##### Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Amendment
No. 1

FORM 10-Q /A

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|                                                                                |       |  |  |                                                                                         
|------------------------------------------------------------------------------- | ----- |  |  | ----------------------------------------------------------------------------------------
|                                                                                | [X]   |  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 
|                                                                               
|For the quarterly period ended March 31, 2002                                  
|                                                                               
|OR                                                                             
|                                                                               
|                                                                                | [   ] |  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                               
|For the transition period from ______________________ to ______________________
|                                                                               
|Commission file number 0-22158                                                 

NetManage, Inc.(Exact name of registrant as specified in its charter)

|                                                                        |  |                                             
|----------------------------------------------------------------------- |  | --------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 77-0252226
(IRS employer
identification no.)

10725 North De Anza Boulevard
Cupertino, California 95014
(Address of principal executive offices, including zip code)

(408) 973-7171
(Registrants telephone number, including area code)

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  [   ]  NO  [X]

Number of shares of registrants common stock
outstanding as of November 15, 2002: 8,882,231



---

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EXPLANATORY NOTE:

The Registrant is filing this form 10-Q/A to give effect to the restatement of
the Registrants financial statements for the fiscal quarters ended March 31,
2002 and March 31, 2001 as discussed in Note 11 to the Condensed Consolidated
Financial Statements.

For purposes of this Form 10-Q/A, and in accordance with Rule 12b-15 under the
Securities Exchange Act of 1934, as amended, the Registrant has amended and
restated in its entirety the Form 10-Q for the quarter period
ended March 31, 2002. Other than information set forth in this amended report: (1) affected by
the restatement of the Registrants financial statements
for the fiscal years ended December 31, 2001 and December 31, 2000 (see Note 11
to the Condensed Consolidated Financial Statements); and (2) the inclusion of
disclosure regarding events that occurred subsequent to the date the
original report was filed, the information in the originally filed
Form 10-Q is
presented as filed therein and has not been updated in this amended filing. In
addition, all shares and per share amounts for all periods have been adjusted
to give effect to the one-for-seven reverse stock split that became effective
at the close of business on September 3, 2002. Without limiting the generality
of the foregoing, with respect to any forward-looking statements included in
the Registrants original filing on May 10, 2002, the Registrant has not
endeavored to update those statements and no implication may be drawn as to the
validity of those statements by the fact that they are included in this Form 10-Q/A.

1



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TABLE OF CONTENTS



|                          |                                                                                                |                                                         |  |  |  |  |  | 
|------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                                | CONDENSED CONSOLIDATED BALANCE SHEETS                  
|                          |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        
|                          |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|                          |                                                                                                | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        
|                          |                                                                                                | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   
|                          | Item 2. Managements discussion and analysis of financial condition and results of operations.
|                          | Item 3. Quantitative and qualitative disclosures about market risk                            
|PART II OTHER INFORMATION
|                          | Item 1. Legal proceedings                                                                     
|                          | Item 2. Changes in securities and use of proceeds                                             
|                          | Item 3. Defaults upon senior securities                                                       
|                          | Item 4. Submission of matters to a vote of security holders                                   
|                          | Item 5. Other information                                                                     
|                          | Item 6. Exhibits and reports on Form 8-k                                                      
|SIGNATURES               
|CERTIFICATIONS           



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##### Table of Contents



NETMANAGE, INC.
Table of Contents

|         |  |                                                                                       |  |                                                                                                                                                  |    |      |   | 
|-------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------ | -- | ---- | - | 
|         |  |                                                                                       |  |                                                                                                                                                  |    | Page
|         |  |                                                                                       |  |                                                                                                                                                  |    |     
|PART I.  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                                                  |    |     
|        
|        
|        
|        
|Item 1.  |  | Financial Statements                                                                  |  |                                                                                                                                                  |    |     
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed Consolidated Balance Sheets at March 31, 2002 (As restated)
and December 31, 2001 (As restated)                                        |    |      | 3 | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed Consolidated Statements of Operations for the three months
ended March 31, 2002 (As restated) and March 31, 2001 (As restated)         |    |      | 4 | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed Consolidated Statements of Comprehensive Loss for the three months
ended March 31, 2002 (As restated) and
March 31, 2001 (As restated) |    |      | 5 | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 2002 (As restated)
and March 31, 2001 (As restated)         |    |      | 6 | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                                                             |    |      | 7 | 
|        
|        
|        
|        
|Item 2.  |  | Managements discussion and analysis of financial condition
and results of operations |  |                                                                                                                                                  | 18 |     
|        
|        
|        
|        
|Item 3.  |  | Quantitative and qualitative disclosures about market risk                            |  |                                                                                                                                                  | 37 |     
|        
|        
|        
|        
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                                                                  |    |     
|        
|        
|        
|        
|Item 1.  |  | Legal proceedings                                                                     |  |                                                                                                                                                  | 38 |     
|        
|        
|        
|        
|Item 2.  |  | Changes in securities and use of proceeds                                             |  |                                                                                                                                                  | 38 |     
|        
|        
|        
|        
|Item 3.  |  | Defaults upon senior securities                                                       |  |                                                                                                                                                  | 38 |     
|        
|        
|        
|        
|Item 4.  |  | Submission of matters to a vote of security holders                                   |  |                                                                                                                                                  | 38 |     
|        
|        
|        
|        
|Item 5.  |  | Other information                                                                     |  |                                                                                                                                                  | 38 |     
|        
|        
|        
|        
|Item 6.  |  | Exhibits and reports on Form 8-K                                                      |  |                                                                                                                                                  | 38 |     
|        
|        
|        
|        
|         |  |                                                                                       |  | Signatures                                                                                                                                       |    |      |   | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Certifications                                                                                                                                   |    |      |   | 

2



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##### Table of Contents






NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)

|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |              |          |   |        | 
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------------------------------------------ | -------- | ------------ | ------ | ------------ | -------- | - | ------ | 
|                                       |  |                                                                                                                                                                                           |        |                                            |          | March 31,    |        | December 31,
|                                       |  |                                                                                                                                                                                           |        |                                            |          | 2002         |        | 2001        
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        |                                            |          | (As restated |        | (As restated
|                                       |  |                                                                                                                                                                                           |        |                                            |          | See Note 11) |        | See Note 11)
|ASSETS                                 |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|Current assets:                        |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  | Cash and cash equivalents                                                                                                                                                                 |        | $                                          | 33,601   |              |        | $            | 32,766   |  
|                                       |  | Short-term investments                                                                                                                                                                    |        |                                            | 732      |              |        |              | 792      |  
|                                       |  | Accounts receivable, net of allowances of $2,363
and $2,448, respectively                                                                                                                 |        |                                            | 12,396   |              |        |              | 17,801   |  
|                                       |  | Prepaid expenses and other current assets                                                                                                                                                 |        |                                            | 4,058    |              |        |              | 3,487    |  
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        | Total current assets                       |          |              | 50,787 |              |          |   | 54,846 | 
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|Property and equipment, at cost:       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  | Computer software and equipment                                                                                                                                                           |        |                                            | 9,140    |              |        |              | 9,259    |  
|                                       |  | Furniture and fixtures                                                                                                                                                                    |        |                                            | 6,103    |              |        |              | 6,138    |  
|                                       |  | Leasehold improvements                                                                                                                                                                    |        |                                            | 1,826    |              |        |              | 2,805    |  
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           | 17,069 |                                            |          |              | 18,202 |             
|                                       |  | Less  Accumulated depreciation                                                                                                                                                           |        |                                            | (13,617  | )            |        |              | (14,319  | )
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        | Net property and equipment                 |          |              | 3,452  |              |          |   | 3,883  | 
|Goodwill, net                          |  |                                                                                                                                                                                           | 6,701  |                                            |          |              | 6,701  |             
|Other intangibles, net                 |  |                                                                                                                                                                                           | 6,738  |                                            |          |              | 7,530  |             
|Other assets                           |  |                                                                                                                                                                                           | 3,060  |                                            |          |              | 3,133  |             
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        | Total assets                               |          | $            | 70,738 |              |          | $ | 76,093 | 
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|LIABILITIES AND STOCKHOLDERS EQUITY   |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|Current liabilities:                   |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  | Accounts payable                                                                                                                                                                          |        | $                                          | 1,941    |              |        | $            | 2,691    |  
|                                       |  | Accrued liabilities                                                                                                                                                                       |        |                                            | 6,548    |              |        |              | 7,261    |  
|                                       |  | Accrued payroll and payroll-related expenses                                                                                                                                              |        |                                            | 3,423    |              |        |              | 3,279    |  
|                                       |  | Deferred revenue                                                                                                                                                                          |        |                                            | 18,765   |              |        |              | 21,627   |  
|                                       |  | Income taxes payable                                                                                                                                                                      |        |                                            | 1,835    |              |        |              | 1,861    |  
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        | Total current liabilities                  |          |              | 32,512 |              |          |   | 36,719 | 
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|Long-term liabilities                  |  |                                                                                                                                                                                           | 210    |                                            |          |              | 286    |             
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        | Total liabilities                          |          |              | 32,722 |              |          |   | 37,005 | 
|Commitments and contingencies (Note 9) |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|Stockholders equity:                  |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  | Common
stock, $0.01 par value
   Authorized  125,000,000 shares
   Issued  10,528,631 and 10,528,631 shares, respectively
   Outstanding  9,026,843 and 9,140,115 shares, respectively |        |                                            | 105      |              |        |              | 105      |  
|                                       |  | Treasury stock, at cost  1,501,788 and 1,388,516 shares,
respectively                                                                                                                    |        |                                            | (18,946  | )            |        |              | (18,267  | )
|                                       |  | Additional paid-in capital                                                                                                                                                                |        |                                            | 177,421  |              |        |              | 177,421  |  
|                                       |  | Accumulated deficit                                                                                                                                                                       |        |                                            | (116,286 | )            |        |              | (115,799 | )
|                                       |  | Accumulated comprehensive loss                                                                                                                                                            |        |                                            | (4,278   | )            |        |              | (4,372   | )
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        | Total stockholders equity                 |          |              | 38,016 |              |          |   | 39,088 | 
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             
|                                       |  |                                                                                                                                                                                           |        | Total liabilities and stockholders equity |          | $            | 70,738 |              |          | $ | 76,093 | 
|                                       |  |                                                                                                                                                                                           |        |                                            |          |              |        |             

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

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##### Table of Contents






NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

|                                                |                   |                                   |        |                          |        |                    |        |                   |        |  |        | 
|----------------------------------------------- | ----------------- | --------------------------------- | ------ | ------------------------ | ------ | ------------------ | ------ | ----------------- | ------ |  | ------ | 
|                                                |                   |                                   |        |                          |        | Three months ended
|                                                |                   |                                   |        |                          |        | March 31,         
|                                                |                   |                                   |        |                          |        |                   
|                                                |                   |                                   |        |                          |        | 2002               |        | 2001             
|                                                |                   |                                   |        |                          |        |                    |        |                  
|                                                |                   |                                   |        |                          |        | (As restated, see  |        | (As restated, see
|                                                |                   |                                   |        |                          |        | Note 11)           |        | Note 11)         
|Net revenues:                                   |                   |                                   |        |                          |        |                    |        |                  
|                                                |                   | License fees                      |        | $                        | 10,175 |                    |        | $                 | 11,409 | 
|                                                |                   | Services                          |        |                          | 8,857  |                    |        |                   | 10,243 | 
|                                                |                   |                                   |        |                          |        |                    |        |                  
|                                                |                   |                                   |        | Total net revenues       |        |                    | 19,032 |                   |        |  | 21,652 | 
|                                                |                   |                                   |        |                          |        |                    |        |                  
|Cost of revenues:                               |                   |                                   |        |                          |        |                    |        |                  
|                                                |                   | License fees                      |        |                          | 803    |                    |        |                   | 805    | 
|                                                |                   | Services                          |        |                          | 1,665  |                    |        |                   | 1,883  | 
|                                                |                   |                                   |        |                          |        |                    |        |                  
|                                                |                   |                                   |        | Total cost of revenues   |        |                    | 2,468  |                   |        |  | 2,688  | 
|                                                |                   |                                   |        |                          |        |                    |        |                  
|Gross margin                                    |                   |                                   | 16,564 |                          |        |                    | 18,964 |                  
|                                                |                   |                                   |        |                          |        |                    |        |                  
|Operating expenses:                             |                   |                                   |        |                          |        |                    |        |                  
|                                                |                   | Research and development          |        |                          | 3,597  |                    |        |                   | 5,723  | 
|                                                |                   | Sales and marketing               |        |                          | 9,605  |                    |        |                   | 13,980 | 
|                                                |                   | General and administrative        |        |                          | 2,471  |                    |        |                   | 3,715  | 
|                                                |                   | Amortization of intangible assets |        |                          | 793    |                    |        |                   | 1,444  | 
|                                                |                   |                                   |        |                          |        |                    |        |                  
|                                                |                   |                                   |        | Total operating expenses |        |                    | 16,466 |                   |        |  | 24,862 | 
|                                                |                   |                                   |        |                          |        |                    |        |                  
|Income (loss) from operations                   |                   |                                   | 98     |                          |        |                    | (5,898 | )                
|Interest income and other, net                  |                   |                                   | 81     |                          |        |                    | 1,152  |                  
|Foreign currency transaction losses             |                   |                                   | (595   | )                        |        |                    | (401   | )                
|                                                |                   |                                   |        |                          |        |                    |        |                  
|Loss before provision for income taxes          |                   |                                   | (416   | )                        |        |                    | (5,147 | )                
|Provision for income taxes                      |                   |                                   | 71     |                          |        |                    | 322    |                  
|                                                |                   |                                   |        |                          |        |                    |        |                  
|Net loss                                        |                   | $                                 | (487   | )                        |        | $                  | (5,469 | )                
|                                                |                   |                                   |        |                          |        |                    |        |                  
|Net loss per share:                             |                   |                                   |        |                          |        |                    |        |                  
|                                                | Basic and diluted |                                   | $      | (0.05                    | )      |                    | $      | (0.59             | )     
|Weighted average common shares and equivalents: |                   |                                   |        |                          |        |                    |        |                  
|                                                | Basic and diluted |                                   |        | 9,085                    |        |                    |        | 9,318             |       

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

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NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(Unaudited)

|                                   |                                               |   |                            |     |      |   |        |        |  
|---------------------------------- | --------------------------------------------- | - | -------------------------- | --- | ---- | - | ------ | ------ | -
|                                   |                                               |   | Three months ended        
|                                   |                                               |   | March 31,                 
|                                   |                                               |   |                           
|                                   |                                               |   | 2002                       |     | 2001
|                                   |                                               |   |                            |     |     
|                                   |                                               |   | (As restated, see Note 11)
|Net loss                           |                                               | $ | (487                       | )   |      | $ | (5,469 | )     
|Other
comprehensive income (loss): |                                               |   |                            |     |      |   |        |       
|                                   | Unrealized loss on investments, net           |   |                            | (60 | )    |   |        | (1,639 | )
|                                   | Foreign currency translation adjustments, net |   |                            | 154 |      |   |        | 133    |  
|                                   |                                               |   |                            |     |      |   |        |       
|Comprehensive loss                 |                                               | $ | (393                       | )   |      | $ | (6,975 | )     
|                                   |                                               |   |                            |     |      |   |        |       

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

5



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##### Table of Contents






NETMANAGE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|---------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ----- | ------------------ | ------ | ----------------- | ----- | ------ | --- | -
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       | Three months ended
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       | March 31          
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                   
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       | 2002               |        | 2001             
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                  
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       | (As restated, see  |        | (As restated, see
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       | Note 11)           |        | Note 11)         
|Cash flows from operating activities:          |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                  
|                                               | Net loss                                                                        |                                                                            | $                                                         | (487                                                | )     |                    | $      | (5,469            | )    
|                                               | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                            |                                                           |                                                     |       |                    |        |                   |      
|                                               |                                                                                 | Depreciation and amortization                                              |                                                           |                                                     | 1,306 |                    |        |                   | 2,594 |       
|                                               |                                                                                 | Write-off of prepaid royalty, patents, and copyrights                      |                                                           |                                                     |      |                    |        |                   | 8     |       
|                                               |                                                                                 | Loss
on disposal of property, plant and equipment                          |                                                           |                                                     | 59    |                    |        |                   |      |       
|                                               |                                                                                 | Provision for doubtful accounts and returns                                |                                                           |                                                     | 10    |                    |        |                   |      |       
|                                               |                                                                                 | Changes in operating assets and liabilities, net of business combinations: |                                                           |                                                     |       |                    |        |                   |       |       
|                                               |                                                                                 |                                                                            | Accounts receivable                                       |                                                     |       | 5,396              |        |                   |       | 5,721  |    
|                                               |                                                                                 |                                                                            | Refundable income taxes                                   |                                                     |       |                   |        |                   |       | 4,320  |    
|                                               |                                                                                 |                                                                            | Prepaid expenses and other current assets                 |                                                     |       | (578               | )      |                   |       | (392   | )  
|                                               |                                                                                 |                                                                            | Other assets                                              |                                                     |       | 41                 |        |                   |       | 361    |    
|                                               |                                                                                 |                                                                            | Accounts payable                                          |                                                     |       | (750               | )      |                   |       | 303    |    
|                                               |                                                                                 |                                                                            | Accrued liabilities, payroll and payroll-related expenses |                                                     |       | (416               | )      |                   |       | (4,208 | )  
|                                               |                                                                                 |                                                                            | Deferred revenue                                          |                                                     |       | (2,578             | )      |                   |       | (1,424 | )  
|                                               |                                                                                 |                                                                            | Income taxes payable                                      |                                                     |       | (26                | )      |                   |       | 193    |    
|                                               |                                                                                 |                                                                            | Long-term liabilities                                     |                                                     |       | (76                | )      |                   |       | (1,373 | )  
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|                                               |                                                                                 |                                                                            |                                                           | Net cash provided by operating activities           |       |                    | 1,901  |                   |       |        | 634 |  
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|Cash flows from investing activities:          |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                  
|                                               | Purchases of short-term investments                                             |                                                                            |                                                           |                                                    |       |                    |        | (69,877           | )    
|                                               | Proceeds from sales and maturities of short-term investments                    |                                                                            |                                                          |                                                     |       |                    | 70,453 |                  
|                                               | Purchases of property and equipment                                             |                                                                            |                                                           | (261                                                | )     |                    |        | (46               | )    
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|                                               |                                                                                 |                                                                            |                                                           | Net cash provided by (used in) investing activities |       |                    | (261   | )                 |       |        | 530 |  
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|Cash flows from financing activities:          |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                  
|                                               | Proceeds from sale of common stock, net of issuance costs                       |                                                                            |                                                           |                                                    |       |                    |        | 2                 |      
|                                               | Purchases of common stock                                                       |                                                                            |                                                           | (679                                                | )     |                    |        | (44               | )    
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|                                               |                                                                                 |                                                                            |                                                           | Net cash used in financing activities               |       |                    | (679   | )                 |       |        | (42 | )
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                  
|Effect of exchange rate changes on cash        |                                                                                 |                                                                            | (126                                                      | )                                                   |       |                    | 116    |                  
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|Net increase in cash and cash equivalents      |                                                                                 |                                                                            | 835                                                       |                                                     |       |                    | 1,238  |                  
|Cash and cash equivalents, beginning of period |                                                                                 |                                                                            | 32,766                                                    |                                                     |       |                    | 35,015 |                  
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  
|Cash and cash equivalents, end of period       |                                                                                 | $                                                                          | 33,601                                                    |                                                     |       | $                  | 36,253 |                  
|                                               |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |                   |       |        |     |  

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

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NETMANAGE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



|1. |  | Interim financial data
|-- |  | ----------------------

The accompanying
interim unaudited condensed consolidated financial statements of Net
Manage, Inc., (the Company) have
been prepared in accordance with accounting
principles generally accepted in the United States of America
(generally accepted accounting principles) for interim
financial information and in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation. Actual results for fiscal year 2002 could differ materially from those
reported in this Form 10-Q/A. The Company believes the results of
operations for interim periods are subject to fluctuation and may
not be an indicator of future financial performance. In the
accompanying notes to the interim unaudited condensed consolidated
financial statements, the Company is also referred to as
Management, we, or our.



|2. |  | Consolidation
|-- |  | -------------

The interim unaudited
condensed consolidated financial statements include our
accounts and the accounts of our wholly owned subsidiaries. All inter-company accounts and
transactions have been eliminated.



|3. |  | Summary of significant accounting policies
|-- |  | ------------------------------------------

Use of estimates

The preparation of
the condensed 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 loss

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

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

Cash and cash equivalents

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

Short-term investments

We account for our
investments under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Under SFAS No. 115, our investments are
currently classified as available-for-sale and are reported at fair value, with unrealized gains and
losses, net of tax, reported in other
comprehensive income. Held-to-maturity securities are valued using
the amortized cost method. At March 31, 2002 and 2001, the fair value
of the time deposit investments approximated amortized cost and, as
such, gross unrealized holding gains and losses were not material.
The fair value of the available-for-sale securities was determined
based on quoted market prices at the reporting dates for those instruments.

Our investment in
KANA Software Inc. is included in short-term investments.

Prepaid expenses and other current assets

Prepaid expenses and
other current assets as of March 31, 2002 include a $137,500 convertible bridge financing
loan receivable due
on December 31, 2002, from easyBASE, Ltd.

Other investments

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

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

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

Property and equipment

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

|                                |  |                                                       
|------------------------------- |  | ------------------------------------------------------
|Classification                  |  | Life                                                  
|                                |  |                                                       
|Computer software and equipment |  | 2 to 3 years                                          
|Furniture and fixtures          |  | 5 years                                               
|Leasehold improvements          |  | Shorter of the lease term or the estimated useful life

Accrued liabilities and restructuring

We account for
restructuring charges under the provisions of Emerging Issues Task
Force (EITF) 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) and Staff
Accounting Bulletin (SAB) No. 100 regarding the accounting for
and disclosure of certain expenses commonly reported in connection
with exit activities and business combinations.

Software development costs

Software development
costs are accounted for in accordance with SFAS No. 86,
Accounting for Computer Software to be Sold, Leased or Otherwise
Marketed, under which capitalization of software development costs
begins upon the establishment of technological feasibility of the
product, which we define as the development of a working model and
further define as the development of a beta version of the software.
The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable
judgment by management with respect to certain external factors,
including, but not limited to, anticipated future gross product
revenue, estimated economic life and changes in technology. Such
costs are reported at the lower of amortized cost or net
realizable value. Amortization of purchased software is generally
computed on a straight-line basis over one to five years or, if
less, the estimated remaining economic life of the underlying
products. To date, software development costs that were eligible for
capitalization have not been significant, and we charged all
software development costs to research and development as incurred.

Concentrations of credit risk

Financial instruments
which potentially subject us to concentrations of credit risk consist
principally of cash investments and trade receivables. We have a
cash investment policy that limits the amount of credit exposure to
any one issuer and restricts placement of these investments to
issuers evaluated as credit worthy. Concentrations of credit risk
with respect to trade receivables are limited due to the large number
of customers comprising our customer base and their dispersion across
many different industries and geographies.

We currently do not
enter into financial instruments for either trading or speculative purposes.

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 different treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in 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 our allowance in a period changes, the amount
recognized as provision for income taxes in the statement of
operations could change.

Revenue recognition

We derive revenue
primarily from 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 licenses include the first year of
maintenance and support. To date such licenses have been insignificant.

We apply the
provisions of Statement of Position 97-2, Software Revenue
Recognition, 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.

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

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

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

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

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

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

Cost of revenues

License cost of
revenues primarily includes costs associated with order processing,
product packaging, documentation and software duplication, the
amortization and write-down of licensed technology and royalties paid
to third parties for licensed software incorporated into our
products. Services cost of revenues includes costs associated with
both consulting and customer service, and consists primarily of
salaries and commissions, benefits, travel, and occupancy expenses.

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|4. |  | Recent accounting pronouncements
|-- |  | --------------------------------

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

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



|5. |  | Goodwill and other intangible assets, net
|-- |  | -----------------------------------------

We adopted SFAS
No. 142 beginning January 1, 2002 and discontinued
amortization of all goodwill and assembled workforce intangible assets. The following table presents net
loss had SFAS No. 142 been applied at the beginning of
fiscal 2001 (In thousands, except net loss per share amounts):

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|                                               |                                  |   |                    |       |      |   |        |       |  
|---------------------------------------------- | -------------------------------- | - | ------------------ | ----- | ---- | - | ------ | ----- | -
|                                               |                                  |   | Three months ended
|                                               |                                  |   | March 31,         
|                                               |                                  |   |                   
|                                               |                                  |   | 2002               |       | 2001
|                                               |                                  |   |                    |       |     
|Net
loss, as reported                          |                                  | $ | (487               | )     |      | $ | (5,469 | )    
|                                               | Goodwill amortization            |   |                    |      |      |   |        | 664   |  
|                                               | Assembled workforce amortization |   |                    |      |      |   |        | 20    |  
|                                               |                                  |   |                    |       |      |   |        |      
|Net loss, as adjusted                          |                                  | $ | (487               | )     |      | $ | (4,785 | )    
|                                               |                                  |   |                    |       |      |   |        |      
|Net loss per share (Basic and diluted)         |                                  |   |                    |       |      |   |        |      
|                                               | As reported                      |   | $                  | (0.05 | )    |   | $      | (0.59 | )
|                                               | Goodwill amortization            |   |                    |      |      |   |        | 0.07  |  
|                                               | Assembled workforce amortization |   |                    |      |      |   |        | 0.01  |  
|                                               |                                  |   |                    |       |      |   |        |      
|                                               | As adjusted                      |   | $                  | (0.05 | )    |   | $      | (0.51 | )
|Weighted
average common shares and equivalents |                                  |   |                    |       |      |   |        |      
|                                               | Basic and diluted                |   |                    | 9,085 |      |   |        | 9,318 |  

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

|                                  |                     |   |           |         |              |   |        |         |  
|--------------------------------- | ------------------- | - | --------- | ------- | ------------ | - | ------ | ------- | -
|                                  |                     |   | March 31, |         | December 31,
|                                  |                     |   | 2002      |         | 2001        
|                                  |                     |   |           |         |             
|Carrying amount of:               |                     |   |           |         |              |   |        |        
|                                  | Goodwill            |   | $         | 17,658  |              |   | $      | 17,658  |  
|                                  | Assembled workforce |   |           | 1,035   |              |   |        | 1,035   |  
|                                  |                     |   |           |         |              |   |        |        
|Gross carrying amount of goodwill |                     |   | 18,693    |         |              |   | 18,693 |        
|Less accumulated amortization:    |                     |   |           |         |              |   |        |        
|                                  | Goodwill            |   |           | (11,181 | )            |   |        | (11,181 | )
|                                  | Assembled workforce |   |           | (811    | )            |   |        | (811    | )
|                                  |                     |   |           |         |              |   |        |        
|Net carrying amount of goodwill   |                     | $ | 6,701     |         |              | $ | 6,701  |        
|                                  |                     |   |           |         |              |   |        |        

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

|                                           |                      |   |           |        |              |   |        |        |  
|------------------------------------------ | -------------------- | - | --------- | ------ | ------------ | - | ------ | ------ | -
|                                           |                      |   | March 31, |        | December 31,
|                                           |                      |   | 2002      |        | 2001        
|                                           |                      |   |           |        |             
|Carrying amount of:                        |                      |   |           |        |              |   |        |       
|                                           | Developed technology |   | $         | 12,154 |              |   | $      | 12,154 |  
|                                           | Customer base        |   |           | 3,315  |              |   |        | 3,315  |  
|                                           | RUMBA trade name     |   |           | 1,557  |              |   |        | 1,557  |  
|                                           | Patents & copyrights |   |           | 398    |              |   |        | 398    |  
|                                           |                      |   |           |        |              |   |        |       
|Gross carrying amount of other intangibles |                      |   | 17,424    |        |              |   | 17,424 |       
|Less accumulated amortization:             |                      |   |           |        |              |   |        |       
|                                           | Developed technology |   |           | (7,283 | )            |   |        | (6,709 | )
|                                           | Customer base        |   |           | (2,132 | )            |   |        | (1,991 | )
|                                           | RUMBA trade name     |   |           | (1,001 | )            |   |        | (936   | )
|                                           | Patents & copyrights |   |           | (270   | )            |   |        | (258   | )
|                                           |                      |   |           |        |              |   |        |       
|Net carrying amount of other intangibles   |                      | $ | 6,738     |        |              | $ | 7,530  |       
|                                           |                      |   |           |        |              |   |        |       

SFAS No. 142 also requires companies to perform an impairment test within
six months of adopting the statement. We conducted an impairment analysis of
goodwill and other intangible assets and determined that no impairment existed
at January 1, 2002 nor have there been any events or circumstances that would
have created an impairment during the three months ended March 31, 2002.

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|6. |  | Net loss per share
|-- |  | ------------------

On August 28, 2002, our stockholders approved a one-for-seven reverse
stock split of our common stock. The reverse stock split became
effective at the close of business on September 3, 2002. All share and per share information in the accompanying financial
statements has been retroactively adjusted to 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 dilutive potential common shares. Potential common
shares include dilutive shares issuable upon the exercise of outstanding common
stock options computed using the treasury stock method. For the three month
periods ended March 31, 2002 and 2001, the number of shares used in the
computation of diluted loss per share were the same as those used for the
computation of basic loss per share. Potentially dilutive securities of
164,566 and 72,675 were not included in the computation of diluted net loss per
common share because to do so would have been anti-dilutive for the three month
periods ended March 31, 2002 and 2001, respectively.



|7. |  | Restructuring of operations
|-- |  | ---------------------------

On August 3, 2000, we announced a restructuring of our operations, which
was 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 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 Systems, Inc. for a software license that we no
longer planned to use. As of March 31, 2002, our total cash expenditures
incurred were $4.8 million. The remaining reserve related to this
restructuring is approximately $0.8 million, and is included in accrued
liabilities as of March 31, 2002.

The following table
lists the components of the August 2000 restructuring
reserve for the three month period ended March 31, 2002
(In thousands):

|                                                                |  |            |     |       |  |       |     |   |  |   |      |  
|--------------------------------------------------------------- |  | ---------- | --- | ----- |  | ----- | --- | - |  | - | ---- | -
|                                                                |  | Excess     |     |       |  |       |     |   |  |  
|                                                                |  | Facilities |     | Other |  | Total
|                                                                |  |            |     |       |  |      
|Balance at December 31, 2001                                    |  | $          | 930 |       |  | $     | 27  |   |  | $ | 957  |  
|Reserve utilized in the three month period ended March 31, 2002 |  |            | (84 | )     |  |       | (27 | ) |  |   | (111 | )
|                                                                |  |            |     |       |  |       |     |   |  |   |      |  
|Balance at March 31, 2002                                       |  | $          | 846 |       |  | $     |    |   |  | $ | 846  |  
|                                                                |  |            |     |       |  |       |     |   |  |   |      |  

In the fourth quarter of 1999, following the acquisitions of Wall Data,
Inc., or Wall Data, and Simware Inc., or Simware, we initiated a plan to
restructure our worldwide operations and integrate the 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 and $0.5 million for legal,
accounting, and other. We anticipated that the execution of the restructuring
actions would require total cash expenditures of approximately $3.8 million,
which we expected to be funded from internal operations. As of March 31,
2002, out total cash expenditures incurred were approximately $2.9 million.
The remaining reserve related to this restructuring is approximately $0.9
million, and is included in accrued liabilities as of March 31, 2002.

The following table
lists the change in our restructuring reserve for the
three month period ended March 31, 2002 (In thousands):

|                                                                |  |            |     |   |  |  |  |  |  |  |  | 
|--------------------------------------------------------------- |  | ---------- | --- | - |  |  |  |  |  |  |  | 
|                                                                |  | Excess    
|                                                                |  | Facilities
|                                                                |  |           
|Balance at December 31, 2001                                    |  | $          | 958 |  
|Reserve utilized in the three month period ended March 31, 2002 |  |            | (32 | )
|                                                                |  |            |     |  
|Balance at March 31, 2002                                       |  | $          | 926 |  
|                                                                |  |            |     |  

Prior to the acquisition, Wall Data had initiated a plan to restructure
their worldwide operations to re-focus Wall Data on their core business
functions and to reduce operating expenses. In conjunction with the
acquisition, we recorded the remaining

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restructuring accrual of approximately
$0.7 million for facilities-related expenses. As of March 31, 2002, we had
incurred costs of approximately $0.5 million. We estimate that total cash
expenditures will be approximately $0.7 million. The remaining reserve related
to this restructuring was approximately $0.2 million and is included in accrued
liabilities as of March 31, 2002.

The following table lists the change in the Wall Data restructuring
reserve for the three month period ended March 31, 2002
(In thousands):

|                                                                |  |            |     |  
|--------------------------------------------------------------- |  | ---------- | --- | -
|                                                                |  | Excess    
|                                                                |  | Facilities
|                                                                |  |           
|Balance at December 31, 2001                                    |  | $          | 211 |  
|Reserve utilized in the three month period ended March 31, 2002 |  |            | (3  | )
|                                                                |  |            |     |  
|Balance at March 31, 2002                                       |  | $          | 208 |  
|                                                                |  |            |     |  

In August 1998, following the acquisition of FTP Software, Inc., 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. In addition, prior to our acquisition of FTP, FTP
had recorded a restructuring charge. We assumed the remaining restructuring
liability of $9.7 million as of the date of acquisition for a total
restructuring liability of $16.7 million. The remaining reserve related to
this restructuring was approximately $0.2 million and is included in the
accrued liabilities as of March 31, 2002.

The following table lists the change in the FTP restructuring reserve for
the three month period ended March 31, 2002 (In thousands):

|                                                                |  |            |      |  
|--------------------------------------------------------------- |  | ---------- | ---- | -
|                                                                |  | Excess    
|                                                                |  | Facilities
|                                                                |  |           
|Balance at December 31, 2001                                    |  | $          | 465  |  
|Reserve utilized in the three month
period ended March 31, 2002 |  |            | (250 | )
|                                                                |  |            |      |  
|Balance at March 31, 2002                                       |  | $          | 215  |  
|                                                                |  |            |      |  



|8. |  | Treasury stock
|-- |  | --------------

During the first
three months of 2002, we repurchased 113,272 shares of our
outstanding common shares on the open market at an average purchase price of
$6.00 per share for a total cost of approximately $0.7 million.



|9. |  | Commitments and contingencies
|-- |  | -----------------------------

Legal Proceedings

On November 22, 1999, Kenneth Fisher filed a complaint alleging violations
of the False Claims Act, 31 U.S.C. § 3729 et seq.,against us, and our
affiliates Network Software Associates, Inc. or NSA, and NetSoft Inc., or
NetSoft, in the United States District Court of the District of Columbia. The
United States government declined to pursue the action on its own behalf and,
therefore, the action is 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 us
from this action in exchange for our agreement to toll, or forego, applicable
statutes of limitation as to Mr. Fishers claims.

On May 13, 2002, on an order of the court following defendants successful
motion to strike the second amended complaint, filed by Mr. Fisher on
January 31, 2002, 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

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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). Mr. Fisher alleges damages in excess of
$30,000,000.

We did not acquire NSA until July 1997 and had no involvement with the
events alleged by Mr. Fisher. However, Mr. Fisher alleges that any liabilities
of NSA and NetSoft passed to us. On May 31, 2002, NSA and NetSoft and the other
defendants answered the complaint. We, and our affiliates, vigorously dispute
Mr. Fishers allegations.

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



|10. |  | Correspondence from the Nasdaq Stock Market
|--- |  | -------------------------------------------

We received a letter from the staff of the Nasdaq National Market, or
Nasdaq, dated June 20, 2002 notifying us that we no longer complied with the
minimum $1.00 per share bid price requirement for continued listing, as set
forth in Marketplace Rule 4450(a)(5), and that our stock was therefore subject
to delisting from the Nasdaq National Market.

On August 21, 2002, we received a letter from the Nasdaq Stock Market,
Inc. notifying us of our failure to timely file our Form 10-Q for the quarter
ended June 30, 2002 as required by the Nasdaq National Market under Nasdaq
Marketplace Rule 4310(c)(14). This failure subjected our common stock to
delisting by the Nasdaq National Market. Nasdaq indicated that it would
consider this additional delinquency in determining whether continued listing
of our common stock on the Nasdaq National Market was appropriate.

On September 12,
2002, we communicated with the Nasdaq Listing Qualifications Panel,
or Panel, with an update as to
the implementation of our reverse stock split and the re-audit of our financial
results for the years ended December 31, 2001 and 2000. In the
correspondence,
we mentioned that stockholders representing a majority of our outstanding common
stock at the Special Meeting of the Stockholders held on August 28, 2002 had
approved our reverse stock split. Given the additional time needed to complete
the re-audit, we requested an extension to
our September 13, 2002 compliance date.

On September 18, 2002, we received a letter from Nasdaq acknowledging that
on September 4, 2002, we implemented a reverse stock split at a ratio of
one-for-seven that resulted, as of September 17, 2002, in our regaining
compliance with the minimum bid price of $1.00 per share by trading at or above
the $1.00 per share minimum bid price for ten consecutive trading days. The
Panel determined to continue the listing of our common stock on Nasdaq on the
condition that on or before November 1, 2002 we file our delinquent Form 10-Q
for the period ended June 30, 2002 and all amended public reports required to
be filed with the Securities and Exchange Commission, or Commission, and that we otherwise
continue to comply with all other continued listing requirements of Nasdaq.

On November 5, 2002, we received additional correspondence from the Panel
extending to November 14, 2002 the date by which we are required to comply with
the continued listing requirements of Nasdaq by filing our Forms 10-Q for the
quarters ending June 30, 2002 and September 30, 2002 and all amended public
reports required to be filed with the Commission.

On
November 14, 2002, we communicated with the Panel with respect to our
failure to file our Forms 10-Q for the quarters ended June 30, 2002
and September 30, 2002 and all amended public reports required to be
filed with the Commission, as required by the November 5, 2002
correspondence from the Panel, and requested an extension of our
November 14, 2002 target date. As of the date of this report, the
Panel has not responded to our request. In the event that the Panel
does not grant our request for an extension or, if granted, we fail
to comply with any terms of the Panel's decision, our securities may
be delisted from Nasdaq and may be traded over-the-counter or on the Pink
Sheets, assuming we meet the qualification requirements for either or both of
these markets.

Since regaining compliance with Nasdaqs $1.00 minimum bid price listing
requirement, the bid price for our common stock has, at times, fallen below
$1.00. Even if we regain compliance with Nasdaq rules, if our common stock
trades below $1.00 for thirty consecutive days, we may again be subject to
delisting by Nasdaq.



|11. |  | Restatement of financial statements
|--- |  | -----------------------------------

Subsequent to the issuance of the Companys interim unaudited condensed
consolidated financial statements for the three months ended March 31, 2002, we
determined that the accounting treatment was inappropriate for certain
transactions that had been previously recorded in 2000, 2001, and the first
three months of 2002. Those transactions are as follows:

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Three months ended March 31, 2002

We recorded service
revenue for certain software revenue contracts that should
have been deferred as of December 31, 2001. Accordingly, we recorded an
adjustment to increase service revenue for the three months ended March 31,
2002 by $35,000, to properly recognize the amortization of deferred revenue for
that period.

Upon the adoption of SFAS No. 142 on January 1, 2002 we should have
discontinued amortization of all goodwill as of that date.
However, we continued to amortize goodwill associated with our 1998 acquisition
of FTP Software, Inc., or FTP. Additionally, we should have reduced the
amortization period of the identifiable intangible assets associated with the FTP
acquisition, as discussed further below. Therefore, we recorded an adjustment
to reduce amortization expense by $50,000 to correct for the net effect of
these two adjustments.

Additionally, (i) foreign currency adjustments were recorded for various
foreign currency transactions, and (ii) the
provision for income taxes was increased for revisions to the estimated
effective tax rate for 2002.

2001 adjustments

A loss of approximately $1.6 million in the Company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 recorded in the consolidated results of operations in accordance with
Emerging Issues Task Force Issue No. 91-5, Nonmonetary Exchange of Cost-Method
Investments. Furthermore, we 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, we
recorded an adjustment to recognize the total realized investment loss of $1.8
million in the 2001 consolidated statement of operations.

During 2001, we 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. We determined that the
utilization of the related deferred tax assets, for which we had
previously established a full valuation allowance, should have been recorded as
a reduction to 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 a tax audit at the Haifa, Israel
subsidiary. As a result of the adjustment to goodwill, amortization expense
related to goodwill for the three months ended March 31, 2001 and the year
ended December 31, 2001, has been reduced by approximately $162,500 and
$650,000, respectively. The net increase to the provision for income taxes
resulting from the two tax adjustments described above was $187,000 and
$650,000 for the three months ended March 31, 2001, and the year ended
December 31, 2001, respectively.

Third party
transactions were improperly included within accumulated comprehensive loss as of December 31, 2001.
Consequently, we recorded an adjustment to remove these transactions
from accumulated
comprehensive loss, which decreased service revenue by approximately $355,000 in
2001. The impact on the first quarter of fiscal 2001 was a decrease in service
revenue of $127,000.

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

We had previously not reported cost of services revenue as a component of cost
of revenues. Accordingly, we 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, we wrote-off $10.0 million of goodwill and
other intangibles related to the 1998 acquisition of FTP. At that
time, we
should have reduced the amortization period of the remaining intangible assets
from the FTP acquisition. Consequently, we recorded an adjustment in 2001 to
increase amortization expense by $416,000 to recognize the impact of the
reduced amortization period for that year. The increase in amortization
expense for the three months ended March 31, 2001 was $104,000.

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.

13



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##### Table of Contents



2000 adjustments

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

An analysis of the purchase price allocation resulting from our acquisition of
Wall Data in December 1999, indicated we 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 us. 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, we recorded a $2.3 million adjustment to
reduce revenue in 2000 with an offsetting reduction of impairment expense,
given that the goodwill resulting from the acquisition had been written-off in
2000.

During 2000, we incorrectly wrote-off $810,000 of trade receivables against
liabilities, that
had been recorded in connection with the acquisition of Wall Data.
Consequently, we 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 accumulated deficit by
$344,000 as of December 31, 1999.

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

We had previously not reported cost of services revenues as a component of cost
of revenues. Accordingly, we 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.

The Companys accounts receivable reserve at December 31, 1999 was understated at that date by approximately $600,000. Consequently,
we recorded an adjustment to decrease bad debt expense in 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 our acquisition of
FTP, as discussed above, we 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.

Restated financial statements

As a result of the adjustments
described above, the accompanying interim condensed consolidated
financial statements for the three months ended March 31, 2002
and 2001 have been restated from the amounts previously reported to
reflect the correction of the matters described above.

In addition, we intend to restate our 2001 and 2000 consolidated
financial statements to reflect the adjustments described above.

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):

|                              |                                          |  |   |                    |   |                    |   |           |   |                |   |        |   |  |   |        |   | 
|----------------------------- | ---------------------------------------- |  | - | ------------------ | - | ------------------ | - | --------- | - | -------------- | - | ------ | - |  | - | ------ | - | 
|                              |                                          |  |   | Three months ended |   | Three months ended
|                              |                                          |  |   | March 31, 2002     |   | March 31, 2001    
|                              |                                          |  |   |                    |   |                   
|                              |                                          |  |   | (As previously     |   |                    |   |           |   | (As previously |   |        |   | 
|                              |                                          |  |   | reported)          |   | (As restated)      |   | reported) |   | (As restated) 
|                              |                                          |  |   |                    |   |                    |   |           |   |               
|Statement
of Operations Data: |                                          |  |   |                    |   |                    |   |           |   |                |   |        |   |  |   |       
|                              | Total net revenues                       |  | $ | 18,997             |   |                    | $ | 19,032    |   |                | $ | 21,731 |   |  | $ | 21,652 |  
|                              | Gross margin                             |  |   | 16,528             |   |                    |   | 16,564    |   |                |   | 19,042 |   |  |   | 18,964 |  
|                              | Sales and marketing                      |  |   | 9,605              |   |                    |   | 9,605     |   |                |   | 13,791 |   |  |   | 13,980 |  
|                              | Research
and development                 |  |   | 3,597              |   |                    |   | 3,597     |   |                |   | 5,709  |   |  |   | 5,723  |  
|                              | General
and administrative               |  |   | 2,471              |   |                    |   | 2,471     |   |                |   | 3,681  |   |  |   | 3,715  |  
|                              | Amortization of goodwill and intangibles |  |   | 843                |   |                    |   | 793       |   |                |   | 1,502  |   |  |   | 1,444  |  
|                              | Interest income and other, net           |  |   | 34                 |   |                    |   | 81        |   |                |   | 801    |   |  |   | 1,152  |  
|                              | Foreign
currency transaction losses      |  |   | (546               | ) |                    |   | (595      | ) |                |   | (70    | ) |  |   | (401   | )
|                              | Provision for income taxes               |  |   | 33                 |   |                    |   | 71        |   |                |   | 135    |   |  |   | 322    |  
|                              | Net loss                                 |  |   | (533               | ) |                    |   | (487      | ) |                |   | (5,234 | ) |  |   | (5,469 | )
|                              | Net loss per share  basic and diluted   |  | $ | (0.06              | ) |                    | $ | (0.05     | ) |                | $ | (0.56  | ) |  | $ | (0.59  | )

|                                                                   |                                          |  |   |          |                |  |               |          |   |  | 
|------------------------------------------------------------------ | ---------------------------------------- |  | - | -------- | -------------- |  | ------------- | -------- | - |  | 
|                                                                   |                                          |  |   |          | (As previously |  |               |          |  
|                                                                   |                                          |  |   |          | reported)      |  | (As restated)
|                                                                   |                                          |  |   |          |                |  |              
|Balance
Sheet Data as of March 31, 2002:                           |                                          |  |   |          |                |  |               |         
|                                                                   | Goodwill and other intangibles, net      |  | $ | 16,738   |                |  | $             | 13,439   |  
|                                                                   | Total
assets                             |  |   | 74,030   |                |  |               | 70,738   |  
|                                                                   | Deferred
revenue                         |  |   | 18,327   |                |  |               | 18,765   |  
|                                                                   | Income
taxes payable                     |  |   | 3,747    |                |  |               | 1,835    |  
|                                                                   | Accumulated deficit                      |  |   | (113,201 | )              |  |               | (116,286 | )
|                                                                   | Accumulated
comprehensive loss           |  |   | (5,545   | )              |  |               | (4,278   | )
|                                                                   | Total
stockholders equity               |  |   | 39,834   |                |  |               | 38,016   |  
|                                                                  
|Balance
Sheet Data as of December 31, 2001:                        |                                          |  |   |          |                |  |               |         
|                                                                   | Goodwill and other intangibles, net      |  | $ | 17,581   |                |  | $             | 14,231   |  
|                                                                   | Total
assets                             |  |   | 79,436   |                |  |               | 76,093   |  
|                                                                   | Deferred revenue                         |  |   | 21,154   |                |  |               | 21,627   |  
|                                                                   | Income taxes payable                     |  |   | 3,811    |                |  |               | 1,861    |  
|                                                                   | Accumulated deficit                      |  |   | (112,668 | )              |  |               | (115,799 | )
|                                                                   | Accumulated comprehensive loss           |  |   | (5,639   | )              |  |               | (4,372   | )
|                                                                   | Total
stockholders equity               |  |   | 40,952   |                |  |               | 39,088   |  
|                                                                  
|Statement
of Operations Data for the year ended December 31, 2001: |                                          |  |   |          |                |  |               |         
|                                                                   | Total net revenues                       |  | $ | 79,970   |                |  | $             | 79,249   |  
|                                                                   | Gross margin                             |  |   | 76,516   |                |  |               | 67,664   |  
|                                                                   | Sales and marketing                      |  |   | 53,220   |                |  |               | 45,104   |  
|                                                                   | General and administrative               |  |   | 10,579   |                |  |               | 10,792   |  
|                                                                   | Amortization of goodwill and intangibles |  |   | 6,077    |                |  |               | 5,843    |  
|                                                                   | Interest income and other, net           |  |   | 2,104    |                |  |               | 2,636    |  
|                                                                   | Foreign
currency transaction losses      |  |   |         |                |  |               | (419     | )
|                                                                   | Loss
on investment exchange              |  |   |         |                |  |               | (1,824   | )
|                                                                   | Provision for income taxes               |  |   | 78       |                |  |               | 728      |  
|                                                                   | Net loss                                 |  |   | (9,294   | )              |  |               | (12,372  | )
|                                                                   | Net loss per share  basic and diluted   |  | $ | (1.00    | )              |  | $             | (1.33    | )

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##### Table of Contents



|                                                                   |                                                 |  |   |          |                |  |               |          |   |  | 
|------------------------------------------------------------------ | ----------------------------------------------- |  | - | -------- | -------------- |  | ------------- | -------- | - |  | 
|                                                                   |                                                 |  |   |          | (As previously |  |               |          |  
|                                                                   |                                                 |  |   |          | reported)      |  | (As restated)
|                                                                   |                                                 |  |   |          |                |  |              
|                                                                  
|Balance
Sheet Data as of December 31, 2000:                        |                                                 |  |   |          |                |  |               |         
|                                                                   | Goodwill and other intangibles, net             |  | $ | 23,689   |                |  | $             | 22,705   |  
|                                                                   | Total assets                                    |  |   | 109,981  |                |  |               | 108,988  |  
|                                                                   | Accounts payable                                |  |   | 5,050    |                |  |               | 4,937    |  
|                                                                   | Accumulated deficit                             |  |   | (103,374 | )              |  |               | (103,427 | )
|                                                                   | Accumulated comprehensive loss                  |  |   | (3,990   | )              |  |               | (4,822   | )
|                                                                   | Total
stockholders equity                      |  |   | 53,029   |                |  |               | 52,144   |  
|Statement
of Operations Data for the year ended December 31, 2000: |                                                 |  |   |          |                |  |               |         
|                                                                   | Total net revenues                              |  | $ | 104,072  |                |  | $             | 102,865  |  
|                                                                   | Gross margin                                    |  |   | 99,845   |                |  |               | 84,510   |  
|                                                                   | Research
and development                        |  |   | 24,394   |                |  |               | 24,517   |  
|                                                                   | Sales and marketing                             |  |   | 71,881   |                |  |               | 60,773   |  
|                                                                   | General and administrative                      |  |   | 18,740   |                |  |               | 17,047   |  
|                                                                   | Goodwill and other intangible assets impairment |  |   | 42,164   |                |  |               | 39,844   |  
|                                                                   | Amortization of goodwill and intangibles        |  |   | 14,164   |                |  |               | 14,338   |  
|                                                                   | Interest income and other, net                  |  |   | 1,836    |                |  |               | 2,699    |  
|                                                                   | Foreign
currency transaction losses             |  |   |         |                |  |               | (370     | )
|                                                                   | Gain on investments                             |  |   | 1,973    |                |  |               | 2,282    |  
|                                                                   | Provision for income taxes                      |  |   | 737      |                |  |               | 737      |  
|                                                                   | Net loss                                        |  |   | (71,910  | )              |  |               | (71,019  | )
|                                                                   | Net
loss per share  basic and diluted          |  | $ | (7.76    | )              |  | $             | (7.66    | )

The effect of the
above adjustments also increased accumulated deficit as of
December 31, 1999 by an aggregate of $944,000 from the amount
previously reported.

15



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##### Table of Contents





|12. |  | Subsequent events
|--- |  | -----------------

Loss on investments

In the third quarter of 2002, we determined that the 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 which have developed technologies which 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 our
investments in easyBASE and fusionONE have been permanently impaired
and have written them down by $1.5 million and
$0.3 million, respectively, to
expected net realizable values. In addition, we realized a loss of
approximately $700,000 on our
investment in Kana Software, Inc. As a result, we recorded an aggregate loss on
investments of approximately $2.5 million for the three months ended
September 30, 2002.

Restructuring charge

In August 2002, we
recorded a restructuring charge of approximately $4.6
million which represents the reduction in force of approximately 130
full-time
employees and related benefits, or approximately $2.0 million, plus the cost of
excess space and equipment associated with these employees, or approximately
$2.6 million. We anticipate that by March 2003, the transition of these people
and space will be completed.

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##### Table of Contents



NETMANAGE, INC.




Item 2  Managements discussion and analysis of financial condition and
results of operations.

Some of the
statements contained in this quarterly report on Form 10-Q/A are
forward-looking statements, including, but not limited to, those specifically
identified as such, that involve risks and uncertainties, including those set
forth below under the heading Factors that may affect our future results
and financial condition and elsewhere in this Report. The statements contained
in this Report on Form 10-Q/A that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including, without limitation, statements regarding
our expectations, beliefs, intentions or strategies regarding the future. These
statements involve known and unknown risks, uncertainties and other factors,
which may cause our actual results to differ materially from those implied by
the forward-looking statements. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expects, plans,
anticipates, believes, estimates, predicts, potential, or continue
or the negative of these terms or other comparable terminology. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. All forward-looking statements included in this Report are
based on information available to us as of May 10, 2002, the
original filing date of the Form 10-Q, and we assume no
obligation to update any such forward-looking statements.

The financial
information for the three month periods ended March 31, 2002 and
2001 reflect the restatement adjustments described in Note 11 to
the unaudited condensed 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.

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

We develop and market these software solutions to allow our customers to
access and leverage applications, business processes and data on International
Business Machines, or IBM, corporate mainframe computers, and IBM midrange
computers such as AS/400 and on UNIX® based servers. We also develop and market
software that 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
consultancy services to our customers in association with the products we
develop and market. We provide professional applications and management
consultancy to our customers in association with the server-based products we
deliver that 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, IBM operating systems, Novell, Inc., or Novell, operating
systems and various implementations of the industry standard UNIX operating
system such as IBMs AIX, Hewlett Packard Corporations HP/UX, Sun Microsystems
Inc.s Solaris, and the open source Linux system.

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

Critical accounting policies

Revenue Recognition:We derive revenue primarily from 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 licenses include the first year of
maintenance and support. To date, revenues from such licenses have been
insignificant.

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We apply the provisions of Statement of Position 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.

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

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

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

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

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

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

Allowances for doubtful accounts and litigation:The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Specifically, management must
make estimates of the collectibility of our accounts receivables. We analyze
accounts receivable and analyze historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms, when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $12.4 million, net of allowance
for doubtful accounts of $2.4 million as of March 31, 2002.

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

Accounting for income taxes:As part of the process of preparing our
consolidated financial statements, we are required to estimate our income taxes
in each of the jurisdictions in which we operate. This process involves us
estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included in our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable

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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 our allowance in a period changes, the
amount recognized as provision for income taxes in the statement of operations
could change.

Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities, and any valuation
allowance recorded against our net deferred tax assets. We have a
full valuation
allowance as of March 31, 2002, due to uncertainties related
to our ability to utilize our deferred tax assets, primarily consisting
of certain net operating losses carried forward and foreign tax credits, before
they expire. The valuation allowance is based on our history of
losses and our judgement that it is more likely than not that our deferred tax assets will not be recoverable. In the event that actual results
differ from these estimates, we will adjust these estimates in future periods.

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



| |  |  | significant underperformance relative to 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.                                                        

When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we measure impairment based on a projected discounted cash flow
method using a discount rate determined by us to be commensurate with the risk
inherent in our current business model. Goodwill and other intangible assets
amounted to $13.4 million as of March 31, 2002, net of accumulated
amortization.

On January 1, 2002, SFAS No. 142, Goodwill and Other Intangible Assets
became effective and as a result, we ceased to amortize approximately $6.7
million of goodwill. We recorded approximately $2.7 million of amortization of
goodwill during 2001 and would have recorded approximately $2.7 million of
amortization during 2002. In lieu of amortization, we are required to perform
an initial impairment review of our goodwill as of January 1, 2002, and on at
least an annual basis thereafter. As required by SFAS No. 142, we conducted an
impairment analysis of goodwill and other intangibles and determined that no
impairment existed at January 1, 2002, nor do we believe there have been any
events or circumstances that would have triggered impairment during the three
months ended March 31, 2002.

Operations

During the past several years, we have implemented a number of initiatives
designed to control costs and reduce operating expenses, including the
discontinuance of several low revenue-generating products and the
implementation of a worldwide restructuring of our operations due to the effect
of acquisitions and prevailing market conditions.

In 2001, we focused on the core competencies of our key business lines 
Host Accessand Host Integration each with dedicated development, sales,
marketing, and support resources. These products aim to leverage the strengths
and popularity of the Internet, as well as corporate private networks, and
offer features to improve network manageability. The Host Accessproduct line
includes our products branded Rumba and ViewNow. The Host Integrationproduct
line is designed to provide the technology to allow customers to leverage the
investment they have in existing host-based systems, applications and business
processes for new web-based presentation, applications, and solutions. The Host
Integrationproduct line includes our products branded OnWeb. The Real-time
Interactive Support functionality, previously sold as the standalone product
SupportNow, is being incorporated into our full line of products and we believe
adds value to our Host Accessand Host Integrationproduct offerings.

We experienced a reduction in incoming orders from the latter half of 2000
through the third quarter of 2001, and incoming orders did not begin to
increase until the fourth quarter of 2001. The slowdown in the North American
economy, as well as the events associated with the September 11, 2001 disaster,
influenced customers willingness to place new orders for our products. We
experienced significant revenue reduction in each of the quarters of 2001,
compared to the same quarter of the previous year and this trend continued into
the first quarter of 2002. In some cases, customers chose to reduce the number
of desktop units at the time of annual maintenance renewal to reflect a
reduction-in-force at their facilities, or they continued to postpone their
buying decisions due to budget constraints. The reduction in revenue in the
first quarter of 2002 primarily was attributed to our North American operations.
Our first quarter 2002 revenues are approximately 12% less than the amount
recorded in the first quarter of 2001 and approximately 3% less than the amount
recorded in the fourth quarter of 2001. There can be no assurance that
revenues will increase at all in future periods.

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As a result of the slowdown experienced in the latter half of 2000 and
throughout 2001, we took steps in fiscal 2001 to simplify our product offerings
and messages to our customers. The result of the year-long effort resulted in
the consolidation of our products into two major product families  Rumba and
OnWeb. Also, steps were taken to install a compliance program to better
monitor the reporting of the number of installations at customer sites in
accordance with written contracts.

We initiated restructuring plans as a result of our acquisitions of Wall
Data, Simware, and Aqueduct Software, Inc, or Aqueduct, including the $5.6
million restructuring plan announced on August 3, 2000 (see Note 7 
Restructuring of Operations). For most of 2000, we focused on the core
competencies of our key business lines  the Host Accessproduct line, the Web
Publishing, Integration and Development product line, referred to as Host
Integrationand the Real-time Interactive Support product line  each with
dedicated development, sales, marketing, and support resources. As part of the
restructuring announced on August 3 2000, we reduced our workforce by
approximately 17%, consisting mostly of Engineering and Customer Support
personnel who were focused primarily on our older technologies, predominantly
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 was reduced, thus
impacting future expected revenues from these product families. In connection
with the restructuring, we 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, approximately $200,000 in other equipment and
professional service costs, and an $800,000 settlement to Verity for a software
license that we no longer plan to use. As of March 31, 2002, our total cash
expenditures incurred were approximately $4.8 million. (See
Note 7  Restructuring of operations.)

Our Host Accessproduct line is designed to provide 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. Our Host Integrationproduct line is designed to
provide 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 product line includes
our products branded as OnWeb. Real-time Interactive Support, previously sold as
the standalone product SupportNow, is now built into our full line of products
and we believe adds value through increased functionality to the Host Access
and Host Integrationproduct offerings.

In fiscal year 2001, we experienced a general decline in revenues compared
to the prior year, a trend that has continued into the first quarter of 2002.
We believe that our revenues have been adversely impacted by the continued
slowdown in technology purchases due to current economic conditions in North
America and Europe. We continue to experience pricing pressures on our
products. There can be no assurance that revenues will increase at all in
future periods.

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, and
revenues in any one quarter are substantially dependent on orders booked in
that quarter. Our operating expense levels are based in part on our expectation
of future revenues and, to a large extent, are fixed. Operating expenses are
expected to stabilize at those levels incurred in the last half of fiscal year
2001 and the first quarter of fiscal year 2002 and may fluctuate as a
percentage of net revenues as we develop and introduce new products. While we
continue to adjust our operations to address these issues, there can be no
assurance that net revenues or net loss will improve in the future.

In the third quarter of 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. In accordance with SFAS No. 121, we re-evaluated the fair
value of these long-lived assets and intangibles using estimated discounted
cash flows, which was consistent with the methodology used at the time of the
acquisition. As a result, we determined an impairment of $39.8 million of goodwill
and other intangibles which was charged to operations in the third quarter of
fiscal 2000. In the fourth quarter of 2000, we determined that we had
overestimated the liabilities assumed in the FTP and Wall Data acquisitions by
approximately $9.4 million. We reversed these liabilities against the remaining
goodwill and other intangibles acquired.

On June 5, 2000, we completed our acquisition of Aqueduct, an early stage
web-based application intelligence company. We issued 160,214 shares of our
common stock and issued warrants and options to purchase an additional 103,891
shares of our common stock for all the outstanding stock of Aqueduct, including
the retirement of $2.2 million of notes payable and accrued interest thereon.
We also hired three employees of Aqueduct who subsequently left. The
acquisition was accounted for as a purchase. The warrants and options, none of
which were exercised, expired on December 5, 2001.

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As described 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
acquisitions, 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.

Three months ended March 31, 2002 compared to March 31, 2001 (dollars in
millions):

This selected unaudited financial data for the three months ended March 31,
2002 and 2001 contains certain financial information that has been
restated. (See Note 11 to the unaudited condensed consolidated financial
statements for further discussion of this matter.)

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|                                    |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |       |       |   
|----------------------------------- | ------------------------------- | ------------------ | ---- | --------------------------- | ----- | ---- | ---- | ------ | ----- | - | ---- | ---- | ----- | - | ----- | ----- | ----- | --
|                                    |                                 |                    |      | Three months ended March 31
|                                    |                                 |                    |      |                            
|                                    |                                 |                    |      | 2002                        |       | 2001 |      | Change
|                                    |                                 |                    |      |                             |       |      |      |       
|Net revenues                        |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |      
|                                    | License fees                    |                    | $    | 10.2                        |       |      | $    | 11.4   |       |   | $    | (1.2 | )     |   |       | (10.5 | )%   
|                                    | Services                        |                    |      | 8.8                         |       |      |      | 10.3   |       |   |      | (1.5 | )     |   |       | (14.6 | )%   
|                                    |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |      
|                                    |                                 | Total net revenues |      |                             | $19.0 |      |      |        | $21.7 |   |      |      | $(2.7 | ) |       |       | (12.4 | )%
|As a percentage of net revenues:    |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |      
|                                    | License fees                    |                    |      | 53.7                        | %     |      |      | 52.5   | %     |   |      |      |       |   |       |       |      
|                                    | Services                        |                    |      | 46.3                        | %     |      |      | 47.5   | %     |   |      |      |       |   |       |       |      
|                                    |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |      
|                                    |                                 | Total net revenues |      |                             | 100.0 | %    |      |        | 100.0 | % |      |      |       |   |       |       |       |   
|Gross margin  license fees         |                                 | $                  | 9.4  |                             |       | $    | 10.6 |        |       | $ | (1.2 | )    |       |   | (11.3 | )%   
|Gross margin  service              |                                 |                    | 7.2  |                             |       |      | 8.4  |        |       |   | (1.2 | )    |       |   | (14.3 | )%   
|                                    |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |      
|                                    |                                 | Total gross margin |      | $                           | 16.6  |      |      | $      | 19.0  |   |      | $    | (2.4  | ) |       |       | (12.6 | )%
|As a percentage of net revenue:     |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |      
|                                    | Gross margin  license fees     |                    |      | 49.5                        | %     |      |      | 48.9   | %     |   |      |      |       |   |       |       |      
|                                    | Gross margin  service          |                    |      | 37.9                        | %     |      |      | 38.7   | %     |   |      |      |       |   |       |       |      
|                                    |                                 |                    |      |                             |       |      |      |        |       |   |      |      |       |   |       |      
|                                    |                                 | Total gross margin |      |                             | 87.4  | %    |      |        | 87.6  | % |      |      |       |   |       |       |       |   
|Research and development            |                                 | $                  | 3.6  |                             |       | $    | 5.7  |        |       | $ | (2.1 | )    |       |   | (36.8 | )%   
|                                    | As a percentage of net revenue: |                    |      | 18.9                        | %     |      |      | 26.3   | %     |   |      |      |       |   |       |       |      
|Sales and marketing                 |                                 | $                  | 9.6  |                             |       | $    | 14.0 |        |       | $ | (4.4 | )    |       |   | (31.4 | )%   
|                                    | As a percentage of net revenue: |                    |      | 50.5                        | %     |      |      | 64.5   | %     |   |      |      |       |   |       |       |      
|General and administrative          |                                 | $                  | 2.5  |                             |       | $    | 3.9  |        |       | $ | (1.4 | )    |       |   | 35.9  | %    
|                                    | As a percentage of net revenue: |                    |      | 13.2                        | %     |      |      | 17.9   | %     |   |      |      |       |   |       |       |      
|Amortization of intangible assets   |                                 | $                  | 0.8  |                             |       | $    | 1.4  |        |       | $ | (0.6 | )    |       |   | (42.9 | )%   
|                                    | As a percentage of net revenue: |                    |      | 4.2                         | %     |      |      | 6.5    | %     |   |      |      |       |   |       |       |      
|Interest income and other, net      |                                 | $                  | 0.1  |                             |       | $    | 1.2  |        |       | $ | (1.1 | )    |       |   | (91.7 | )%   
|                                    | As a percentage of net revenue: |                    |      | 0.0                         | %     |      |      | 5.5    | %     |   |      |      |       |   |       |       |      
|Foreign
currency transaction losses |                                 | $                  | (0.6 | )                           |       | $    | (0.4 | )      |       | $ | (0.2 | )    |       |   | 50.0  | %    
|                                    | As a percentage of net revenue: |                    |      | (3.2                        | )%    |      |      | 1.8    | %     |   |      |      |       |   |       |       |      
|Provision for income taxes          |                                 | $                  | 0.1  |                             |       | $    | 0.3  |        |       | $ | (0.2 | )    |       |   | (66.7 | )%   
|                                    | Effective tax rate              |                    |      |                            |       |      |      |       |       |   |      |      |       |   |       |       |      
|Net loss                            |                                 | $                  | (0.5 | )                           |       | $    | (5.5 | )      |       | $ | 5.0  |      |       |   | (90.9 | )%   
|                                    | As a percentage of net revenue: |                    |      | (2.6                        | )%    |      |      | (25.3  | )%    |   |      |      |       |   |       |       |      

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Net revenues

Our revenues are derived from the sale of software licenses and related
services, which include maintenance and support, consulting and training
services. License fees are earned under software license agreements with
end-users and resellers and are generally recognized as revenue upon shipment
of the software if collection of the resulting receivable is probable, the fee
is fixed and determinable and vendor-specific objective evidence exists to
allocate the total fee to all undelivered elements of the arrangement.
Certain of our sales are made to domestic distributors under agreements
allowing right-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, if all other revenue recognition criteria have been met.

Services 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 the services are included in the initial licensing fee, the
fair value of the services is unbundled and recognized ratably over the related
service period. Service revenues derived from consulting and training are
deferred and recognized, when the services are performed, and the
collectibility is deemed probable.

License fees and
services revenues decreased $1.2 million and $1.5
million, respectively, for the three month period ended March 31, 2002 as
compared to the same period in 2001. Total net revenues for the three month
period ended March 31, 2002 decreased $2.7 million from those recorded in the
three month period ended March 31, 2001. These decreases resulted primarily
from continued customer decisions to cancel or postpone purchases of our
products, due to the sluggish North American and European economies, and to
competitive pressures on our average selling prices.

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 27% and 26% for the three months ended March 31, 2002 and 2001,
respectively.

No customer accounted for 10% or more of net revenues in either of the
three month periods ended March 31, 2002 and 2001.

Gross margin

Gross margin
decreased slightly as a percentage of net revenues to 87.4%
from 87.6% but declined 13% in absolute dollars for the three months ended
March 31, 2002 as compared to the three month period ended March 31, 2001.
This decline in absolute dollars is primarily the result of the decrease in net
revenues of $2.7 million as discussed in Net revenues above, partially offset
by a reduction in cost of revenues of $0.2 million. Cost of revenues includes
direct and indirect expenses associated with both license and services
revenues.

License cost of revenues primarily includes 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. Services cost of
revenues includes costs associated with both consulting and customer service,
and consists primarily of salaries and commissions, benefits, travel, and
occupancy expenses.

Cost of revenues for license fees increased slightly as a percentage of
net license revenues to 7.9% for the three month period ended March 31, 2002
as compared to 7.1% for the same period in 2001 but declined in absolute dollars for
the three month period ended March 31, 2002 as compared to the same period in
2001. The fluctuations in both percentage of net revenues and in absolute
dollars were primarily the result of reductions in headcount of 6 full-time
employees in operations from the first quarter of 2001, continuing cost reduction efforts, a VAT refund of
approximately $0.2 million, and a reduction in net license revenue of $1.2
million for the three month period ended March 31, 2002 as compared to the same
period in 2001.

Cost of revenue for services increased slightly to 18.8% from 18.4% as a
percentage of net services revenues for the three month period ended March 31,
2002 from the comparable period in 2001 but declined in absolute dollars for
the three month period ended March 31, 2002 as compared to the same period in
2001. The decline in cost of revenues for services primarily

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resulted from a
reduction in head count of 17 full-time employees in customer service and
consulting from the first quarter of 2001.

Gross margin as a percentage of net revenues may fluctuate in the future
due to increased price competition, the mix of distribution channels that we
use, the mix of license fee revenues versus service revenues, the mix of
products sold, and the mix of international versus domestic revenues. We
typically recognize higher gross margins on direct sales than sales through our
indirect channels of distribution, which generally carry lower margins.

Research and development

Research and development, or R & D, expenses primarily consist 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 the three month period ended March 31, 2002 as compared to
the three month period ended March 31, 2001, primarily as a result of a
reduction in headcount of 45 full-time employees for research and development
activities from the first quarter of 2001 to the first quarter of 2002.

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 management
with respect to certain external factors; including, but not limited to,
anticipated future gross product revenue, estimated economic life, and changes
in technology. Costs that do not qualify for capitalization are charged to R&D
expense when incurred. We did not capitalize any software development costs in
either of the three month periods ended March 31, 2002 or March 31, 2001.

Sales and marketing

Sales and marketing expenses consist primarily of salaries and commissions
of sales and marketing personnel, advertising, promotional expenses,
occupancy, and related costs. Sales and marketing expenses decreased in absolute
dollars for the three month period ended March 31, 2002 as compared to the
three month period ended March 31, 2001, primarily due to the reduction in
sales and support staff of 94 full-time employees from the first quarter of
2001 to the first quarter of 2002 and our ongoing cost reduction efforts in
2001 and 2002.

General and administrative

General and administrative expenses consist primarily of salaries,
benefits, accounting, operating, legal, and proportionate shares of occupancy
expenses for our human resources, legal, information technology, facilities and
general management functions as well as bad debt expense. General and
administrative expenses decreased in absolute dollars and as a percentage of
net revenues for the three month period ended March 31, 2002 as compared to the same
period in 2001 primarily as a result of our ongoing cost reduction efforts.

Interest income and other, net

Interest income and
other, net for the three month periods ended March 31,
2002 and 2001 are as shown in the following table (In thousands):

|                       |                       |   |                    |    |      |   |       |     | 
|---------------------- | --------------------- | - | ------------------ | -- | ---- | - | ----- | --- | 
|                       |                       |   | Three months ended
|                       |                       |   | March 30,         
|                       |                       |   |                   
|                       |                       |   | 2002               |    | 2001
|                       |                       |   |                    |    |     
|Interest income        |                       |   |                    |    |      |   |       |    
|                       | On cash & investments |   | $                  | 99 |      |   | $     | 311 | 
|                       | On tax refunds        |   |                    |   |      |   |       | 863 | 
|Interest expense       |                       |   | (19                | )  |      |   | (21   | )  
|Other
income (expense) |                       |   | 1                  |    |      |   | (1    | )  
|                       |                       |   |                    |    |      |   |       |    
|Total                  |                       | $ | 81                 |    |      | $ | 1,152 |    
|                       |                       |   |                    |    |      |   |       |    

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The reduction in interest earned on cash and investments results from a
reduction of our cash balances and lower interest rates from 2001 to 2002.

For the three month
period ended March 31, 2002 interest income of $99,000
was received on cash and investments. Interest income on tax
refunds for 2001 includes $0.9 million received on a $5.1 million income tax
refund received in the first quarter.

Transaction gains and losses from foreign currency activity exclude
activity flowing through our inter-company accounts (see below).

Foreign currency transaction
losses

For the three month
period ended March 31, 2002, foreign currency transaction losses
includes transaction
losses associated with inter-company accounts of approximately $0.6 million,
almost exclusively as a result of the decline in the value of the Israeli
Shekel against the U.S. dollar and the Euro. For the comparable quarter of
fiscal year 2001, the transaction loss associated with inter-company accounts
was approximately $0.4 million.

Provision for income taxes

Our provision for
income taxes primarily relates to international and state
taxes.

Liquidity and capital resources

|                                          |  |           |      |   | 
|----------------------------------------- |  | --------- | ---- | - | 
|                                          |  | March 31, |     
|(In millions)                             |  | 2002      |     
|                                          |  |           |     
|As of:                                    |  |           |     
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Cash and cash equivalents                 |  | $         | 33.6 |   | 
|Short-term investments                    |  |           | 0.7  |   | 
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|For the three months ended:               |  |           |     
|                                         
|                                         
|                                         
|                                         
|                                         
|                                         
|Net cash provided by operating activities |  |           | 1.9  |   | 
|Net cash used in investing activities     |  |           | (0.3 | ) | 
|Net cash used in financing activities     |  |           | (0.7 | ) | 

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

During the three months ended March 31, 2002, our aggregate cash, cash
equivalents and short-term investments increased from
$33.6 million to $34.3
million. This increase was due primarily to the collection of accounts
receivable, offset by an increase in prepaid expenses, a reduction in accounts
payable, a reduction in deferred revenue, and the purchase of approximately
$0.7 million in treasury stock.

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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 the three month period ended
March 31, 2002 reflects our purchases of our common stock, from time to time,
through the open market.

Our Board of Directors, or Board, has authorized the purchase from time to
time of up to 2,142,857 shares of our common stock through open market
purchases. In the twelve months ended December 31, 2001, we repurchased 337,221
shares of our common stock on the open market at an average purchase price of
$5.49 per share for a total cost of approximately $1.9 million. During the
three months ended March 31, 2002, we repurchased 113,272 shares of our common
stock on the open market at an average purchase price of $6.00 per share for a
total cost of approximately $0.7 million. Cumulatively, as of March 31, 2002,
we had repurchased 1,501,788 shares of our common stock at an average price of
$12.62 per share for a total cost of approximately $19.0 million.

At March 31, 2002, we had working capital of $18.3 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 for
the foreseeable future.

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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 credit exposure with 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 high credit
quality securities, and by positioning our portfolio to respond appropriately
to a significant reduction in the credit rating of any investment issuer or
guarantor. To ensure portfolio liquidity, the portfolio includes only marketable
securities with active secondary or resale markets. We mitigate territory risk
by only allowing up to 25% of the portfolio to be placed outside of the United
States.

Foreign currency risk

We conduct business in various foreign currencies, primarily in Europe
and Israel. Prior to 2000, we had established a foreign currency-hedging
program, utilizing foreign currency forward exchange contracts (forward
contracts) to hedge certain foreign currency exposures in certain European
countries. Under this program, increases or decreases in our foreign currency
transactions were partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of short-term earnings volatility.

We have not entered into any foreign currency forward contracts in either
2001 or 2002.

Factors that may affect our future results and financial condition

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

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

We have experienced, and expect to experience in future periods,
significant fluctuations in operating results that may be caused by many
factors including, among others:



| |  |  | general economic conditions, in particular, the recent slowdown of
purchases of information technology due to current economic conditions
in North America;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | demand for our products;                                                                                                                                   
|
| |  |  | introduction or enhancements to our products and those of our competitors;                                                                                 
|
| |  |  | technological changes in computer networking;                                                                                                              
|
| |  |  | competitive pricing pressures;                                                                                                                             
|
| |  |  | market acceptance of new products;                                                                                                                         
|
| |  |  | customer order deferrals in anticipation of new products and product enhancements;                                                                         
|
| |  |  | the size and timing of individual product orders;                                                                                                          
|
| |  |  | mix of international and domestic revenues;                                                                                                                
|
| |  |  | mix of distribution channels through which our products are sold;                                                                                          
|
| |  |  | impact of, or failure to enter into, strategic alliances to promote our products;                                                                          
|
| |  |  | quality control of our products;                                                                                                                           
|
| |  |  | changes in our operating expenses;                                                                                                                         
|
| |  |  | personnel changes; or                                                                                                                                      
|
| |  |  | foreign currency exchange rates.                                                                                                                           

In addition, our acquisition of complementary businesses, products or
technologies may cause fluctuations in our operating results due to in-process
research and development charges, the amortization of acquired identifiable
intangible assets, and integration costs such as those recorded in connection
with the acquisitions of FTP, Wall Data, Simware, and Aqueduct.

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

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

We have not been profitable on an annual basis since 1995 and may never achieve
profitability in the future

We had a net loss from operations of approximately $12.4 million for the
year ended December 31, 2001. Despite our operating profit in the first quarter
of 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, price competition may make it difficult for us to achieve
profitability. Increasing competition may cause our prices to decline, which
would harm our operating results. We expect our prices for our software
products to decline over the next few years. We expect to face increased
competition in markets where we sell our products, which will make it more
difficult to increase or maintain our revenues or maintain our prices and
profit margins even if our sales volumes increase. We need to significantly
increase our sales volume and/or reduce our costs to be profitable in future
periods. If anticipated increases in sales volume do not keep pace with
anticipated pricing pressures, our

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

We had been notified by Nasdaq that our stock price had fallen below the
minimum bid price listing requirement to maintain a listing on the Nasdaq
National Market and were subsequently notified that our failure to timely file
our Form 10-Q for the quarter ended June 30, 2002 may subject our common stock
to delisting; the low price of our common stock may impair its liquidity

We received a letter from the staff of the Nasdaq National Market, or
Nasdaq, dated June 20, 2002 notifying us that we no longer complied with the
minimum $1.00 per share bid price requirement for continued listing, as set
forth in Marketplace Rule 4450(a)(5), and that our stock was therefore subject
to delisting from the Nasdaq National Market.

On August 21, 2002, we received a letter from the Nasdaq Stock Market,
Inc. notifying us of our failure to timely file our Form 10-Q for the quarter
ended June 30, 2002 as required by the Nasdaq National Market under Nasdaq
Marketplace Rule 4310(c)(14). This failure subjected our common stock to
delisting by the Nasdaq National Market. Nasdaq indicated that it would
consider this additional delinquency in determining whether continued listing
of our common stock on the Nasdaq National Market was appropriate.

On September 12, 2002, we communicated with the Panel with an update as to
the implementation of our reverse stock split and the re-audit of our financial
results for the years ended December 31, 2001 and 2000. In the correspondence
we mentioned that stockholders representing a majority of our outstanding common
stock at the Special Meeting of the Stockholders held on August 28, 2002 had
approved our reverse stock split. Given the additional time needed to complete
the re-audit work by our independent accountants, we requested an extension to
our September 13, 2002 compliance date.

On September 18, 2002, we received a letter from Nasdaq acknowledging that
on September 4, 2002, we implemented a reverse stock split at a ratio of
one-for-seven that resulted, as of September 17, 2002, in our regaining
compliance with the minimum bid price of $1.00 per share by trading at or above
the $1.00 per share minimum bid price for ten consecutive trading days. The
Panel determined to continue the listing of our common stock on Nasdaq
on the condition that on or before November 1, 2002 we file our delinquent
Form 10-Q for the period ended June 30, 2002 and all amended public reports
required to be filed with the Securities and Exchange Commission, or
Commission, and that we
otherwise continue to comply with all other continued listing requirements of
Nasdaq.

On November 5, 2002, we received additional correspondence from the Panel
extending to November 14, 2002 the date by which we are required to comply with
the continued listing requirements of Nasdaq by filing our Forms 10-Q for the
quarters ending June 30, 2002 and September 30, 2002 and all amended public
reports required to be filed with the Commission.

On
November 14, 2002, we communicated with the Panel with respect to our
failure to file our Forms 10-Q for the quarters ended June 30, 2002
and September 30, 2002 and all amended public reports required to be
filed with the Commission, as required by the November 5, 2002
correspondence from the Panel, and requested an extension of our
November 14, 2002 target date. As of the date of this report, the
Panel has not responded to our request. In the event that the Panel
does not grant our request for an extension or, if granted, we fail
to comply with any terms of the Panels decision, our securities
may be delisted from Nasdaq and may be traded over-the-counter or on the Pink
Sheets, assuming we meet the qualification requirements for either or both of
these markets.

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Since regaining compliance with Nasdaqs $1.00 minimum bid price listing
requirement, the bid price for our common stock has, at times, fallen below
$1.00. Even if we regain compliance with Nasdaq rules, if our common stock
trades below $1.00 for thirty consecutive days, we may again be subject to
delisting by Nasdaq.

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; and                                                                                           
|
| |  |  | the difficulty of presenting a unified corporate image.                                                                  

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 Wall Data and Simware. 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 facilities. 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. We may also be required to
implement additional restructuring plans in the future.

The successful combination of companies requires coordination of sales and
marketing with research and development efforts, and can be difficult to
accomplish. The integration of both Wall Data and Simware involved
geographically separated organizations (in suburban Kirkland, Washington;
Boston, Massachusetts; Cupertino and Irvine, California; Ottawa, Ontario,
Canada; and Haifa, Israel), and personnel with diverse business
backgrounds and corporate cultures. We believe 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

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business do not meet our expectations,
we may be required to restructure the acquired business, or write-off the value
of some or all of the assets of the acquired business as we did in the third
quarter of 2000. No assurance can be given that any acquisition by us will or
will not occur, that if an acquisition does occur, that it will not materially
and adversely affect us, or that any such acquisition will be successful in
enhancing our business. If any acquisitions are effected through issuance of
stock, our shareholders may suffer dilution and any cash would weaken our
balance sheet.

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 were to leave 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 may not be able to hire and retain qualified employees, which would impair
our ability to grow

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

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

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

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

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

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

From time to time, many of our customers have delayed purchase decisions
due to the confusion in the marketplace relating to rapidly changing technology
and product introductions. To maintain or improve our position in our 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

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manner that satisfies customer requirements
and changing market demands. Any further failure by us to anticipate or respond
adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, could have a
material adverse effect on our business, financial condition, and results of
operations. The failure to develop products or product enhancements
incorporating new functionality on a timely basis could cause customers to
delay the 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 into certain of our products 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 Communications, Inc. for Power TCP Telnet
and Power TCP VT320 for 5 years, which we use in the OnWeb product line. There
can be no assurance that we would be able to replace the functionality provided
by the third party technologies currently offered in conjunction with our
products if those technologies become unavailable to us or obsolete or
incompatible with future versions of our products or market standards.

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

Substantially all of our net revenues have been derived from the sales of
products that provide internetworking applications for the Microsoft Windows
environment and are marketed primarily to Windows users. As a result, sales of
certain of our products might be negatively impacted by developments adverse to
Microsofts Windows products. In addition, our strategy of developing products
based on the Windows operating environment is substantially dependent on our
ability to gain pre-release access to, and to develop expertise in, current and
future Windows developments by Microsoft. If we are unable to provide on a
timely basis products compatible with future Windows releases, our business
could be harmed.

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

Our future success depends on our ability to maintain and enter into new
strategic alliances and OEM relationships to develop necessary products or
technologies, to expand our distribution channels or to jointly market or gain
market awareness for our products. We currently rely on strategic
relationships, such as those with Microsoft, to provide us with state of the
art technology, assist us in integrating our products with leading industry
applications and help us make use of economies of scale in manufacturing and
distribution. However, we do not have written agreements with many of our
strategic partners that could ensure these relationships will continue for a
significant period of time. Many of our agreements with these partners are
informal and may be terminated by them at any time. There can be no assurance that
we will be successful in maintaining current alliances or developing new
alliances and relationships or that such alliances and relationships will
achieve their intended purposes.

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

Software products as complex as those offered by us may contain undetected
errors or failures when first introduced or as new versions are released. The
likelihood of errors is higher when a new product is introduced or when new
versions or enhancements are released. Errors may also arise as a result of
defects in the products that 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 of 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;       

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| |  |  | increased service and warranty costs; and
| | - |  | -----------------------------------------
|
| |  |  | litigation costs.                        

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

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

Our ability to compete depends substantially upon our internally developed
technology. We rely primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures, and contractual provisions to
protect our proprietary rights. We seek to protect our software, documentation
and other written materials under trade secret and copyright laws, which afford
only limited protection, and, to a lesser extent, patent laws. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our products and technology is
difficult and, while we are unable to determine the extent to which piracy of
our software products exists, software piracy can be expected to be a
persistent problem. In selling our products, we rely primarily on shrink-wrap
and click-wrap licenses that are not signed by licensees and, therefore, may
be unenforceable under the laws of certain jurisdictions. In addition, the laws
of some foreign countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. If we are not successful in
protecting our intellectual property, our business could be substantially
harmed.

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. It is possible that:



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

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

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

Substantial litigation regarding intellectual property rights 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

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

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

We derived approximately 27% of our net revenues from sales outside of
North America (United States and Canada) during the three-month period ended
March 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, including reduced intellectual property protection;           
|
| |  |  | increased prevalence of intellectual property piracy and
misappropriation;       
|
| |  |  | 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;                                     
|
| |  |  | changes in markets caused by a variety of political, social and economic factors;
|
| |  |  | tariffs and other trade barriers;                                                
|
| |  |  | costs and risks of localizing products for foreign countries;                    
|
| |  |  | longer accounts receivable payment cycles;                                       
|
| |  |  | difficulties in managing international operations;                               
|
| |  |  | currency exchange rate fluctuations;                                             
|
| |  |  | potentially adverse tax consequences;                                            
|
| |  |  | repatriation of earnings; and                                                    
|
| |  |  | the burdens of complying with a wide variety of foreign laws.                    

Many of our customers are subject to many of the risks described above.
These factors may have an adverse effect on our international sales and,
consequently, on our business, financial condition or results of operations.
See We face risks from the uncertainties of current and future governmental
regulation.

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 U.S., the U.S. 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 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 the remainder of 2002 and beyond. Any escalation in
these events or any similar future events may disrupt our operations or those
of our customers. These events

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have had and may continue to have an adverse
impact on the U.S. and world economy in general and consumer confidence and
spending in particular, which has and could, continue to harm our sales. In
addition these events could increase volatility in the U.S. 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
significant impact on our operating results, revenues and costs and may result
in the increased volatility in the market 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. In addition, such
repurchases are at the discretion of our management and may be reduced or
stopped altogether at any time. As a result, there can be no assurance as to
the timing and/or amount of shares that we may repurchase under this stock
repurchase program.

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

We may require substantial additional capital to finance our future growth
and fund our ongoing operations through the remainder of 2002 and beyond. Our
capital requirements will depend on many factors including, among other things:



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

Although our current business plan does not foresee the need for further
financing activities to fund our operations for the foreseeable future, due to
risks and uncertainties in the marketplace as well as a potential of pursuing
further acquisitions, we may need to raise additional capital. If we issue
additional stock to raise capital particularly at our current low price per
share, our stockholders ownership in NetManage would be reduced. Additional
financing may not be available when needed and, if such financing is available,
it may not be available on terms favorable to us. In addition, our
current inability to register any shares issued by us in connection
with future financing activities or acquisitions on Form S-3 due
to our recent failure to timely file our Form 10-Q for the
period ended June 30, 2002 may increase the transaction costs of
engaging in such activities and may delay the timing of the
consummation of transactions.

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

As of August 28, 2002, our officers, directors and entities affiliated
with them, in the aggregate, beneficially owned approximately 1.8 million
shares, or approximately 19.8% 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 shareholder 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 currently provides that in the event a change in control of
NetManage occurs, each outstanding option will automatically
accelerate in full, unless: (i) the option is assumed by the successor
corporation or otherwise continued in effect, or (ii) the option is
replaced with a cash incentive program which preserves the spread
existing on the unvested option shares (the excess of the fair market
value of those shares over the option exercise price payable for such
shares) and provides for subsequent payout in accordance with the
same vesting schedule in effect for those option shares. In addition,
all unvested shares outstanding under the 1992 Stock Option Plan will
immediately vest, except to the extent our repurchase rights with
respect to those shares are to be assigned to the successor
corporation or otherwise continued in effect. Furthermore, all
options granted prior to the June 5, 2002 statement of our 1992 Stock
Option Plan will accelerate upon a change in control of NetManage.
Our 1999 Nonstatutory Stock Option Plan currently provides that, in
the event of a change of control of NetManage, all options
outstanding under the plan would become fully vested and exercisable
and would be terminated if not exercised prior to the closing of such
change of control transaction. These acceleration of vesting
provisions may have the effect of deterring or reducing the price
that a potential acquiror would be willing to pay to acquire
NetManage.

We have adopted a stockholder rights plan that would cause substantial
dilution to a stockholder, and substantially increase the cost paid by a
stockholder, who attempts to acquire us on terms not approved by our board of
directors. This could prevent us from being acquired. In addition, our board of
directors has the authority without any further vote or action on the part of
the stockholders to issue up to 5,000,000 shares of preferred stock and to
determine the price, rights, preferences, privileges and restrictions of the
preferred stock. This preferred stock, if it is ever issued, may have
preference over, and harm the rights of the holders of, our common stock.
Although the issuance of this preferred stock will provide us with flexibility
in connection with possible acquisitions and other corporate purposes, the
issuance of the preferred stock may make it more difficult for a third party to
acquire a majority of our outstanding voting stock. We currently have no plans
to issue preferred stock.

Our certificate of incorporation and bylaws include provisions that may
have the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation
Law, may delay or impede a merger, tender offer or proxy contest involving us.
Furthermore, our board of directors is divided into three classes,

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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.




Item 3. Quantitative and qualitative disclosures about market risk

The information
required by Item 3 is incorporated by reference from the
section entitled Disclosures about market risk found
above, under Item 2,
Managements discussion and analysis of financial condition and results of
operations.

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PART II OTHER INFORMATION




Item 1. Legal proceedings

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. The
United States government declined to pursue the action on its own behalf and,
therefore, the action is 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 us
from this action in exchange for our agreement to toll, or forego, applicable
statutes of limitation as to Mr. Fishers claims.

On May 13, 2002, on an order of the court following defendants successful
motion to strike the second amended complaint filed by Mr. Fisher on
January 31, 2002, 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). Mr. Fisher alleges damages in excess of
$30,000,000.

We did not acquire NSA until July 1997 and had no involvement with the
events alleged by Mr. Fisher. However, Mr. Fisher alleges that any liabilities
of NSA and NetSoft passed to us. On May 31, 2002, NSA and NetSoft and the other
defendants answered the complaint. We, and our affiliates, vigorously dispute
Mr. Fishers allegations.

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




Item 2. Changes in securities
and use of proceeds

Not applicable




Item 3. Defaults upon senior securities

Not applicable




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

Not applicable




Item 5. Other information

Subsequent event

Ido Hardanog was appointed to the position of
senior vice president, engineering in October 2002. In addition, in
September 2002, Bob Fedorciow joined our management staff as
vice president and general manager of Europe.

On
November 14, 2002, we communicated with the Panel with respect to our
failure to file our Forms 10-Q for the quarters ended June 30, 2002
and September 30, 2002 and all amended public reports required to be
filed with the Commission, as required by the November 5, 2002
correspondence from the Panel, and requested an extension of our
November 14, 2002 target date. As of the date of this report, the
Panel has not responded to our request. In the event that the Panel
does not grant our request for an extension or, if granted, we fail
to comply with any terms of the Panel's decision, our securities may
be delisted from Nasdaq and may be traded over-the-counter or on the Pink
Sheets, assuming we meet the qualification requirements for either or both of
these markets.




Item 6. Exhibits and reports on Form 8-K



|a. |  | Exhibits  None                                                              
|-- |  | -----------------------------------------------------------------------------
|  
|b. |  | We filed no reports on Form 8-K during the three months ended March 31, 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

|                        |  |                                                                                                                                        
|----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|                        |  | NETMANAGE, INC.(Registrant)                                                                                                            
|                       
|DATE: November 20, 2002 |  | By: /s/ Michael Peckham

Michael Peckham
Chief Financial Officer and Senior Vice President
(Principal Financial and Accounting Officer)





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CERTIFICATIONS

I, Zvi Alon, certify that:

1. I have reviewed this quarterly
report on Form 10-Q/A of NetManage, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly
report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.

|                        |  |                                 
|----------------------- |  | --------------------------------
|Date: November 20, 2002 |  | /s/ Zvi Alon                    
|                        |  |                                 
|                        |  | Zvi Alon
Chief Executive Officer

I, Michael Peckham, certify that:

1. I have reviewed this quarterly report on Form 10-Q/A of NetManage, Inc.;

2. Based on my knowledge, this quarterly 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 quarterly
report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report.

|                        |  |                                        
|----------------------- |  | ---------------------------------------
|Date: November 20, 2002 |  | /s/ Michael Peckham                    
|                        |  |                                        
|                        |  | Michael Peckham
Chief Financial Officer