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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2008

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



|                                                     |  |           
|---------------------------------------------------- |  | ----------
|20883 Stevens Creek Boulevard, Cupertino, California |  | 95014     
|(Address of principal executive offices)             |  | (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  x    NO   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                                                                       |  |                             
|---------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                                             |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈ (Do not check if a smaller reporting company) |  | Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).    Yes   ̈    No  x

Number of shares of registrants common stock outstanding as of May 13, 2008: 9,678,171









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Table of Contents

NetManage, Inc.

Table of Contents



|         |  |                                                                                                             |  |         
|-------- |  | ----------------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                             |  | Page No.
|PART I.  |  | FINANCIAL INFORMATION                                                                                       |  |         
|Item 1.  |  | Financial Statements (Unaudited)                                                                            |  | 4       
|         |  | Condensed Consolidated Balance Sheets at March 31, 2008 and December 31, 2007                               |  | 4       
|         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007          |  | 5       
|         |  | Condensed Consolidated Statements of Comprehensive Loss for the three month s ended March 31, 2008 and 2007 |  | 6       
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007          |  | 7       
|         |  | Notes to Condensed Consolidated Financial Statements                                                        |  | 8       
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                       |  | 18      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 26      
|Item 4.  |  | Controls and Procedures                                                                                     |  | 27      
|PART II. |  | OTHER INFORMATION                                                                                           |  |         
|Item 1.  |  | Legal Proceedings                                                                                           |  | 28      
|Item 1A. |  | Risk Factors                                                                                                |  | 28      
|Item 6.  |  | Exhibits                                                                                                    |  | 28      
|         |  | Signatures                                                                                                  |  | 29      
|         |  | Exhibit Index                                                                                               |  | 30      



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Forward-looking statements

Some of the statements contained in this Quarterly Report on Form 10-Q are forward-looking statements, including but not limited to those specifically
identified as such, that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. These statements involve known and unknown risks, uncertainties and other factors,
which may cause our actual results to differ materially from those implied by the forward-looking statements, including those described in our Annual Report on Form 10-K in Item 1ARisk Factors. 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 Quarterly Report on Form 10-Q are based on information available to us on the date hereof, and we assume no obligation to update any such
forward-looking statements.



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PART I  FINANCIAL INFORMATION



|Item  1. | Financial Statements (Unaudited)
|-------- | --------------------------------

NETMANAGE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

(Unaudited)



|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                     |  | March 31,2008 |          |   | December 31,2007 |  
|ASSETS                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                            |  | $             | 23,903   |   |                  | $ | 15,141   |  
|Short-term investments                                                                                                                                                               |  |               | 6,017    |   |                  |   | 10,223   |  
|Accounts receivable, net of allowances of $104 and $106, respectively                                                                                                                |  |               | 4,985    |   |                  |   | 10,530   |  
|Prepaid expenses and other current assets                                                                                                                                            |  |               | 924      |   |                  |   | 802      |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                 |  |               | 35,829   |   |                  |   | 36,696   |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Property and equipment, at cost:                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Computer software and equipment                                                                                                                                                      |  |               | 2,024    |   |                  |   | 1,921    |  
|Furniture and fixtures                                                                                                                                                               |  |               | 3,094    |   |                  |   | 3,054    |  
|Leasehold improvements                                                                                                                                                               |  |               | 444      |   |                  |   | 429      |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |               | 5,562    |   |                  |   | 5,404    |  
|Less-accumulated depreciation and amortization                                                                                                                                       |  |               | (4,308   | ) |                  |   | (3,990   | )
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Net property and equipment                                                                                                                                                           |  |               | 1,254    |   |                  |   | 1,414    |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Goodwill                                                                                                                                                                             |  |               | 3,648    |   |                  |   | 3,648    |  
|Other intangible assets, net                                                                                                                                                         |  |               | 617      |   |                  |   | 714      |  
|Other assets                                                                                                                                                                         |  |               | 178      |   |                  |   | 185      |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                         |  | $             | 41,526   |   |                  | $ | 42,657   |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                     |  | $             | 1,115    |   |                  | $ | 1,194    |  
|Accrued liabilities                                                                                                                                                                  |  |               | 1,948    |   |                  |   | 1,821    |  
|Accrued payroll and related expenses                                                                                                                                                 |  |               | 2,776    |   |                  |   | 2,856    |  
|Deferred revenue                                                                                                                                                                     |  |               | 13,382   |   |                  |   | 14,968   |  
|Income taxes payable                                                                                                                                                                 |  |               | 42       |   |                  |   | 26       |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                            |  |               | 19,263   |   |                  |   | 20,865   |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Long-term liabilities:                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Deferred revenue                                                                                                                                                                     |  |               | 313      |   |                  |   | 445      |  
|Long-term income taxes payable                                                                                                                                                       |  |               | 229      |   |                  |   | 229      |  
|Other long-term liabilities                                                                                                                                                          |  |               | 491      |   |                  |   | 530      |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total long-term liabilities                                                                                                                                                          |  |               | 1,033    |   |                  |   | 1,204    |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                    |  |               | 20,296   |   |                  |   | 22,069   |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Commitments and contingencies (Note 5)                                                                                                                                               |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Preferred stock, $0.01 par value - Authorized - 1,000,000 shares. No shares issued and outstanding.                                                                                  |  |               |         |   |                  |   |         |  
|Common stock, $0.01 par value - Authorized - 36,000,000 shares. Issued - 11,706,925 and 11,678,082 shares, respectively. Outstanding -
9,630,077 and 9,601,234 shares, respectively. |  |               | 117      |   |                  |   | 117      |  
|Treasury stock, at cost - 2,076,848 shares                                                                                                                                           |  |               | (20,804  | ) |                  |   | (20,804  | )
|Additional paid in capital                                                                                                                                                           |  |               | 184,232  |   |                  |   | 183,948  |  
|Accumulated deficit                                                                                                                                                                  |  |               | (138,892 | ) |                  |   | (139,197 | )
|Accumulated other comprehensive loss                                                                                                                                                 |  |               | (3,423   | ) |                  |   | (3,476   | )
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                           |  |               | 21,230   |   |                  |   | 20,588   |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                           |  | $             | 41,526   |   |                  | $ | 42,657   |  
|                                                                                                                                                                                     |  |               |          |   |                  |   |          |  

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



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NETMANAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)



|                                         |  |                             |       |   |      |   |        |  
|---------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ------ | -
|                                         |  | Three Months EndedMarch 31, |      
|                                         |  | 2008                        |       |   | 2007 |  
|Net revenues:                            |  |                             |       |   |      |   |        |  
|License fees                             |  | $                           | 2,416 |   |      | $ | 1,770  |  
|Services                                 |  |                             | 6,473 |   |      |   | 5,914  |  
|                                         |  |                             |       |   |      |   |        |  
|Total net revenues                       |  |                             | 8,889 |   |      |   | 7,684  |  
|                                         |  |                             |       |   |      |   |        |  
|Cost of revenues:                        |  |                             |       |   |      |   |        |  
|License fees                             |  |                             | 158   |   |      |   | 270    |  
|Services                                 |  |                             | 912   |   |      |   | 760    |  
|Amortization of developed technology     |  |                             | 81    |   |      |   | 81     |  
|                                         |  |                             |       |   |      |   |        |  
|Total cost of revenues                   |  |                             | 1,151 |   |      |   | 1,111  |  
|                                         |  |                             |       |   |      |   |        |  
|Gross margin                             |  |                             | 7,738 |   |      |   | 6,573  |  
|                                         |  |                             |       |   |      |   |        |  
|Operating expenses:                      |  |                             |       |   |      |   |        |  
|Research and development                 |  |                             | 1,376 |   |      |   | 1,738  |  
|Sales and marketing                      |  |                             | 3,926 |   |      |   | 5,042  |  
|General and administrative               |  |                             | 1,706 |   |      |   | 1,466  |  
|Restructuring charge                     |  |                             | 370   |   |      |   | 2,196  |  
|Amortization of intangible assets        |  |                             | 15    |   |      |   | 15     |  
|                                         |  |                             |       |   |      |   |        |  
|Total operating expenses                 |  |                             | 7,393 |   |      |   | 10,457 |  
|                                         |  |                             |       |   |      |   |        |  
|Income (loss) from operations            |  |                             | 345   |   |      |   | (3,884 | )
|Interest income and other, net           |  |                             | 182   |   |      |   | 302    |  
|Foreign currency transaction gain (loss) |  |                             | (154  | ) |      |   | 63     |  
|                                         |  |                             |       |   |      |   |        |  
|Income (loss) before income taxes        |  |                             | 373   |   |      |   | (3,519 | )
|Provision for income taxes               |  |                             | 68    |   |      |   | 37     |  
|                                         |  |                             |       |   |      |   |        |  
|Net income (loss)                        |  | $                           | 305   |   |      | $ | (3,556 | )
|                                         |  |                             |       |   |      |   |        |  
|Net income (loss) per share:             |  |                             |       |   |      |   |        |  
|Basic                                    |  | $                           | 0.03  |   |      | $ | (0.37  | )
|Diluted                                  |  | $                           | 0.03  |   |      | $ | (0.37  | )
|Weighted average common shares:          |  |                             |       |   |      |   |        |  
|Basic                                    |  |                             | 9,630 |   |      |   | 9,540  |  
|Diluted                                  |  |                             | 9,714 |   |      |   | 9,540  |  

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 EndedMarch 31, |    
|                                         |  | 2008                        |     | 2007 |  
|Net income (loss)                        |  | $                           | 305 |      | $ | (3,556 | )
|Other comprehensive income (loss):       |  |                             |     |      |   |        |  
|Foreign currency translation adjustments |  |                             | 53  |      |   | (13    | )
|                                         |  |                             |     |      |   |        |  
|Total comprehensive income (loss)        |  | $                           | 358 |      | $ | (3,569 | )
|                                         |  |                             |     |      |   |        |  

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



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NETMANAGE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                |  | Three months endedMarch 31, |        
|                                                                                |  | 2008                        |         |   | 2007 |  
|Cash flows from operating activities:                                           |  |                             |         |   |      |   |         |  
|Net income (loss)                                                               |  | $                           | 305     |   |      | $ | (3,556  | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                             |         |   |      |   |         |  
|Depreciation and amortization                                                   |  |                             | 290     |   |      |   | 337     |  
|Loss on disposal of property, plant and equipment                               |  |                             | 2       |   |      |   | 208     |  
|Provision for doubtful accounts and returns                                     |  |                             | (7      | ) |      |   | 85      |  
|Share-based compensation expense                                                |  |                             | 139     |   |      |   | 182     |  
|Changes in operating assets and liabilities:                                    |  |                             |         |   |      |   |         |  
|Accounts receivable                                                             |  |                             | 5,672   |   |      |   | 4,729   |  
|Prepaid expenses and other current assets                                       |  |                             | (104    | ) |      |   | 51      |  
|Other assets                                                                    |  |                             | (1      | ) |      |   | 8       |  
|Accounts payable                                                                |  |                             | (101    | ) |      |   | (92     | )
|Accrued liabilities, payroll and payroll-related expenses                       |  |                             | (129    | ) |      |   | 64      |  
|Deferred revenue                                                                |  |                             | (2,054  | ) |      |   | (2,323  | )
|Income taxes payable                                                            |  |                             | 14      |   |      |   | (20     | )
|Other long-term liabilities                                                     |  |                             | (53     | ) |      |   | 681     |  
|                                                                                |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                             | 3,973   |   |      |   | 354     |  
|                                                                                |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                                           |  |                             |         |   |      |   |         |  
|Purchases of short-term investments                                             |  |                             | (19,993 | ) |      |   | (13,223 | )
|Proceeds from sales and maturities of short-term investments                    |  |                             | 24,219  |   |      |   | 12,248  |  
|Purchases of property and equipment                                             |  |                             | (14     | ) |      |   | (114    | )
|                                                                                |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                             |  |                             | 4,212   |   |      |   | (1,089  | )
|                                                                                |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                           |  |                             |         |   |      |   |         |  
|Proceeds from issuance of common stock                                          |  |                             | 145     |   |      |   | 68      |  
|                                                                                |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                       |  |                             | 145     |   |      |   | 68      |  
|                                                                                |  |                             |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                         |  |                             | 432     |   |      |   | (51     | )
|                                                                                |  |                             |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                            |  |                             | 8,762   |   |      |   | (718    | )
|Cash and cash equivalents, beginning of period                                  |  |                             | 15,141  |   |      |   | 8,306   |  
|                                                                                |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                        |  | $                           | 23,903  |   |      | $ | 7,588   |  
|                                                                                |  |                             |         |   |      |   |         |  

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 NetManage, Inc. and subsidiaries (the
Company or NetManage) 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 2008
could differ materially from those reported in this quarterly report on Form 10-Q. The Company believes the results of operations for interim periods are subject to fluctuation and may not be an indicator of future financial performance. The
financial statements should be read in conjunction with the audited financial statements and notes thereto, included in the Companys annual report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and
Exchange Commission on March 31, 2008.

2. Summary of significant accounting policies:

Principles of consolidation

The consolidated
financial statements include the accounts of NetManage and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated.

Use of estimates

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

Foreign currency translation, foreign exchange contracts, and comprehensive income

The functional currency of
NetManages foreign subsidiaries is the local currency of each subsidiary. Gains and losses resulting from the translation of the foreign subsidiaries financial statements are included in accumulated other comprehensive loss and reported
as a separate component of stockholders equity. Gains and losses resulting from foreign currency transactions are included in net income (loss).

The Company currently does not enter into financial instruments for either trading or speculative purposes. The Company held no forward foreign exchange contracts used during the three month periods ended
March 31, 2008 and 2007.

Total comprehensive loss is comprised of net loss and other comprehensive earnings (losses) such as foreign
currency translation gains or losses and unrealized gains or losses on available-for-sale marketable securities.

Cash and cash equivalents

Cash equivalents consist of amounts invested in money market funds.

Investments

The Company accounts for its investments under the provisions of the Financial
Accounting Standards Boards (FASB) Statement of Financial Accounting Standards (SFAS) No. 115,Accounting for Certain Investments in Debt and Equity Securities. Under SFAS No. 115, the Companys investments are classified
as either available-for-sale or held-to-maturity securities. All available-for-sale securities are reported at fair value, with unrealized gains and losses, net of tax, reported in the consolidated balance sheet as Accumulated other
comprehensive loss. Held-to-maturity investments are valued using the amortized cost method.

As of March 31, 2008 the
Companys investments are considered available-for-sale and primarily consist of high grade debt securities. These securities are carried at fair market value based on market quotes. Unrealized gains and losses, net of tax, are reported as a
separate component of stockholders equity and included in Accumulated other comprehensive loss.



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The following table summarizes NetManages available-for-sale securities recorded as cash, cash
equivalents and short-term investments as of March 31, 2008 (in thousands):



|                                                     |  |               |         |   |                                |   |           |  |   |         |  
|---------------------------------------------------- |  | ------------- | ------- | - | ------------------------------ | - | --------- |  | - | ------- | -
|                                                     |  | AmortizedCost |         |   | Gross UnrealizedGains (losses) |   | FairValue | 
|Cash and cash equivalents                            |  | $             | 23,903  |   |                                | $ |          |  | $ | 23,903  |  
|Commercial paper                                     |  |               | 4,991   |   |                                |   | 2         |  |   | 4,993   |  
|Government bonds                                     |  |               | 1,004   |   |                                |   |          |  |   | 1,004   |  
|Time deposits                                        |  |               | 20      |   |                                |   |          |  |   | 20      |  
|Less amounts classified as Cash and cash equivalents |  |               | (23,903 | ) |                                |   |          |  |   | (23,903 | )
|                                                     |  |               |         |   |                                |   |           |  |   |         |  
|Total short-term investments                         |  | $             | 6,015   |   |                                | $ | 2         |  | $ | 6,017   |  
|                                                     |  |               |         |   |                                |   |           |  |   |         |  

All short-term investments have contractual maturity periods of less than one year.

The following table summarizes NetManages available-for-sale securities recorded as cash, cash equivalents and short-term investments as of
December 31, 2007 (in thousands):



|                                                     |  |               |         |   |                                |   |    |           |  |   |         |  
|---------------------------------------------------- |  | ------------- | ------- | - | ------------------------------ | - | -- | --------- |  | - | ------- | -
|                                                     |  | AmortizedCost |         |   | Gross UnrealizedGains (losses) |   |    | FairValue | 
|Cash and cash equivalents                            |  | $             | 15,141  |   |                                | $ |   |           |  | $ | 15,141  |  
|Corporate bonds and commercial paper                 |  |               | 8,179   |   |                                |   | (2 | )         |  |   | 8,177   |  
|Taxable municipal bonds                              |  |               | 1,526   |   |                                |   | 4  |           |  |   | 1,530   |  
|Government bonds                                     |  |               | 500     |   |                                |   |   |           |  |   | 500     |  
|Time deposits                                        |  |               | 16      |   |                                |   |   |           |  |   | 16      |  
|Less amounts classified as Cash and cash equivalents |  |               | (15,141 | ) |                                |   |   |           |  |   | (15,141 | )
|                                                     |  |               |         |   |                                |   |    |           |  |   |         |  
|Total short-term investments                         |  | $             | 10,221  |   |                                | $ | 2  |           |  | $ | 10,223  |  
|                                                     |  |               |         |   |                                |   |    |           |  |   |         |  

All short-term investments have contractual maturity periods of less than one year.

Effective January 1, 2008, the Company adopted the provisions of SFAS No. 157, Fair Value Measurements (SFAS No. 157), which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS No. 157 also requires that a fair value measurement reflect the assumptions market participants would use in pricing an asset or
liability based on the best information available. Assumptions include the risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model. The adoption of SFAS No. 157 did not
have a significant impact on our financial statements.

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs
(level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:



| |  |  | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

A financial instruments level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value
measurement. Further information about the application of SFAS No. 157 may be found in Note 7 below.

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 as incurred. Depreciation and amortization 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

Depreciation and amortization expense for the three month periods ended March 31, 2008 and
2007 was $0.2 million and $0.2 million, respectively.



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Goodwill and other intangible assets, net

NetManage reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. NetManage evaluates possible impairment of long-lived assets using estimates of undiscounted future cash flows. Impairment loss to be recognized is measured as the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Management evaluates the fair value of long-lived assets and intangibles using primarily the estimated discounted future cash flows method.

Goodwill and other assets with indefinite lives are not amortized but are reviewed for impairment under SFAS No. 142,Goodwill and Other
Intangible Assets. NetManage performs an annual impairment review during the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Under SFAS
No. 142, goodwill impairment may exist if the net book value of a reporting unit exceeds its estimated fair value.

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



|                                                 |  |               |        |   |                  |   |       |  
|------------------------------------------------ |  | ------------- | ------ | - | ---------------- | - | ----- | -
|                                                 |  | March 31,2008 |        |   | December 31,2007 |  
|Carrying amount of:                              |  |               |        |   |                  |   |       |  
|Developed technology                             |  | $             | 1,535  |   |                  | $ | 1,535 |  
|Trade names                                      |  |               | 300    |   |                  |   | 300   |  
|                                                 |  |               |        |   |                  |   |       |  
|Gross carrying amount of other intangible assets |  | $             | 1,835  |   |                  | $ | 1,835 |  
|Less accumulated amortization:                   |  |               |        |   |                  |   |       |  
|Developed technology                             |  |               | (1,013 | ) |                  |   | (931  | )
|Trade names                                      |  |               | (205   | ) |                  |   | (190  | )
|                                                 |  |               |        |   |                  |   |       |  
|Net carrying amount of other intangible assets   |  | $             | 617    |   |                  | $ | 714   |  
|                                                 |  |               |        |   |                  |   |       |  

The remaining net carrying amount of other intangible assets is expected to be amortized as
follows (in thousands):



|                                |  |                     |    
|------------------------------- |  | ------------------- | ---
|Year                            |  | AmortizationExpense
|Remainder of 2008 (nine months) |  | $                   | 289
|2009                            |  |                     | 328
|                                |  |                     |    
|                                |  | $                   | 617
|                                |  |                     |    

The aggregate amortization expense for the three month periods ended March 31, 2008 and 2007,
respectively, was $0.1 million and $0.1 million, respectively.

Accrued liabilities

Accrued liabilities at March 31, 2008 and December 31, 2007 consisted of the following (in thousands):



|                                   |  |               |       |                  |   |      
|---------------------------------- |  | ------------- | ----- | ---------------- | - | -----
|Description                        |  | March 31,2008 |       | December 31,2007
|Current restructuring (see Note 3) |  | $             | 683   |                  | $ | 593  
|Other accruals                     |  |               | 1,265 |                  |   | 1,228
|                                   |  |               |       |                  |   |      
|Total accrued liabilities          |  | $             | 1,948 |                  | $ | 1,821
|                                   |  |               |       |                  |   |      

Other accruals include legal and accounting fees, sales & use tax and VAT obligations,
customer deposits and other obligations and accrued expenses.

Long-term liabilities

Long-term liabilities at March 31, 2008 and December 31, 2007 consisted of the following (in thousands):



|                                     |  |               |       |                  |   |      
|------------------------------------ |  | ------------- | ----- | ---------------- | - | -----
|Description                          |  | March 31,2008 |       | December 31,2007
|Long-term restructuring (see Note 3) |  | $             | 270   |                  | $ | 310  
|Long-term other                      |  |               | 221   |                  |   | 220  
|                                     |  |               |       |                  |   |      
|Other long-term liabilities          |  |               | 491   |                  |   | 530  
|Long-term income taxes payable       |  |               | 229   |                  |   | 229  
|Long-term deferred revenue           |  |               | 313   |                  |   | 445  
|                                     |  |               |       |                  |   |      
|Total long-term liabilities          |  | $             | 1,033 |                  | $ | 1,204
|                                     |  |               |       |                  |   |      



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Concentrations of credit risk

Financial instruments, which potentially subject NetManage to concentrations of credit risk, consist principally of cash, cash equivalents, short-term investments and trade receivables. NetManage has an investment
policy that limits the amount of credit exposure to any one issuer and restricts placement of these investments to issuers evaluated as less than creditworthy. Concentrations of credit risk with respect to trade receivables are limited due to the
large number of customers comprising NetManages customer base and their dispersion across many different industries and geographies. No single customer accounted for more than 10% of accounts receivable as of March 31, 2008 and
December 31, 2007. There were no customers that accounted for more than 10% of consolidated revenues in the three month periods ended March 31, 2008 and 2007.

Net income (loss) per share

Basic net income (loss) per share data has been computed using
the weighted-average number of shares of common stock outstanding during the indicated periods. Diluted net income (loss) per share data has been computed using the weighted-average number of shares of common stock and potential dilutive common
shares. Potential dilutive 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, 2008 and 2007, potentially dilutive securities, consisting of applicable stock options, are as shown in the following table. In the period in which a net loss is
recorded, the potentially dilutive securities are not included in the computation of diluted net loss per share because to do so would be anti-dilutive.



|                                                                                                                                                      |  |                             |  |     
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ----
|                                                                                                                                                      |  | Three Months EndedMarch 31,
|                                                                                                                                                      |  | 2008                        |  | 2007
|Potentially dilutive shares for options for which the exercise price is higher than the market price of number of options outstanding (in
thousands): |  | 639                         |  | 270 

The following table sets forth the computation of basic and diluted net income (loss) per share
for the three month periods ended March 31, 2008 and 2007 (in thousands, except per share amounts):



|                                                                                           |  |                             |       |      |   |        |  
|------------------------------------------------------------------------------------------ |  | --------------------------- | ----- | ---- | - | ------ | -
|                                                                                           |  | Three Months EndedMarch 31, |      
|                                                                                           |  | 2008                        |       | 2007 |  
|Net income (loss)                                                                          |  | $                           | 305   |      | $ | (3,556 | )
|                                                                                           |  |                             |       |      |   |        |  
|Shares used to compute basic net income (loss) per share                                   |  |                             | 9,630 |      |   | 9,540  |  
|Potentially dilutive shares used to compute net income (loss) per share on a diluted basis |  |                             | 84    |      |   |       |  
|                                                                                           |  |                             |       |      |   |        |  
|Shares used to compute diluted net income (loss) per share                                 |  |                             | 9,714 |      |   | 9,540  |  
|Net income (loss) per share:                                                               |  |                             |       |      |   |        |  
|Basic                                                                                      |  | $                           | 0.03  |      | $ | (0.37  | )
|Diluted                                                                                    |  | $                           | 0.03  |      | $ | (0.37  | )

Revenue recognition

NetManage derives revenue primarily from two sources: (1) license fees, which includes software license and, to a lesser extent, royalty revenue, and (2) support and services revenue, which includes software
license maintenance and, to a lesser extent, consulting services. NetManage licenses its software products on a term basis and on a perpetual basis. Its term-based arrangements are primarily for a period of 12 months. NetManage also licenses its
software in both source code and object code format. NetManage applies the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 97-2,Software Revenue Recognition, and related amendments and
interpretations to all transactions involving the licensing of software products.

NetManage recognizes revenue from the sale of software
licenses to end users and resellers when the following criteria are met: persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or determinable, and collection of the resulting receivable is reasonably
assured. Delivery occurs when the product is delivered to a common carrier or when a software key has been transmitted to our customer.

Product is sold, without the right of return, except for distributor inventory rotation of old or excess product. Certain of its sales are made to domestic distributors under agreements allowing rights of return and price protection on
unsold merchandise. Accordingly, the Company defers recognition of such sales until the distributor sells the merchandise to the end customer. NetManage recognizes sales to international resellers upon shipment, provided all other revenue
recognition criteria have been met. NetManage gives rebates to customers on a limited basis. These rebates are presented in its Consolidated Statements of Operations as a reduction of revenue.



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##### Table of Contents

At the inception of the transaction, the Company assesses whether the fee associated with a revenue
transaction is fixed or determinable and whether or not collection is reasonably assured. NetManage assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction. If a significant portion of a fee is
due after our normal payment terms, the Company accounts for the fee as not being fixed or determinable. In these cases, it recognizes revenue as the fees become due.

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

For all sales, except those completed over the Internet, NetManage uses either a binding purchase order or equivalent customer commitment or signed
license agreement as evidence of an arrangement. For sales over the Internet, it uses a credit card authorization as evidence of an arrangement. Sales through the Companys 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), the Company allocates revenue to each element of the arrangement using the residual value method based on vendor-specific objective evidence (VSOE) of the fair value of the undelivered elements. This
means that it defers revenue from the arrangement fee equivalent to the fair value of the undelivered elements. Fair values for the ongoing maintenance and support obligations are generally based upon separate sales of renewals to other customers or
upon renewal rates quoted in the sales contracts. Fair value of services, such as training or consulting, is based upon separate sales by NetManage of these services to other customers. 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.

The Company derives its
service revenues from providing its customers with software updates for existing software products, user documentation, and technical support under annual service agreements. These revenues are recognized ratably over the terms of such agreements.
If such services are included in the initial licensing fee, the value of the services determined based on VSOE of fair value 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. To date, consulting revenue has not been significant.

Deferred revenue

Deferred revenue is primarily comprised of advance billing for service, support and maintenance agreements and revenue deferred for
other services yet to be completed as well as license revenue for which collectability is not assured or customer acceptance is required. Deferred revenue is not recognized as revenue until the completion of related performance and acceptance
criteria.

Income taxes

The
Company accounts for income taxes under the liability method. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company is required to adjust its deferred tax liabilities in the period when tax rates or the provisions of the income tax laws
change. Valuation allowances are established when necessary to reduce deferred tax assets to amounts that, more likely than not, are expected to be realized.

As part of the process of preparing condensed consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which the Company operates. This process requires the
Company to estimate its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within the condensed consolidated balance sheet. The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent it believes that recovery is
not likely, a valuation allowance is established. Any adjustment to the valuation allowance in a period is recorded in the tax provision in the Condensed Consolidated Statement of Operations.

NetManage adopted FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes  an Interpretation of FASB Statement
No. 109 (FIN 48) on January 1, 2007. This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109 and prescribes a minimum
recognition threshold of more-likely-than-not to be sustained upon examination that a tax position must meet before being recognized in the financial statements. Under FIN 48, the impact of an uncertain income tax position on the income tax
return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.

During the first quarter of 2008 and 2007, we recognized a $835,000 and $161,000 decrease, respectively, in the deferred tax assets for unrecognized tax
benefits related to tax positions taken in current periods. This amount was fully offset by a valuation allowance.

The Company includes
interest and penalties recognized in accordance with FIN 48 in the financial statements as a component of income tax expense. The Company had $16,000 of accrued interest and penalties at December 31, 2007.

Although the Company files U.S. federal, U.S. state, and foreign tax returns, our major tax jurisdictions are the U.S., Canada, and Israel. Our 1998-2006
tax years remain subject to examination by the IRS for U.S. federal tax purposes, and our 2002-2006 tax years remain subject to examination by the appropriate governmental agencies for Canada and Israel tax purposes.



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Share-based compensation

The fair value of the Companys stock options granted to employees for the three month periods ended March 31, 2008 and 2007, respectively, was estimated using the following weighted-average assumptions:



|                                        |  |                                  |                   |   |                                  |   |               |  
|--------------------------------------- |  | -------------------------------- | ----------------- | - | -------------------------------- | - | ------------- | -
|                                        |  | Three Months EndedMarch 31, 2008 |                   |   | Three Months EndedMarch 31, 2007 |  
|Expected Term                           |  |                                  | 5.72 - 5.81 years |   |                                  |   | 5.96 years    |  
|Volatility                              |  |                                  | 47.74             | % |                                  |   | 50.96  52.03 | %
|Risk-free interest rate                 |  |                                  | 2.67  3.01       | % |                                  |   | 4.53  4.81   | %
|Dividend yield                          |  |                                  | 0.00              | % |                                  |   | 0.00          | %
|Weighted average fair value (per share) |  | $                                | 2.29              |   |                                  | $ | 2.90          |  

Share-based compensation expense

Cost of revenues and operating expenses for the three month periods ended March 31, 2008 and 2007, respectively includes share based compensation
related to SFAS No. 123(R),Share-Based Payment (SFAS 123(R)).

The following table shows total share-based compensation
expense included in the Condensed Consolidated Statement of Operations for the three month periods ended March 31, 2008 and 2007 (in thousands):



|                                                     |  |                                  |     |                                  |   |    
|---------------------------------------------------- |  | -------------------------------- | --- | -------------------------------- | - | ---
|                                                     |  | Three months endedMarch 31, 2008 |     | Three months endedMarch 31, 2007
|Cost of revenues:                                    |  |                                  |     |                                  |   |    
|License fees                                         |  | $                                | 2   |                                  | $ | 3  
|Services                                             |  |                                  | 11  |                                  |   | 13 
|                                                     |  |                                  |     |                                  |   |    
|Additional expense recorded as cost of revenues      |  |                                  | 13  |                                  |   | 16 
|                                                     |  |                                  |     |                                  |   |    
|Operating expenses:                                  |  |                                  |     |                                  |   |    
|Research and development                             |  |                                  | 37  |                                  |   | 53 
|Sales and marketing                                  |  |                                  | 70  |                                  |   | 95 
|General and administrative                           |  |                                  | 19  |                                  |   | 18 
|                                                     |  |                                  |     |                                  |   |    
|Additional expense recorded as operating expenses:   |  |                                  | 126 |                                  |   | 166
|                                                     |  |                                  |     |                                  |   |    
|Additional expense recorded in loss from operations: |  | $                                | 139 |                                  | $ | 182
|                                                     |  |                                  |     |                                  |   |    

As required by SFAS 123(R), management made an estimate of expected forfeitures and is recognizing
compensation costs only for those equity awards that vest or are expected to vest.

At March 31, 2008 the total compensation cost
related to unvested share-based awards granted to employees and directors under the Companys stock option plans but not yet recognized was approximately $0.8 million, net of estimated forfeitures of $0.9 million. This cost will be
amortized on a straight-line basis over a weighted-average period of approximately 2.3 years and will be adjusted for subsequent changes in estimated forfeitures.

Stock options and awards activity

The following is a summary of option activity for our stock option plans for the
three month period ended March 31, 2008 (in thousands, except per share amounts):



|                                              |  |                 |   |  |                               |      |                                                  |      |                          |   |    
|--------------------------------------------- |  | --------------- | - |  | ----------------------------- | ---- | ------------------------------------------------ | ---- | ------------------------ | - | ---
|                                              |  | Number ofShares |   |  | WeightedAverageExercise Price |      | WeightedAverageRemainingContractualTerm in Years |      | AggregateIntrinsic Value
|Outstanding at December 31, 2007              |  | 1,704           |   |  | $                             | 4.92 |                                                  |      |                          |   |    
|Granted                                       |  | 1               |   |  |                               | 4.78 |                                                  |      |                          |   |    
|Exercised                                     |  | (29             | ) |  |                               | 5.03 |                                                  |      |                          |   |    
|Forfeitures and cancellations                 |  | (59             | ) |  |                               | 5.38 |                                                  |      |                          |   |    
|                                              |  |                 |   |  |                               |      |                                                  |      |                          |   |    
|Outstanding at March 31, 2008                 |  | 1,617           |   |  | $                             | 4.90 |                                                  | 6.44 |                          | $ | 331
|                                              |  |                 |   |  |                               |      |                                                  |      |                          |   |    
|Vested and expected to vest at March 31, 2008 |  | 1,347           |   |  | $                             | 4.93 |                                                  | 5.96 |                          | $ | 328
|                                              |  |                 |   |  |                               |      |                                                  |      |                          |   |    
|Exercisable at March 31, 2008                 |  | 1,015           |   |  | $                             | 5.05 |                                                  | 4.95 |                          | $ | 322
|                                              |  |                 |   |  |                               |      |                                                  |      |                          |   |    

The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying awards and the market price of the Companys common stock for the options where the market price was higher than the exercise price at March 31, 2008.

The aggregate intrinsic value of options exercised under the Companys stock option plans, determined as of the date of the option exercise, was
$21,130 and $62,734, respectively, for the three month periods ended March 31, 2008 and 2007, respectively.



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Recent accounting pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141 (revised 2007),Business Combinations
(SFAS 141R) and SFAS No. 160,Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB 51 (SFAS 160), which will change the accounting for and reporting of business
combination transactions and noncontrolling interests in consolidated financial statements. SFAS 141R and SFAS 160 will be effective for us on January 1, 2009. We are currently evaluating the impact of adopting SFAS 141R and
SFAS 160 on our consolidated financial position, cash flows, and results of operations.

In February 2007, the FASB issued
SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159), which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. The provisions of SFAS 159 became effective for us on January 1, 2008. The Company chose not to make any fair value evaluation under SFAS 159 for any of its financials assets or liabilities.

3. Restructuring charges:

The Company
accrues for restructuring costs when it makes a commitment to a firm exit plan that specifically identifies all significant actions to be taken in conjunction with its response to a change in its strategic plan, product demand, expense structure or
other factors such as the date it ceases to use a facility. The Company reassesses its prior restructuring accruals on a quarterly basis to reflect changes in the costs of its restructuring activities, and the Company records new restructuring
accruals as commitments are made. Estimates are based on anticipated costs of such restructuring activities and are subject to change.

In
March 2008, the Company implemented a restructuring of its operations designed to further align its business units with its core business functions, to relocate certain of its functional operations, and to reduce operating expenses. As part of
the restructuring, the Company reduced its workforce in excess of 4% and recorded an approximately $289,000 charge to operating expenses in the first quarter of 2008. The distribution of this reduction in workforce is as follows:



|                           |  |             
|-------------------------- |  | ------------
|                           |  | Terminations
|Services                   |  | 2           
|Sales and marketing        |  | 2           
|General and administrative |  | 2           
|                           |  |             
|Total                      |  | 6           
|                           |  |             

The restructuring charge included approximately $289,000 of expenses for employee and
other-related expenses for employee terminations. These restructuring costs are expected to be funded from internal operations and existing cash balances. The reserve consists of $279,000, which is included in accrued liabilities and $10,000, which
is included in long-term liabilities.

The following table lists the components of the March 2008 restructuring reserve for the three month
period ended March 31, 2008 (in thousands):



|                                                      |  |               |    
|----------------------------------------------------- |  | ------------- | ---
|                                                      |  | EmployeeCosts
|Balance at December 31, 2007                          |  | $             |   
|Initial reserve established                           |  |               | 289
|Reserve utilized in three months ended March 31, 2008 |  |               |   
|                                                      |  |               |    
|Balance at March 31, 2008                             |  | $             | 289
|                                                      |  |               |    



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##### Table of Contents

On February 22, 2007, the Company implemented a restructuring of operations designed to align its
business units with its core business functions, to relocate certain of its functional operations, and to reduce operating expenses. As part of the restructuring, the Company reduced its workforce in excess of 10% and recorded a release of charge of
$62,000 to operating expenses in the first quarter of 2008. The distribution of this reduction in workforce is as follows:



|                           |  |             
|-------------------------- |  | ------------
|                           |  | Terminations
|Services                   |  | 2           
|Research and development   |  | 14          
|Sales and marketing        |  | 7           
|General and administrative |  | 6           
|                           |  |             
|Total                      |  | 29          

The 2007 restructuring charge included a release of approximately $30,000 of expenses related to
change in estimate of facilities no longer needed as of March 31, 2008 for company operations and a release of approximately $32,000 for change in estimate in employee and other-related expenses for employee terminations. The execution of the
2007 restructuring actions will require total cash expenditures of $307,000. These restructuring costs are expected to be funded from internal operations and existing cash balances. The remaining reserve related to this restructuring is
approximately $307,000, which is included in accrued liabilities.

The following table lists the components of the February 2007
restructuring reserve for the three month period ended March 31, 2008 (in thousands):



|                                                                                                   |  |               |      |   |                  |   |     |       |  |   |      |  
|-------------------------------------------------------------------------------------------------- |  | ------------- | ---- | - | ---------------- | - | --- | ----- |  | - | ---- | -
|                                                                                                   |  | EmployeeCosts |      |   | ExcessFacilities |   |     | Total | 
|Balance at December 31, 2007                                                                       |  | $             | 510  |   |                  | $ | 30  |       |  | $ | 540  |  
|Change in estimate recorded in restructuring charge in the three month period ended March 31, 2008 |  |               | (32  | ) |                  |   | (30 | )     |  |   | (62  | )
|Reserve utilized in three months ended March 31, 2008                                              |  |               | (171 | ) |                  |   |    |       |  |   | (171 | )
|                                                                                                   |  |               |      |   |                  |   |     |       |  |   |      |  
|Balance at March 31, 2008                                                                          |  | $             | 307  |   |                  | $ |    |       |  | $ | 307  |  
|                                                                                                   |  |               |      |   |                  |   |     |       |  |   |      |  

In August 1998, following the acquisition of FTP Software Inc. (FTP), the Company initiated a plan
to restructure its worldwide operations as a result of business conditions and in connection with the integration of the operations of FTP. In connection with this plan, the Company recorded a $7.0 million charge to operating expenses in 1998. For
the three month period ended March 31, 2008, the Company recorded a change in estimate of $143,000. The change in estimate is composed of adjustments to expected lease, sublease and associated obligations related to the Birmingham, U.K.
facility and related foreign exchange adjustments on the long-term lease commitments and related sublease income. The remaining reserve related to this restructuring at March 31, 2008 is $357,000 of which $97,000 is included in accrued
liabilities and $260,000 is included in long-term liabilities.

The following table lists the components of the FTP restructuring reserve
for the three month period ended March 31, 2008 (in thousands):



|                                                                                                   |  |                  |      |  
|-------------------------------------------------------------------------------------------------- |  | ---------------- | ---- | -
|                                                                                                   |  | ExcessFacilities |     
|Balance at December 31, 2007                                                                       |  | $                | 363  |  
|Change in estimate recorded in restructuring charge in the three month period ended March 31, 2008 |  |                  | 143  |  
|Reserve utilized during the three month period ended March 31, 2008                                |  |                  | (149 | )
|                                                                                                   |  |                  |      |  
|Balance at March 31, 2008                                                                          |  | $                | 357  |  
|                                                                                                   |  |                  |      |  



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4. Segment information

The Company operates in one reportable segment as defined by Statement of Financial Accounting Standards No. 131,Disclosures About Segments of an Enterprise and Related Information. The Company designs,
develops, markets and sells software products involving both client-side and server-side solutions. NetManages chief operating decision maker is its chief executive officer. The Company has operations worldwide, with sales offices located in
the United States, Europe, Canada, and Israel. Revenues outside of North America (United States and Canada) as a percentage of total net revenues was approximately 38% for each of the three month periods ended March 31, 2008 and 2007,
respectively.

The following is a summary of revenues by geographic region based on customer location (in thousands):



|                         |  |                             |       |      |   |      
|------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                         |  | Three Months endedMarch 31,
|                         |  | 2008                        |       | 2007
|Net revenues:            |  |                             |       |      |   |      
|North America operations |  | $                           | 5,504 |      | $ | 4,743
|European operations      |  |                             | 3,012 |      |   | 2,696
|Latin America operations |  |                             | 290   |      |   | 73   
|Asian operations         |  |                             | 83    |      |   | 172  
|                         |  |                             |       |      |   |      
|Total net revenues       |  | $                           | 8,889 |      | $ | 7,684
|                         |  |                             |       |      |   |      

5. Commitments and contingencies:

Legal proceedings

The Company may be party to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business, including proceedings and claims that may relate to acquisitions that have been completed or to companies that have been acquired. While the outcome of these matters cannot be
predicted with certainty, the Company does not believe that the outcome of any of these potential claims will have a material adverse effect on its consolidated financial position, results of operations or cash flow.

On May 9, 2008, a purported stockholder class action lawsuit related to the Merger Agreement was filed in the Superior Court of Santa Clara County,
California, Gottlieb Family Foundation v. NetManage, Inc., et al. (Case No. 108CV112353), naming us, Micro Focus, Merger Sub, and each of our directors as defendants. This lawsuit alleges, among other things, that our directors violated their
fiduciary duties to our stockholders in approving the Merger. This lawsuit seeks class action status and injunctive and other equitable relief against completion of the Merger. In the event that the Merger is completed before the entry of the
courts final judgment, this lawsuit seeks to rescind the Merger or award recissory damages. Additionally, this lawsuit seeks an award of the costs of this action, including attorneys fees and expenses. We believe that this lawsuit is
without merit and intend to vigorously defend the action, however, the outcome of the lawsuit is inherently uncertain and we cannot be sure that we will prevail. The future impact of this claim, if any, on the results of operations, cash flows and
financial position is not yet determinable.

Leases

Facilities and equipment are leased under non-cancelable operating leases expiring on various dates through the year 2011. The Company has a single capital equipment lease. As of March 31, 2008, future minimum
rental and lease payments, primarily for facilities net of any sublease income, under non-cancelable operating and capital leases are as follows (in thousands):



|                 |  |                                            |       |                    |   |             |  |             |       |                    |   |     |  |   |  
|---------------- |  | ------------------------------------------ | ----- | ------------------ | - | ----------- |  | ----------- | ----- | ------------------ | - | --- |  | - | -
|                 |  | Amount of commitment expiration per period
|                 |  | Total                                      |       | Less Than 12Months |   | 12-36Months |  | 37-60Months |       | More Than60 Months
|Capital lease    |  | $                                          | 17    |                    | $ | 7           |  | $           | 10    |                    | $ |    |  | $ | 
|Operating leases |  |                                            | 4,422 |                    |   | 1,987       |  |             | 1,983 |                    |   | 452 |  |   | 
|                 |  |                                            |       |                    |   |             |  |             |       |                    |   |     |  |   |  
|Total            |  | $                                          | 4,439 |                    | $ | 1,994       |  | $           | 1,993 |                    | $ | 452 |  | $ | 
|                 |  |                                            |       |                    |   |             |  |             |       |                    |   |     |  |   |  

Other

As an element of its standard commercial terms, the Company includes an indemnification clause in its software licensing agreements that indemnifies the licensee against liability and damages (including legal defense
costs) arising from any claims of patent, copyright, trademark, or trade secret infringement by its software. The Companys indemnification limitation is the cost to defend any third party claim brought against its customers, and to the
maximum, a refund of the purchase price. To date, the Company has not experienced any claims related to its indemnification provisions and therefore has not established an indemnification loss reserve. The Company licenses its software products on a
term and a perpetual basis.



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6. Related party transactions:

On July 19, 2007, the Company entered into an independent contractor services agreement with Dr. Shelley Harrison, a director of the Company, pursuant to which Dr. Harrison will receive compensation in
consideration for consultancy and advisory services to the Company. The terms of the agreement require the Company to pay Dr. Harrison a fixed fee of $150,000 per year, and a one time grant to Dr. Harrison of an option to purchase 100,000
shares under the 1999 Plan, at an exercise price of $4.33 per share (which represents the quoted market price of the stock at the date of grant). The option will vest on a monthly basis over a four-year term and expires ten years from the date of
issuance. The fair value of the 100,000 options from the 1999 Plan was determined using the Black-Scholes option pricing model with the following assumptions: stock price $4.00-$6.00; no dividends; risk free interest rate of 2.67%-4.64%; volatility
of 47%-56%; and a contractual life of ten years.

On March 11, 2008, NetManage and Dr. Shelley Harrison agreed that the Company
will pay Dr. Shelley Harrison for consulting services through March 15, 2008, and that thereafter he shall serve NetManage as an unpaid consultant, reporting to NetManage Chief Executive Officer, Zvi Alon. Options that were granted under
the independent contractor service agreement between the Company and Dr. Harrison shall continue to vest on a monthly basis over a four-year term and expires ten years from the date of issuance.

The fair value of the option is subject to change over the vesting period of the option based on changes in the underlying assumptions. For the quarter
ended March 31, 2008, the Company recorded approximately $1,000 in share based compensation expense under this agreement and recorded total aggregate cash and non-cash compensation of approximately $32,250 included in General and Administrative
expense in the Consolidated Statements of Operations.

7. Fair value measurements:

The financial assets of the Company measured at fair value on a recurring basis are cash equivalents and short-term investments. The Companys cash
equivalents are generally classified within level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The
Companys short-term investments are classified within Level 2 of the fair value hierarchy because they are valued using quoted prices in markets that are not active or financial instruments for which all significant inputs are observable,
either directly or indirectly.



| |  |  | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2: Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

The following table summarizes NetManages available-for-sale securities recorded as cash, cash equivalents and short-term investments as of March
31, 2008, which are measured at fair value on a recurring basis by level within the fair value hierarchy. As required by SFAS No. 157, these are classified based on the lowest level of input that is significant to the fair value measurement.



|                 |  |         |        |         |   |         |  |                     |   |  |   |       
|---------------- |  | ------- | ------ | ------- | - | ------- |  | ------------------- | - |  | - | ------
|(In thousands)   |  | Level 1 |        | Level 2 |   | Level 3 |  | Assets atfair value
|Money market     |  | $       | 16,668 |         | $ |        |  | $                   |  |  | $ | 16,668
|Commercial paper |  |         |       |         |   | 4,993   |  |                     |  |  |   | 4,993 
|Government bonds |  |         |       |         |   | 1,004   |  |                     |  |  |   | 1,004 
|Time deposits    |  |         | 20     |         |   |        |  |                     |  |  |   | 20    
|                 |  |         |        |         |   |         |  |                     |   |  |   |       
|Total            |  | $       | 16,688 |         | $ | 5,997   |  | $                   |  |  | $ | 22,685
|                 |  |         |        |         |   |         |  |                     |   |  |   |       

The above table excludes approximately $7.2 million of cash held by us.

The Companys Level 2 assets consist of short-term investments which are valued using quoted prices in markets that are not active or financial
instruments for which all significant inputs are observable, either directly or indirectly. The following table provides a summary of changes in the fair value of the Companys Level 2 financial assets as of March 31, 2008 (in thousands):



|                                                           |  |                       |        |  
|---------------------------------------------------------- |  | --------------------- | ------ | -
|                                                           |  | Short-termInvestments |       
|December 31, 2007                                          |  | $                     | 10,223 |  
|Total unrealized loss included in other comprehensive loss |  |                       |       |  
|Transfers in Level 2                                       |  |                       | (4,226 | )
|                                                           |  |                       |        |  
|March 31, 2008                                             |  | $                     | 5,997  |  
|                                                           |  |                       |        |  

8. Subsequent events:

On April 30, 2008, NetManage, entered into an Agreement and Plan of Merger (the Merger Agreement) with Micro Focus (US), Inc., a Delaware corporation and wholly-owned subsidiary of Micro Focus
International plc (Micro Focus), and MF Merger Sub, a Delaware corporation and wholly-owned subsidiary of Micro Focus (Merger Sub), pursuant to which Merger Sub will be merged with and into NetManage (the Merger)
with NetManage continuing as the surviving entity. Pursuant to the Merger Agreement, at the effective time of the Merger, each share of NetManages common stock will be converted into the right to receive $7.20 cash and each outstanding option
will be converted into the right to receive $7.20 cash less the exercise price of such option. On April 30, 2008, the Companys Preferred Shares Rights Agreement was amended so that the Merger and any related transactions would not result
in the grant of any rights to any person under this rights agreement or enable any of the rights under this rights agreement to be exercised, distributed or triggered.

The Board of Directors of NetManage unanimously approved the Merger and the Merger Agreement at a special meeting on April 30, 2008, and directed that the Merger Agreement be submitted to NetManages
stockholders for adoption.

The proposed transaction is subject to approval of NetManages stockholders and other customary conditions
to closing and a shareholders meeting is expected to be held during the second quarter of 2008. Either party will also have a right to terminate the Merger Agreement if the transaction is not closed on or prior to September 8, 2008.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Overview

We develop and market software solutions and service offerings that are designed to enable
our customers to access, Web enable and integrate enterprise information systems. These solutions assist our customers in their efforts to leverage the investment they have in their corporate business applications, processes, and data. We provide a
range of personal computer, browser-based and server-based software products and tools. These products allow our customers to access and leverage applications, business processes and data on IBM and IBM compatible mainframe computers, IBM mid-range
computers such as the iSeries, in packaged applications, middleware, and databases such as SAP, Siebel, Oracle, and PeopleSoft, amongst others, and on UNIX and Microsoft-based servers. We provide support, maintenance, and technical consultation
services to our customers in association with the products we develop and market. We provide applications and management consultancy to our customers primarily in association with the server-based products we deliver that are designed to allow
customers to develop and deploy new web-based applications and services.

Important industry trends that have strong influence on our
business strategy are as follows:



| |  |  | the adoption of electronic commerce by major corporations worldwide and the acceptance of these approaches in mid-sized companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the continuing development of the Internet, intranets, and extranets for delivery of mission-critical business applications in large and mid-sized companies;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the desire on the part of corporations to make business processes and information broadly accessible internally and externally to their employees and business
partners; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the emergence of security and privacy standards and the need to keep all information secure.
| | - |  | --------------------------------------------------------------------------------------------

The globalization of enterprise customers, especially those in the consumer and retail space, has created opportunities for NetManage product
proliferation. With the need for real time inventory and more specific customer tracking, standard legacy applications simply will not suffice. We anticipate that these trends will continue to accelerate over the next several years which equates to
additional software and consulting service opportunities.

We believe that our customers require a single set of solutions that address the
traditional need for host access combined with the need for the presentation of existing corporate systems with a Web application look and feel, along with the delivery of existing corporate processes and transactions as reusable programmatic
components such as Web services. In assessing the change in the marketplace, we have focused on assisting our customers as they transition from traditional host access to newer software solutions that allow them to Web enable and integrate
applications and data more cost effectively. Several technologies are employed to provide these solutions and include traditional thick client or desktop solutions; thin client or browser-based solutions; zero footprint or server-based solutions and
application adapter or connector technologies. Within this marketplace, we believe the trend is away from desktop solutions and toward zero footprint solutions. We believe this movement is primarily driven by a desire to reduce the total cost of
ownership associated with deploying and maintaining older technology. We also believe that a major element of our customer base will deploy a mixture of all types of solutions. We believe that our products, specifically our OnWeb integration
products, are differentiated from competitive products in two main areas:



| |  |  | Speed of deploymentapplications can be Web enabled and deployed in days and weeks instead of weeks and months with more traditional application development;
and,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Scalability of applicationsapplications, while initially deployed to a limited number of users may be further deployed to much larger user populations with
little or no additional development effort.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The market is also made up of a number of products that allow organizations
to reduce costs or increase revenue by allowing them, or their business partners, to interact via the Internet with corporate business applications that are the backbone of their business processes. A primary example of this kind of solution is
found in self-service call center applications. Companies are building solutions that allow customers to determine order status over the Internet without involving a customer support representative. This approach simultaneously minimizes staffing
costs and improves customer service. Our products assist our customers in building solutions that quickly transform corporate applications into Web-based solutions.



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##### Table of Contents

Customer technology purchases are affected by many factors that are beyond our control, including
longer-term infrastructure decisions, product offerings or pricing by our competitors, project timing and duration, business priorities, seasonal buying patterns and various customer financial constraints and initiatives. We believe that ongoing
initiatives to reduce costs and improve profitability within our customer base has continued to put pressure on their IT budgets for both new license purchases and maintenance and consulting services. This has resulted in customers delaying
decisions to license additional software solutions and reducing the number of copies of software that have been subject to maintenance agreements in the past or in certain cases to forgo maintenance agreements completely.

We have a direct sales force of 21 quota-carrying sales people that generate the majority of our net revenues, two of which are exclusively selling
through channels. Not all customers buy directly from us and many of our customers choose to place their orders through one of our channel partners because of pre-existing relationships they may have with them. We believe additional growth
opportunities exist through indirect channels and further development of those channels is a priority for us. We also license our Librados adapters to independent software vendors (ISVs) for inclusion in their product or service offerings. We
believe sales to ISVs will increase sales in the future but may fluctuate from quarter to quarter.

Developing and marketing innovative
products is critical to our ongoing success. Time to market pressures also require us to regularly evaluate technology acquisitions that we believe will expand or enhance our existing product offering. We have acquired a number of companies since
our inception and expect that we may make acquisitions in the future.

On April 30, 2008, NetManage, entered into an Agreement and
Plan of Merger (the Merger Agreement) with Micro Focus (US), Inc., a Delaware corporation and wholly-owned subsidiary of Micro Focus International plc (Micro Focus), and MF Merger Sub, a Delaware corporation and wholly-owned
subsidiary of Micro Focus (Merger Sub), pursuant to which Merger Sub will be merged with and into NetManage (the Merger) with NetManage continuing as the surviving entity. Pursuant to the Merger Agreement, at the effective
time of the Merger, each share of NetManages common stock will be converted into the right to receive $7.20 cash and each outstanding option will be converted into the right to receive $7.20 cash less the exercise price of such option. On
April 30, 2008, the Companys Preferred Shares Rights Agreement was amended so that the Merger and any related transactions would not result in the grant of any rights to any person under this rights agreement or enable any of the rights
under this rights agreement to be exercised, distributed or triggered.

The Board of Directors of NetManage unanimously approved the Merger
and the Merger Agreement at a special meeting on April 30, 2008, and directed that the Merger Agreement be submitted to NetManages stockholders for adoption.

The proposed transaction is subject to approval of NetManages stockholders and other customary conditions to closing and a shareholders meeting is expected to be held during the second quarter of 2008. Either
party will also have a right to terminate the Merger Agreement if the transaction is not closed on or prior to September 8, 2008.

Results of
operations

We have three main products: RUMBA (including ViewNow products)connectivity software designed to connect PCs to IBM
mainframe and iSeries systems and UNIX host systems; OnWebhighly scalable server-based solutions designed to allow customers to leverage their existing enterprise applications, information, and business processes for new presentation methods
and integration projects; and Libradosa range of high performance and highly scalable application and technology adapters for Java-based application servers. The Librados adapters are available for a range of enterprise applications such as
SAP, PeopleSoft, JD Edwards, Siebel, and Oracle, amongst others, for a range of databases including Oracle, Informix, IBM DB2, and Sybase and for a range of technology connections including support for Electronic Data Interchange (EDI) standards.
The RUMBA product line is the Companys most mature product line. Our strategy is to help customers migrate from our older product offerings to our newer solutions, OnWeb and Librados, which we believe have greater growth potential.

Our revenues have historically declined over the past five years. This decline has resulted, in part, from our un-successful efforts to migrate
sufficient numbers of customers from our RUMBA products to our OnWeb and Librados products, which typically have lower price points. Prior year 2007 and the first quarter ended March 31, 2008 showed modest increases in revenue. This was due to
the Company refocusing its selling efforts on its core products.

The number of end-user licenses sold with server products, such as OnWeb,
is also lower than the number of end-user licenses represented by desktop products, such as RUMBA. While this transition had contributed to the decline in license and maintenance revenues from our RUMBA products at a faster rate than the growth rate
of revenue from our OnWeb and Librados products, the refocus on our core products should stabilize our trends.

In March 2008, the
Company implemented a restructuring of its operations designed to further align its business units with its core business functions, to relocate certain of its functional operations, and to reduce operating expenses. As part of the restructuring,
the Company reduced its workforce in excess of 4% and recorded approximately $289,000 charge to operating expenses in the first quarter of 2008. The restructuring charge included expenses related to employee and other-related expenses for employee
terminations.



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##### Table of Contents

Three months ended March 31, 2008 compared to March 31, 2007 (in thousands):



|                                                    |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|--------------------------------------------------- |  | ---------------------------- | ----- | ---- | ---- | - | ------ | ------ |  | - | ------ | - |  | ---- | -
|                                                    |  | Three months ended March 31, |      
|                                                    |  | 2008                         |       |      | 2007 |   |        | Change | 
|Net revenues                                        |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|License fees                                        |  | $                            | 2,416 |      |      | $ | 1,770  |        |  | $ | 646    |   |  | 36   | %
|Services                                            |  |                              | 6,473 |      |      |   | 5,914  |        |  |   | 559    |   |  | 9    | %
|                                                    |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|Total net revenues                                  |  | $                            | 8,889 |      |      | $ | 7,684  |        |  | $ | 1,205  |   |  | 16   | %
|As a percentage of net revenues:                    |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|License fees                                        |  |                              | 27.2  | %    |      |   | 23.0   | %      |  |   |        |   |  |      |  
|Services                                            |  |                              | 72.8  | %    |      |   | 77.0   | %      |  |   |        |   |  |      |  
|                                                    |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|Total net revenues                                  |  |                              | 100.0 | %    |      |   | 100.0  | %      |  |   |        |   |  |      |  
|Gross margin - license fees                         |  | $                            | 2,258 |      |      | $ | 1,500  |        |  | $ | 758    |   |  | 51   | %
|Gross margin  services                             |  |                              | 5,561 |      |      |   | 5,154  |        |  |   | 407    |   |  | 8    | %
|Gross margin - amortization of developed technology |  |                              | (81   | )    |      |   | (81    | )      |  |   |       |   |  | 0    | %
|                                                    |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|Total gross margin                                  |  | $                            | 7,738 |      |      | $ | 6,573  |        |  | $ | 1,165  |   |  | 18   | %
|As a percentage of net revenues:                    |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|Gross margin - license fees                         |  |                              | 25.4  | %    |      |   | 19.5   | %      |  |   |        |   |  |      |  
|Gross margin  services                             |  |                              | 62.6  | %    |      |   | 67.1   | %      |  |   |        |   |  |      |  
|Gross margin - amortization of developed technology |  |                              | -0.9  | %    |      |   | -1.1   | %      |  |   |        |   |  |      |  
|                                                    |  |                              |       |      |      |   |        |        |  |   |        |   |  |      |  
|Total gross margin                                  |  |                              | 87.1  | %    |      |   | 85.5   | %      |  |   |        |   |  |      |  
|Research and development                            |  | $                            | 1,376 |      |      | $ | 1,738  |        |  | $ | (362   | ) |  | -21  | %
|As a percentage of net revenues:                    |  |                              | 15.5  | %    |      |   | 22.6   | %      |  |   |        |   |  |      |  
|Sales and marketing                                 |  | $                            | 3,926 |      |      | $ | 5,042  |        |  | $ | (1,116 | ) |  | -22  | %
|As a percentage of net revenues:                    |  |                              | 44.2  | %    |      |   | 65.6   | %      |  |   |        |   |  |      |  
|General and administrative                          |  | $                            | 1,706 |      |      | $ | 1,466  |        |  | $ | 240    |   |  | 16   | %
|As a percentage of net revenues:                    |  |                              | 19.2  | %    |      |   | 19.1   | %      |  |   |        |   |  |      |  
|Restructuring charge                                |  | $                            | 370   |      |      | $ | 2,196  |        |  | $ | (1,826 | ) |  | -83  | %
|As a percentage of net revenues:                    |  |                              | 4.2   | %    |      |   | 28.6   | %      |  |   |        |   |  |      |  
|Amortization of intangibles                         |  | $                            | 15    |      |      | $ | 15     |        |  | $ |       |   |  | 0    | %
|As a percentage of net revenues:                    |  |                              | 0.2   | %    |      |   | 0.2    | %      |  |   |        |   |  |      |  
|Interest income (expense) and other, net            |  | $                            | 182   |      |      | $ | 302    |        |  | $ | (120   | ) |  | -40  | %
|As a percentage of net revenues:                    |  |                              | 2.0   | %    |      |   | 3.9    | %      |  |   |        |   |  |      |  
|Foreign currency transaction gain (loss)            |  | $                            | (154  | )    |      | $ | 63     |        |  | $ | (217   | ) |  | -344 | %
|As a percentage of net revenues:                    |  |                              | -1.7  | %    |      |   | 0.8    | %      |  |   |        |   |  |      |  
|Provision for income taxes                          |  | $                            | 68    |      |      | $ | 37     |        |  | $ | 31     |   |  | 84   | %
|As a percentage of net revenues:                    |  |                              | 0.8   | %(2) |      |   | N/A    | (1)    |  |   |        |   |  |      |  
|Net income (loss)                                   |  | $                            | 305   |      |      | $ | (3,556 | )      |  | $ | 3,861  |   |  | -109 | %
|As a percentage of net revenues:                    |  |                              | 3.4   | %    |      |   | -46.3  | %      |  |   |        |   |  |      |  



|(1) | The effective tax rate for the three month period ended March 31, 2007 was less than 1% due to the consolidated tax loss position.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



|(2) | The effective tax rate for the three month period ended March 31, 2008 was 1.69%.
|--- | ---------------------------------------------------------------------------------



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Net revenues

Total net revenues increased 16% for the three months ended March 31, 2008 as compared to the same period in 2007. The increase in total net revenues resulted from an increase in license fees of $646,000, or 36%,
and an increase in services revenues of $559,000, or 9%, as compared to the same period in 2007. License fees represented 27.2% of our total net revenues in the first quarter of 2008 compared to 23.0% of total net revenues in the first quarter of
2007. The increase in our license fees for the three months ended March 31, 2008 relative to the same period in 2007 was primarily the result of customers upgrading their Rumba products to current versions, such as Microsoft Vista.

We have operations worldwide, with sales offices located in the United States, Europe, China, Canada, and Israel. Revenues outside of North America as
a percentage of total net revenues were approximately 38% for each of the three month periods ended March 31, 2008 and 2007.

No
customer accounted for more than 10% of net revenues in either of the three month periods ended March 31, 2008 and 2007. 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 license fees in any quarter are substantially dependent on orders booked in that quarter.

Gross margin

Gross margin increased $1.2 million, or 18%, for the three month period ended March 31, 2008 as compared to the same period in
2007. The increase was primarily due to the increase in license fees and in part by the increase of in services revenues. Total gross margin as a percentage of net revenues increased to 87% for the three month period ended March 31, 2008 from
86% for the same period in 2007. The increase in gross margin, which was due to the increase in net revenues of $1.2 million, was in part offset by an increase in cost of service for the three month period ended March 31, 2008 as compared to
the same period in 2007. These increases are comprised of retention, outside services, salaries, benefits, corporate allocation, corporate bonus and consulting.

Gross margin on license fees as a percentage of license fees was 93% and 85% for the three month periods ended March 31, 2008 and 2007, respectively. The change was primarily due to an increase in license fees of
$0.6 million and a decrease in the cost of license fees of $0.1 million. Gross margin on services as a percentage of services revenues was 86% and 87% for the three month periods ended March 31, 2008 and 2007.

Research and development

Research and
development, or R & D, expenses consist primarily of salaries and benefits, occupancy, travel expenses, and fees paid to outside consultants. R&D expenses decreased by $362,000, or 21% for the three month period ended March 31, 2008
from the comparative period in 2007. The decrease in expense resulted from lower salary and benefits due to a reduction in headcount in the first quarter of 2007 as a result of restructuring activities, lower consulting and lower corporate
allocations offset by retention and corporate bonus.

Software development costs are accounted for in accordance with SFAS No. 86,Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, under which we are required to capitalize software development costs after technological feasibility is established, which we define as a working model and
further define as a beta version of the software. The establishment of technological feasibility and the ongoing assessment of the recoverability of these costs requires considerable judgment by us with respect to certain external factors,
including, but not limited to, anticipated future gross product revenue, estimated economic life, and changes in technology. Costs that do not qualify for capitalization are charged to R & D expense when incurred. We did not capitalize any
software development costs in the three month periods ended March 31, 2008 or 2007.

Sales and marketing

Sales and marketing expenses consist primarily of salaries, benefits and commissions of sales personnel, salaries and benefits of marketing personnel,
travel, advertising and promotional expenses, and occupancy and related costs. Sales and marketing expenses decreased $1.1 million, or 22% for the three month period ended March 31, 2008 from the comparative period in 2007. The decrease in
expense for the three months ended March 31, 2008 from the comparative period in 2007 is the result of decreases in salary and benefits due to reduction of employees in sales and marketing, corporate allocations, bad debt expense, advertising,
sales meetings, travel and consulting. These decreases were in part offset by the increase in temporary labor, outside services, seminars, retention and corporate bonus.

General and administrative

General and administrative, or G & A, expenses consist
primarily of salaries, benefits, accounting, travel, legal, and occupancy expenses. G & A expenses increased $240,000, or 16%, for the three month period ended March 31, 2008 from the comparative period in 2007. The increase in expense
resulted from increased cost resulting from hiring of personnel in the financial department, legal costs associated with the contemplated Rocket merger, accounting and auditing expense increases, travel, share based compensation, retention and
corporate bonus, offset by reductions in corporate allocation and consulting.



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Restructuring charges

Restructuring charges consist of charges recorded for the restructuring events implemented in February 2007 and in March 2008 to align our core business functions, to relocate certain operations and to reduce
operating expenses. Restructuring charges also include adjustments to the estimated cost of restructuring activities made in previous periods. The restructuring charges for the three month period ended March 31, 2008 includes a $289,000 charge
for employee and other-related expenses for employee terminations related to the March 2008 restructuring and a restructuring benefit of $62,000 for the February 2007 restructuring. We also recorded a $143,000 adjustment related to the change in
estimate for future sublease obligations primarily associated with our Birmingham, U.K. facility and to the effect of fluctuations in exchange rates on the underlying currencies in which those obligations are denominated. The restructuring charges
for the three month period ended March 31, 2007 includes a $2.0 million charge for the February 2007 restructuring activity, composed of $1.0 million for facility costs and $1.0 million in personnel costs. For the three months ended
March 31, 2008 we also recorded a $223,000 adjustment related to the change in estimate for future sublease obligations primarily associated with our Birmingham, U.K. facility and to the effect of fluctuations in exchange rates on the
underlying currencies in which those obligations are denominated.

Amortization of other intangible assets

Amortization expense was $15,000 for each of the three month periods ended March 31, 2008 and 2007, respectively. Amortization expense for both
periods includes only amortization of trade names. Amortization of this intangible is recorded on a straight-line basis over an estimated useful life of five years.

Interest income (expense) and other, net

Interest income (expense) and other, net was
$182,000 and $302,000 for the three month periods ended March 31, 2008 and 2007, respectively. Our interest income decreased in the three month periods ended March 31, 2008 as compared to the same period in 2007 as a result of investing
more in liquid funds as compared to investments in short term securities with higher average rates in prior year. We also recorded other income of $0 and $1,000, for the three month periods ended March 31, 2008 and 2007, respectively. The
$1,000 recorded for the three month periods ended March 31, 2007 is for the recovery of abandoned property. The following table identifies the components of our interest income (expense) and other, net for the three month periods ended
March 31, 2008 and 2007, respectively (in thousands):



|                                         |  |                             |     |   |      |   |     |  
|---------------------------------------- |  | --------------------------- | --- | - | ---- | - | --- | -
|                                         |  | Three months endedMarch 31, |    
|                                         |  | 2008                        |     |   | 2007 |  
|Interest income (expense)                |  |                             |     |   |      |   |     |  
|On cash and investments                  |  | $                           | 185 |   |      | $ | 314 |  
|Interest expense                         |  |                             | (3  | ) |      |   | (13 | )
|Other income (expense)                   |  |                             |    |   |      |   | 1   |  
|                                         |  |                             |     |   |      |   |     |  
|Interest income (expense) and other, net |  | $                           | 182 |   |      | $ | 302 |  
|                                         |  |                             |     |   |      |   |     |  

Foreign currency transaction gains (losses)

For the three month periods ended March 31, 2008, we recorded a transaction loss of $154,000 as compared to a transaction gain of $63,000 in the same
period of 2007. Transaction gains and losses are attributable to fluctuations related primarily to the Israeli shekel (Shekel) in relation to the U.S. dollar (USD), the British pound (Pound) and the Euro. For the three month periods ended
March 31, 2008 and 2007, the relationship of the Shekel to the USD, the Pound and the Euro was as follows:



|               |  |                             |   |  |      |  
|-------------- |  | --------------------------- | - |  | ---- | -
|               |  | Three months endedMarch 31, |  
|               |  | 2008                        |   |  | 2007 |  
|USD % Change   |  | -8.3                        | % |  | -1.1 | %
|Pound % Change |  | -8.4                        | % |  | -0.8 | %
|Euro % Change  |  | -1.6                        | % |  | 0.4  | %

Provision for income taxes

For the three month periods ended March 31, 2008 and 2007, NetManage reported an income tax provision composed of the following:



|                                 |  |                             |    |      |   |    |  
|-------------------------------- |  | --------------------------- | -- | ---- | - | -- | -
|                                 |  | Three Months EndedMarch 31, |   
|                                 |  | 2008                        |    | 2007 |  
|U.S. state tax                   |  | $                           | 10 |      | $ | 14 |  
|International tax                |  |                             | 58 |      |   | 25 |  
|Income tax refunds:              |  |                             |    |      |   |    |  
|U.S. state                       |  |                             |   |      |   | (2 | )
|                                 |  |                             |    |      |   |    |  
|Total provision for income taxes |  | $                           | 68 |      | $ | 37 |  
|                                 |  |                             |    |      |   |    |  

The provision for the three months ended March 31, 2008 and 2007 is primarily comprised of
miscellaneous state income and taxes related to the earnings of our foreign subsidiaries offset by various refunds related to these jurisdictions. The income tax provision includes approximately $1,000 and $2,000 of interest expense and penalties
for the quarters ended March 31, 2008 and March 31, 2007 respectively.



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Disclosures about market risk

Disclosures about market risk can be found below, under Item 3Quantitative and qualitative disclosures about market risk.

Liquidity and capital resources



|                          |  |                    |        |                       |   |       
|------------------------- |  | ------------------ | ------ | --------------------- | - | ------
|                          |  | As ofMarch 31,2008 |        | As ofDecember 31,2007
|Cash and cash equivalents |  | $                  | 23,903 |                       | $ | 15,141
|Short-term investments    |  | $                  | 6,017  |                       | $ | 10,223
|Working capital           |  | $                  | 16,566 |                       | $ | 15,831



|                                                    |  |                            |       |               |   |        |  
|--------------------------------------------------- |  | -------------------------- | ----- | ------------- | - | ------ | -
|                                                    |  | For the three months ended |      
|                                                    |  | March 31,2008              |       | March 31,2007 |  
|Net cash provided by operating activities           |  | $                          | 3,973 |               | $ | 354    |  
|Net cash provided by (used in) investing activities |  | $                          | 4,212 |               | $ | (1,089 | )
|Net cash provided by financing activities           |  | $                          | 145   |               | $ | 68     |  

Our primary source of cash is receipts from customers. The primary uses of cash are payroll
(salaries, commissions, other incentives, and benefits), general operating expenses (marketing, travel, office rent), cost of revenues and the purchase of investments, property, and equipment. Other sources of cash are proceeds from the exercise of
employee stock options.

Net cash provided by operating activities increased by approximately $3.6 million from $0.4 million to $4.0
million in the three months ended March 31, 2008 as compared to the corresponding period in 2007. This increase is primarily a result of the $3.9 million change in net income from $3.6 million net loss for the quarter ended March 31, 2007
to $0.3 million net income for the quarter ended March 31, 2008. In addition net cash provided increased by approximately $0.9 million, the result of $5.6 million decrease in receivables in the quarter ended March 31, 2008
compared to a $4.7 million decrease in receivables in the quarter ended March 31, 2007. In addition net cash used decreased by approximately $0.3 million primarily a result of a change in deferred revenue from approximately
$2.0 million in the quarter ended March 31, 2008 to a $2.3 million in deferred revenue in the quarter ended March 31, 2007. This $5.1 million increase is offset by a decrease of $0.7 million in long term liabilities
from $0.6 million cash provided in the quarter ended March 31, 2007 to $0.1 million cash used in the quarter ended March 31, 2008. The Company also used approximately $0.2 million, the result of $0.1 million reduction in accrued
liabilities and payroll in the quarter ended March 31, 2008 compared to a $0.1 million increase in the quarter ended March 31, 2007. In addition there was also an increase of net cash used of $0.2 million the result of
$0.1 million reduction in prepaid and other current assets in the quarter ended March 31, 2008 compared to a $0.1 million increase in the quarter ended March 31, 2007. Cash used in operating also decreased approximately
$0.2 million, the result of a reduction in loss on disposal from $0.2 million in the quarter ended March 31, 2007 to $2,000 in the quarter ended March 31, 2008. Other reductions of $0.2 million were due to the change in stock
compensation expense, provision for doubtful accounts and returns and depreciation and amortization.

Net cash provided by investing
activities increased by approximately $5.3 million from $1.1 million of net cash used to $4.2 million net cash provided million in the three months ended March 31, 2008 as compared to the corresponding period in 2007. In the three months ended
March 31, 2008, the Company received proceeds from sales and maturities of investments of $4.2 million, net of purchases of investments as compared to the net investment in cash and interest bearing securities of $1.0 million, net of proceeds,
made during the same period in 2007. In addition to the $5.3 million increase in cash provided by net investment activities, the company also had approximately $0.1 million due to less purchases of property and equipment in the three months ended
March 31, 2008 as compared to the corresponding period in 2007. We expect to continue to invest in short-term and long-term investments and to purchase additional property and equipment to support our operations.

Net cash provided by financing activities is derived primarily from proceeds from the sale of common stock through employee stock option plans. Net cash
provided by financing activities increased by $77,000 from $68,000, for the three months ended March 31, 2007, to $145,000 for the three months ended March 31, 2008 entirely from proceeds received from shares issued in connection with
employee stock option plans.



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At March 31, 2008, we had working capital of $16.6 million. We believe that our current cash balance
and investments and future operating cash flows will be sufficient to meet our working capital needs, capital expenditure requirements, currently identified projects and planned objectives for at least the next 12 months.

If our credit rating was to change materially, it could impact our ability to enter into transactions with new and existing customers and subsequently
have an impact on our cash position. We do not anticipate a material change in our credit rating or rating outlook.

Contractual obligations

A table of our contractual obligations as of March 31, 2008 is included in Note 5 to Condensed Consolidated Financial
Statements-Commitments and contingencies.

Off-balance sheet arrangements

As of March 31, 2008, we did not engage in any off-balance sheet arrangements as defined in Item 303(a) (4) of Regulation S-K promulgated
by the Commission under the Securities Exchange Act of 1934, as amended. We do not have external debt financing. We do not issue or purchase derivative instruments or use our stock as a form of liquidity.

Application of critical accounting policies

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

Revenue Recognition: We derive revenue primarily from two sources: (1) license fees, which includes software license and to a
lesser extent, royalty revenue, and (2) support and services revenue, which includes software license maintenance and, to a lesser extent, consulting services. We license our software products both on a term basis and on a perpetual basis. Our
term-based arrangements are primarily for a period of 12 months. We also license our software in both source code and object code format. We apply the provisions of the American Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 97-2,Software Revenue Recognition, and related amendments and interpretations to all transactions involving the licensing of software products.

We recognize revenue from the sale of software licenses to end users and resellers when the following criteria are met: persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed or
determinable, and collection of the resulting receivable is reasonably assured. Delivery occurs when the product is delivered to a common carrier or when a software key has been transmitted to our customer.

Product is sold without the right of return, except for distributor inventory rotation of old or excess product. 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. We recognize sales to international resellers
upon shipment, provided all other revenue recognition criteria as mentioned above have been met. We give rebates to customers on a limited basis. Returns, price protection adjustments, and rebates are presented in our Consolidated Statement of
Operations as a reduction of revenue.

At the time of the transaction, we assess whether the fee associated with a revenue transaction is
fixed or determinable and whether or not collection is reasonably assured. To establish whether the fee is fixed or determinable, we assess the payment terms associated with the transaction. If a significant portion of a fee is due after its normal
payment terms, we account for the fee as not being fixed or determinable. In these cases, we recognize revenue as the fees become due. To establish our ability to collect, we assess a number of factors, including past transaction history with the
customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of payment.

For sales, except those completed over the Internet, we use either a binding purchase order or
equivalent customer commitment or signed license agreement as evidence of a contractual 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.



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##### Table of Contents

For arrangements with multiple elements (for example, undelivered maintenance and support), we allocate
revenue to each element of the arrangement using the residual value method based on vendor-specific objective evidence (VSOE) of the fair value of the undelivered elements. In effect, 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 sales contracts.
Fair value of services, such as training or consulting, is based upon separate sales by us of these services to other customers. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written
customer acceptance or expiration of the acceptance period.

Service revenues are derived from providing our customers with software
updates or upgrades for existing software products, user documentation, and technical support under annual service agreements. These revenues are recognized ratably over the terms of such agreements. If such services are included in the initial
licensing fee, the value of the services determined based on VSOE of fair value 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 collection is considered probable. To date, consulting revenue has not been significant.

Allowance for doubtful
accounts, sales returns and rebates: In establishing our allowance for doubtful accounts we analyze historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms. We
apply significant judgment in connection with assessing whether or not our accounts receivable are collectible. Our accounts receivable balance was $5.0 million and $10.5 million, net of our allowance for doubtful accounts of $100,000 and $98,000 at
March 31, 2008 and December 31, 2007, respectively. In establishing our sales return and rebate allowance, we must make estimates of potential future product returns related to current period product revenue, including analyzing historical
returns, current economic trends, and changes in customer demand and acceptance of our products. Our reserves for returns were $4,000 and $8,000 at March 31, 2008 and December 31, 2007, respectively, and represented less than 0.1% of total
net revenues for both the three month period ended March 31, 2008 and for the twelve month period ended December 31, 2007, respectively. Our rebate reserves are based on our estimates of potential future rebates related to current period
product revenues and includes an analysis of historical rebate expenses. Our reserve for rebates was $0 at March 31, 2008 and December 31, 2007, respectively.

Restructuring reserves: We accrue for restructuring costs when we make a commitment to a firm exit plan that specifically identifies all significant actions to be taken in conjunction with our response to a
change in our strategic plan, product demand, expense structure, or other factors such as the date we cease using a facility. We reassess our prior restructuring accruals on a quarterly basis to reflect changes in the costs of our restructuring
activities, and we record new restructuring accruals as commitments are made. Estimates are based on anticipated costs of such restructuring activities and are subject to change. Our aggregate restructuring reserves were $953,000 and $903,000 at
March 31, 2008 and December 31, 2007, respectively. For further discussion see Note 3 to the Notes to Condensed Consolidated Financial Statements.

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

Valuation of long-lived and intangible assets and goodwill: We believe that the accounting estimate related to asset
impairment is a critical accounting estimate because: (1) it is highly susceptible to change from period to period as it requires us to make assumptions about future revenues over the life of our software products and services; and
(2) the impact that recognizing an impairment has on the assets reported on our Condensed Consolidated Balance Sheet and the net income (loss) reported in our Condensed Consolidated Statement of Operations could be material.

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

We assess the carrying value of identifiable intangibles and long-lived assets whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. We assess the carrying value of goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable and at a
minimum, annually. SFAS No. 142,Goodwill and Other Intangible Assets requires that if the fair value of a companys individual reporting unit is less than the reported value of the individual reporting unit, an asset impairment
charge must be recognized in the financial statements. The amount of the impairment is calculated by subtracting the fair value of the asset from the carrying value of the asset. We measure impairment based on a projected discounted cash flow method
using a discount rate determined by management to be commensurate with the risk inherent in our current business model.



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Factors we consider important which could trigger an impairment review include the following:



| |  |  | significant underperformance relative to expected historical or projected future operating results;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | significant negative industry or economic trends; and
| | - |  | -----------------------------------------------------



| |  |  | our market capitalization relative to net book value.
| | - |  | -----------------------------------------------------

Recent accounting pronouncements

Please refer to Note 2 to our Condensed Consolidated Financial Statements for a discussion
of the expected impact of recently issued accounting pronouncements.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Disclosures about market risk

Interest rate risk

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

We mitigate default and liquidity risks by investing only in high credit quality securities and by positioning our portfolio to respond appropriately
to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We mitigate risk by investing only in the
highest quality bonds as rated by Moodys and Standard & Poors and only allowing up to 5% of the portfolio to be invested in one corporate bond issuer.

The table below presents the carrying value, market value, and related weighted average interest rates for our cash and interest-bearing investment
portfolio as of March 31, 2008. All investments mature, by policy, in two years or less. Currently, these investments all have contractual maturity periods of less than one year.



|                                |  |                                                  |        |             |   |                         |  |      |  
|------------------------------- |  | ------------------------------------------------ | ------ | ----------- | - | ----------------------- |  | ---- | -
|                                |  | CarryingValue                                    |        | MarketValue |   | WeightedAverageInterest | 
|                                |  | (in thousands, except for interest rates/yields) |       
|Cash and Investment Securities: |  |                                                  |        |             |   |                         |  |      |  
|Cashfixed rate                 |  | $                                                | 23,903 |             | $ | 23,903                  |  | 1.32 | %
|Cash equivalents                |  | $                                                |       |             | $ |                        |  |     |  
|Commercial paper                |  | $                                                | 4,991  |             | $ | 4,993                   |  | 2.68 | %
|Government bonds                |  | $                                                | 1,004  |             | $ | 1,004                   |  | 2.4  | %
|Time deposits and other         |  | $                                                | 20     |             | $ | 20                      |  | *    |  



|* | Interest rate/yield is less than 1%
|- | -----------------------------------

Foreign currency risk

We are exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases and
assets and liabilities in currencies other than the functional currency. We transact business in approximately six foreign currencies worldwide, of which the most significant to our operations are the Euro, the Canadian dollar, the Israeli shekel,
and the British pound. For most currencies, we are the net receiver of foreign currencies and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to those foreign currencies in which we transact
significant amounts of business. The net results of the transaction gains or losses relating to the transactions that are not transacted in the functional currency appear in the line entitled foreign currency transaction gains (losses) in the
Consolidated Statements of Operations. At the end of each period, the translation of the Consolidated Balance Sheets from local currency to the reporting currency appears in the Consolidated Statements of Comprehensive Income (Loss) under the
foreign currency translation adjustments line.

We currently do not enter into financial instruments for hedging or speculative purposes.
There were no forward foreign exchange contracts used during the three month period ended March 31, 2008. We may institute a foreign currency hedging program in the future.

The following table presents the potential impact on cash flow of changes in exchange rates on foreign denominated assets and liabilities as noted (in
thousands):



|                            |  |                                              |         |   |            |   |       |            |  |   |            |   |  |            |        |   |  |   |        |  
|--------------------------- |  | -------------------------------------------- | ------- | - | ---------- | - | ----- | ---------- |  | - | ---------- | - |  | ---------- | ------ | - |  | - | ------ | -
|                            |  | Cash flow impact on change in exchange rates |        
|                            |  | March 31,2008                                |         |   | -15%Change |   |       | -10%Change |  |   | +10%Change |   |  | +15%Change |       
|Accounts receivable (1) (2) |  | $                                            | 2,890   |   |            | $ | (507  | )          |  | $ | (319       | ) |  | $          | 261    |   |  | $ | 375    |  
|Accounts payable (2)        |  |                                              | (744    | ) |            |   | 131   |            |  |   | 83         |   |  |            | (68    | ) |  |   | (97    | )
|Inter-company with U.S. (3) |  |                                              | (27,854 | ) |            |   | 4,914 |            |  |   | 3,094      |   |  |            | (2,532 | ) |  |   | (3,632 | )



|(1) | Accounts receivable does not include allowances of $104,000.
|--- | ------------------------------------------------------------



|(2) | The offset entry for this change in exchange rates would be to Accumulated other comprehensive loss in the Consolidated Balance Sheet.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



|(3) | This assumes the change in exchange rates applies only to the relationship between the U.S. dollar and the local currency as of March 31, 2008 and that there is no change in
rates between the various non-U.S. dollar currencies. The offset entry for this change in exchange rates would be to Foreign currency transaction gain (loss) in the Consolidated Statements of Operations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|Item 4. | Controls and Procedures
|------- | -----------------------

Changes in Internal Controls Over
Financial Reporting

In connection with the audits of our Financial Statements for the year ended December 31, 2007, our
management concluded that as of December 31, 2007, we did not maintain effective controls over financial reporting due to a material weakness as described below.

Accounting principles generally accepted in the United States and the reporting requirements of the SEC are complex and require an appropriate level of expertise and experience within the accounting and finance
function to facilitate accurate and timely financial reporting. Although we filled up the key positions of the chief financial officer and corporate controller in 2007, we still lacked the complement of personnel with an appropriate level of
accounting knowledge and training to ensure that our financial information is adequately analyzed and reviewed on a timely basis to detect misstatements.

Our management has developed a plan to remediate the material weakness by the end of the third quarter of 2008. We expect this remediation will require us to augment the resources available to our accounting function
and to increase the level of accounting expertise of current personnel by means of training. We have also concluded that we must ensure that all of our accounting and finance staff are thoroughly trained in the application of our accounting policies
and procedures and internal controls. We are not able at this time to determine the costs of the remediation, but do expect to incur additional expenses related to our accounting function.

There were no other changes in our internal control over financial reporting identified in connection with the evaluation of our controls during the
quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported as specified in the SECs rules and forms. An evaluation was performed under the
supervision and with the participation of our management, including our principal executive officer and principal financial officer of the effectiveness of our disclosure controls and procedures as of March 31, 2008. As we have previously
identified a material weakness in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)) which has not been remediated as of March 31, 2008, our management, including our principal executive officer and
principal financial officer, have concluded that our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) were not effective as of
March 31, 2008.



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##### Table of Contents

PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The Company is party to various
legal proceedings and claims, either asserted or unasserted including proceedings and claims that may relate to acquisitions we have completed or to companies we have acquired. While the outcome of these matters cannot be predicted with certainty,
we do not believe that the outcome of any of these potential claims will have a materially adverse effect on our consolidated financial position, results of operations or cash flow.

On May 9, 2008, a purported stockholder class action lawsuit related to the Merger Agreement was filed in the Superior Court of Santa Clara County,
California, Gottlieb Family Foundation v. NetManage, Inc., et al. (Case No. 108CV112353), naming us, Micro Focus, Merger Sub, and each of our directors as defendants. This lawsuit alleges, among other things, that our directors violated their
fiduciary duties to our stockholders in approving the Merger. This lawsuit seeks class action status and injunctive and other equitable relief against completion of the Merger. In the event that the Merger is completed before the entry of the
courts final judgment, this lawsuit seeks to rescind the Merger or award recissory damages. Additionally, this lawsuit seeks an award of the costs of this action, including attorneys fees and expenses. We believe that this lawsuit is
without merit and intend to vigorously defend the action, including attorneys fees and expenses. We believe that this lawsuit is without merit and intend to vigorously defend the action, however, the outcome of the lawsuit is inherently
uncertain and we cannot be sure that we will prevail. The future impact of this claim, if any, on the results of operations, cash flows and financial position is not yet determinable.



|Item 1A. | Risk Factors
|-------- | ------------

The discussion of our results of
operations and financial condition should be read together with the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 (the 2007 10-K), which describe various risks and uncertainties to
which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. In addition to the risks
identified in our 2007 10-K, we are also subject to the following additional risks:

Risks Related to Our Proposed Merger

On April 30, 2008, we entered into an Agreement and Plan of Merger (the Merger Agreement) with Micro Focus (US), Inc., a Delaware corporation
and wholly-owned subsidiary of Micro Focus International plc (Micro Focus), and MF Merger Sub, a Delaware corporation and wholly-owned subsidiary of Micro Focus (Merger Sub), pursuant to which Merger Sub will be merged with
and into NetManage (the Merger) with NetManage continuing as the surviving entity. Our board of directors has approved the Merger and the Merger Agreement and resolved to recommend to our stockholders approval of the Merger and approval
and adoption of the Merger Agreement at a special meeting of stockholders. A preliminary proxy statement in connection with this special meeting of stockholders was filed with the Securities and Exchange Commission (the SEC) on May 2,
2008 and may be obtained by visiting the SECs website at www.sec.gov. The proxy statement contains important information about us, Micro Focus, Merger Sub, the Merger and other related matters, and the discussions below contain only limited
information about the Merger. As a result, you are encouraged to read the proxy statement in its entirety for additional information about the Merger. In connection with the Merger, we are subject to certain risks including, but not limited to,
those set forth below.

If we are unable to consummate the Merger, our business, financial condition, operating results and stock price could suffer.

The completion of the Merger is subject to the satisfaction of numerous closing conditions, including the approval of the Merger by our
stockholders. In addition, the occurrence of certain material events, changes or other circumstances could give rise to the termination of the Merger Agreement. Further, a lawsuit has been filed seeking class action status and seeking to enjoin the
Merger, and additional legal proceedings may be instituted against us seeking to prevent the Merger from being completed. As a result, no assurances can be given that the Merger will be consummated. If our stockholders choose not to approve the
Merger, we otherwise fail to satisfy, or obtain a waiver of the satisfaction of, the closing conditions to the transaction and the Merger is not consummated, a material event, change or circumstance has occurred that results in the termination of
the Merger Agreement, or any legal proceeding results in enjoining the Merger, we could be subject to various adverse consequences, including, but not limited to, the following:



| |  |  | we would remain liable for significant costs relating to the Merger, including, among others, legal, accounting, financial advisory and financial printing expenses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may face various disruptions to the operation of our business as a result of the substantial time and effort invested by our management in connection with the
Merger;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the decision to enter into the Merger may cause substantial harm to relationships with our employees and/or may divert employee attention away from day-to-day
operations of our business;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an announcement that we have abandoned the Merger could trigger a decline in our stock price to the extent that the stock price reflects a market assumption that we
will complete the Merger;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to solicit competing acquisition proposals and the possibility that we could be required to pay a termination fee if the Merger Agreement is
terminated under certain circumstances; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may forego alternative business opportunities or fail to respond effectively to competitive pressures.
| | - |  | ---------------------------------------------------------------------------------------------------------

Pending consummation of the Merger, existing or prospective customers, vendors and other parties may delay or defer decisions concerning their business transactions
or relationships with us, which may harm our results of operations going forward if the Merger is not consummated.

Because the Merger
is subject to several closing conditions, including the approval of the Merger by our stockholders, uncertainty exists regarding the completion of the Merger. This uncertainty may cause existing or prospective customers, vendors and other parties to
delay or defer decisions concerning their business transactions or relationships with us, which could negatively affect our business and results of operations.



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                                                                                                  
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|2.1  |  | Amendment No. 1 to Agreement and Plan of Merger, dated as of January 18, 2008, by and among Rocket Software, Inc., Eastern Software, Inc. and NetManage, Inc. (1)
|     | 
|2.2  |  | Amendment No. 2 to Agreement and Plan of Merger, dated as of February 8, 2008, by and among Rocket Software, Inc., Eastern Software, Inc. and NetManage, Inc. (2)
|     | 
|2.3  |  | Notice of Termination of Agreement and Plan of Merger dated February 29, 2008. (3)                                                                               
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                             
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                             
|     | 
|32.1 |  | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                   
|     | 
|32.2 |  | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                   



|(1) | Incorporated by reference to Exhibit 2.1 filed with the Registrants Form 8-K dated January 21, 2008 (File No. 000-22158).
|--- | --------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Exhibit 2.1 filed with the Registrants Form 8-K dated February 11, 2008 (File No. 000-22158).
|--- | ---------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to Exhibit 99.1 filed with the Registrants Form 8-K dated February 29, 2008 (File No. 000-22158).
|--- | ----------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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: May 15, 2008 |  |  |  | By:                          |  | /s/ Omer Regev
|                   |  |  |  |                              |  |                |  | Omer Regev                                                                     
|                   |  |  |  |                              |  |                |  | Chief Financial Officer and Vice President of Finance                          
|                   |  |  |  |                              |  |                |  | (On behalf of the registrant and as Principal Financial and Accounting Officer)



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##### Table of Contents

EXHIBIT INDEX



|               |  |                                                                                                                                                                  
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                      
|               | 
|2.1            |  | Amendment No. 1 to Agreement and Plan of Merger, dated as of January 18, 2008, by and among Rocket Software, Inc., Eastern Software, Inc. and NetManage, Inc. (1)
|               | 
|2.2            |  | Amendment No. 2 to Agreement and Plan of Merger, dated as of February 8, 2008, by and among Rocket Software, Inc., Eastern Software, Inc. and NetManage, Inc.(2) 
|               | 
|2.3            |  | Notice of Termination of Agreement and Plan of Merger dated February 29, 2008.(3)                                                                                
|               | 
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                             
|               | 
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                             
|               | 
|32.1           |  | Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                   
|               | 
|32.2           |  | Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                   



|(1) | Incorporated by reference to Exhibit 2.1 filed with the Registrants Form 8-K dated January 21, 2008 (File No. 000-22158).
|--- | --------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Exhibit 2.1 filed with the Registrants Form 8-K dated February 11, 2008 (File No. 000-22158).
|--- | ---------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to Exhibit 99.1 filed with the Registrants Form 8-K dated February 29, 2008 (File No. 000-22158).
|--- | ----------------------------------------------------------------------------------------------------------------------------



30