Net loss                                                 |                                | $                       | (22.0 | )             |       | $      | (12.3 | )     |       | $ | 9.7   |      |       |   | 78.9   | %    
|                                                         | As a percentage of net revenue |                         |       | (33.5         | )%    |        |       | (15.5 | )%    |   |       |      |       |   |        |       |      

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.

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License fees and service revenues decreased 17%
during the year ended December 31, 2002 as compared to the
year ended December 31, 2001. This decrease resulted from
customer decisions to cancel or postpone purchases of our
products, due to the slowing North American (including Latin
America), and European economies, and pressures on our average
selling prices. We experienced a decrease in incoming orders for
2002 that began in the first quarter and continued through the
third quarter. Incoming orders increased in the fourth quarter
of 2002. This trend was identical to the trend experienced in
2001. 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. Host Access revenues in 2002
declined approximately 17% from 2001 with declines in both
license revenues and service revenues across all geographic
territories. Host Integration revenues in 2002 declined
approximately 25% from 2001 primarily because of a decline in
consulting revenues, offset in part by a 55% growth in Host
Integration license revenues and a 5% increase in maintenance
revenues. Service revenues increased as a percentage of total
revenues to just over 52% due to the larger percentage decline
in license revenues in 2002.

We have operations worldwide, with sales offices
located in the United States, Europe, Canada, Latin America, and
Israel. Revenues outside of North America (United States and
Canada) as a percentage of total net revenues were approximately
28% and 29% for the years ended December 31, 2002 and 2001.

No customer accounted for more than 10% of net
revenues during the years ended December 31, 2002 and 2001.

Gross
margin

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

Cost of revenues  Services include
costs associated with both consulting and customer support, and
consist primarily of salaries and commissions, benefits, travel,
and occupancy expenses.

Gross margin decreased in absolute dollars for
the year ended December 31, 2002 as compared to the year
ended 2001, primarily because of the decline in net revenues of
17%, offset in part by cost reductions associated with the
reduction in headcount of 23 full time employees and to more
cost effective software procurement and distribution initiatives.

Gross margin as a percentage of net revenues
increased 1.5% in 2002 as compared to 2001 and 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.

Research and
development

Research and development, or R & D, expenses
consist primarily of salaries and benefits, occupancy and travel
expenses, and fees paid to outside consultants. R & D
expenses decreased, in absolute dollars and as a percentage of
net revenues for 2002 as compared to 2001, primarily as a result
of the reduction in headcount of 32 full time employees for
research and development activities in our Host Access product
line.

Software development costs are accounted for in
accordance with SFAS 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 us 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 2002.

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Sales and
marketing

Sales and marketing expenses consist primarily of
salaries and commissions of sales, and marketing 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 2002,
as compared to the year 2001, primarily as a result of lower
sales levels, the reduction in sales and sales support staff by
50 full time employees as part of our ongoing cost reduction
efforts, and to a lesser extent, actions as a result of our
restructuring in August 2002.

General and
administrative

General and administrative expenses consist
primarily of salaries, benefits, accounting, travel, legal, and
occupancy expenses. General and administrative expenses
increased in absolute dollars and as a percentage of net
revenues for 2002 as compared to 2001 primarily as a result of
higher professional fees related to the re-audit of our 2000 and
2001 fiscal years and for various litigation matters in which
NetManage is involved. The increase in costs was partially
offset as a result of the reduction in staff of 13 full time
employees.

Restructuring
charges

In fiscal 2002, we continued to experience a
reduction in revenues, which we believe relates primarily to the
worsening North American and European economies. Customers are
postponing or canceling decisions to purchase technology
products because of uncertainties within their own businesses.
We believed it was necessary to refocus our operations and
reduce our operating expenses to bring them more in line with
our revised anticipated revenue levels, which we expect to be
comparable or less than those of the previous year.
Consequently, on August 8, 2002, we announced a
restructuring of our operations designed to re-align our core
business functions and reduce operating expenses. As part of the
restructuring, we reduced our workforce by approximately 26% and
recorded a $4.6 million charge to operating expenses in the
third quarter of 2002. The restructuring charge included
approximately $2.6 million of expenses related to
facilities no longer needed for company operations, and
$2.0 million of employee and other-related expenses for
employee terminations. We anticipate that the execution of the
restructuring actions will require total cash expenditures of
$4.4 million, which is expected to be funded from internal
operations and existing cash balances. As of December 31,
2002, we had incurred costs totaling $1.3 million related
to the restructuring, which required $1.2 million in cash
expenditures. The remaining restructuring liability of
approximately $3.3 million is included in accrued
liabilities at December 31, 2002.

An additional charge of $0.1 million was
recorded in the fourth quarter of 2002 as a result of changes in
estimates in restructuring charges originally recorded in prior
years (See Note 4 to the Notes to Consolidated Financial
Statements).

Goodwill and
other intangible assets impairment

In the fourth quarter of 2002, based on our
analysis of revised product directions, revenue forecasts and
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 Simware and Aqueduct. We re-evaluated 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 $5.6 million of
goodwill and intangible assets, consisting of $4.9 million
of goodwill and $0.7 million of other intangibles, through
a charge to operations.

Amortization
of goodwill and other intangible assets

On January 1, 2002, NetManage implemented
SFAS No. 142 Goodwill and Other Intangible Assets
that requires that goodwill no longer be amortized. In 2002, no
goodwill and $3.1 million of other intangibles were
amortized. In 2001, approximately $2.9 million of goodwill
and $3.1 million of other intangibles were

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amortized. Amortization of other intangibles is
recorded on a straight-line basis over an estimated useful life
of five years.


Loss on
investments, net

In the third quarter of 2002, we determined that
our investment in easyBASE Ltd. and fusionOne, Inc. was
permanently impaired, as a result of continued weakness in the
software development industry and our analysis of data provided
to us by both companies. In the past, we have invested in a
number of companies that have developed technologies that we
felt had related use with our products, and had significant
opportunity in their own markets. In large part as a result of
the current economy, we have determined that these investments
in easyBASE and fusionOne were permanently impaired and wrote
them down by $1.5 million and $0.3 million,
respectively, to expected realizable values. In addition, we
realized a loss of approximately $759,000 on our investment in
Kana Software, Inc.. In the fourth quarter of 2002, as a result
of our determination of further deterioration in their business
outlook, we wrote off a bridge loan to easyBASE in the amount of
$275,000 that we believe will not be collectible. As a result,
we recorded an aggregate loss on investments of approximately
$2.8 million in 2002.

Interest
income and other, net

The decrease in interest income and other, net
for 2002 as compared to 2001, is primarily the result of the
reduction in the cash accounts from $33.0 million to
$24.0 million and the lower money market interest rates in
2002. As well, in 2001 we received approximately
$1.4 million in interest income related to income tax
refunds of approximately $9.3 million. No such tax refunds
and interest were received in 2002.

Foreign
currency transaction losses

We are exposed to foreign currency exchange rate
risk inherent in our sales commitments, anticipated sales,
anticipated purchases and assets and liabilities in currencies
other than the U.S. dollar. We transact business in
approximately ten foreign currencies worldwide, of which the
most significant to our operations are the euro, the Canadian
dollar, the Israeli shekel, and the British pound. For most
currencies, we are the net receiver of foreign currencies and
therefore benefit from a weaker U.S. dollar and are
adversely affected by a stronger U.S. dollar relative to
those foreign currencies in which we transact significant
amounts of business. In 2002, we recorded an increase in foreign
currency transaction losses of $1.1 million as compared to
2001 resulting primarily from fluctuations in the Israeli Shekel.

Provision for
income taxes

We recorded a provision for income taxes for the
year-ended December 31, 2002 of approximately
$1.1 million, which consisted primarily of foreign income
taxes, net of state income tax benefits. Our effective tax rate
for 2002 is less than 1%, due to our current consolidated loss
position.

As of December 31, 2002, we had a gross
deferred tax asset of approximately $76.6 million.
Realization of the gross deferred tax asset is dependent on our
generating sufficient future taxable income. Currently, we
believe that it is likely the gross deferred tax asset may not
be realized and, therefore, we have fully reserved the gross
deferred tax asset. The amount of the gross net 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, 2001 compared to
year ended December 31, 2000

This selected financial data for fiscal year 2001
and 2000 contains certain financial information (in millions)
that has been restated (see Note 10 to the Notes to
Consolidated Financial Statements for further discussion of this
matter):

|                                                         |                                 |                         |       |           |       |   |       |       |       |   |       |       |       |   |        |       |       |   
|-------------------------------------------------------- | ------------------------------- | ----------------------- | ----- | --------- | ----- | - | ----- | ----- | ----- | - | ----- | ----- | ----- | - | ------ | ----- | ----- | --
|                                                         |                                 | 2001                    |       | 2000      |       |   |       |      
|                                                         |                                 |                         |       |           |       |   |       |      
|                                                         |                                 |                         |       |           |       |  
|                                                         |                                 | Year Ended December 31, |       |           |       |  
|                                                         |                                 |                         |       |           |       |  
|                                                         |                                 |                         |       |          
|                                                         |                                 |                         |       | Change   
|                                                         |                                 |                         |       |          
|                                                         |                                 | (As                     |       | (As       |       |  
|                                                         |                                 | restated)               |       | restated) |       |  
|Net revenues                                             |                                 |                         |       |           |       |   |       |       |       |   |       |       |       |   |        |      
|                                                         | License fees                    |                         | $     | 39.0      |       |   | $     | 53.8  |       |   | $     | (14.8 | )     |   |        | (27.5 | )%   
|                                                         | Services                        |                         |       | 40.2      |       |   |       | 48.9  |       |   |       | (8.7  | )     |   |        | (17.8 | )%   
|                                                         |                                 |                         |       |           |       |   |       |       |       |   |       |       |       |   |        |      
|                                                         |                                 | Total net revenues      |       |           | 79.2  |   |       |       | 102.7 |   |       |       | (23.5 | ) |        |       | (22.9 | )%
|As a percentage of net revenues:                         |                                 |                         |       |           |       |   |       |       |       |   |       |       |       |   |        |      
|                                                         | License fees                    |                         |       | 49.2      | %     |   |       | 52.4  | %     |   |       |       |       |   |        |       |      
|                                                         | Services                        |                         |       | 50.8      | %     |   |       | 47.6  | %     |   |       |       |       |   |        |       |      
|                                                         |                                 |                         |       |           |       |   |       |       |       |   |       |       |       |   |        |      
|                                                         |                                 | Total net revenues      |       |           | 100.0 | % |       |       | 100.0 | % |       |       |       |   |        |       |       |   
|Gross margin                                             |                                 | $                       | 67.7  |           |       | $ | 84.3  |       |       | $ | (16.6 | )     |       |   | (19.7  | )%   
|                                                         | As a percentage of net revenue: |                         |       | 85.5      | %     |   |       | 82.1  | %     |   |       |       |       |   |        |       |      
|Research and development                                 |                                 | $                       | 18.0  |           |       | $ | 24.5  |       |       | $ | (6.5  | )     |       |   | (26.5  | )%   
|                                                         | As a percentage of net revenue: |                         |       | 22.7      | %     |   |       | 23.9  | %     |   |       |       |       |   |        |       |      
|Sales and marketing                                      |                                 | $                       | 45.4  |           |       | $ | 60.1  |       |       | $ | (14.7 | )     |       |   | (24.5  | )%   
|                                                         | As a percentage of net revenue: |                         |       | 57.3      | %     |   |       | 58.5  | %     |   |       |       |       |   |        |       |      
|General and administrative                               |                                 | $                       | 10.3  |           |       | $ | 17.2  |       |       | $ | (6.9  | )     |       |   | (40.1  | )%   
|                                                         | As a percentage of net revenue: |                         |       | 13.0      | %     |   |       | 16.7  | %     |   |       |       |       |   |        |       |      
|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       | %     |   |       | 1.7   | %     |   |       |       |       |   |        |       |      
|Restructuring charges                                    |                                 | $                       |      |           |       | $ | 5.6   |       |       | $ | (5.6  | )     |       |   | (100.0 | )%   
|                                                         | As a percentage of net revenue: |                         |       | 0.0       | %     |   |       | 5.5   | %     |   |       |       |       |   |        |       |      
|Goodwill and other intangible assets impairment          |                                 | $                       |      |           |       | $ | 39.8  |       |       | $ | (39.8 | )     |       |   | (100.0 | )%   
|                                                         | As a percentage of net revenue: |                         |       | 0.0       | %     |   |       | 38.8  | %     |   |       |       |       |   |        |       |      
|Amortization of goodwill and other intangible
    assets |                                 | $                       | 6.0   |           |       | $ | 14.6  |       |       | $ | (8.6  | )     |       |   | (58.9  | )%   
|                                                         | As a percentage of net revenue: |                         |       | 7.6       | %     |   |       | 14.2  | %     |   |       |       |       |   |        |       |      
|Gain (loss) on investments, net                          |                                 | $                       | (1.8  | )         |       | $ | 2.3   |       |       | $ | (4.1  | )     |       |   | (178.3 | )%   
|                                                         | As a percentage of net revenue: |                         |       | (2.3      | )%    |   |       | 2.2   | %     |   |       |       |       |   |        |       |      
|Interest income and other, net                           |                                 | $                       | 2.6   |           |       | $ | 2.7   |       |       | $ | (0.1  | )     |       |   | (3.7   | )%   
|                                                         | As a percentage of net revenue: |                         |       | 3.3       | %     |   |       | 2.6   | %     |   |       |       |       |   |        |       |      
|Foreign currency transaction losses                      |                                 | $                       | (0.4  | )         |       | $ | (0.4  | )     |       | $ | (0.0  | )     |       |   | 0      | %    
|                                                         | As a percentage of net revenue: |                         |       | (0.5      | )%    |   |       | (0.3  | )%    |   |       |       |       |   |        |       |      
|Provision for income taxes                               |                                 | $                       | 0.7   |           |       | $ | 0.7   |       |       | $ | 0.0   |       |       |   | 0      | %    
|                                                         | Effective tax rate              |                         |       | NA        |       |   |       | NA    |       |   |       |       |       |   |        |       |      
|                                                         |                                 |                         |       |           |       |   |       |       |       |   |       |       |       |   |        |      
|Net loss                                                 |                                 | $                       | (12.3 | )         |       | $ | (71.5 | )     |       | $ | 59.2  |       |       |   | (82.9  | )%   
|                                                         | As a percentage of net revenue: |                         |       | (15.5     | )%    |   |       | (69.6 | )%    |   |       |       |       |   |        |       |      

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Net
revenues

License fees and service revenues decreased 23%
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 (including Latin
America) economy, pressures on our average selling prices, and
the tragic events of September 11, 2001. 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 events, 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 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.
Service revenues increased as a percentage of net revenues to
just over 50% of our total net revenues due to the
proportionally larger decline in license revenues.

Revenues outside of North America (United States,
Latin America, and Canada) as a percentage of total net revenues
were approximately 29% and 28% for the years ended
December 31, 2001 and 2000, respectively. No customer
accounted for more than 10% of net revenues during the years
ended December 31, 2001 and 2000.

Gross
margin

Gross margin decreased in absolute dollars but
increased to approximately 85% as a percentage of net revenues
for the year ended December 31, 2001 as compared to the
year ended 2000. This resulted primarily from an improvement in
the gross margin on services due to ongoing cost reduction
efforts.

Research and
development

Research and development, 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 by 55 full time employees for research and development
activities.

Sales and
marketing

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 114 full time 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 decreased in
absolute dollars and as a percentage of net revenues for 2001 as
compared to 2000. The $6.4 million reduction in expenses
resulted primarily from a reduction in facilities related costs
and personnel reduction efforts including the reduction in staff
of 13 full time employees.

Insurance
recovery

During the year ended December 31, 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 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

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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 (See Note 3 to the Notes
to Consolidated Financial Statements).

Restructuring
charges

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, Inc.
for a software license that we did not plan to use and
accordingly wrote-off (See Note 4 to the Notes to
Consolidated Financial Statements).

Goodwill and
other intangible assets impairment

In connection with the restructuring announced on
August 3, 2000 (See Notes 2 and 4 to the Notes to
Consolidated Financial Statements), we performed an evaluation
in accordance with SFAS No. 121 of the recoverability
of all goodwill and other intangibles assets. We 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 $39.8 million of goodwill and
other intangibles through a charge to operations in August 2000.

Amortization
of goodwill and other intangible assets

Amortization of goodwill and intangibles
decreased in 2001, compared to 2000, as a result of the goodwill
impairment charge of $39.8 million taken in the third
quarter of 2000 and the goodwill and intangible assets
adjustment to reverse $9.7 million of overestimated
liabilities assumed in the Wall Data acquisition, recorded in
the fourth quarter of 2000.

Gain (loss)
on investments, 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 $2.2 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
merged with KANA Software, Inc. (KANA), a publicly traded
company. For the year ended December 31, 2001, we
recognized a loss on our holdings of KANA, of approximately
$1.8 million based on adjusting our holdings in KANA to the
fair market value at December 31, 2001. (See Note 10
to the Notes to Consolidated Financial Statements).

Interest
income and other, net

The small decrease in interest income and other,
net for 2001 as compared to 2000 resulted primarily from the
reduction in interest rates and reduction of our cash balances.
Interest income and other, net in 2001 includes
$1.4 million of interest income related to the
$9.3 million of income tax refunds received during the year.

There was a reduction in interest expense and an
increase in transaction losses for the 2001 year of
approximately $31,000 and $57,000, respectively. In December
2001, we recorded as income a previously

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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.


Foreign
currency transaction losses

We are exposed to foreign currency exchange rate
risk inherent in our sales commitments, anticipated sales,
anticipated purchases and assets and liabilities in currencies
other than the U.S. dollar. We transact business in
approximately ten foreign currencies worldwide, of which the
most significant to our operations are the euro, the Canadian
dollar, the Israeli shekel, and the British pound. For most
currencies, we are the net receiver of foreign currencies and
therefore benefit from a weaker U.S. dollar and are
adversely affected by a stronger U.S. dollar relative to
those foreign currencies in which we transact significant
amounts of business. In 2001 there was no significant change in
foreign currency transaction losses as compared to 2000.



| |                           
| | --------------------------
| | Provision for income taxes

We recorded a provision for income taxes for the
year-ended December 31, 2001 of approximately
$0.7 million, which consisted primarily of foreign income
taxes. Our effective tax rate for 2001 was less than 1% and this
was due to our 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 $63.4 million.
Realization of the gross deferred tax asset was dependent on our
generating sufficient future taxable income. We believed that it
was likely the gross deferred tax asset would not be realized
and, therefore, we fully reserved the gross deferred tax asset.
The amount of the gross net deferred tax asset, however, could
be adjusted in the future if actual future taxable income
differs from estimated amounts.

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, 2002. 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 |                          | $ | 24.0   |  |               | $ | 24.0 |  |  |  | 1.4 | %

A hypothetical change of 10% in interest rates
would not have a material impact on our financial position.



| |                      
| | ---------------------
| | Foreign currency risk

We are exposed to foreign currency exchange rate
risk inherent in our sales commitments, anticipated sales,
anticipated purchases and assets and liabilities in currencies
other than the U.S. dollar. We transact

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business in approximately ten foreign currencies
worldwide, of which the most significant to our operations are
the euro, the Canadian dollar, the Israeli shekel, and the
British pound. For most currencies, we are the net receiver of
foreign currencies and therefore benefit from a weaker
U.S. dollar and are adversely affected by a stronger
U.S. dollar relative to those foreign currencies in which
we transact significant amounts of business. The net results of
the transaction gains or losses appear in the line entitled as
foreign currency transaction gains or losses. At the end of each
period, the translation of the Consolidated Balance Sheet from
local currency to the group currency appear in the Consolidated
Statement of Comprehensive Loss under the foreign currency
translation adjustments line.


Liquidity and capital resources

|                                      |  |               |      |      |  |   |      |  
|------------------------------------- |  | ------------- | ---- | ---- |  | - | ---- | -
|                                      |  | 2002          |      | 2001
|                                      |  |               |      |     
|                                      |  |              
|                                      |  | (In millions)
|Cash and cash equivalents             |  | $             | 24.0 |      |  | $ | 33.0 |  
|Short-term investments                |  |               | 0.1  |      |  |   | 0.8  |  
|Net cash used in operating activities |  |               | (6.2 | )    |  |   | (0.7 | )
|Net cash used in investing activities |  |               | (1.2 | )    |  |   | (0.6 | )
|Net cash used in financing activities |  |               | (1.9 | )    |  |   | (1.1 | )

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 public stock offerings and
private preferred stock issuances, which aggregated net proceeds
to us of approximately $72.5 million. We do not have a bank
line of credit. The domestic and international economic events
described elsewhere in this Annual Report, have negatively
impacted our ability to generate sufficient cash to offset our
cash outflows. We have taken a number of measures to reverse
this trend through restructuring our organization, reducing our
operating expenses through the closing of excess facilities,
subleasing excess facility space, and carefully monitoring our
discretionary expenses. We are committed to bring our expenses
in line with our anticipated revenues and on January 30,
2003 announced more restructuring of our organization. It is the
intent of management in 2003 to change our organization to be a
net provider of cash. Our business has been and will be
dependent upon the spending of our customers in their respective
IT organizations. No guarantees can be made as to when and how
our products will be received in the future under these
uncertain economic times.

During the year ended December 31, 2002, our
aggregate cash and cash equivalents, short-term investments
decreased from $33.0 million to $24.0 million. This
decrease was due primarily to our net cash used in operating
activities of $6.2 million, our repurchase of our common
stock in the open market under the repurchase program described
below, and equipment purchases. 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 used in financing
activities in 2001 reflects the issuance of shares under our
employee stock purchase plan and stock option plans net of the
repurchase of our common stock, from time to time, through open
market purchases. For the year ended December 31, 2001, we
received $9.3 million in tax refunds including interest of
$1.4 million

At December 31, 2002, we had working capital
of $9.8 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 repurchase from time
to time of up to 2,142,857 shares of our common stock
through open market purchases. In October 2001, the Board
authorized the repurchase of 857,143 shares of our common
stock on the open market from time-to-time. During 2002, we
repurchased 616,401 shares of our common stock for
$2.4 million on the open market at the average price of
$3.83 per share. During 2001, we repurchased 337,221 shares
of our common stock on the open market at an average

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purchase price of $5.49 per share for a
total cost of approximately $1.9 million. During 2000, we
repurchased 143,538 shares of our common stock on the open
market at an average purchase price of $5.95 per share for
a total cost of approximately $0.9 million. Cumulatively,
as of December 31, 2002, we had repurchased 2,004,917
shares of our common stock at an average price of
$10.29 per share for a total cost of approximately
$20.6 million.


A summary of certain contractual obligations as
of December 31, 2002 is as follows:

|                 |  |                                            |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 
|---------------- |  | ------------------------------------------ | ------ | --------- |  | --------- | ----- | --------- |  | ------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                 |  |                                           
|                 |  | Amount of commitment expiration per period
|                 |  |                                           
|                 |  |                                            |        | Less Than |  |           |       | After    
|                 |  | Total                                      |        | 1 Year    |  | 2-3 Years |       | 4-5 Years |  | 5 Years
|                 |  |                                            |        |           |  |           |       |           |  |        
|                 |  |                                           
|                 |  | (in thousands)                            
|Capital leases   |  | $                                          | 15     |           |  | $         | 15    |           |  |         |      |  |  |   |      |  |  |   |      | 
|Operating leases |  |                                            | 13,705 |           |  |           | 5,494 |           |  | $       | 4,551 |  |  | $ | 1,542 |  |  | $ | 2,118 | 
|                 |  |                                            |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 
|Total            |  | $                                          | 13,720 |           |  | $         | 5,509 |           |  | $       | 4,551 |  |  | $ | 1,542 |  |  | $ | 2,118 | 
|                 |  |                                            |        |           |  |           |       |           |  |         |       |  |  |   |       |  |  |   |       | 

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 Securities and Exchange
Commission, or 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 and internationally;
|
| |  | changes in the 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;                                                                                                                  
|
| |  | loss of, or failure to enter into, strategic
    alliances to develop or promote our products;                                                                                         
|
| |  | quality control of our products;                                                                                                                                                       
|
| |  | changes in our operating expenses;                                                                                                                                                     
|
| |  | personnel changes;                                                                                                                                                                     
|
| |  | foreign currency exchange rates;                                                                                                                                                       

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| |   |                                                        
| | - | -------------------------------------------------------
| |  | seasonality; and                                       
|
| |  | adverse business conditions in specific
    industries.

In addition, our acquisition of complementary
businesses, products or technologies has in the past caused and
may continue to 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 in 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.

We had a net loss from operations of
approximately $22.0 million for the year ended
December 31, 2002. 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, if we are profitable, 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 and the declining worldwide economy are likely to
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 increase or maintain our prices and
profit margins. 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 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 2003 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

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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.




| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | 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;                                                                                                                                                                      
|
| |  | the loss of customers;                                                                                                                                                                                                                              
|
| |  | undisclosed liabilities;                                                                                                                                                                                                                            
|
| |  | adverse effects on reported operating results;                                                                                                                                                                                                      
|
| |  | the amortization of acquired intangible assets;                                                                                                                                                                                                     
|
| |  | the loss of key employees;                                                                                                                                                                                                                          
|
| |  | the difficulty of presenting a unified corporate
    image;                                                                                                                                                                                         
|
| |  | in 2001 and 2002, our operating results have been
    materially lowered by write-downs of our goodwill we have taken
    in connection with our past acquisitions. We cannot assume we
    will have to take similar write-downs in future periods.



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

In early December 1999, following our
acquisitions of Wall Data and Simware, we initiated a plan to
restructure our worldwide operations in order to integrate the
operations of these companies. We undertook further
restructurings of our operations in August 2000, and again in
August 2002. These restructuring plans involved reductions in
our worldwide workforce and the consolidation of certain of our
sales, customer support, and research and development
operations. We have also had to write-down assets acquired in
these acquisitions, which has lowered our operating results.
These restructuring plans may not be successful and may not
improve future operating results. Completion of the
restructuring plans may disrupt our operations and have a
material adverse effect on our business, financial condition and
results of operations. On January 30, 2003, we announced
further restructuring of our organization. See Note 11 to
Notes to Consolidated Financial Statements for more discussion
under subsequent events. 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 Seattle,
Washington; suburban Boston, Massachusetts; Cupertino and
Irvine, California; Ottawa, Ontario, Canada; and Haifa, Israel),
and personnel with

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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. 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 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 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 Ltd.,
Seagull Holding HV, and Hummingbird 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.

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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, Windows
NT, Windows XP, and Windows.NET 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.



| |                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 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, Inc. for Power TCP Telnet and Power TCP VT320
for five years, which we use in our 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 would be negatively impacted by
developments adverse to Microsofts Windows products. In
addition, our strategy of developing products based on the
Windows

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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 gain such access our ability to
develop new products compatible with future Windows release in a
timely manner 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, we do not have written agreements with many of our
strategic partners and cannot 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 third-party products or components, 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 or may only limit, rather than
eliminate potential liability. 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 proprietary 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 and contractual confidentiality
agreements,

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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.




| |                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------
| | 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 patent applications 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. However, 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 six patents pending and we have been
issued approximately 89 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 exists 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
overlaps. 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

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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.




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

We derived approximately 28% of our net revenues
from sales outside of North America (United States and Canada)
during the year ended December 31, 2002. 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, particularly regarding
    intellectual property rights and protection;                
|
| |  | costs and risks of localizing products for
    foreign countries;                                         
|
| |  | longer accounts receivable payment cycles;                                                                
|
| |  | 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;                                                                         
|
| |  | 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.

The terrorist attacks in the United States, the
United States response to these attacks, the threat of war in
Iraq, and the related decline in consumer confidence and
continued economic weakness have had an adverse

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impact on our operations. Recent consumer reports
indicate that consumer confidence has reached its lowest level
since 1993. If consumer confidence continues to decline or does
not recover, our revenues and results of operations may continue
to be adversely impacted in 2003 and beyond. Any escalation in
these events, or similar future events may disrupt our
operations or those of our customers. These events have had and
may continue to have an adverse impact on the United States and
world economy in general and consumer confidence and spending in
particular, which has and could continue to harm our sales. Any
of these events could increase volatility in the United States
and worldwide financial markets and economy, which could harm
our stock price and may limit the capital resources available to
us and our customers. This could have a significant impact on
our operating results, revenues and costs and may result in
increased volatility in the market price of 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 2,142,857 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 assurance as to the timing and/or amount of
shares that we may repurchase, if any, 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 growth and fund ongoing operations in future years. Our
capital requirements will depend on many factors including,
among other things:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | our results of operations;                                                                
|
| |  | acceptance of and demand for our products;                                                
|
| |  | the number and timing of any acquisitions and the
    cost of these acquisitions;         
|
| |  | the costs of developing new products;                                                     
|
| |  | the costs associated with our refocusing on core
    products and technologies; 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 us would be diluted. If we raise capital
through debt; our debt servicing costs will increase. 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 January 31, 2003, our officers,
directors and entities affiliated with them, in the aggregate,
beneficially owned approximately 1.5 million shares, or 17%
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
    plan, our stockholder rights plan 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

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exercisable for at least 10 days prior to
the consummation of such change of control transaction. These
accelerations of vesting provisions would increase the cost to
any potential acquirer and could have the effect of deterring or
reducing the per share price paid 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. In addition, we have
implemented a stockholder rights plan that could deter or at
least make it significantly more expensive for 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.



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



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

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB
Statement No. 123, which provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. Effective
January 1, 2003, NetManage will adopt the amended
disclosure requirements of SFAS No. 123.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of
FIN 45 are effective for financial

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statements of interim or annual periods that end
after December 15, 2002. The provisions for initial
recognition and measurement are effective on a prospective basis
for guarantees that are issued or modified after
December 31, 2002, irrespective of a guarantors
year-end. Management has not yet determined the impact of the
adoption of the recognition provisions of FIN 45 on
NetManages results of operations or financial position.


In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 addresses certain aspects of
the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. The
EITF will be effective for fiscal years beginning after
June 15, 2003. Management has not yet determined the impact
of the adoption of EITF 00-21 on NetManages results
of operations or financial position.

In June 2002, the FASB, issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). SFAS No. 146 requires that the
liability for costs associated with an exit or disposal activity
be recognized when the liability is incurred. Under Issue
No. 94-3, a liability for an exit cost was recognized at
the date of the commitment to an exit plan. SFAS No. 146
also establishes that the liability should initially be measured
and recorded at fair value. Accordingly, SFAS
No. 146 may affect the timing of recognizing future
restructuring costs as well as the amounts recognized. NetManage
will adopt the provisions of SFAS No. 146 for restructuring
activities initiated after December 31, 2002.




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 condition
and results of operations.

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Item 8  Financial
statements and supplementary data.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                           |                                                                                                                                     |      |  |    | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                           |                                                                                                                                     | Page
|                                           |                                                                                                                                     |     
|Financial Statements:                      |                                                                                                                                     |      |  |   
|                                           | Independent Auditors Report                                                                                                        |      |  | 44 | 
|                                           | Consolidated Balance Sheets at December 31,
    2002, and 2001 (As restated)                                                        |      |  | 45 | 
|                                           | Consolidated Statements of Operations 
    Years ended December 31, 2002, 2001 (As restated), and 2000
    (As restated)           |      |  | 46 | 
|                                           | Consolidated Statements of Comprehensive
    Loss  Years ended December 31, 2002, 2001 (As
    restated), and 2000 (As restated)   |      |  | 47 | 
|                                           | Consolidated Statements of Stockholders
    Equity  Years ended December 31, 2002, 2001 (As
    restated), and 2000 (As restated) |      |  | 48 | 
|                                           | Consolidated Statements of Cash Flows 
    Years ended December 31, 2002, 2001 (As restated), and 2000
    (As restated)           |      |  | 49 | 
|                                           | Notes to Consolidated Financial Statements                                                                                          |      |  | 50 | 
|Consolidated Financial Statement Schedule: |                                                                                                                                     |      |  |   
|                                           | II  Valuation and Qualifying Accounts                                                                                              |      |  | 83 | 

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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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of

NetManage, Inc.


Cupertino, California


We have audited the accompanying consolidated
balance sheets of NetManage, Inc. and subsidiaries (the
Company) as of December 31, 2002 and 2001, and
the related consolidated statements of operations, comprehensive
loss, stockholders equity, and cash flows for each of the
three years in the period ended December 31, 2002. Our
audits also included the consolidated financial statement
schedule listed in the Index at Item 15(a)(2). These
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement 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, such consolidated financial
statements present fairly, in all material respects, the
financial position of NetManage, Inc. and subsidiaries as of
December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth
therein.

As discussed in Note 10, the consolidated
financial statements as of December 31, 2001 and for the
years ended December 31, 2001 and 2000 have been restated.

As discussed in Note 2, in 2002 the Company
changed its method of accounting for goodwill and other
intangible assets to conform to Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets.

/s/ DELOITTE & TOUCHE LLP

San Jose, California

February 14, 2003


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NETMANAGE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share
amounts)


|                                           |                                                                               |                                                                |                                            |               |        |        |        |          |        |        | 
|------------------------------------------ | ----------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------ | ------------- | ------ | ------ | ------ | -------- | ------ | ------ | 
|                                           |                                                                               |                                                               
|                                           |                                                                               | December 31,                                                  
|                                           |                                                                               |                                                               
|                                           |                                                                               | 2002                                                           |                                            | 2001         
|                                           |                                                                               |                                                                |                                            |              
|                                           |                                                                               |                                                                |                                            | (As restated,
|                                           |                                                                               |                                                                |                                            | see Note 10) 
|ASSETS                                    
|Current Assets:                            |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           | Cash and cash equivalents                                                     |                                                                | $                                          | 24,014        |        |        | $      | 33,038   |       
|                                           | Short-term investments                                                        |                                                                |                                            | 80            |        |        |        | 792      |       
|                                           | Accounts receivable, net of allowances of $1,077
    and $2,448, respectively |                                                                |                                            | 18,332        |        |        |        | 17,801   |       
|                                           | Prepaid expenses and other current assets                                     |                                                                |                                            | 2,933         |        |        |        | 3,278    |       
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           |                                                                               |                                                                | Total current assets                       |               |        | 45,359 |        |          |        | 54,909 | 
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|Property and equipment:                    |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           | Computer software and equipment                                               |                                                                |                                            | 1,106         |        |        |        | 9,259    |       
|                                           | Furniture and fixtures                                                        |                                                                |                                            | 4,598         |        |        |        | 6,138    |       
|                                           | Leasehold improvements                                                        |                                                                |                                            | 1,273         |        |        |        | 2,805    |       
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           |                                                                               |                                                                | 6,977                                      |               |        |        | 18,202 |         
|                                           | Less-accumulated depreciation                                                 |                                                                |                                            | (4,654        | )      |        |        | (14,319  | )     
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           | Net property and equipment                                                    |                                                                |                                            | 2,323         |        |        |        | 3,883    |       
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|Goodwill, net                              |                                                                               |                                                                | 1,762                                      |               |        |        | 7,413  |         
|Other intangibles, net                     |                                                                               |                                                                | 3,573                                      |               |        |        | 7,292  |         
|Other assets                               |                                                                               |                                                                | 221                                        |               |        |        | 2,149  |         
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           |                                                                               |                                                                | Total assets                               |               | $      | 53,238 |        |          | $      | 75,646 | 
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current Liabilities:                       |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           | Accounts payable                                                              |                                                                | $                                          | 2,431         |        |        | $      | 2,691    |       
|                                           | Accrued liabilities                                                           |                                                                |                                            | 9,549         |        |        |        | 6,609    |       
|                                           | Accrued payroll and related expenses                                          |                                                                |                                            | 3,693         |        |        |        | 3,495    |       
|                                           | Deferred revenue                                                              |                                                                |                                            | 18,551        |        |        |        | 21,627   |       
|                                           | Income taxes payable                                                          |                                                                |                                            | 1,346         |        |        |        | 1,861    |       
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           |                                                                               |                                                                | Total current liabilities                  |               |        | 35,570 |        |          |        | 36,283 | 
|Long-term liabilities                      |                                                                               |                                                                | 1,581                                      |               |        |        | 775    |         
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           |                                                                               |                                                                | Total liabilities                          |               |        | 37,151 |        |          |        | 37,058 | 
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|Commitments and contingencies
    (Note 5) |                                                                               |                                                                |                                            |               |        |        |        |         
|Stockholders equity:                      |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           | Common stock, $0.01 par value                                                |                                                                |                                            |               |        |        |        |          |       
|                                           |                                                                               | Authorized  125,000,000 shares                                |                                            |               |        |        |        |          |        |       
|                                           |                                                                               | Issued  10,698,025 and 10,528,631
    shares, respectively    |                                            |               |        |        |        |          |        |       
|                                           |                                                                               | Outstanding  8,693,108 and 9,140,115
    shares, respectively |                                            |               | 107    |        |        |          | 105    |       
|                                           | Treasury stock, at cost  2,004,917 and
    1,388,516 shares, respectively    |                                                                |                                            | (20,629       | )      |        |        | (18,267  | )     
|                                           | Additional paid-in capital                                                    |                                                                |                                            | 177,836       |        |        |        | 177,421  |       
|                                           | Accumulated deficit                                                           |                                                                |                                            | (138,157      | )      |        |        | (116,163 | )     
|                                           | Accumulated comprehensive loss                                                |                                                                |                                            | (3,070        | )      |        |        | (4,508   | )     
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           |                                                                               | Total stockholders equity                                     |                                            |               | 16,087 |        |        |          | 38,588 |       
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         
|                                           |                                                                               |                                                                | Total liabilities and stockholders equity |               | $      | 53,238 |        |          | $      | 75,646 | 
|                                           |                                                                               |                                                                |                                            |               |        |        |        |         

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

45



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##### Table of Contents



NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |        |         |        | 
|-------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ---------------------- | ------------- | ------ | ------------- | ------- | ------ | ------ | ------ | ------- | ------ | ------- | ------ | 
|                                                   |                                                          |                         
|                                                   |                                                          | Years Ended December 31,
|                                                   |                                                          |                         
|                                                   |                                                          | 2002                     |                        | 2001          |        | 2000         
|                                                   |                                                          |                          |                        |               |        |              
|                                                   |                                                          |                          |                        | (As restated, |        | (As restated,
|                                                   |                                                          |                          |                        | see Note 10)  |        | see Note 10) 
|Net revenues:                                      |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   | License fees                                             |                          | $                      | 31,401        |        |               | $       | 39,033 |        |        | $       | 53,738 |        
|                                                   | Services                                                 |                          |                        | 34,288        |        |               |         | 40,216 |        |        |         | 48,915 |        
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   |                                                          | Total net revenues       |                        |               | 65,689 |               |         |        | 79,249 |        |         |        | 102,653 |       
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|Cost of revenues:                                  |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   | License fees                                             |                          |                        | 2,327         |        |               |         | 3,454  |        |        |         | 4,227  |        
|                                                   | Services                                                 |                          |                        | 6,243         |        |               |         | 8,131  |        |        |         | 14,128 |        
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   |                                                          |                          | Total cost of revenues |               |        | 8,570         |         |        |        | 11,585 |         |        |         | 18,355 | 
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|Gross margin                                       |                                                          |                          | 57,119                 |               |        |               | 67,664  |        |        |        | 84,298  |       
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|Operating expenses:                                |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   | Research and development                                 |                          |                        | 13,075        |        |               |         | 17,962 |        |        |         | 24,517 |        
|                                                   | Sales and marketing                                      |                          |                        | 35,397        |        |               |         | 45,383 |        |        |         | 60,103 |        
|                                                   | General and administrative                               |                          |                        | 12,239        |        |               |         | 10,297 |        |        |         | 17,136 |        
|                                                   | Insurance recovery                                       |                          |                        |              |        |               |         |       |        |        |         | (3,816 | )      
|                                                   | Write-off of in-process research and development         |                          |                        |              |        |               |         |       |        |        |         | 1,700  |        
|                                                   | Restructuring charges                                    |                          |                        | 4,693         |        |               |         |       |        |        |         | 5,600  |        
|                                                   | Goodwill and other intangible assets impairment          |                          |                        | 5,605         |        |               |         |       |        |        |         | 39,844 |        
|                                                   | Amortization of goodwill and other intangible
    assets |                          |                        | 3,051         |        |               |         | 5,964  |        |        |         | 14,577 |        
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   |                                                          | Total operating expenses |                        |               | 74,060 |               |         |        | 79,606 |        |         |        | 159,661 |       
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|Loss from operations                               |                                                          |                          | (16,941                | )             |        |               | (11,942 | )      |        |        | (75,363 | )     
|Gain (loss) on investments, net                    |                                                          |                          | (2,809                 | )             |        |               | (1,824  | )      |        |        | 2,282   |       
|Interest income and other, net                     |                                                          |                          | 374                    |               |        |               | 2,636   |        |        |        | 2,699   |       
|Foreign currency transaction losses                |                                                          |                          | (1,550                 | )             |        |               | (411    | )      |        |        | (354    | )     
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|Loss before provision for income
    taxes         |                                                          |                          | (20,926                | )             |        |               | (11,541 | )      |        |        | (70,736 | )     
|Provision for income taxes                         |                                                          |                          | 1,068                  |               |        |               | 728     |        |        |        | 737     |       
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|Net loss                                           |                                                          | $                        | (21,994                | )             |        | $             | (12,269 | )      |        | $      | (71,473 | )     
|                                                   |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|Net loss per share                                 |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   | Basic and diluted                                        |                          | $                      | (2.46         | )      |               | $       | (1.32  | )      |        | $       | (7.71  | )      
|Weighted average common shares and
    equivalents |                                                          |                          |                        |               |        |               |         |        |        |        |         |       
|                                                   | Basic and diluted                                        |                          |                        | 8,927         |        |               |         | 9,276  |        |        |         | 9,266  |        

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 COMPREHENSIVE
LOSS

(In thousands)


|                                   |                                            |                          |         |               |  |               |         |     |   |   |         |        |  
|---------------------------------- | ------------------------------------------ | ------------------------ | ------- | ------------- |  | ------------- | ------- | --- | - | - | ------- | ------ | -
|                                   |                                            |                         
|                                   |                                            | Years Ended December 31,
|                                   |                                            |                         
|                                   |                                            | 2002                     |         | 2001          |  | 2000         
|                                   |                                            |                          |         |               |  |              
|                                   |                                            |                          |         | (As restated, |  | (As restated,
|                                   |                                            |                          |         | see Note 10)  |  | see Note 10) 
|Net loss                           |                                            | $                        | (21,994 | )             |  | $             | (12,269 | )   |   | $ | (71,473 | )     
|Other comprehensive income (loss): |                                            |                          |         |               |  |               |         |     |   |   |         |       
|                                   | Unrealized gain (loss) on investments, net |                          |         | 47            |  |               |         | (14 | ) |   |         | 27     |  
|                                   | Foreign currency translation adjustments   |                          |         | 1,391         |  |               |         | 101 |   |   |         | (2,045 | )
|                                   |                                            |                          |         |               |  |               |         |     |   |   |         |       
|Comprehensive loss                 |                                            | $                        | (20,556 | )             |  | $             | (12,182 | )   |   | $ | (73,491 | )     
|                                   |                                            |                          |         |               |  |               |         |     |   |   |         |       

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

47



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##### Table of Contents



NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(In thousands, except share amounts)


|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------ | --------- | -------- |  | ---------- | --- | ----------- |  | ------------- | ------- | ---- |  | ----- | ------- |  |  | - | -------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |     
|                                                                             |  | Common Stock |           |          |  | Additional |     |             |  | Accumulated   |         |     
|                                                                             |  |              |           | Treasury |  | Paid-in    |     | Accumulated |  | Comprehensive |         |     
|                                                                             |  | Shares       |           | Amount   |  | Stock      |     | Capital     |  | Deficit       |         | Loss |  | Total
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |      
|Balance, December 31, 1999
    (As previously reported)                      |  |              | 9,115,407 |          |  | $          | 100 |             |  | $             | (15,559 | )    |  | $     | 170,207 |  |  | $ | (31,464  | ) |  | $ | (3,091 | ) |  | $ | 120,193 |  
|Prior period adjustments (see Note 10)                                       |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   | (957     | ) |  |   | 514    |   |  |   | (443    | )
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 1999
    (As restated, see Note 10)                    |  |              | 9,115,407 |          |  |            | 100 |             |  |               | (15,559 | )    |  |       | 170,207 |  |  |   | (32,421  | ) |  |   | (2,577 | ) |  |   | 119,750 |  
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|Sale of common stock under employee stock
    purchase plan                  |  |              | 101,032   |          |  |            | 1   |             |  |               |        |      |  |       | 975     |  |  |   |         |   |  |   |       |   |  |   | 976     |  
|Exercise of common stock options                                             |  |              | 90,664    |          |  |            | 1   |             |  |               |        |      |  |       | 1,198   |  |  |   |         |   |  |   |       |   |  |   | 1,199   |  
|Common stock and warrants issued in connection
    with Aqueduct acquisition |  |              | 160,214   |          |  |            | 2   |             |  |               |        |      |  |       | 4,323   |  |  |   |         |   |  |   |       |   |  |   | 4,325   |  
|Repurchase of common stock for cash                                          |  |              | (143,538  | )        |  |            |    |             |  |               | (855    | )    |  |       |        |  |  |   |         |   |  |   |       |   |  |   | (855    | )
|Unrealized gain on investments (As restated, see
    Note 10)                |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   |         |   |  |   | 27     |   |  |   | 27      |  
|Foreign currency translation adjustment (As
    restated, see Note 10)       |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   |         |   |  |   | (2,045 | ) |  |   | (2,045  | )
|Net loss (As restated, see Note 10)                                          |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   | (71,473  | ) |  |   |       |   |  |   | (71,473 | )
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2000
    (As restated, see Note 10)                    |  |              | 9,323,779 |          |  |            | 104 |             |  |               | (16,414 | )    |  |       | 176,703 |  |  |   | (103,894 | ) |  |   | (4,595 | ) |  |   | 51,904  |  
|Sale of common stock under employee stock
    purchase plan                  |  |              | 153,244   |          |  |            | 1   |             |  |               |        |      |  |       | 716     |  |  |   |         |   |  |   |       |   |  |   | 717     |  
|Exercise of common stock options                                             |  |              | 313       |          |  |            |    |             |  |               |        |      |  |       | 2       |  |  |   |         |   |  |   |       |   |  |   | 2       |  
|Repurchase of common stock for cash                                          |  |              | (337,221  | )        |  |            |    |             |  |               | (1,853  | )    |  |       |        |  |  |   |         |   |  |   |       |   |  |   | (1,853  | )
|Unrealized loss on investments (As restated, see
    Note 10)                |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   |         |   |  |   | (14    | ) |  |   | (14     | )
|Foreign currency translation adjustment (As
    restated, see Note 10)       |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   |         |   |  |   | 101    |   |  |   | 101     |  
|Net loss (As restated, see Note 10)                                          |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   | (12,269  | ) |  |   |       |   |  |   | (12,269 | )
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2001
    (As restated, see Note 10)                    |  |              | 9,140,115 |          |  |            | 105 |             |  |               | (18,267 | )    |  |       | 177,421 |  |  |   | (116,163 | ) |  |   | (4,508 | ) |  |   | 38,588  |  
|Sale of common stock under employee stock
    purchase plan                  |  |              | 169,394   |          |  |            | 2   |             |  |               |        |      |  |       | 415     |  |  |   |         |   |  |   |       |   |  |   | 417     |  
|Repurchase of common stock for cash                                          |  |              | (616,401  | )        |  |            |    |             |  |               | (2,362  | )    |  |       |        |  |  |   |         |   |  |   |       |   |  |   | (2,362  | )
|Unrealized gain on investments                                               |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   |         |   |  |   | 47     |   |  |   | 47      |  
|Foreign currency translation adjustment                                      |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   |         |   |  |   | 1,391  |   |  |   | 1,391   |  
|Net loss                                                                     |  |              |          |          |  |            |    |             |  |               |        |      |  |       |        |  |  |   | (21,994  | ) |  |   |       |   |  |   | (21,994 | )
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  
|Balance, December 31, 2002.                                                  |  |              | 8,693,108 |          |  | $          | 107 |             |  | $             | (20,629 | )    |  | $     | 177,836 |  |  | $ | (138,157 | ) |  | $ | (3,070 | ) |  | $ | 16,087  |  
|                                                                             |  |              |           |          |  |            |     |             |  |               |         |      |  |       |         |  |  |   |          |   |  |   |        |   |  |   |         |  

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

48



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##### Table of Contents



NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |          |        |         |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------- | ----- | ------------- | ------ | -------- | ----- | ------- | ------- | -------- | ------ | ------- | ------- | -
|                                                 |                                                                                 |                                                                                
|                                                 |                                                                                 | Years Ended December 31,                                                       
|                                                 |                                                                                 |                                                                                
|                                                 |                                                                                 | 2002                                                                            |                                                               | 2001                                                    |       | 2000         
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |              
|                                                 |                                                                                 |                                                                                 |                                                               | (As restated,                                           |       | (As restated,
|                                                 |                                                                                 |                                                                                 |                                                               | see Note 10)                                            |       | see Note 10) 
|Cash flows from operating
    activities:        |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|                                                 | Net loss                                                                        |                                                                                 | $                                                             | (21,994                                                 | )     |               | $      | (12,269  | )     |         | $       | (71,473  | )     
|                                                 | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |          |       
|                                                 |                                                                                 | Depreciation and amortization                                                   |                                                               |                                                         | 4,802 |               |        |          | 9,356 |         |         |          | 19,660 |        
|                                                 |                                                                                 | Write-off of in-process research and development                                |                                                               |                                                         |      |               |        |          |      |         |         |          | 1,700  |        
|                                                 |                                                                                 | Write-off of prepaid royalty, patents and
    copyrights                        |                                                               |                                                         |      |               |        |          | 31    |         |         |          |       |        
|                                                 |                                                                                 | Provision for doubtful accounts and returns                                     |                                                               |                                                         | 24    |               |        |          | 430   |         |         |          | 881    |        
|                                                 |                                                                                 | Loss on disposal of property, plant &
    equipment                             |                                                               |                                                         | 432   |               |        |          | 515   |         |         |          | 387    |        
|                                                 |                                                                                 | Loss (gain) on investments                                                      |                                                               |                                                         | 2,809 |               |        |          | 1,824 |         |         |          | (2,282 | )      
|                                                 |                                                                                 | Non-cash impairment charges                                                     |                                                               |                                                         | 5,605 |               |        |          |      |         |         |          | 39,844 |        
|                                                 |                                                                                 | Change in operating assets and liabilities:                                     |                                                               |                                                         |       |               |        |          |       |         |         |          |        |        
|                                                 |                                                                                 |                                                                                 | Accounts receivable                                           |                                                         |       | (551          | )      |          |       | 7,275   |         |          |        | 3,010   |        
|                                                 |                                                                                 |                                                                                 | Prepaid expenses and other current assets                     |                                                         |       | 495           |        |          |       | 8,220   |         |          |        | 8,493   |        
|                                                 |                                                                                 |                                                                                 | Other assets                                                  |                                                         |       | 138           |        |          |       | 234     |         |          |        | 905     |        
|                                                 |                                                                                 |                                                                                 | Accounts payable                                              |                                                         |       | (206          | )      |          |       | (2,112  | )       |          |        | (2,085  | )      
|                                                 |                                                                                 |                                                                                 | Accrued liabilities, payroll and payroll-related
    expenses |                                                         |       | 3,740         |        |          |       | (11,443 | )       |          |        | (19,310 | )      
|                                                 |                                                                                 |                                                                                 | Deferred revenue and other long-term liabilities              |                                                         |       | (2,904        | )      |          |       | (2,443  | )       |          |        | (1,556  | )      
|                                                 |                                                                                 |                                                                                 | Income taxes payable                                          |                                                         |       | 572           |        |          |       | 459     |         |          |        | (1,008  | )      
|                                                 |                                                                                 |                                                                                 | Long term liabilities                                         |                                                         |       | 806           |        |          |       | (748    | )       |          |        | (2,134  | )      
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|                                                 |                                                                                 |                                                                                 |                                                               | Net cash used in operating activities                   |       |               | (6,232 | )        |       |         | (671    | )        |        |         | (24,968 | )
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|Cash flows from investing
    activities:        |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|                                                 | Purchases of short-term investments                                             |                                                                                 |                                                               | (11                                                     | )     |               |        | (111,830 | )     |         |         | (214,193 | )     
|                                                 | Proceeds from sales and maturities of short-term
    investments                |                                                                                 |                                                               | 11                                                      |       |               |        | 112,115  |       |         |         | 213,445  |       
|                                                 | Purchases of property and equipment                                             |                                                                                 |                                                               | (875                                                    | )     |               |        | (844     | )     |         |         | (874     | )     
|                                                 | Purchase of equity investment carried at cost                                   |                                                                                 |                                                               |                                                        |       |               |        |         |       |         |         | (1,500   | )     
|                                                 | Bridge financing provided to investee                                           |                                                                                 |                                                               | (275                                                    | )     |               |        |         |       |         |         |         |       
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|                                                 |                                                                                 |                                                                                 |                                                               | Net cash used in investing activities                   |       |               | (1,150 | )        |       |         | (559    | )        |        |         | (3,122  | )
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|Cash flows from financing
    activities:        |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|                                                 | Proceeds from sale of common stock, net of
    issuance costs                   |                                                                                 |                                                               | 417                                                     |       |               |        | 719      |       |         |         | 2,175    |       
|                                                 | Repurchase of common stock                                                      |                                                                                 |                                                               | (2,362                                                  | )     |               |        | (1,853   | )     |         |         | (855     | )     
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|                                                 |                                                                                 |                                                                                 |                                                               | Net cash (used in) provided by financing
    activities |       |               | (1,945 | )        |       |         | (1,134  | )        |        |         | 1,320   |  
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|Effect of exchange rate changes on
    cash      |                                                                                 |                                                                                 | 303                                                           |                                                         |       |               | 115    |          |       |         | (1,022  | )       
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|Net decrease in cash and cash
    equivalents    |                                                                                 |                                                                                 | (9,024                                                        | )                                                       |       |               | (2,249 | )        |       |         | (27,792 | )       
|Cash and cash equivalents, beginning of
    year |                                                                                 |                                                                                 | 33,038                                                        |                                                         |       |               | 35,287 |          |       |         | 63,079  |         
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|Cash and cash equivalents, end of
    year       |                                                                                 | $                                                                               | 24,014                                                        |                                                         |       | $             | 33,038 |          |       | $       | 35,287  |         
|                                                 |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|Supplemental cash flow information:              |                                                                                 |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |         
|                                                 | Cash paid during the year for:                                                  |                                                                                 |                                                               |                                                         |       |               |        |          |       |         |         |          |       
|                                                 |                                                                                 | Income taxes                                                                    |                                                               | $                                                       | 716   |               |        | $        | 692   |         |         | $        | 871    |        
|                                                 |                                                                                 | Interest                                                                        |                                                               | $                                                       | 31    |               |        | $        | 39    |         |         | $        | 70     |        
|                                                 | 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.

49



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##### Table of Contents



NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Nature of
operations and organization:

NetManage, Inc. (NetManage) develops and markets
software and service solutions that allow its customers to
access and leverage the investment they have in their host-based
business applications, processes and data. NetManages
business is primarily focused on providing a full spectrum of
specific personal computer and network or application
server-based software programs and software tools. These
products are intended to allow NetManage 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; create new web-based applications that leverage a
corporations existing business processes; and, ensure the
continued operation of these solutions through the incorporation
of innovative real-time Internet-based support solutions.

NetManage develops and markets these software
solutions to allow its customers to access and leverage
applications, business processes and data on IBM corporate
mainframe computers, IBM midrange computers such as AS/400, and
on UNIX based servers. NetManage also provide professional
support, maintenance and technical consultancy services to its
customers.

NetManage has a range of host access, and host
integration products. NetManages Host Access
products 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 primarily under the brand name of RUMBA for
client-side Host Access solutions 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). NetManages Host Integration products
provide server-side solutions that allow the integration of
multiple host applications and business processes to create new
applications for the web. NetManages Host
Integration products also allow its 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.

2.     Summary of
significant accounting policies:



| |                            
| | ---------------------------
| | Principles of consolidation

The consolidated financial statements include the
accounts of NetManage and its wholly-owned subsidiaries. All
inter-company 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 of America 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 NetManages
foreign subsidiaries is the local currency. Gains and losses
resulting from the translation of the foreign subsidiaries
financial statements are included in accumulated comprehensive
loss and reported as a separate component of stockholders
equity.

NetManage currently does not enter into financial
instruments for either trading or speculative purposes.
Historically, financial instruments were used to reduce the
impact of changes in foreign currency exchange rates. The
principal instruments used were forward foreign exchange
contracts of which the counter-parties

50



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


were major financial institutions. There were no
forward foreign exchange contracts used during the three year
period ended December 31, 2002.

Comprehensive loss is comprised of net loss and
other comprehensive earnings such as foreign currency
translation gains or losses and unrealized gains or losses on
marketable securities.



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

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



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

NetManage accounts for its investments under the
provisions of the Financial Accounting Standards Boards
(FASB) Statement of Financial Accounting Standards, or SFAS,
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. Under SFAS No. 115, short-term
investments are classified as available-for-sale and are
reported at fair value, with unrealized gains and losses, net of
tax, reported in the Consolidated Statement of Comprehensive
Loss. Held-to-maturity securities are valued using the amortized
cost method. At December 31, 2002 and 2001, all short-term
investments were classified as available-for-sale, and the fair
value of the investments approximated amortized cost.

In December 2000 ServiceSoft, Inc., a private
company in which NetManage owned a minority interest, was
acquired by Broadbase, a publicly traded company. As a result
NetManage received shares of Broadbase common stock in exchange
for the minority interest NetManage held in the shares of common
stock of ServiceSoft, Inc. and recognized a gain which is
included in Gain (loss) on investments, of approximately
$2.2 million on the original investment. The shares of
Broadbase common stock owned by NetManage were classified as
available-for-sale securities as of December 31, 2000. On
June 29, 2001, Broadbase was acquired by KANA Software
Inc., KANA, a publicly traded company, at which time NetManage
recorded a $1.8 million loss on its investment (See
Note 10).



| |                  
| | -----------------
| | 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 NetManage 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. NetManages Chairman and Chief
Executive Officer, Zvi Alon, also has a personal investment of
less than 1% in easyBASE Ltd. He is also a member of the board
of directors of easyBASE Ltd.

In May, June, and December 1999 NetManage
invested a total of $275,000 in pcFirst, Inc. On April 28,
2001 pcFirst, Inc. was purchased by fusionOne, Inc., a
development stage private company, and NetManage received 13,625
shares of common stock of fusionOne, Inc. NetManages
investment represents less than 1% of the total ownership of
fusionOne, Inc.

In the third quarter of 2002, NetManage
determined that the investments in easyBASE Ltd. and fusionOne,
Inc. were permanently impaired, as a result of continued
weakness in the software development industry and
managements analysis of data provided to NetManage by both
companies. Also in the third quarter of 2002, NetManage
determined that the investment in KANA was permanently impaired
and wrote off $759,000 of its investment. In the fourth quarter
2002, NetManage determined that a $275,000 bridge loan to
easyBASE was uncollectible and, as such, the bridge loan was
written off.

51



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                       
| | ----------------------
| | 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 and other intangible assets,
    net

NetManage reviews long-lived assets and certain
identifiable intangibles to be held and used for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. NetManage
evaluates possible impairment of long-lived assets using
estimates of undiscounted future cash flows. Impairment loss to
be recognized is measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
Management evaluates the fair value of 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. Effective January 1, 2002,
NetManage adopted SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS
No. 144). SFAS No. 144 removes goodwill from its scope
and retains the requirements of SFAS No. 121 to
(a) recognize an impairment loss only if the carrying
amount of the long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss
as the difference between the carrying amount and the fair value
of the asset. There was no effect from the adoption of SFAS
No. 144. In the fourth quarter of 2002, NetManage recorded
a $0.7 million charge to fully impair the developed
technology acquired in connection with the purchase of Aqueduct
Software, Inc.

Effective January 1, 2002, NetManage adopted
SFAS No. 142, Goodwill and Other Intangibles. Under
SFAS No. 142, goodwill is no longer subject to
amortization. Rather, SFAS No. 142 requires that intangible
assets deemed to have an indefinite useful life be reviewed for
impairment upon adoption of SFAS No. 142 and at least
annually thereafter. NetManage performed its annual impairment
review during the fourth quarter of 2002. Under SFAS
No. 142, goodwill impairment may exist if the net book
value of a reporting unit exceeds its estimated fair value.
NetManage determines an impairment loss using the discounted
future cash flows method. NetManages reporting units are
generally consistent with the operating segments identified in
Note 9 to the Notes to Consolidated Financial Statements.
Upon the adoption of SFAS No. 142 on January 1, 2002,
NetManage ceased amortization of assembled workforce and
reclassified the net carrying amount of $224,000 to goodwill. In
connection with its annual impairment review in the fourth
quarter of 2002, NetManage determined that the net carrying
amount of goodwill for the Host Integration reporting
unit was impaired and recorded a $4.9 million impairment
loss. In addition, goodwill was reduced by $0.7 million in
2002 as a result of the utilization of pre-acquisition tax
attributes of Wall Data (see Note 8).

52



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table provides pro forma results
for the years ended December 31, 2002, 2001 and 2000 as if
the non-amortization provisions of SFAS No. 142, had been
applied at the beginning of 2000 (in thousands, except per share
amounts):

|                                     |                                  |                          |         |       |         |      |         |       |        |   |         |       |         |  
|------------------------------------ | -------------------------------- | ------------------------ | ------- | ----- | ------- | ---- | ------- | ----- | ------ | - | ------- | ----- | ------- | -
|                                     |                                  |                         
|                                     |                                  | Years Ended December 31,
|                                     |                                  |                         
|                                     |                                  | 2002                     |         | 2001  |         | 2000
|                                     |                                  |                          |         |       |         |     
|Net loss, as reported                |                                  | $                        | (21,994 | )     |         | $    | (12,269 | )     |        | $ | (71,473 | )    
|                                     | Goodwill amortization            |                          |         |      |         |      |         | 2,896 |        |   |         | 7,918 |        
|                                     | Assembled workforce amortization |                          |         |      |         |      |         | 80    |        |   |         | 666   |        
|                                     |                                  |                          |         |       |         |      |         |       |        |   |         |      
|                                     |                                  | Net loss, as adjusted    |         | $     | (21,994 | )    |         | $     | (9,293 | ) |         | $     | (62,889 | )
|                                     |                                  |                          |         |       |         |      |         |       |        |   |         |      
|Net loss per share basic and diluted |                                  |                          |         |       |         |      |         |       |        |   |         |      
|                                     | As reported                      |                          | $       | (2.46 | )       |      | $       | (1.32 | )      |   | $       | (7.71 | )      
|                                     | Goodwill amortization            |                          |         |      |         |      |         | 0.31  |        |   |         | 0.85  |        
|                                     | Assembled workforce amortization |                          |         |      |         |      |         | 0.01  |        |   |         | 0.07  |        
|                                     |                                  |                          |         |       |         |      |         |       |        |   |         |      
|                                     |                                  | Net loss, as adjusted    |         | $     | (2.46   | )    |         | $     | (1.00  | ) |         | $     | (6.79   | )
|                                     |                                  |                          |         |       |         |      |         |       |        |   |         |      

Goodwill includes both the carrying amount of
goodwill and assembled workforce less accumulated amortization,
as follows (in thousands):

|                                  |                     |              |        |              |   |   |        |         |  
|--------------------------------- | ------------------- | ------------ | ------ | ------------ | - | - | ------ | ------- | -
|                                  |                     | December 31, |        | December 31,
|                                  |                     | 2002         |        | 2001        
|                                  |                     |              |        |             
|Carrying amount of:               |                     |              |        |              |   |   |        |        
|                                  | Goodwill            |              | $      | 13,423       |   |   | $      | 18,850  |  
|                                  | Assembled workforce |              |        |             |   |   |        | 1,035   |  
|                                  |                     |              |        |              |   |   |        |        
|Gross carrying amount of goodwill |                     |              | 13,423 |              |   |   | 19,885 |        
|Less accumulated amortization:    |                     |              |        |              |   |   |        |        
|                                  | Goodwill            |              |        | (11,661      | ) |   |        | (11,661 | )
|                                  | Assembled workforce |              |        |             |   |   |        | (811    | )
|                                  |                     |              |        |              |   |   |        |        
|Net carrying amount of goodwill   |                     | $            | 1,762  |              |   | $ | 7,413  |        
|                                  |                     |              |        |              |   |   |        |        

The net carrying amount of goodwill at
December 31, 2002 pertains entirely to the Host Access
segment.

53



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table provides a summary of the
carrying amounts of other intangible assets that will continue
to be amortized (in thousands).

|                                           |                      |              |        |              |   |   |        |        |  
|------------------------------------------ | -------------------- | ------------ | ------ | ------------ | - | - | ------ | ------ | -
|                                           |                      | December 31, |        | December 31,
|                                           |                      | 2002         |        | 2001        
|                                           |                      |              |        |             
|Carrying amount of:                        |                      |              |        |              |   |   |        |       
|                                           | Developed technology |              | $      | 11,332       |   |   | $      | 12,000 |  
|                                           | Customer base        |              |        | 3,177        |   |   |        | 3,177  |  
|                                           | RUMBA trade name     |              |        | 1,492        |   |   |        | 1,492  |  
|                                           | Patents & copyrights |              |        | 399          |   |   |        | 399    |  
|                                           |                      |              |        |              |   |   |        |       
|Gross carrying amount of other intangibles |                      |              | 16,400 |              |   |   | 17,068 |       
|Less accumulated amortization:             |                      |              |        |              |   |   |        |       
|                                           | Developed technology |              |        | (8,903       | ) |   |        | (6,658 | )
|                                           | Customer base        |              |        | (2,461       | ) |   |        | (1,946 | )
|                                           | RUMBA trade name     |              |        | (1,156       | ) |   |        | (914   | )
|                                           | Patents & copyrights |              |        | (307         | ) |   |        | (258   | )
|                                           |                      |              |        |              |   |   |        |       
|Net carrying amount of other intangibles   |                      | $            | 3,573  |              |   | $ | 7,292  |       
|                                           |                      |              |        |              |   |   |        |       

Amortization expense for the years ending
December 31, 2003 and 2004 is expected to be
$1.9 million and $1.7 million, respectively.

Accrued
liabilities

Accrued liabilities at December 31, 2002 and
2001 consisted of the following (in thousands):

|                           |       |      |       |       |  |   |       |       | 
|-------------------------- | ----- | ---- | ----- | ----- |  | - | ----- | ----- | 
|Description                |       | 2002 |       | 2001 
|                           |       |      |       |      
|Restructuring (see Note 4) |       | $    | 4,593 |       |  | $ | 2,591 |      
|Other accruals             |       |      | 4,956 |       |  |   | 4,018 |      
|                           |       |      |       |       |  |   |       |      
|                           | Total |      | $     | 9,549 |  |   | $     | 6,609 | 
|                           |       |      |       |       |  |   |       |      

NetManage accounts for restructuring charges
under the provisions of the FASBs 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 Securities and Exchange Commission (SEC)
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 management defines as the development of a working model
and further defines as the development of a beta version of the
software. The establishment of technological feasibility and the
ongoing assessment of the recoverability of these costs requires
considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated
future gross product revenue, estimated economic life and
changes in technology. Such costs are reported at the lower of
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

54



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


capitalization have not been significant.
Additionally, all other software development costs have been
expensed as incurred.



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

Financial instruments, which potentially subject
NetManage to concentrations of credit risk, consist principally
of cash investments and trade receivables. NetManage has 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 less than creditworthy. Concentrations of
credit risk with respect to trade receivables are limited due to
the large number of customers comprising NetManages
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 2002,
2001, or 2000.



| |                   
| | ------------------
| | Net loss per share

On August 28, 2002, NetManage stockholders
approved a one-for-seven reverse stock split of its common stock
for stockholders of record on July 15, 2002. All share and
per share information in the accompanying financial statements
have been adjusted to retroactively give effect to the reverse
stock split.

Basic net loss per share data has been computed
using the weighted average number of shares of common stock
outstanding during the periods. Diluted net loss per share data
has been computed using the weighted average number of shares of
common stock and potentially dilutive common shares. Potentially
dilutive 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,
2002, 2001, and 2000, 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 6,857, none, and
90,140 shares 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, 2002,
2001, and 2000, respectively.



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

NetManage derives 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.

NetManage licenses its software products on a one
and two-year term basis or on a perpetual basis. Two-year term
based licenses include the first year of maintenance and
support. To date such two-year term licenses have been
insignificant. NetManage applies the provisions of the American
Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP) 97-2, Software Revenue Recognition,
and related amendments and interpretations to all transactions
involving the sale of software products and to hardware
transactions where the software is not incidental.

NetManage recognizes 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 NetManages sales are made to domestic
distributors under agreements allowing rights of return and
price protection on unsold merchandise. Accordingly, NetManage
defers recognition of such sales until the distributor sells the
merchandise. NetManages international distributors
generally do not have return rights and, as such, NetManage
generally recognizes sales to international distributors upon
shipment, provided all other revenue recognition criteria have
been met.

55



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


At the time of the transaction, NetManage
assesses whether the fee associated with revenue transactions is
fixed and determinable and whether or not collection is
reasonably assured. NetManage assesses 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
normal payment terms, NetManage accounts for the fee as not
being fixed and determinable. In these cases, NetManage
recognizes revenue as the fees become due.

NetManage assesses collectability based on a
number of factors, including past transaction history with the
customer and the credit-worthiness of the customer. NetManage
does not request collateral from its customers. If NetManage
determines that collection of a fee at the transaction date is
not reasonably assured, NetManage defers the fee and recognizes
revenue at the time collection becomes reasonably assured, which
is generally upon receipt of cash.

For all sales, except those completed over the
Internet, NetManage uses either a binding purchase order or
signed license agreement as evidence of an arrangement. For
sales over the Internet, NetManage uses a credit card
authorization as evidence of an arrangement. Sales through
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), NetManage
allocates revenue to each component of the arrangement using the
residual value method based on vendor specific objective
evidence (VSOE) of the fair value of the undelivered elements.
This means that NetManage defers 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 NetManage of these services to other customers.

NetManage 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
VSOE is deferred 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 collectability is deemed probable. To date, consulting
revenue has not been significant.



| |                   
| | ------------------
| | Insurance recovery

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



| |                                          
| | -----------------------------------------
| | Advertising and sales promotion
    costs

Advertising and sales promotion costs are
expensed as incurred. Advertising costs consist primarily of
magazine advertisements, agency fees and other direct production
costs. Advertising and sales promotion costs totaled
approximately $1.8 million, $1.5 million, and
$2.6 million for the years ended December 31, 2002,
2001, and 2000, respectively.



| |             
| | ------------
| | Income taxes

NetManage accounts for income taxes under the
liability method. Under the liability method, deferred tax
assets and liabilities are determined based on differences
between financial reporting and tax bases of

56



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. NetManage is required to
adjust its deferred tax liabilities in the period when tax rates
or the provisions of the income tax laws change. Valuation
allowances are established when necessary to reduce deferred tax
assets to amounts that more likely than not are expected to be
realized.



| |                   
| | ------------------
| | Stock compensation

SFAS No. 123, Accounting for Stock-Based
Compensation encourages all entities to adopt a fair value
based method of accounting for employee stock compensation
plans, whereby compensation cost is measured at the grant date
based on the fair value of the award which is recognized over
the service period, which is usually the vesting period. However
it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to
Employees, whereby compensation cost is the excess, if any,
of the quoted market price of the stock at the grant date (or
other measurement date) over the amount an employee must pay to
acquire the stock. Stock options issued under NetManages
stock option plans have no intrinsic value at the grant date,
accordingly, under APB Opinion No. 25, no compensation cost
is recognized. Management has elected to continue with the
accounting prescribed in APB Opinion No. 25 and, as a
result, must make pro forma disclosures of net income and
earnings per share and other disclosures as if the fair value
based method of accounting had been applied (see Note 7).



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

Certain reclassifications have been made to prior
year amounts to conform to current year presentation.



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

In December 2002, the FASB, issued SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment of FASB
Statement No. 123, which provides alternative methods
of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. Effective
January 1, 2003, NetManage will adopt the amended
disclosure requirements of SFAS No. 123.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it
assumes under that guarantee. The disclosure provisions of
FIN 45 are effective for financial statements of interim or
annual periods that end after December 15, 2002. The
provisions for initial recognition and measurement are effective
on a prospective basis for guarantees that are issued or
modified after December 31, 2002, irrespective of a
guarantors year-end. Management has not yet determined the
impact of the adoption of the recognition provisions of
FIN 45 on NetManages results of operations or
financial position.

In November 2002, the EITF reached a consensus on
Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. EITF 00-21 addresses certain aspects of
the accounting by a vendor for arrangements under which the
vendor will perform multiple revenue generating activities. The
EITF will be effective for fiscal years beginning after
June 15, 2003. Management has not yet determined the impact
of the adoption of EITF 00-21 on NetManages results
of operations or financial position.

In June 2002, the FASB, issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting
guidance, principally Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for

57



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). SFAS
No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the
liability is incurred. Under Issue No. 94-3, a liability
for an exit cost was recognized at the date of the commitment to
an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing
of recognizing future restructuring costs as well as the amounts
recognized. NetManage will adopt the provisions of SFAS
No. 146 for restructuring activities initiated after
December 31, 2002.

3.     Acquisitions:



| |                        
| | -----------------------
| | Aqueduct Software, Inc.

On June 5, 2000, NetManage completed its
acquisition of Aqueduct Software, Inc. or Aqueduct, an early
stage web-based application intelligence company. NetManage
issued 160,214 shares of NetManage common stock and issued
warrants and options to purchase an additional
103,891 shares for all the outstanding stock of Aqueduct.
NetManage also hired the three employees of Aqueduct who
subsequently left NetManage in 2001. The acquisition was
accounted for using the purchase method of accounting, and
accordingly, the results of Aqueduct from the date of
acquisition have been recorded in NetManages consolidated
financial statements. The warrants and options, none of which
were exercised, expired on December 5, 2001. Disclosure of
pro forma operations for Aqueduct from January 1, 2000
through the date of acquisition has not been provided as it is
not material.

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 was 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,
NetManage 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. As discussed in Note 2, NetManage recorded a charge
to operations in the amount of $0.7 million in the fourth
quarter of 2002, to fully impair the net carrying amount of
developed technology. The remaining intangibles at
December 31, 2002 consisted of $1.1 million of
goodwill, net. At December 31, 2001 goodwill, net totaled
$1.1 million and developed technology totaled
$0.9 million.



| |                       
| | ----------------------
| | Wall Data Incorporated

On December 29, 1999, NetManage completed
the acquisition of Wall Data Incorporated (Wall Data). NetManage
acquired all outstanding shares of Wall Data common stock and
paid cash to qualifying Wall

58



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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. NetManage completed the transaction in two
stages. On November 26, 1999, NetManage acquired
approximately 89% of the outstanding shares of Wall Data
pursuant to the cash tender offer. NetManage acquired the
remaining outstanding shares of Wall Data by means of a merger
completed in accordance with State of 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 have been recorded in
NetManages consolidated financial statements. As of
December 31, 2000, NetManage had approximately
$2.0 million of acquisition-related costs for Wall Data,
which was included in accrued liabilities in NetManages
consolidated balance sheet. All remaining expenses associated
with the acquisition were recorded and paid in 2001. In December
2000, NetManage recorded a decrease to intangible assets of
approximately $9.7 million as a result of reversal of
liabilities NetManage had overestimated at the acquisition date.
The following tables reflect this adjustment.

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 was 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                  |                     |   | (25,201 | )      
|                                     |                     |   |         |        
|                                     | Net assets acquired |   | $       | 103,504 | 
|                                     |                     |   |         |        

In connection with the acquisition of Wall Data,
NetManage allocated $12.4 million of the purchase price to
in-process research and development projects which was expensed
as of the acquisition date in 1999. 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 $45.6 million, consisted of goodwill,
developed technology, customer base, assembled workforce and
trade name.

Subsequent to the acquisition, the sales and
profitability of the combined company was adversely affected and
management determined that the value of other acquired
intangible assets had become impaired. As a result NetManage
wrote off $29.7 million of goodwill and other intangibles
through a charge to operations in the third quarter of fiscal
2000. The net carrying amount of the remaining intangibles,
consisting of developed technology, installed customer base and
trade name, totaled approximately $1.4 million and
$2.5 million at December 31, 2002 and 2001, and are
being amortized over their estimated useful lives of
five years.



| |             
| | ------------
| | Simware Inc.

On December 10, 1999, NetManage completed
its acquisition of Simware Inc., or Simware, a leading provider
of e-commerce solutions and web integration servers. NetManage
acquired all outstanding shares of Simware common stock and paid
cash to qualifying Simware option holders and employee stock
purchase plan participants pursuant to a cash tender offer of
$3.75 per common share. The acquisition was accounted

59



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


for using the purchase method of accounting and,
accordingly, the results of Simware from the date of acquisition
have been recorded in NetManages consolidated financial
statements.

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

|                                       |  |   |        | 
|-------------------------------------- |  | - | ------ | 
|Cash payments pursuant to tender offer |  | $ | 29,191 | 
|Acquisition costs                      |  |   | 953    | 
|                                       |  |   |        | 
|                                       |  | $ | 30,144 | 
|                                       |  |   |        | 

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

|                                     |                     |   |        |        | 
|------------------------------------ | ------------------- | - | ------ | ------ | 
|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,
NetManage allocated $6.7 million of the purchase price to
in-process research and development projects and expensed this
amount in 1999. 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, consisted of goodwill, developed technology,
and assembled work force.

Subsequent to the acquisition, there has been an
inability to achieve budgeted sales of Host Integration
products associated with the acquisition of Simware.
Consequently, management determined that the value of other
acquired intangible assets had become impaired. As a result
NetManage wrote off $4.9 million of goodwill and other
intangibles through a charge to operations in the fourth quarter
of fiscal 2002 (see Note 2). The net carrying amount of the
remaining intangibles, consisting of developed technology,
totaled approximately $2.1 million and $3.3 million at
December 31, 2002 and 2001, and are being amortized over an
estimated useful life of five years.



| |                   
| | ------------------
| | FTP Software, Inc.

Based on managements analysis of revised
product directions, revenue forecasts and future cash flows, it
was determined that there was a permanent impairment of the long
lived assets associated with the 1998 acquisition of FTP
Software, Inc. As a result, NetManage wrote off
$10.1 million of goodwill and other intangibles in the
third quarter of fiscal 2000. The remaining intangibles at
December 31, 2002 consisted of $0.7 million of
goodwill, net. At December 31, 2001 goodwill, net totaled
$0.7 million and patents, copyrights and developed
technology totaled $0.5 million.

4.     Restructuring
of operations:

On August 8, 2002, NetManage announced a
restructuring of its operations designed to re-align its core
business functions and reduce operating expenses. As part of the
restructuring, NetManage reduced its workforce by approximately
26% and recorded a $4.6 million charge to operating
expenses in the third quarter of 2002. The restructuring charge
included approximately $2.6 million of expenses related to
facilities no longer needed for company operations and
$2.0 million of employee and other-related expenses for
employee terminations. NetManage anticipates that the execution
of the restructuring actions will require total cash

60



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


expenditures of $4.4 million, which is
expected to be funded from internal operations and existing cash
balances. Approximately $0.2 million of this restructuring
activity relates to write-off of excess equipment, furniture,
software and leasehold improvements and is included in the
approximately $2.6 million related to facilities. As of
December 31, 2002, NetManage had incurred costs totaling
$1.3 million related to the restructuring, which required
approximately $1.2 million in cash expenditures. The
remaining $0.1 million relates to the write-downs of
furniture, equipment, software and leasehold improvements. The
remaining reserve related to this restructuring is approximately
$3.3 million, and is included in accrued liabilities as of
December 31, 2002.

The following table lists the components of the
August 2002 restructuring charge for the year ended
December 31, 2002 (in thousands):

|                                                      |  |          |       |            |  |       |       |   |  |   |        |  
|----------------------------------------------------- |  | -------- | ----- | ---------- |  | ----- | ----- | - |  | - | ------ | -
|                                                      |  | Employee |       | Excess     |  |      
|                                                      |  | Costs    |       | Facilities |  | Total
|                                                      |  |          |       |            |  |      
|Initial reserve established                           |  | $        | 2,043 |            |  | $     | 2,557 |   |  | $ | 4,600  |  
|Reserves utilized in year ended December 31,
    2002 |  |          | (921  | )          |  |       | (401  | ) |  |   | (1,322 | )
|                                                      |  |          |       |            |  |       |       |   |  |   |        |  
|Balance at December 31, 2002                          |  | $        | 1,122 |            |  | $     | 2,156 |   |  | $ | 3,278  |  
|                                                      |  |          |       |            |  |       |       |   |  |   |        |  

On August 3, 2000, NetManage announced a
restructuring of its operations designed to re-focus its core
business functions and reduce operating expenses. In connection
with the restructuring, NetManage reduced its workforce by
approximately 20% from the second quarter of 2000, consisting of
sales, marketing and general employees, 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. The restructuring
charge includes approximately $3.0 million of estimated
expenses for facilities-related charges, $1.6 million of
employee-related expenses for employee terminations, an $800,000
settlement to Verity for a software license that NetManage no
longer plans to use, and $200,000 of other expenses. As of
December 31, 2002, NetManage had incurred costs totaling
approximately $5.1 million related to the restructuring,
which required $5.1 million in cash expenditures and
recorded a reduction in the original estimate of
$0.3 million. The remaining reserve related to this
restructuring is approximately $0.2 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, 2002, 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    |  
|Reserves utilized in year ended December 31,
    2002 |  |          |       |            |  |            | (321   | )     |  |       |     |   |  |   | (157 | ) |  |   | (478   | )
|Change in estimates in 2002                           |  |          |       |            |  |            | (521   | )     |  |       |     |   |  |   | 249  |   |  |   | (272   | )
|                                                      |  |          |        |            |  |            |        |       |  |       |      |   |  |   |      |   |  |   |        |  
|Balance at December 31, 2002                          |  | $        |       |            |  | $          | 88     |       |  | $     |     |   |  | $ | 119  |   |  | $ | 207    |  
|                                                      |  |          |        |            |  |            |        |       |  |       |      |   |  |   |      |   |  |   |        |  

In the fourth quarter of 1999, following the
acquisitions of Wall Data and Simware, NetManage initiated a
plan to restructure its worldwide operations in connection with
the integration of operations of the two

61



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


acquired companies. In connection with this plan,
NetManage recorded a $3.8 million charge to operating
expenses in 1999. The restructuring charge includes
approximately $1.9 million of estimated expenses for
facilities-related charges associated with the consolidation of
redundant operations, $1.4 million of employee-related
expenses for employee terminations across all functions, and
$0.5 million of other miscellaneous expenses. NetManage
anticipated that the execution of the restructuring actions
would require total cash expenditures of approximately
$3.6 million that were expected to be funded from internal
operations. As of December 31, 2002, NetManage made cash
payments totaling approximately $3.3 million related to the
restructuring.

The following table lists the components of the
NetManage restructuring charge from 1999 for the years ended
December 31, 2002, 2001, and 2000 (in thousands):

|                                                     |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  
|---------------------------------------------------- |  | -------- | ------ | ---------- |  | ----- | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                                     |  | Employee |        | Excess     |  |       |       |      
|                                                     |  | Costs    |        | Facilities |  | Other |       | Total
|                                                     |  |          |        |            |  |       |       |      
|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    |  
|Reserve utilized in year ended December 31,
    2002 |  |          |       |            |  |       | (395  | )     |  |   |     |   |  |   | (395   | )
|Change in estimates in 2002                          |  |          |       |            |  |       | (128  | )     |  |   |     |   |  |   | (128   | )
|                                                     |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  
|Balance at December 31, 2002                         |  | $        |       |            |  | $     | 435   |       |  | $ |     |   |  | $ | 435    |  
|                                                     |  |          |        |            |  |       |       |       |  |   |      |   |  |   |        |  

Other reserves consist primarily of legal fees,
professional fees, and excess equipment to be disposed.

Prior to their acquisition by NetManage, Wall
Data had initiated a plan to restructure its worldwide
operations to re-focus Wall Data on its core business functions
and to reduce operating expenses. In conjunction with the
acquisition, NetManage recorded as an accrued liability, the
remaining restructuring accrual of approximately
$0.7 million for facilities related expenses. NetManage
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, 2002, NetManage had incurred
costs totaling approximately $0.5 million. As of
December 31, 2002, all obligations associated with this
restructuring reserve had been fulfilled and the excess reserves
of approximately $0.2 million were reclassified to the
statement of operations as a credit to restructuring expense.

The following table lists the change in the Wall
Data restructuring reserve for the years ended December 31,
2002, 2001, and 2000 (in thousands):

|                                                     |  |            |      |  
|---------------------------------------------------- |  | ---------- | ---- | -
|                                                     |  | Excess    
|                                                     |  | Facilities
|                                                     |  |           
|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  |  
|Reserve utilized in year ended December 31,
    2002 |  |            | (13  | )
|Change in estimates in 2002                          |  |            | (198 | )
|                                                     |  |            |      |  
|Balance at December 31, 2002                         |  | $          |     |  
|                                                     |  |            |      |  

62



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


In August 1998, following the acquisition of
FTP Software, or FTP, we initiated a plan to restructure
our worldwide operations as a result of business conditions and
in connection with the integration of the operations of FTP. In
connection with this plan, we recorded a $7.0 million
charge to operating expenses in 1998. Additionally, prior to the
acquisition of FTP by us, FTP recorded a restructuring charge.
We assumed the remaining restructuring liability of
$9.7 million as of the date of the acquisition for a total
restructuring liability of $16.7 million. The remaining
reserve related to this restructuring at December 31, 2002
was approximately $0.7 million and is included in accrued
liabilities.

The following table lists the change in the FTP
restructuring reserve for the years ended December 31,
2002, 2001 and 2000 (in thousands):

|                                                     |  |            |        |  
|---------------------------------------------------- |  | ---------- | ------ | -
|                                                     |  | Excess    
|                                                     |  | Facilities
|                                                     |  |           
|Balance at December 31, 1999                         |  | $          | 3,297  |  
|Reserve utilized in year ended December 31,
    2000 |  |            | (2,189 | )
|                                                     |  |            |        |  
|Balance at December 31, 2000                         |  |            | 1,108  |  
|Reserve utilized in year ended December 31,
    2001 |  |            | (643   | )
|                                                     |  |            |        |  
|Balance at December 31, 2001                         |  |            | 465    |  
|Reserve utilized in year ended December 31,
    2002 |  |            | (483   | )
|Change in estimates in 2002                          |  |            | 691    |  
|                                                     |  |            |        |  
|Balance at December 31, 2002                         |  | $          | 673    |  
|                                                     |  |            |        |  

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 NetManage, and its
affiliates Network Software Associates, Inc. or NSA, and NetSoft
Inc., or NetSoft, in the United States District Court of the
District of Columbia. NetManage acquired NSA and NetSoft in
1997. The United States government declined to pursue the action
on its own behalf and, therefore, the action was pursued by
Kenneth Fisher. NetManage, and its affiliates, first learned of
the action when NetManage was served with the amended complaint
in May 2001. On September 5, 2001, Mr. Fisher agreed
to voluntarily dismiss NetManage from this action in exchange
for its agreement to suspend applicable statutes of limitation
as to Mr. Fishers claims.

On January 31, 2002, on an order of the
court following defendants successful motion to dismiss
the May 2001 amended complaint, Mr. Fisher filed a Second
Amended Complaint, or Second Complaint, in the United States
District Court of the District of Columbia against NSA and
NetSoft among numerous other defendants. On May 13, 2002,
on an order of the court following defendants successful
motion to strike the Second Complaint, Mr. Fisher filed a
Third Amended Complaint, or Complaint, in the United States
District Court of the District of Columbia against NSA and
NetSoft 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). NetManage did not acquire NSA
until July 1997 and had

63



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


no involvement with the events alleged by
Mr. Fisher. However, Mr. Fisher alleges that any
liabilities of NSA and Netsoft passed to NetManage.
Mr. Fisher alleges damages in excess of $30,000,000. On
May 31, 2002, NSA and NetSoft and the other defendants
answered the complaint and filed a motion to strike the
complaint. NetManage, and its affiliates, vigorously dispute
Mr. Fishers allegations.

In addition, NetManage may be contingently liable
with respect to certain asserted and unasserted claims that
arise during the normal course of business.



| |       
| | ------
| | Leases

Facilities and equipment are leased under
non-cancelable operating leases expiring on various dates
through the year 2011. As of December 31, 2002, future
minimum rental and lease payments under operating leases are as
follows (in thousands):

|           |                         |                                                   |       |        |       | 
|---------- | ----------------------- | ------------------------------------------------- | ----- | ------ | ----- | 
|           |                         | Operating                                        
|Year       |                         | Leases                                           
|           |                         |                                                  
|2003       |                         | $                                                 | 5,494 |       
|2004       |                         |                                                   | 3,627 |       
|2005       |                         |                                                   | 924   |       
|2006       |                         |                                                   | 789   |       
|2007       |                         |                                                   | 753   |       
|Thereafter |                         |                                                   | 2,118 |       
|           |                         |                                                   |       |       
|           | Gross lease obligations |                                                   | $     | 13,705 |      
|           | Less sublease income    |                                                   |       | (3,900 | )    
|           |                         |                                                   |       |       
|           |                         | Total minimum obligations, net of sublease income |       | $      | 9,805 | 
|           |                         |                                                   |       |       

Rent expense was approximately $4.0 million,
$4.9 million and $6.3 million for the years ended
December 31, 2002, 2001, and 2000 respectively, net of
sublease payments.

6.     Stockholders
equity:

On August 28, 2002, NetManages
stockholders approved a one-for-seven reverse stock split of its
common stock for shareholders of record at the close of business
on July 15, 2002. All shares and per share information in
the accompanying consolidated financial statements have been
adjusted to retroactively give effect to the reverse stock split.



| |             
| | ------------
| | Common stock

As of December 31, 2002, NetManage reserved
the following shares of authorized but unissued common stock:

|                             |  |  |           | 
|---------------------------- |  |  | --------- | 
|Employee stock option plans  |  |  | 2,139,925 | 
|Directors stock option plan |  |  | 114,286   | 
|Employee stock purchase plan |  |  | 277,391   | 
|                             |  |  |           | 
|Total shares reserved        |  |  | 2,531,602 | 
|                             |  |  |           | 



| |                      
| | ---------------------
| | Stock repurchase plan

Previously, NetManages Board of Directors
authorized the repurchase of up to 2,142,857 shares of its
common stock for possible reissue and general corporate purposes
from time to time. During 2002, 2001, and 2000, NetManage
repurchased 616,401, 337,221, and 143,538, shares of NetManage
common stock,

64



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


respectively, on the open market at an average
purchase price of $3.83, $5.49, and $5.95, per share,
respectively, for a total cost of $2.4 million,
$1.9 million, and $0.9 million, respectively.

7.     Stock option,
stock purchase plans, and employee benefit plan:



| |                            
| | ---------------------------
| | 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
571,429 shares of NetManage 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
NetManage. The 1999 Plan does not allow for issuance to
NetManages directors. The exercise price of stock options
issued under the 1999 Plan is established by the 1999 Plan
Administrator, which is a committee of the Board of Directors.
Options granted under the 1999 Plan become exercisable at a rate
of 25% of the shares subject to the option at the end of the
first year and 1/48 of the shares subject to the option at the
end of each calendar month thereafter. The maximum term of a
stock option under the 1999 Plan is 10 years.

During 1992, NetManage established the 1992
Employee Stock Option Plan, or the 1992 Plan. As of
December 31, 2002, NetManage stockholders had authorized a
total of 2,071,429 shares for issuance under the 1992 Plan
including 214,286 and 142,857 shares authorized for
issuance in 2002 and 2001, respectively. 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 NetManages outstanding capital stock (a
10% stockholder)); the exercise price of non-statutory options
may not be less than 85% of such fair market value. Under the
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).

On June 5, 2002 at NetManages Annual
Stockholders Meeting, approval was granted to
(1) increase the number of shares reserved for issuance
under the 1992 Plan by 214,286 shares, (2) to add an annual
share increase provision to the 1992 Plan beginning in the
calendar year 2003 and continuing through calendar year 2007,
and (3) extend the term of the 1992 Plan to April 24,
2012.



| |                                              
| | ---------------------------------------------
| | Non-employee directors stock option
    plan

In July 1993, NetManage adopted the 1993
Directors Stock Option Plan, or Directors Plan, and
reserved 114,286 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
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 Directors Plan is 10 years.



| |                             
| | ----------------------------
| | Employee stock purchase plan

In July 1993, NetManage adopted the Employee
Stock Purchase Plan, or the Purchase Plan. As of
December 31, 2002, NetManages stockholders authorized
985,714 shares of common stock for issuance under the
Purchase Plan including 214,286 and 285,714 shares authorized
for issuance in 2002 and 2001, respectively. Under the Purchase
Plan, NetManage 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,
2002, 2001, and 2000, 169,394, 153,244, and 101,033 shares,
respectively, were issued under the Purchase Plan at prices
ranging from $0.89 to $3.99, $3.93 to $5.00, and $7.63 to $12.27
per share, respectively.

65



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


On June 5, 2002 at NetManages Annual
Stockholders Meeting, an approval was granted to
(1) increase the number of shares reserved for issuance
under the Purchase Plan by 214,286 shares, (2) add an
annual share increase provision to the Purchase Plan beginning
in the calendar year 2003 and continuing through calendar 2007,
and (3) extend the term of the Purchase Plan to
April 30, 2012.



| |                         
| | ------------------------
| | Stock-based compensation

NetManage accounts for the above plans under APB
Opinion 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, NetManages net loss per
share would have been adjusted to the following pro forma
amounts (in thousands, except per share amounts).

|                    |                               |                          |   |         |   |      |   |         |   |  |   |         |  
|------------------- | ----------------------------- | ------------------------ | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                    |                               |                         
|                    |                               | Years Ended December 31,
|                    |                               |                         
|                    |                               | 2002                     |   | 2001    |   | 2000
|                    |                               |                          |   |         |   |     
|Net loss:           |                               |                          |   |         |   |      |   |         |   |  |   |        
|                    | As reported                   |                          | $ | (21,994 | ) |      | $ | (12,269 | ) |  | $ | (71,473 | )
|                    | Pro forma                     |                          |   | (25,364 | ) |      |   | (16,376 | ) |  |   | (76,018 | )
|Net loss per share: |                               |                          |   |         |   |      |   |         |   |  |   |        
|                    | As reported                   |                          | $ | (2.46   | ) |      | $ | (1.32   | ) |  | $ | (7.71   | )
|                    | Pro forma  Basic and diluted |                          |   | (2.84   | ) |      |   | (1.77   | ) |  |   | (8.20   | )

Option activity, including the acquired options,
under NetManages stock option plans was as follows:

|                                 |            |           |           |          |   |                |           |          |   |   |       |       | 
|-------------------------------- | ---------- | --------- | --------- | -------- | - | -------------- | --------- | -------- | - | - | ----- | ----- | 
|                                 |            |           |           |          |   | Weighted      
|                                 |            | Options   |           | Options  |   | Average       
|                                 |            | Available |           | Issued   |   | Exercise Price
|                                 |            |           |           |          |   |               
|Balance at December 31, 1999     |            |           | 512,404   |          |   |                | 1,332,784 |          |   | $ | 18.73 |      
|                                 | Authorized |           |           | 142,857  |   |                |           |         |   |   |       |       | 
|                                 | Granted    |           |           | (491,312 | ) |                |           | 491,312  |   |   |       | 23.67 | 
|                                 | Exercised  |           |           |         |   |                |           | (90,664  | ) |   |       | 11.84 | 
|                                 | Terminated |           |           | 702,462  |   |                |           | (702,462 | ) |   |       | 21.89 | 
|                                 |            |           |           |          |   |                |           |          |   |   |       |      
|Balance at December 31, 2000     |            |           | 866,411   |          |   |                | 1,030,970 |          |   |   | 19.55 |      
|                                 | Authorized |           |           | 142,857  |   |                |           |         |   |   |       |       | 
|                                 | Granted    |           |           | (253,970 | ) |                |           | 253,970  |   |   |       | 5.32  | 
|                                 | Exercised  |           |           |         |   |                |           | (313     | ) |   |       | 7.35  | 
|                                 | Terminated |           |           | 293,860  |   |                |           | (293,860 | ) |   |       | 19.12 | 
|                                 |            |           |           |          |   |                |           |          |   |   |       |      
|Balance at December 31, 2001     |            |           | 1,049,158 |          |   |                | 990,767   |          |   |   | 16.03 |      
|                                 | Authorized |           |           | 214,286  |   |                |           |         |   |   |       |       | 
|                                 | Granted    |           |           | (227,205 | ) |                |           | 227,205  |   |   |       | 3.82  | 
|                                 | Exercised  |           |           |         |   |                |           |         |   |   |       |       | 
|                                 | Terminated |           |           | 208,550  |   |                |           | (208,550 | ) |   |       | 15.72 | 
|                                 |            |           |           |          |   |                |           |          |   |   |       |      
|Balance at December 31, 2002     |            |           | 1,244,789 |          |   |                | 1,009,422 |          |   | $ | 13.34 |      
|                                 |            |           |           |          |   |                |           |          |   |   |       |      
|Exercisable at December 31, 2000 |            |           |          |          |   |                | 256,726   |          |   | $ | 16.84 |      
|Exercisable at December 31, 2001 |            |           |          |          |   |                | 373,984   |          |   | $ | 20.10 |      
|Exercisable at December 31, 2002 |            |           |          |          |   |                | 565,019   |          |   | $ | 16.82 |      

66



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##### Table of Contents







NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table summarizes NetManages
outstanding options as of December 31, 2002:

|                        |  |                     |           |                     |  |                |      |             |  |                |       |  |  |  |         |  |  |   |       | 
|----------------------- |  | ------------------- | --------- | ------------------- |  | -------------- | ---- | ----------- |  | -------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                        |  |                     |           |                    
|                        |  | 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
|                        |  |                     |           |                     |  |                |      |             |  |               
|$0.88 - $5.11           |  |                     | 259,425   |                     |  |                | 9.21 |             |  | $              | 3.63  |  |  |  | 50,397  |  |  | $ | 4.73  | 
|$5.25 - $7.00           |  |                     | 289,249   |                     |  |                | 7.79 |             |  | $              | 5.92  |  |  |  | 146,075 |  |  | $ | 6.14  | 
|$8.97 - $17.94          |  |                     | 253,355   |                     |  |                | 6.56 |             |  | $              | 13.38 |  |  |  | 215,964 |  |  | $ | 13.48 | 
|$18.59 - $58.72         |  |                     | 207,393   |                     |  |                | 7.04 |             |  | $              | 35.80 |  |  |  | 152,583 |  |  | $ | 35.76 | 
|                        |  |                     |           |                     |  |                |      |             |  |                |       |  |  |  |         |  |  |   |       | 
|$0.88 - $58.72          |  |                     | 1,009,422 |                     |  |                | 7.69 |             |  | $              | 13.34 |  |  |  | 565,019 |  |  | $ | 16.82 | 
|                        |  |                     |           |                     |  |                |      |             |  |                |       |  |  |  |         |  |  |   |       | 

The weighted average fair values of options
granted during 2002, 2001, and 2000 were $3.20, $4.32, and
$18.22 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 2002, 2001, and 2000:

|                                         |  |      |                  |      |  |      |                  |  |  |  |                  | 
|---------------------------------------- |  | ---- | ---------------- | ---- |  | ---- | ---------------- |  |  |  | ---------------- | 
|                                         |  | 2002 |                  | 2001 |  | 2000
|                                         |  |      |                  |      |  |     
|Volatility                               |  |      | 131.19%          |      |  |      | 132.50%          |  |  |  | 116.54%          | 
|Weighted average risk-free interest rate |  |      | 3.82%            |      |  |      | 4.55%            |  |  |  | 6.15%            | 
|Dividend yield                           |  |      | 0.00%            |      |  |      | 0.00%            |  |  |  | 0.00%            | 
|Expected term                            |  |      | 3 - 4 months     |      |  |      | 3 - 4 months     |  |  |  | 3 - 4 months     | 
|                                         |  |      | beyond vest date |      |  |      | beyond vest date |  |  |  | beyond vest date | 



| |                      
| | ---------------------
| | Employee benefit plan

NetManage has an Employees 401(k) Savings Plan,
or 401(k) Plan, established in 1992 to provide retirement and
incidental benefits for its employees. As allowed under
Section 401(k) of the Internal Revenue Code, the 401(k)
Plan provides tax-deferred salary deductions for eligible
employees. Employees may contribute from 1% to 25% of their
eligible pre-tax compensation up to the amount allowable under
current income tax regulations. Under the plan NetManage is not
required to make contributions and has not made any
contributions since inception.

8.     Income
taxes

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

|         |  |                          |         |      |  |      |         |   |  |   |         |  
|-------- |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2002                     |         | 2001 |  | 2000
|         |  |                          |         |      |  |     
|Domestic |  | $                        | (16,207 | )    |  | $    | (17,018 | ) |  | $ | (60,329 | )
|Foreign  |  |                          | (4,719  | )    |  |      | 5,477   |   |  |   | (10,407 | )
|         |  |                          |         |      |  |      |         |   |  |   |         |  
|         |  | $                        | (20,926 | )    |  | $    | (11,541 | ) |  | $ | (70,736 | )
|         |  |                          |         |      |  |      |         |   |  |   |         |  

67



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##### Table of Contents







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,
|                           |         |                         
|                           |         | 2002                     |       | 2001  |       | 2000
|                           |         |                          |       |       |       |     
|Current                    |         |                          |       |       |       |      |     |     |     |   |     |    
|                           | Federal |                          | $     |      |       |      | $   |    |     |   | $   |    |    
|                           | State   |                          |       | (141  | )     |      |     | 119 |     |   |     | 78  |    
|                           | Foreign |                          |       | 1,209 |       |      |     | 609 |     |   |     | 659 |    
|                           |         |                          |       |       |       |      |     |     |     |   |     |    
|                           |         | Total current            |       |       | 1,068 |      |     |     | 728 |   |     |     | 737 | 
|                           |         |                          |       |       |       |      |     |     |     |   |     |    
|Deferred                   |         |                          |       |       |       |      |     |     |     |   |     |    
|                           | Federal |                          |       |      |       |      |     |    |     |   |     |    |    
|                           | State   |                          |       |      |       |      |     |    |     |   |     |    |    
|                           | Foreign |                          |       |      |       |      |     |    |     |   |     |    |    
|                           |         |                          |       |       |       |      |     |     |     |   |     |    
|                           |         | Total deferred           |       |       |      |      |     |     |    |   |     |     |    | 
|                           |         |                          |       |       |       |      |     |     |     |   |     |    
|Provision for income taxes |         | $                        | 1,068 |       |       | $    | 728 |     |     | $ | 737 |    
|                           |         |                          |       |       |       |      |     |     |     |   |     |    

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,
|                                                |                            |                         
|                                                |                            | 2002                     |        | 2001  |  | 2000
|                                                |                            |                          |        |       |  |     
|Benefit at federal statutory rate               |                            | $                        | (7,324 | )     |  | $    | (4,039 | )   |  | $ | (24,758 | )  
|State income taxes, net of federal tax benefits |                            |                          | (141   | )     |  |      | 119    |     |  |   | 78      |    
|Incremental tax (benefit) on non-U.S operations |                            |                          | 2,861  |       |  |      | (1,308 | )   |  |   | 4,301   |    
|Nondeductible write-off of in-process R&D       |                            |                          |       |       |  |      |       |     |  |   | 595     |    
|Change in federal valuation allowance           |                            |                          | 5,284  |       |  |      | 5,343  |     |  |   | 6,811   |    
|Nondeductible goodwill amortization             |                            |                          | 413    |       |  |      | 632    |     |  |   | 13,602  |    
|Other permanent differences                     |                            |                          | (25    | )     |  |      | (19    | )   |  |   | 108     |    
|                                                |                            |                          |        |       |  |      |        |     |  |   |         |    
|                                                | Provision for income taxes |                          | $      | 1,068 |  |      | $      | 728 |  |   | $       | 737 | 
|                                                |                            |                          |        |       |  |      |        |     |  |   |         |    

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                                                                    |                          |                          |         |        |  |      |         |        |  |   |         |        | 
|------------------------------------------------------------------- | ------------------------ | ------------------------ | ------- | ------ |  | ---- | ------- | ------ |  | - | ------- | ------ | 
|                                                                    |                          |                         
|                                                                    |                          | Years Ended December 31,
|                                                                    |                          |                         
|                                                                    |                          | 2002                     |         | 2001   |  | 2000
|                                                                    |                          |                          |         |        |  |     
|Deferred revenue recognized currently for tax
    purposes          |                          | $                        | 63      |        |  | $    | 832     |        |  | $ | 2,024   |       
|Reserves and accruals not currently deductible
    for tax purposes |                          |                          | 1,532   |        |  |      | 2,389   |        |  |   | 5,886   |       
|Net operating loss carryforwards                                    |                          |                          | 58,673  |        |  |      | 45,700  |        |  |   | 40,611  |       
|Tax credit carryforwards                                            |                          |                          | 2,352   |        |  |      | 2,482   |        |  |   | 2,715   |       
|Deferred R&D expenses                                               |                          |                          | 7,069   |        |  |      | 7,760   |        |  |   | 8,112   |       
|Basis difference in fixed assets                                    |                          |                          | 508     |        |  |      | 1,121   |        |  |   | 1,123   |       
|Amortizable intangibles                                             |                          |                          | 5,600   |        |  |      | 3,332   |        |  |   | 467     |       
|Other temporary differences                                         |                          |                          | 852     |        |  |      | (215    | )      |  |   | (954    | )     
|                                                                    |                          |                          |         |        |  |      |         |        |  |   |         |       
|                                                                    | Total deferred tax asset |                          |         | 76,649 |  |      |         | 63,401 |  |   |         | 59,984 | 
|Less: Valuation allowance                                           |                          |                          | (76,649 | )      |  |      | (63,401 | )      |  |   | (59,984 | )     
|                                                                    |                          |                          |         |        |  |      |         |        |  |   |         |       
|                                                                    | Net deferred tax asset   |                          | $       |       |  |      | $       |       |  |   | $       |       | 
|                                                                    |                          |                          |         |        |  |      |         |        |  |   |         |       

The pretax income (loss) from foreign operations,
which is comprised of Canadian, European, Asian, and Latin
American operations, was $(4.7) million, $5.5 million, and
$(10.4) million, in 2002, 2001, and 2000, respectively.
Undistributed earnings of NetManages foreign subsidiaries
are considered to be indefinitely reinvested and, accordingly,
no provision for federal and state income taxes has been
provided thereon. Upon distribution of those earnings in the
form of a dividend or otherwise, NetManage would be subject to
both US income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign
countries. It is not practicable to estimate the income tax
liability that might be incurred on the remittance of such
earnings.

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 net
deferred tax asset. This is due to the history of net operating
losses that NetManage has and expects to incur. The amount of
the deferred tax asset considered realizable, however, may
change if actual future taxable income differs from estimated
amounts.

At December 31, 2002, NetManage had gross
net operating loss carryforwards of approximately
$115.7 million and $144.7 million for federal income
tax purposes and state income tax purposes, respectively,
expiring at various dates through 2022 and federal tax credit
carryforwards of approximately $1.1 million that expire in
various years through 2012. At December 31, 2002, NetManage
had foreign net operating loss carryforwards of approximately
$40.9 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 its ability to utilize
its net operating loss carryforward from tax periods prior to
the ownership change. Such a change in ownership occurred with
respect to NetManages past acquisition of certain
companies, including Wall Data. Accordingly, NetManages
net operating losses and credits are subject to these
limitations.

Included in the above net operating loss
carryforwards are $62.5 million, $18.4 million and
$5.6 million of federal, state and foreign net operating
losses, respectively, related to acquisitions accounted for
under the purchase method of accounting. There are also
$0.8 million and $1.3 million in federal and foreign
tax credit carryforwards, respectively, from these acquisitions.
The benefit of such losses and tax credits, if and when
realized, will be credited first to reduce to zero any goodwill
related to the respective acquisition, second to reduce to zero
other non-current intangible assets related to the respective
acquisition, and third to reduce income tax expense. At
December 31, 2002, the net carrying amount of goodwill and
other non-current intangible assets against which such
pre-acquisition tax attributes could be applied is
$5.3 million. During

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2000, NetManage utilized pre-acquisition tax
attributes of Wall Data in Ireland to reduce the current tax
liability for that year on Ireland taxable income to zero.
During 2001 and 2002, NetManage utilized pre-acquisition net
operating losses and tax credits of Simware in Canada to reduce
current tax liabilities for those years, on Canadian taxable
income, to zero. The benefit from the reduction of the valuation
allowance attributable to these tax attributes, which
approximated $0.7 million, $2.6 million and
$0.4 million in 2002, 2001 and 2000, respectively, has been
recorded as a reduction of goodwill.

During the years ended December 31, 2002 and
December 31, 2001, NetManage recognized benefits of
$218,000 and $277,000, respectively from the utilization of
Canadian post-acquisition net operating loss carryforwards for
which NetManage had previously established a full valuation
allowance.

NetManages subsidiary in Haifa, Israel has
a ten-year tax holiday, which commenced January 1, 1995.
During the first two years of the tax holiday, the subsidiary
was exempt from taxation on income generated during that period.
During the remaining eight years in which income is generated by
the subsidiary, that generated income will be taxed at a reduced
income tax rate of 10%.

In December 2001, NetManages 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 payment
resulted from this transaction and tax reserves, previously
recorded, of approximately $1.9 million, for this matter,
were reversed (see Note 10).



|   |                    
|-- | -------------------
|9. | Segment information

In 1998, NetManage adopted SFAS No. 131
Disclosures about Segments of an Enterprise and Related
Information. 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. NetManages chief operating
decision-maker is its chief executive officer. NetManage has
concluded that it operates, based on products and services, in
two segments: Host Access and Host Integration.
NetManages chief operating decision-maker evaluates these
segments at the sales and bookings level.

NetManages Host Access segment
provides the technology to make the connection between personal
computers and large corporate computers possible. These products
are designed to leverage the strengths and popularity of the
Internet, as well as corporate private networks, and offer
features to improve network manageability. The Host
Integration segment provides the technology to allow
customers to leverage the investment they have in existing
host-based systems, applications and business processes for new
web-based presentations, applications, and solutions. This
segment includes NetManage product branded as OnWeb. Realtime
Interactive Support, previously sold as the standalone product
SupportNow has been or is being built into NetManages full
line of products, and NetManage believes adds value through
increased functionality in the Host Access and Host
Integration product offerings. These segments have similar
economic characteristics and are similar with respect to the
nature of the products, the nature of the production processes,
the type of customer that the products are sold to and the
methods used to distribute the products. Net revenues for the
Host Access and Host Integration segments were as
follows for the years ended December 31, 2002, 2001 and
2000 (in thousands):

|                 |  |                          |        |      |  |      |        |  |  |   |         | 
|---------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------- | 
|                 |  |                         
|                 |  | Years Ended December 31,
|                 |  |                         
|                 |  | 2002                     |        | 2001 |  | 2000
|                 |  |                          |        |      |  |     
|Host Access      |  | $                        | 63,117 |      |  | $    | 75,820 |  |  | $ | 99,627  | 
|Host Integration |  |                          | 2,572  |      |  |      | 3,429  |  |  |   | 3,026   | 
|                 |  |                          |        |      |  |      |        |  |  |   |         | 
|Total            |  | $                        | 65,689 |      |  | $    | 79,249 |  |  | $ | 102,653 | 
|                 |  |                          |        |      |  |      |        |  |  |   |         | 

70



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


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

|                               |                          |                          |   |         |   |      |   |         |   |  |   |         |  
|------------------------------ | ------------------------ | ------------------------ | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                               |                          |                         
|                               |                          | Years Ended December 31,
|                               |                          |                         
|                               |                          | 2002                     |   | 2001    |   | 2000
|                               |                          |                          |   |         |   |     
|Net revenues:                  |                          |                          |   |         |   |      |   |         |   |  |   |        
|                               | North America operations |                          | $ | 47,159  |   |      | $ | 55,968  |   |  | $ | 72,897  |  
|                               | European operations      |                          |   | 15,848  |   |      |   | 18,511  |   |  |   | 23,391  |  
|                               | Latin America operations |                          |   | 1,255   |   |      |   | 1,839   |   |  |   | 2,302   |  
|                               | Asian operations         |                          |   | 1,427   |   |      |   | 2,931   |   |  |   | 4,063   |  
|                               |                          |                          |   |         |   |      |   |         |   |  |   |        
|                               | Consolidated             |                          | $ | 65,689  |   |      | $ | 79,249  |   |  | $ | 102,653 |  
|                               |                          |                          |   |         |   |      |   |         |   |  |   |        
|Income (loss) from operations: |                          |                          |   |         |   |      |   |         |   |  |   |        
|                               | North America operations |                          | $ | (13,202 | ) |      | $ | (7,951  | ) |  | $ | (70,248 | )
|                               | European operations      |                          |   | (4,146  | ) |      |   | (4,723  | ) |  |   | (6,111  | )
|                               | Latin America operations |                          |   | 265     |   |      |   | 115     |   |  |   | (135    | )
|                               | Asian operations         |                          |   | 142     |   |      |   | 617     |   |  |   | 1,131   |  
|                               |                          |                          |   |         |   |      |   |         |   |  |   |        
|                               | Consolidated             |                          | $ | (16,941 | ) |      | $ | (11,942 | ) |  | $ | (75,363 | )
|                               |                          |                          |   |         |   |      |   |         |   |  |   |        

North America consists of the United States and
Canada, whose operations have not been separated as it would be
impracticable to do so. Revenues are attributed to individual
countries primarily based on customer ship to and
invoice to addresses. Long-lived assets associated
with European, Latin America and Asian operations are
insignificant.

There were no customers that accounted for more
than 10% of net revenues for the years ended December 31,
2002, 2001, or 2000.

10.     Restatement
of financial statements

Subsequent to the issuance of NetManages
consolidated financial statements for the year ended
December 31, 2001, management determined that the
accounting treatment originally afforded to certain transactions
that had been recorded in 2000 and 2001 and the first three
quarters of 2002 was inappropriate. Listed below is a summary of
such transactions.

2001 adjustments

A loss of approximately $1.6 million in
NetManages investment in Broadbase had been recorded as
unrealized loss in accumulated comprehensive loss as of the
business combination date between Broadbase and KANA in June
2001 rather than as a loss in consolidated results of operations
in accordance with Emerging Issues Task Force Issue
No. 91-5, Nonmonetary Exchange of Cost-Method
Investments. Furthermore, NetManage recorded a realized loss
of $0.2 million on this investment in 2000 (see further
discussion below), which should have been recognized as an
unrealized loss within accumulated comprehensive loss until the
date of the business combination between KANA and Broadbase, at
which time it should have been recorded as a realized loss. As a
result, NetManage recorded an adjustment to recognize the total
realized investment loss of $1.8 million for the year ended
December 31, 2001.

During 2001, NetManage recorded an income tax
benefit of approximately $2.6 million upon utilization of
pre-acquisition net operating losses and tax credits of Simware
in Canada to offset Canadian taxable income. NetManage
subsequently determined that the utilization of the related
deferred tax assets, for which NetManage had previously
established a full valuation allowance, should have been
recorded as a reduction in goodwill rather than as an income tax
benefit. Additionally, tax liabilities were adjusted by
approximately $1.9 million to reflect a favorable tax
settlement in 2001 of tax contingencies at the Haifa, Israel
subsidiary. As

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


a result of the adjustment to goodwill,
amortization expense related to goodwill has been reduced by
$650,000 for the year ended December 31, 2001. The net
increase to the provision for income taxes resulting from the
two tax adjustments described above was $650,000 for the year
ended December 31, 2001.

Third party transactions were improperly included
within accumulated comprehensive loss as of December 31,
2001. Consequently, NetManage recorded an adjustment to remove
these transactions from accumulated comprehensive loss, which
decreased services revenue by approximately $355,000 in 2001.

NetManage recorded license and service revenue
for certain software contracts that should have been deferred as
of December 31, 2001. Accordingly, NetManage recorded an
adjustment to reduce license revenue by $316,000 and service
revenue by $157,000 for 2001 with an offsetting increase to
deferred revenue at December 31, 2001.

NetManage had previously not reported cost of
services revenue as a component of cost of revenues.
Accordingly, NetManage recorded an adjustment to reclassify
$8.1 million in operating expense to cost of services
revenue for fiscal 2001 to reflect the cost of services revenue
as a component of cost of revenues.

In the third quarter of fiscal 2000, NetManage
wrote-off $10.0 million of goodwill and other intangibles
related to the 1998 acquisition of FTP. At that time, NetManage
should have reduced the amortization period of the remaining
intangible assets from the FTP acquisition. Consequently,
NetManage recorded an adjustment in 2001 to increase
amortization expense by $416,000, to recognize the impact of the
reduced amortization period for that year.

In addition to the above adjustments:
(i) income from marketable securities totaling $133,000 was
adjusted from unrealized to realized income; (ii) certain
general and administrative expenses were adjusted for excess
accruals totaling $114,000 that were reversed in 2001 instead of
2000, and (iii) foreign currency amounts were adjusted for
various foreign currency transactions.

2000 adjustments

As discussed above, an adjustment was made to
reverse a $0.2 million loss that was recognized in 2000 on
NetManages investment in Broadbase and to present the loss
as an unrealized loss as of December 31, 2000 within the
consolidated statement of comprehensive loss.

An analysis of the purchase price allocation
resulting from NetManages acquisition of Wall Data in
December 1999 indicated that NetManage had overstated deferred
revenue at December 31, 1999 on certain software contracts
that were acquired from Wall Data, on which Wall Data had
recognized revenue prior to being acquired by NetManage. The
impact of the incorrect purchase price allocation was an
overstatement of goodwill and deferred revenue at the
acquisition date, and a resulting overstatement of revenue in
2000 upon the amortization of the deferred revenue.
Consequently, NetManage recorded a $2.3 million adjustment
to reduce revenue in 2000 with an offsetting reduction of the
impairment expense recognized in connection with the write-off
of the related goodwill in 2000.

During 2000, NetManage incorrectly wrote-off
$810,000 of trade receivables against liabilities that had been
recorded in connection with the acquisition of Wall Data.
Consequently, NetManage recorded an adjustment of $810,000 to
increase bad debt expense in 2000 and reduce identifiable
intangibles relating to the acquisition.

Certain revenue, expense and gain transactions
were recorded in accumulated comprehensive loss. Consequently,
an adjustment was recorded in 2000 to remove the transactions
from accumulated comprehensive loss with offsetting increases to
revenue, selling expenses, and gain on investment, of
$1,112,000, $756,000 and $116,000, respectively. In addition,
corrections to the accumulated comprehensive loss account
related to periods prior to 2000 increased the accumulated
deficit by $344,000 as of December 31, 1999.

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Income from investment securities had been
recorded as unrealized gains during 2000 instead of investment
income. Consequently, NetManage recorded an adjustment of
$451,000 to recognize the investment income for fiscal 2000.

NetManage had previously not reported cost of
services revenue as a component of cost of revenues.
Accordingly, NetManage recorded an adjustment to reclassify
$14.1 million in operating expense to cost of services
revenue for fiscal 2000 to reflect the cost of services revenue
as a component of cost of revenues.

NetManages accounts receivable reserve at
December 31, 1999 was understated by approximately
$600,000. Consequently, NetManage recorded an adjustment to
decrease bad debt expense for 2000 by $600,000 and to increase
accumulated deficit as of December 31, 1999 by the same
amount, given that the shortfall in the reserve at
December 31, 1999 resulted in an overstatement of bad debt
expense for 2000.

In connection with the reduction of the
amortization period for goodwill and other intangible assets
related to NetManages acquisition of FTP, as discussed
above, NetManage recorded an adjustment in 2000 to increase
amortization expense by $173,000.

In addition to the above adjustments:
(i) certain general and administrative expenses were
adjusted for excess accruals totaling $114,000 (as discussed
above), and (ii) foreign currency adjustments were recorded
for various foreign currency transactions.

Additional adjustments

NetManage recorded an adjustment to increase cash
by $272,000 as of December 31, 2001, 2000 and 1999,
pertaining to foreign currency balances that had been
incorrectly included as a component of accumulated comprehensive
loss.

NetManage had recorded a deferred tax asset in
the amount of $1,192,000, relating to pre-acquisition tax
benefits of Simware in Canada, as other non-current assets as of
December 31, 2001, 2000 and 1999. As the deferred tax asset
related to pre-acquisition investment tax credits should have
been fully reserved in connection with the purchase accounting
adjustments for the acquisition of Simware in December 1999,
NetManage determined that an adjustment was required to increase
goodwill and reduce other non-current assets by $1,192,000 as of
December 31, 1999. As a result of the adjustment to
goodwill, amortization expense was increased by $240,000 for
each of the years ended December 31, 2001, and 2000.

NetManage recorded an adjustment to decrease
goodwill and increase accumulated comprehensive loss as of
December 31, 2000 by $357,000, relating to the utilization
of pre-acquisition tax benefits of Wall Data that had been
incorrectly recognized as a reduction of accumulated
comprehensive loss. As a result of the adjustment to goodwill,
amortization expense was reduced by approximately $119,000 for
the year ended December 31, 2001.

Management identified additional third party
transactions that were improperly included within accumulated
comprehensive loss as of December 31, 2000. Such
transactions should have been recognized as a reduction of
revenue. Consequently, an adjustment was recorded to remove
these transactions from accumulated comprehensive loss and
decrease license revenue by approximately $211,000 in 2000.

In addition to the above adjustments, in 2000:
(i) general and administrative expenses were adjusted by
$89,000 to accrue for certain unrecorded expenses and to correct
for certain transactions that had been previously recorded as
accumulated comprehensive loss, (ii) sales and marketing
expenses were adjusted by $70,000 to reduce certain excess
accruals, and (iii) foreign currency translation loss was
adjusted by $16,000 for various foreign currency transactions.

In addition to the above adjustments, in 2001:
(i) general and administrative expenses were reduced by
$496,000 to eliminate certain excess accruals and to record
transactions which were previously recorded as accumulated
comprehensive loss, (ii) sales and marketing expenses were
adjusted by $280,000 to accrue for

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


certain unrecorded expenses, (iii) foreign
currency translation loss was adjusted by $8,000 for various
foreign currency transactions, and (iv) $209,000 of current
assets and $489,000 of current liabilities were reclassified as
long term assets and liabilities, respectively.

In addition to the above adjustments, accumulated
deficit at December 31, 1999 was adjusted for
(i) excess accruals totaling $157,000, and
(ii) certain expense transactions totaling $170,000 which
were previously recorded within accumulated comprehensive loss.

As a result of the adjustments recorded to
correct the accounting treatment afforded to the transactions
described above, the accompanying 2001 and 2000 consolidated
financial statements have been restated from amounts previously
reported. A summary of the significant effects of the
restatements, as adjusted for the one-for-seven reverse stock
split discussed in Note 6, is as follows (in thousands,
except per share amounts):

|                                                |  |               |          |               |  |              |          |   |  |   |          |  
|----------------------------------------------- |  | ------------- | -------- | ------------- |  | ------------ | -------- | - |  | - | -------- | -
|                                                |  |               |          | As initially  |  |             
|                                                |  |               |          | restated and  |  |             
|                                                |  |               |          | reported,     |  |             
|                                                |  |               |          | September 30, |  |             
|                                                |  | As originally |          | 2002          |  | As currently
|                                                |  | reported      |          | Form 10-Q     |  | restated    
|                                                |  |               |          |               |  |             
|Balance Sheet Data as of December 31,
    2001: |  |               |          |               |  |              |          |   |  |   |          |  
|Cash                                            |  | $             | 32,766   |               |  | $            | 32,766   |   |  | $ | 33,038   |  
|Prepaid expenses and other current assets       |  |               | 3,487    |               |  |              | 3,487    |   |  |   | 3,278    |  
|Goodwill and other intangibles, net             |  |               | 17,581   |               |  |              | 14,231   |   |  |   | 14,705   |  
|Other non-current assets                        |  |               | 3,133    |               |  |              | 3,133    |   |  |   | 2,149    |  
|Total assets                                    |  |               | 79,436   |               |  |              | 76,093   |   |  |   | 75,646   |  
|Accrued liabilities                             |  |               | 7,262    |               |  |              | 7,261    |   |  |   | 6,609    |  
|Accrued payroll and related expenses            |  |               | 3,280    |               |  |              | 3,279    |   |  |   | 3,495    |  
|Deferred revenue                                |  |               | 21,154   |               |  |              | 21,627   |   |  |   | 21,627   |  
|Income taxes payable                            |  |               | 3,811    |               |  |              | 1,861    |   |  |   | 1,861    |  
|Long-term liabilities                           |  |               | 286      |               |  |              | 286      |   |  |   | 775      |  
|Accumulated deficit                             |  |               | (112,668 | )             |  |              | (115,799 | ) |  |   | (116,163 | )
|Accumulated other comprehensive loss            |  |               | (5,639   | )             |  |              | (4,372   | ) |  |   | (4,508   | )
|Total stockholders equity                      |  |               | 40,952   |               |  |              | 39,088   |   |  |   | 38,588   |  

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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                                                       |  |               |         |               |  |              |         |   |  |   |         |  
|---------------------------------------------------------------------- |  | ------------- | ------- | ------------- |  | ------------ | ------- | - |  | - | ------- | -
|                                                                       |  |               |         | As initially  |  |             
|                                                                       |  |               |         | restated and  |  |             
|                                                                       |  |               |         | reported,     |  |             
|                                                                       |  |               |         | September 30, |  |             
|                                                                       |  | As originally |         | 2002          |  | As currently
|                                                                       |  | reported      |         | Form 10-Q     |  | restated    
|                                                                       |  |               |         |               |  |             
|Statement of Operations Data for the year
    ended December 31, 2001: |  |               |         |               |  |              |         |   |  |   |         |  
|Total net revenues                                                     |  | $             | 79,970  |               |  | $            | 79,249  |   |  | $ | 79,249  |  
|Gross margin                                                           |  |               | 76,516  |               |  |              | 67,664  |   |  |   | 67,664  |  
|Sales and marketing                                                    |  |               | 53,220  |               |  |              | 45,104  |   |  |   | 45,383  |  
|General and administrative                                             |  |               | 10,579  |               |  |              | 10,792  |   |  |   | 10,297  |  
|Amortization of goodwill and intangibles                               |  |               | 6,077   |               |  |              | 5,843   |   |  |   | 5,964   |  
|Interest income and other, net                                         |  |               | 2,104   |               |  |              | 2,636   |   |  |   | 2,636   |  
|Foreign currency transaction losses                                    |  |               |        |               |  |              | (419    | ) |  |   | (411    | )
|Loss on investments                                                    |  |               |        |               |  |              | (1,824  | ) |  |   | (1,824  | )
|Provision for income taxes                                             |  |               | 78      |               |  |              | 728     |   |  |   | 728     |  
|Net loss                                                               |  |               | (9,294  | )             |  |              | (12,372 | ) |  |   | (12,269 | )
|Net loss per share  basic and
    diluted                             |  | $             | (1.00   | )             |  | $            | (1.33   | ) |  | $ | (1.32   | )
|Statement of Operations Data for the year
    ended December 31, 2000: |  |               |         |               |  |              |         |   |  |   |         |  
|Total net revenues                                                     |  | $             | 104,072 |               |  | $            | 102,865 |   |  | $ | 102,653 |  
|Gross margin                                                           |  |               | 99,845  |               |  |              | 84,510  |   |  |   | 84,298  |  
|Research and development                                               |  |               | 24,394  |               |  |              | 24,517  |   |  |   | 24,517  |  
|Sales and marketing                                                    |  |               | 71,881  |               |  |              | 60,173  |   |  |   | 60,103  |  
|General and administrative                                             |  |               | 18,740  |               |  |              | 17,047  |   |  |   | 17,136  |  
|Goodwill and other intangible assets impairment                        |  |               | 42,164  |               |  |              | 39,844  |   |  |   | 39,844  |  
|Amortization of goodwill and intangibles                               |  |               | 14,164  |               |  |              | 14,338  |   |  |   | 14,577  |  
|Interest income and other, net                                         |  |               | 1,836   |               |  |              | 2,699   |   |  |   | 2,699   |  
|Foreign currency transaction losses                                    |  |               |        |               |  |              | (370    | ) |  |   | (354    | )
|Gain on investments                                                    |  |               | 1,973   |               |  |              | 2,282   |   |  |   | 2,282   |  
|Provision for income taxes                                             |  |               | 737     |               |  |              | 737     |   |  |   | 737     |  
|Net loss                                                               |  |               | (71,910 | )             |  |              | (71,019 | ) |  |   | (71,473 | )
|Net loss per share  basic and
    diluted                             |  | $             | (7.76   | )             |  | $            | (7.66   | ) |  | $ | (7.71   | )

11.     Subsequent
event

On January 30, 2003, NetManage announced a
restructuring of its operations designed to re-align its core
business functions and reduce operating expenses. As part of the
restructuring, NetManage reduced its workforce by more than 20%
and expects to record a restructuring charge to operating
expenses in the first quarter of 2003. In accordance with SFAS
No. 146 which was adopted effective January 1, 2003
(see Note 2), NetManages restructuring charge will be
recognized when this liability is incurred and will include
expenses related to facilities no longer needed for company
operations, and employee and other related expenses for employee
terminations. NetManage anticipates that the execution of the
restructuring actions will be funded from internal operations
and existing cash balances.

75



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Quarterly financial data (unaudited)

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 our
future results and financial condition of Item 7,
Managements discussion and analysis of financial condition
and results of operations. 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 net 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.

The following table sets forth unaudited
consolidated quarterly financial information for 2002 and 2001.
This unaudited information has been prepared on the same basis
as the audited consolidated financial statements and, in the
opinion of management, includes all normal and reoccurring
adjustments necessary for the fair presentation of the
information for the periods presented.

As discussed in Note 10 to the Notes to
Consolidated Financial Statements, NetManage has restated its
Consolidated Financial Statements to correct errors in the
accounting treatment originally afforded to certain transactions
that had been recorded in 2000 and 2001 and the first three
quarters of 2002. In connection with the restatement, management
identified certain adjustments affecting the previously reported
unaudited consolidated quarterly financial information for 2002
and 2001 as described below

The 2002 quarterly adjustments affected revenues,
sales and marketing expense, amortization of intangibles and the
provision for income taxes. The net effect of the adjustments
was a decrease of $8,000, an increase of $59,000 and an increase
of $75,000 to the net loss for the three month periods ended
March 31, 2002, June 30, 2002 and September 30,
2002, respectively.

The 2001 quarterly adjustments, resulting from
the transactions described in further detail in Note 10 to
the Notes to Consolidated Financial Statements, affected general
and administrative expense, sales & marketing expense,
amortization of intangibles and foreign currency transaction
losses. The net effect of the adjustments was an increase of
$182,000 and a decrease of $372,000 in the net loss for the
three month periods ended March 31, 2001 and June 30,
2001, respectively, and an increase of $44,000 in the net loss
for each of the three month periods ended September 30,
2001 and December 31, 2001.

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A summary of the significant effects of the
restatements on the selected quarterly financial information for
2002 and 2001 is presented below (in thousands, except per share
data):



| |                                   
| | ----------------------------------
| | 2002 Quarter Ended
    (Unaudited)

|                                                  |  |             |        |              |  |          |         |            |  |          |         |            |  |           |        |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ----------- | ------ | ------------ |  | -------- | ------- | ---------- |  | -------- | ------- | ---------- |  | --------- | ------ | --------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                  |  |             |        |              |  |          |         |           
|                                                  |  | December 31 |        | September 30 |  | June 30  |         | March 31  
|                                                  |  |             |        |              |  |          |         |           
|                                                  |  |             |        | As           |  |          |         | As         |  |          |         | As         |  | As        |        | As       
|                                                  |  |             |        | originally   |  | As       |         | originally |  | As       |         | originally |  | initially |        | currently
|                                                  |  |             |        | reported     |  | restated |         | reported   |  | restated |         | reported   |  | restated  |        | restated 
|                                                  |  |             |        |              |  |          |         |            |  |          |         |            |  |           |        |          
|Statement of Operations Data:                     |  |             |        |              |  |          |         |            |  |          |         |            |  |           |        |           |  |   |        |   |  |   |        |   |  |   |        |   |  |   |        |  
|Net revenues                                      |  | $           | 16,521 |              |  | $        | 14,093  |            |  | $        | 13,954  |            |  | $         | 16,240 |           |  | $ | 16,194 |   |  | $ | 18,997 |   |  | $ | 19,032 |   |  | $ | 19,020 |  
|Gross margin                                      |  |             | 14,589 |              |  |          | 12,153  |            |  |          | 12,014  |            |  |           | 14,010 |           |  |   | 13,964 |   |  |   | 16,528 |   |  |   | 16,564 |   |  |   | 16,552 |  
|Income (loss) from operations                     |  |             | (5,855 | )            |  |          | (8,561  | )          |  |          | (8,466  | )          |  |           | (3,054 | )         |  |   | (2,902 | ) |  |   | 12     |   |  |   | 98     |   |  |   | 282    |  
|Net loss                                          |  |             | (6,341 | )            |  |          | (11,265 | )          |  |          | (11,340 | )          |  |           | (3,775 | )         |  |   | (3,834 | ) |  |   | (533   | ) |  |   | (487   | ) |  |   | (479   | )
|Net loss per share, basic and diluted             |  | $           | (0.72  | )            |  | $        | (1.27   | )          |  | $        | (1.28   | )          |  | $         | (0.42  | )         |  | $ | (0.43  | ) |  | $ | (0.06  | ) |  | $ | (0.05  | ) |  | $ | (0.05  | )
|Weighted average common shares, basic and diluted |  |             | 8,767  |              |  |          | 8,878   |            |  |          | 8,878   |            |  |           | 8,977  |           |  |   | 8,977  |   |  |   | 9,085  |   |  |   | 9,085  |   |  |   | 9,085  |  

2001 Quarter
Ended (Unaudited)

|                                                  |  |             |        |              |  |            |        |           |  |           |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ----------- | ------ | ------------ |  | ---------- | ------ | --------- |  | --------- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                  |  |             |        |             
|                                                  |  | December 31 |        | September 30
|                                                  |  |             |        |             
|                                                  |  | As          |        |              |  | As         |        | As        |  | As       
|                                                  |  | originally  |        | As           |  | originally |        | initially |  | currently
|                                                  |  | reported    |        | restated     |  | reported   |        | restated  |  | restated 
|                                                  |  |             |        |              |  |            |        |           |  |          
|Statement of Operations Data:                     |  |             |        |              |  |            |        |           |  |           |        |   |  |   |        |   |  |   |        |  
|Net revenues                                      |  | $           | 19,796 |              |  | $          | 19,523 |           |  | $         | 18,094 |   |  | $ | 17,668 |   |  | $ | 17,668 |  
|Gross margin                                      |  |             | 18,940 |              |  |            | 16,747 |           |  |           | 17,303 |   |  |   | 14,929 |   |  |   | 14,929 |  
|Loss from operations                              |  |             | (485   | )            |  |            | (750   | )         |  |           | (1,734 | ) |  |   | (2,111 | ) |  |   | (2,154 | )
|Net income (loss)                                 |  |             | 355    |              |  |            | (152   | )         |  |           | (1,911 | ) |  |   | (2,237 | ) |  |   | (2,281 | )
|Net loss per share, basic and diluted             |  | $           | 0.04   |              |  | $          | (0.02  | )         |  | $         | (0.21  | ) |  | $ | (0.24  | ) |  | $ | (0.25  | )
|Weighted average common shares, basic and diluted |  |             | 9,153  |              |  |            | 9,153  |           |  |           | 9,281  |   |  |   | 9,281  |   |  |   | 9,281  |  

2001 Quarter
Ended (Unaudited)

|                                                  |  |            |        |           |  |           |        |            |  |           |        |           |  |   |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ---------- | ------ | --------- |  | --------- | ------ | ---------- |  | --------- | ------ | --------- |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                  |  |            |        |          
|                                                  |  | June 30    |        | March 31 
|                                                  |  |            |        |          
|                                                  |  | As         |        | As        |  | As        |        | As         |  | As        |        | As       
|                                                  |  | originally |        | initially |  | currently |        | originally |  | initially |        | currently
|                                                  |  | reported   |        | restated  |  | restated  |        | reported   |  | restated  |        | restated 
|                                                  |  |            |        |           |  |           |        |            |  |           |        |          
|Statement of Operations Data:                     |  |            |        |           |  |           |        |            |  |           |        |           |  |   |        |   |  |   |        |   |  |   |        |  
|Net revenues                                      |  | $          | 20,349 |           |  | $         | 20,406 |            |  | $         | 20,406 |           |  | $ | 21,731 |   |  | $ | 21,652 |   |  | $ | 21,652 |  
|Gross margin                                      |  |            | 19,347 |           |  |           | 17,024 |            |  |           | 17,024 |           |  |   | 20,926 |   |  |   | 18,964 |   |  |   | 18,964 |  
|Loss from operations                              |  |            | (3,271 | )         |  |           | (3,321 | )          |  |           | (2,954 | )         |  |   | (5,830 | ) |  |   | (5,898 | ) |  |   | (6,084 | )
|Net loss                                          |  |            | (2,504 | )         |  |           | (4,514 | )          |  |           | (4,142 | )         |  |   | (5,234 | ) |  |   | (5,469 | ) |  |   | (5,651 | )
|Net loss per share, basic and diluted             |  | $          | (0.27  | )         |  | $         | (0.48  | )          |  | $         | (0.44  | )         |  | $ | (0.56  | ) |  | $ | (0.59  | ) |  | $ | (0.61  | )
|Weighted average common shares, basic and diluted |  |            | 9,353  |           |  |           | 9,353  |            |  |           | 9,353  |           |  |   | 9,318  |   |  |   | 9,318  |   |  |   | 9,318  |  

77



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

On June 14, 2002, NetManage decided to
dismiss its independent public accountants, Arthur Andersen LLP,
or Andersen, and to select Deloitte & Touche LLP to serve as
its new independent accountants for the year ending
December 31, 2002. This determination was recommended by
NetManages Audit Committee and approved by
NetManages Board of Directors.

Andersens reports on NetManages
financial statements for each of the years ended
December 31, 2001 and December 31, 2000 did not
contain an adverse opinion or disclaimer of opinion, nor were
they qualified or modified as to uncertainty, audit scope or
accounting principles.

During the years ended December 31, 2001 and
2000 and the interim period between December 31, 2001 and
the date Andersen was dismissed there were no disagreements
between NetManage and Andersen on any matter of accounting
principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to
Andersens satisfaction, would have caused them to make
reference to the subject matter of the disagreement in
connection with their report for such years; and there were no
reportable events as defined in Item 304(a)(1)(v) of
Regulation S-K.

NetManage provided Andersen with a copy of the
foregoing disclosures and requested a letter from Andersen
stating whether it agrees with the disclosures contained herein.
Andersen provided such a letter and NetManage filed this letter
with the Securities and Exchange Commission on June 24,
2002.

During the years ended December 31, 2001 and
2000 and through the date Andersen was dismissed neither
NetManage nor anyone acting on their behalf consulted Deloitte
& Touche LLP with respect to the application of accounting
principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on
NetManage financial statements, or any other matters or
reportable events listed in Item 304(a)(2)(i) and
(ii) of Regulation S-K.




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 May 30, 2003. 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).

Reference is made to the information regarding
executive officers appearing in Part I of this Annual
Report on Form 10-K, which information is hereby
incorporated by reference.






|          |                        
|--------- | -----------------------
|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 and related stockholder
    matters.

The information required by this item is
incorporated herein by reference from the information contained
in our Proxy Statement under the captions Security
Ownership of Certain Beneficial Owners and Management and
Equity Compensation Information for Plans or Individual
Arrangements with Employees and Non-Employees.

78



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##### Table of Contents








|          |                                                    
|--------- | ---------------------------------------------------
|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.

Item 14  Controls and
procedures.

a. Evaluation of disclosure controls and
procedures. Based on their evaluation as of a date within
90 days of the filing date of this Annual Report on
Form 10-K, NetManages Chief Executive Officer and
Chief Financial Officer have concluded that NetManages
disclosure controls and procedures, as defined in
Rule 13a-14(c) under the Securities Exchange Act of 1934,
are generally effective, but also concluded that there are
several weaknesses in NetManages Information Technology
(IT) area, including the need for formal IT policies and
procedures that address password administration, system backup
and recovery procedures, physical security controls and business
continuity planning. Weaknesses were also noted with respect to
the elimination of inter-company transactions, financial
management review of international subsidiaries financial
information, and proper training of finance department
personnel. In view of the restatement of the 2001 and 2000
financial statements, and the interim financial statements for
the quarters ended March 31, June 30, and
September 30, 2002, NetManage has dedicated resources to
correct these issues and enhance the understanding and
implementation of NetManages controls and procedures.

b. Changes in internal controls. There have
been no significant changes in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.




PART IV

Item 15  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:



| |                                      
| | -------------------------------------
| | 1. Consolidated financial statements:

See Index to Consolidated Financial Statements at
Item 8 on page 43 of this Report.



| |                                 
| | --------------------------------
| | 2. Financial statement schedule:

See Index to Consolidated Financial Statements at
Item 8 on page 43 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 |  |               |  | Certificate of Amendment to Certificate of
    Incorporation of the Registrant.                                                    
|        | 3  | .4 |  |               |  | 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)                                                                                               
|        | 4  | .3 |  |               |  | Form of Preferred Shares Rights Agreement, among
    the Registrant and the parties named therein, dated as of
    May 7, 1999.(16)
|        | 4  | .4 |  |               |  | Form of Certificate of Designations of Rights,
    Preferences and Privileges of Series A Participating
    Preferred Stock.(16)   
|        | 4  | .5 |  |               |  | Form of Rights Certificate.(16)                                                                                                    
|        | 10 | .1 |  |               |  | Form of Indemnity Agreement entered into among
    the Registrant and our directors and officers.(1)                               

79



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|        |    |      |  |               |  |                                                                                                                                                                                                                                                                              
|------- | -- | ---- |  | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |      |  |              
|Number  |    |      |  | Exhibit Title
|        |    |      |  |              
|        | 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   |  |               |  | Independent Auditors Consent                                                                                                                                                                                                                                                
|        | 99 | .1   |  |               |  | NetManage, Inc. News Release dated June 8,
    2001.(13)                                                                                                                                                                                                                     
|        | 99 | .2   |  |               |  | NetManage, Inc. News Release dated
    September 14, 2001.(14)                                                                                                                                                                                                               
|        | 99 | .3   |  |               |  | 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).                                         
|   
|(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.                                                                                

80



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##### Table of Contents





|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|(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.                         
|    
|(16) | Incorporated by reference to the Exhibits filed
    with the Registrants Form 8-A(No. 000-22158)
    filed May 18, 1999.



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

(b) Reports
on Form 8-K

On October 4, 2002, the Registrant filed a
Current Report on Form 8-K reporting under Item 5 that
we filed a press release announcing that on October 2, 2002
our trading symbol was changed back to NETME.

On November 12, 2002, the Registrant filed a
Current Report on Form 8-K reporting under Item 5 that
we filed a press release announcing that on November 5,
2002 we received a letter from The Nasdaq Stock Market, Inc.
extending to November 14, 2002 the date by which we are
required to comply with the continued listing requirements of
The Nasdaq National Market.

On November 19, 2002, the Registrant filed a
Current Report on Form 8-K reporting under Item 5 we
filed a press release announcing that on November 19, 2002
we would to file our Forms 10-Q for the quarters ended
September 30, 2002 and June 30, 2002, and our
Form 10-Q/A for the quarter ended March 31, 2002.

On November 20, 2002, the Registrant filed a
Current Report on Form 8-K reporting under Item 5 that
On November 20, 2002, NetManage, Inc. filed Amendment
No. 1 to its Quarterly Report on Form 10-Q for the
quarter ended March 31, 2002, its Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002, and its
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (collectively, the Reports)
with the Securities and Exchange Commission. Accompanying each
report were certifications of NetManages Chief Executive
Officer, Zvi Alon, and Chief Financial Officer, Michael Peckham,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
codified at 18 U.S.C. §1350.

On November 25, 2002, the Registrant filed a
Current Report on Form 8-K reporting under Item 5 on
November 20, 2002, that we filed a press release reporting
our financial results for our third quarter ended
September 30, 2002.

On November 26, 2002, the Registrant filed a
Current Report on Form 8-K reporting under Item 5 we
filed a press release announcing that we recently received a
letter from The Nasdaq Stock Market, Inc., confirming that the
Nasdaq Listing Qualifications Panel has agreed to continue the
listing of the Companys securities on the Nasdaq National
Market provided that the Company files its Form 10-K for
the fiscal year

81



---



##### Table of Contents



ending December 31, 2002 with the Securities
and Exchange Commission and with Nasdaq by February 28,
2003.


(c) Exhibits

The exhibits required by this Item are listed
under Item 15(a).

(d) Financial
Statement Schedules

The financial statement schedule required by this
Item is listed under Item 15(a).

82



---



##### Table of Contents



NETMANAGE, INC.






SCHEDULE
II     VALUATION AND QUALIFYING
ACCOUNTS


|                                                         |  |            |       |                |  |                |     |            |  |   |        |      |  |   |       | 
|-------------------------------------------------------- |  | ---------- | ----- | -------------- |  | -------------- | --- | ---------- |  | - | ------ | ---- |  | - | ----- | 
|                                                         |  |            |       | Charged to     |  |                |     |           
|                                                         |  | Balance at |       | Revenues,      |  | Additions,     |     | Balance at
|                                                         |  | Beginning  |       | Costs or       |  | Deductions     |     | End of    
|                                                         |  | of Period  |       | Expenses       |  | and Write-Offs |     | Period    
|                                                         |  |            |       |                |  |                |     |           
|                                                         |  |            |       |                |  |               
|                                                         |  |            |       | (In thousands) |  |               
|Year ended December 31, 2000:                            |  |            |       |                |  |                |     |            |  |   |        |      |  |   |       | 
|Allowance for doubtful accounts and sales
    returns(1) |  | $          | 4,523 |                |  | $              | 881 |            |  | $ | (1,316 | )    |  | $ | 4,088 | 
|Year ended December 31, 2001:                            |  |            |       |                |  |                |     |            |  |   |        |      |  |   |       | 
|Allowance for doubtful accounts and sales returns        |  | $          | 4,088 |                |  | $              | 430 |            |  | $ | (2,070 | )(2) |  | $ | 2,448 | 
|Year ended December 31, 2002:                            |  |            |       |                |  |                |     |            |  |   |        |      |  |   |       | 
|Allowance for doubtful accounts and sales returns        |  | $          | 2,448 |                |  | $              | 24  |            |  | $ | (1,395 | )(3) |  | $ | 1,077 | 



---



|    |                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.
|   
|(2) | Consists primarily of write-offs of approximately
    five customer accounts in 2001.                                                                                                                           
|   
|(3) | Includes the write-offs of the accounts of two
    domestic customers aggregating $630,000.                                                                                                                     

|                                                                 |                                            |            |     |          |  |          |   |            |  |            |      |        |   |  |   |      |   |   |     |       | 
|---------------------------------------------------------------- | ------------------------------------------ | ---------- | --- | -------- |  | -------- | - | ---------- |  | ---------- | ---- | ------ | - |  | - | ---- | - | - | --- | ----- | 
|                                                                 |                                            | Balance at |     |          |  |          |   |            |  | Balance at
|                                                                 |                                            | Beginning  |     | Reserve  |  | Reserve  |   | Additions/ |  | End of    
|                                                                 |                                            | of Period  |     | Provided |  | Utilized |   | Deductions |  | Period    
|                                                                 |                                            |            |     |          |  |          |   |            |  |           
|FTP Restructuring Reserve                                        |                                            |            |     |          |  |          |   |            |  |            |      |        |   |  |   |      |   |   |     |      
|                                                                 | Year ended December 31, 2000 (as restated) |            | $   | 3,297    |  |          |   |            |  |            | $    | (2,189 | ) |  |   |      |   |   | $   | 1,108 | 
|                                                                 | Year ended December 31, 2001               |            |     | 1,108    |  |          |   |            |  |            |      | (643   | ) |  |   |      |   |   |     | 465   | 
|                                                                 | Year ended December 31, 2002               |            | $   | 465      |  |          |   |            |  |            | $    | (483   | ) |  | $ | 691  |   |   | $   | 673   | 
|Wall Data and Simware Restructuring Reserve                      |                                            |            |     |          |  |          |   |            |  |            |      |        |   |  |   |      |   |   |     |      
|                                                                 | Year ended December 31, 2000               |            | $   | 3,016    |  |          |   |            |  |            | $    | (1,577 | ) |  |   |      |   |   | $   | 1,439 | 
|                                                                 | Year ended December 31, 2001               |            |     | 1,439    |  |          |   |            |  |            |      | (481   | ) |  |   |      |   |   |     | 958   | 
|                                                                 | Year ended December 31, 2002               |            | $   | 958      |  |          |   |            |  |            | $    | (395   | ) |  | $ | (128 | ) |   | $   | 435   | 
|NetManage Restructuring Reserve (August 2000)                    |                                            |            |     |          |  |          |   |            |  |            |      |        |   |  |   |      |   |   |     |      
|                                                                 | Year ended December 31, 2000               |            | $   |         |  |          | $ | 5,600      |  |            | $    | (3,516 | ) |  |   |      |   |   | $   | 2,084 | 
|                                                                 | Year ended December 31, 2001               |            |     | 2,084    |  |          |   |            |  |            |      | (1,127 | ) |  |   |      |   |   |     | 957   | 
|                                                                 | Year ended December 31, 2002               |            | $   | 957      |  |          |   |            |  |            | $    | (478   | ) |  | $ | (272 | ) |   | $   | 207   | 
|Wall Data Restructuring Reserve Year ended
    December 31, 2000 |                                            | $          | 712 |          |  |          |   |            |  | $          | (295 | )      |   |  |   |      |   | $ | 417 |      
|                                                                 | Year ended December 31, 2001               |            |     | 417      |  |          |   |            |  |            |      | (206   | ) |  |   |      |   |   |     | 211   | 
|                                                                 | Year ended December 31, 2002               |            | $   | 211      |  |          |   |            |  |            | $    | (13    | ) |  | $ | (198 | ) |   | $   |      | 
|NetManage Restructuring Reserve (August 2002)                    |                                            |            |     |          |  |          |   |            |  |            |      |        |   |  |   |      |   |   |     |      
|                                                                 | Year ended December 31, 2002               |            | $   |         |  |          | $ | 4,600      |  |            | $    | (1,322 | ) |  |   |      |   |   | $   | 3,278 | 

83



---



##### 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 Annual Report on Form 10-K to be
signed on its behalf by the undersigned, thereunto duly
authorized on the 27th day of February 2003.



| |                
| | ---------------
| | NETMANAGE, INC.



| |     |             
| | --- | ------------
| | By: | /s/ ZVI ALON

| |                                 
| | --------------------------------
| |                                 
| | Zvi Alon                        
| | Chairman of the Board, President
| | and Chief Executive Officer     
| | (On behalf of the Registrant)   

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)                                |  | February 27, 2003
|                                      
|/s/ MICHAEL PECKHAMMichael Peckham     |  | Chief Financial Officer and Senior Vice
    President, Finance and Secretary (Principal Financial and
    Accounting Officer) |  | February 27, 2003
|                                      
|/s/ JOHN BOSCHJohn Bosch               |  | Director                                                                                                                      |  | February 27, 2003
|                                      
|/s/ UZIA GALILUzia Galil               |  | Director                                                                                                                      |  | February 27, 2003
|                                      
|/s/ SHELLEY HARRISONShelley Harrison   |  | Director                                                                                                                      |  | February 27, 2003
|                                      
|/s/ DARRELL MILLERDarrell Miller       |  | Director                                                                                                                      |  | February 27, 2003
|                                      
|/s/ ABRAHAM OSTROVSKYAbraham Ostrovsky |  | Director                                                                                                                      |  | February 27, 2003

84



---



##### Table of Contents



CERTIFICATIONS

I, Zvi Alon, certify that:

1. I have reviewed this annual report on
Form 10-K of NetManage, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                
| | -------------------------------
| | /s/ ZVI ALON                   
| |                                
| | Name: Zvi Alon                 
| | Title:  Chief Executive Officer

Date: February 27, 2003

85



---



##### Table of Contents



I, Michael Peckham, certify that:

1. I have reviewed this annual report on
Form 10-K of NetManage, Inc.;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                
| | -------------------------------
| | /s/ MICHAEL PECKHAM            
| |                                
| | Name: Michael Peckham          
| | Title:  Chief Financial Officer

Date: February 27, 2003

86



---



##### Table of Contents



EXHIBIT INDEX

|        |        |               |  |                                                                                                                                                                                                                                                                              
|------- | ------ | ------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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    |               |  | Certificate of Amendment to Certificate of
    Incorporation of the Registrant.                                                                                                                                                                                              
|        | 3.4    |               |  | 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)                                                                                                                                                                                                                                         
|        | 4.3    |               |  | Form of Preferred Shares Rights Agreement, among
    the Registrant and the parties named therein, dated as of
    May 7, 1999.(16)                                                                                                                                          
|        | 4.4    |               |  | Form of Certificate of Designations of Rights,
    Preferences and Privileges of Series A Participating
    Preferred Stock.(16)                                                                                                                                             
|        | 4.5    |               |  | Form of Rights Certificate.(16)                                                                                                                                                                                                                                              
|        | 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   |               |  | Independent Auditors Consent                                                                                                                                                                                                                                                



---



##### Table of Contents



|        |      |               |  |                                                               
|------- | ---- | ------------- |  | --------------------------------------------------------------
|Exhibit |      |              
|Number  |      | Exhibit Title
|        |      |              
|        | 99.1 |               |  | NetManage, Inc. News Release dated June 8,
    2001.(13)      
|        | 99.2 |               |  | NetManage, Inc. News Release dated
    September 14, 2001.(14)
|        | 99.3 |               |  | 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).                                         
|
| | (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.                          
|    
|(16) | Incorporated by reference to the Exhibits filed
    with the Registrants Form 8-A (No. 000-22158)
    filed May 18, 1999.



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