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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 June 30, 2002

OR

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

For the transition period from           to

Commission file number 0-22158

NetManage, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

YES [  ] NO [X]

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



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TABLE OF CONTENTS



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



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##### Table of Contents



NETMANAGE, INC.
Table of Contents

|         |  |                                                                                       |  |                                                                                                                                         |    |      |    | 
|-------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|         |  |                                                                                       |  |                                                                                                                                         |    | Page
|         |  |                                                                                       |  |                                                                                                                                         |    |     
|Part I   |  | Financial Information                                                                 |  |                                                                                                                                         |    |     
|        
|        
|        
|        
|Item 1.  |  | Financial Statements                                                                  |  |                                                                                                                                         |    |     
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed Consolidated Balance Sheets at June 30, 2002 and December 31, 2001 (As restated)                                              |    |      | 3  | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2002 and
June 30, 2001(As restated)         |    |      | 4  | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed
Consolidated Statements of Comprehensive Loss for the three and six months
ended June 30, 2002 and June 30, 2001(As restated) |    |      | 5  | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and
June 30, 2001(As restated)                   |    |      | 6  | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                                                    |    |      | 7  | 
|        
|        
|        
|        
|Item 2.  |  | Managements discussion and analysis of financial condition and results of operations |  |                                                                                                                                         | 19 |     
|        
|        
|        
|        
|Item 3.  |  | Quantitative
and qualitative disclosures about market risk                            |  |                                                                                                                                         | 38 |     
|        
|        
|        
|        
|Item 4   |  | Controls and procedures                                                               |  |                                                                                                                                         | 38 |     
|        
|        
|        
|        
|PART II. |  | OTHER INFORMATION                                                                     |  |                                                                                                                                         |    |     
|        
|        
|        
|        
|Item 1.  |  | Legal proceedings                                                                     |  |                                                                                                                                         | 39 |     
|        
|        
|        
|        
|Item 2.  |  | Changes in securities and use of proceeds                                             |  |                                                                                                                                         | 39 |     
|        
|        
|        
|        
|Item 3.  |  | Defaults upon senior securities                                                       |  |                                                                                                                                         | 39 |     
|        
|        
|        
|        
|Item 4.  |  | Submission of matters to a vote of security holders                                   |  |                                                                                                                                         | 39 |     
|        
|        
|        
|        
|Item 5.  |  | Other information                                                                     |  |                                                                                                                                         | 40 |     
|        
|        
|        
|        
|Item 6.  |  | Exhibits and reports on Form 8-K                                                      |  |                                                                                                                                         | 40 |     
|        
|        
|        
|        
|         |  |                                                                                       |  | Signatures                                                                                                                              |    |      | 41 | 
|        
|        
|        
|        
|         |  |                                                                                       |  | Certifications                                                                                                                          |    |      | 42 | 

2



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##### Table of Contents






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

|                                       |                                                                           |                                            |        |          |        |          |        |              |        |                           |  | 
|-------------------------------------- | ------------------------------------------------------------------------- | ------------------------------------------ | ------ | -------- | ------ | -------- | ------ | ------------ | ------ | ------------------------- |  | 
|                                       |                                                                           |                                            |        |          |        | June 30, |        | December 31,
|                                       |                                                                           |                                            |        |          |        | 2002     |        | 2001        
|                                       |                                                                           |                                            |        |          |        |          |        |             
|                                       |                                                                           |                                            |        |          |        |          |        |              |        | (As
restated,see note 11)
|ASSETS                                
|                                      
|                                      
|                                      
|                                      
|Current assets:                        |                                                                           |                                            |        |          |        |          |        |             
|                                      
|                                      
|                                      
|                                      
|                                       | Cash and cash equivalents                                                 |                                            | $      | 30,615   |        |          | $      | 32,766       |       
|                                      
|                                      
|                                      
|                                      
|                                       | Short-term investments                                                    |                                            |        | 173      |        |          |        | 792          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts receivable, net of allowances of $2,091 and $2,448, respectively |                                            |        | 11,239   |        |          |        | 17,801       |       
|                                      
|                                      
|                                      
|                                      
|                                       | Prepaid expenses and other current assets                                 |                                            |        | 4,231    |        |          |        | 3,487        |       
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           | Total current assets                       |        |          | 46,258 |          |        |              | 54,846 |                          
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|Property and equipment, at cost        |                                                                           |                                            |        |          |        |          |        |             
|                                      
|                                      
|                                      
|                                      
|                                       | Computer software and equipment                                           |                                            |        | 8,948    |        |          |        | 9,259        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Furniture and fixtures                                                    |                                            |        | 5,580    |        |          |        | 6,138        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Leasehold improvements                                                    |                                            |        | 1,733    |        |          |        | 2,805        |       
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           |                                            | 16,261 |          |        |          | 18,202 |             
|                                      
|                                      
|                                      
|                                      
|                                       | Less
 Accumulated depreciation and amortization                          |                                            |        | (13,226  | )      |          |        | (14,319      | )     
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           | Net property and equipment                 |        |          | 3,035  |          |        |              | 3,883  |                          
|Goodwill, net                          |                                                                           |                                            | 6,701  |          |        |          | 6,701  |             
|                                      
|                                      
|                                      
|                                      
|Other intangibles, net                 |                                                                           |                                            | 5,945  |          |        |          | 7,530  |             
|                                      
|                                      
|                                      
|                                      
|Other assets                           |                                                                           |                                            | 3,325  |          |        |          | 3,133  |             
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           | Total assets                               |        | $        | 65,264 |          |        | $            | 76,093 |                          
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|LIABILITIES AND STOCKHOLDERS EQUITY  
|                                      
|                                      
|                                      
|                                      
|Current liabilities:                   |                                                                           |                                            |        |          |        |          |        |             
|                                      
|                                      
|                                      
|                                      
|                                       | Accounts payable                                                          |                                            | $      | 1,981    |        |          | $      | 2,691        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued liabilities                                                       |                                            |        | 5,898    |        |          |        | 7,261        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accrued payroll and payroll-related expenses                              |                                            |        | 3,572    |        |          |        | 3,279        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Deferred revenue                                                          |                                            |        | 16,956   |        |          |        | 21,627       |       
|                                      
|                                      
|                                      
|                                      
|                                       | Income taxes payable                                                      |                                            |        | 1,783    |        |          |        | 1,861        |       
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           | Total current liabilities                  |        |          | 30,190 |          |        |              | 36,719 |                          
|                                      
|                                      
|                                      
|                                      
|Long-term liabilities                  |                                                                           |                                            | 160    |          |        |          | 286    |             
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           | Total liabilities                          |        |          | 30,350 |          |        |              | 37,005 |                          
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|Commitments and contingencies (Note 9) |                                                                           |                                            |        |          |        |          |        |             
|                                      
|                                      
|                                      
|                                      
|Stockholders equity:                  |                                                                           |                                            |        |          |        |          |        |             
|                                      
|                                      
|                                      
|                                      
|                                       | Common stock, $0.01 par value                                             |                                            |        |          |        |          |        |              |       
|                                      
|                                      
|                                      
|                                      
|                                       | Authorized - 125,000,000 shares                                           |                                            |        |          |        |          |        |              |       
|                                      
|                                      
|                                      
|                                      
|                                       | Issued - 10,614,346 and 10,528,631 shares, respectively                   |                                            |        |          |        |          |        |              |       
|                                      
|                                      
|                                      
|                                      
|                                       | Outstanding - 8,945,975 and 9,140,115 shares, respectively                |                                            |        | 106      |        |          |        | 105          |       
|                                      
|                                      
|                                      
|                                      
|                                       | Treasury stock, at cost - 1,668,371 and 1,388,516 shares, respectively    |                                            |        | (19,910  | )      |          |        | (18,267      | )     
|                                      
|                                      
|                                      
|                                      
|                                       | Additional paid in-capital                                                |                                            |        | 177,762  |        |          |        | 177,421      |       
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated deficit                                                       |                                            |        | (120,061 | )      |          |        | (115,799     | )     
|                                      
|                                      
|                                      
|                                      
|                                       | Accumulated other comprehensive loss                                      |                                            |        | (2,983   | )      |          |        | (4,372       | )     
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           | Total stockholders equity                 |        |          | 34,914 |          |        |              | 39,088 |                          
|                                       |                                                                           |                                            |        |          |        |          |        |              |       
|                                       |                                                                           | Total liabilities and stockholders equity |        | $        | 65,264 |          |        | $            | 76,093 |                          
|                                       |                                                                           |                                            |        |          |        |          |        |              |       

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

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##### Table of Contents






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

|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |        | 
|----------------------------------------------- | --------------------------------- | ------------------------ | ------ | --------------------------- | ------ | ------------------------- | ------ | -------------------------- | ------ | ---- | ------ | ------ | ------ | -------------------------- | ------ | ------ | ------ | 
|                                                |                                   |                          |        | Three months ended June 30, |        | Six months ended June 30,
|                                                |                                   |                          |        |                             |        |                          
|                                                |                                   |                          |        | 2002                        |        | 2001                      |        | 2002                       |        | 2001
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |     
|                                                |                                   |                          |        |                             |        |                           |        | (As
restated, see Note 11) |        |      |        |        |        | (As
restated, see Note 11)
|Net revenues:                                   |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |       
|                                               
|                                               
|                                               
|                                               
|                                                | License fees                      |                          | $      | 7,936                       |        |                           | $      | 9,399                      |        |      | $      | 18,111 |        |                            | $      | 20,808 |       
|                                               
|                                               
|                                               
|                                               
|                                                | Services                          |                          |        | 8,304                       |        |                           |        | 11,007                     |        |      |        | 17,161 |        |                            |        | 21,250 |       
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|                                                |                                   | Total net revenues       |        |                             | 16,240 |                           |        |                            | 20,406 |      |        |        | 35,272 |                            |        |        | 42,058 | 
|                                               
|                                               
|                                               
|                                               
|Cost of revenues:                               |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |       
|                                               
|                                               
|                                               
|                                               
|                                                | License fees                      |                          |        | 579                         |        |                           |        | 1,002                      |        |      |        | 1,382  |        |                            |        | 1,807  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Services                          |                          |        | 1,651                       |        |                           |        | 2,380                      |        |      |        | 3,316  |        |                            |        | 4,263  |       
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|                                                |                                   | Total cost of revenues   |        |                             | 2,230  |                           |        |                            | 3,382  |      |        |        | 4,698  |                            |        |        | 6,070  | 
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|Gross margin                                    |                                   |                          | 14,010 |                             |        |                           | 17,024 |                            |        |      | 30,574 |        |        |                            | 35,988 |       
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|Operating expenses:                             |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Research and development          |                          |        | 3,592                       |        |                           |        | 4,777                      |        |      |        | 7,189  |        |                            |        | 10,500 |       
|                                               
|                                               
|                                               
|                                               
|                                                | Sales and marketing               |                          |        | 10,181                      |        |                           |        | 11,157                     |        |      |        | 19,786 |        |                            |        | 25,137 |       
|                                               
|                                               
|                                               
|                                               
|                                                | General and administrative        |                          |        | 2,499                       |        |                           |        | 2,967                      |        |      |        | 4,970  |        |                            |        | 6,682  |       
|                                               
|                                               
|                                               
|                                               
|                                                | Amortization of intangible assets |                          |        | 792                         |        |                           |        | 1,444                      |        |      |        | 1,585  |        |                            |        | 2,888  |       
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|                                                |                                   | Total operating expenses |        |                             | 17,064 |                           |        |                            | 20,345 |      |        |        | 33,530 |                            |        |        | 45,207 | 
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|Loss from operations                            |                                   |                          | (3,054 | )                           |        |                           | (3,321 | )                          |        |      | (2,956 | )      |        |                            | (9,219 | )     
|                                               
|                                               
|                                               
|                                               
|Loss on investment exchange                     |                                   |                          |       |                             |        |                           | (1,824 | )                          |        |      |       |        |        |                            | (1,824 | )     
|                                               
|                                               
|                                               
|                                               
|Interest
income and other, net                  |                                   |                          | 122    |                             |        |                           | 693    |                            |        |      | 203    |        |        |                            | 1,845  |       
|                                               
|                                               
|                                               
|                                               
|Foreign
currency transaction gains/(losses)     |                                   |                          | (713   | )                           |        |                           | 203    |                            |        |      | (1,308 | )      |        |                            | (198   | )     
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|Loss before provision for income taxes          |                                   |                          | (3,645 | )                           |        |                           | (4,249 | )                          |        |      | (4,061 | )      |        |                            | (9,396 | )     
|                                               
|                                               
|                                               
|                                               
|Provision for income taxes                      |                                   |                          | 130    |                             |        |                           | 265    |                            |        |      | 201    |        |        |                            | 587    |       
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|Net loss                                        |                                   | $                        | (3,775 | )                           |        | $                         | (4,514 | )                          |        | $    | (4,262 | )      |        | $                          | (9,983 | )     
|                                                |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |        |       
|Net
loss per share:                             |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Basic and diluted                 |                          | $      | (0.42                       | )      |                           | $      | (0.48                      | )      |      | $      | (0.47  | )      |                            | $      | (1.07  | )     
|                                               
|                                               
|                                               
|                                               
|Weighted average common shares and equivalents: |                                   |                          |        |                             |        |                           |        |                            |        |      |        |        |        |                            |        |       
|                                               
|                                               
|                                               
|                                               
|                                                | Basic and diluted                 |                          |        | 8,977                       |        |                           |        | 9,353                      |        |      |        | 9,031  |        |                            |        | 9,335  |       

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

4



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##### Table of Contents






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

|                                   |                                               |   |                    |       |                  |   |                            |     |      |   |        |       |                            |   |        |     | 
|---------------------------------- | --------------------------------------------- | - | ------------------ | ----- | ---------------- | - | -------------------------- | --- | ---- | - | ------ | ----- | -------------------------- | - | ------ | --- | 
|                                   |                                               |   | Three
months ended |       | Six
months ended
|                                   |                                               |   | June 30,           |       | June 30,        
|                                   |                                               |   |                    |       |                 
|                                   |                                               |   | 2002               |       | 2001             |   | 2002                       |     | 2001
|                                   |                                               |   |                    |       |                  |   |                            |     |     
|                                   |                                               |   |                    |       |                  |   | (As
restated, see Note 11) |     |      |   |        |       | (As
restated, see Note 11)
|Net loss                           |                                               | $ | (3,775             | )     |                  | $ | (4,514                     | )   |      | $ | (4,262 | )     |                            | $ | (9,983 | )  
|                                  
|                                  
|                                  
|                                  
|Other
comprehensive income (loss): |                                               |   |                    |       |                  |   |                            |     |      |   |        |       |                            |   |        |    
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized
gain (loss) on investments, net    |   |                    | (570  | )                |   |                            | 67  |      |   |        | (630  | )                          |   |        | 67  | 
|                                  
|                                  
|                                  
|                                  
|                                   | Foreign currency translation adjustments, net |   |                    | 1,865 |                  |   |                            | 264 |      |   |        | 2,019 |                            |   |        | 397 | 
|                                   |                                               |   |                    |       |                  |   |                            |     |      |   |        |       |                            |   |        |    
|Comprehensive loss                 |                                               | $ | (2,480             | )     |                  | $ | (4,183                     | )   |      | $ | (2,873 | )     |                            | $ | (9,519 | )  
|                                   |                                               |   |                    |       |                  |   |                            |     |      |   |        |       |                            |   |        |    

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

5



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##### Table of Contents






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

|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |       |                            |      |  
|-------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ----- | ---------------- | ------ | ------- | ----- | -------------------------- | ---- | -
|                                                   |                                                                             |                                                                            |                                                           |                                       |       | Six months ended
|                                                   |                                                                             |                                                                            |                                                           |                                       |       | June 30,        
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                 
|                                                   |                                                                             |                                                                            |                                                           |                                       |       | 2002             |        | 2001   
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |        
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |       | (As
restated, see Note 11)
|Cash flows from operating activities:              |                                                                             |                                                                            |                                                           |                                       |       |                  |        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net loss                                                                    |                                                                            | $                                                         | (4,262                                | )     |                  | $      | (9,983  | )    
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Adjustments
to reconcile net loss to net cash used in operating activities: |                                                                            |                                                           |                                       |       |                  |        |         |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             | Depreciation and amortization                                              |                                                           |                                       | 2,576 |                  |        |         | 4,997 |                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             | Loss on disposal of property, plant & equipment                            |                                                           |                                       | 265   |                  |        |         |      |                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             | Provision for doubtful accounts and returns                                |                                                           |                                       | 9     |                  |        |         |      |                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             | Write-off of prepaid royalty, patents, and copyrights                      |                                                           |                                       |      |                  |        |         | 8     |                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             | Loss on investment exchange                                                |                                                           |                                       |      |                  |        |         | 1,824 |                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             | Changes in operating assets and liabilities, net of business combinations: |                                                           |                                       |       |                  |        |         |       |                           
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Accounts receivable                                       |                                       |       | 6,580            |        |         |       | 8,030                      |     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Refundable income taxes                                   |                                       |       |                 |        |         |       | 7,467                      |     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Prepaid
expenses and other current assets                 |                                       |       | (607             | )      |         |       | (133                       | )   
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Other assets                                              |                                       |       | 45               |        |         |       | 370                        |     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Accounts payable                                          |                                       |       | (612             | )      |         |       | (2,061                     | )   
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Accrued liabilities, payroll and payroll-related expenses |                                       |       | (522             | )      |         |       | (6,477                     | )   
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Deferred revenue                                          |                                       |       | (4,397           | )      |         |       | (3,734                     | )   
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Income taxes payable                                      |                                       |       | 217              |        |         |       | 368                        |     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                             |                                                                            | Long-term liabilities                                     |                                       |       | (126             | )      |         |       | (1,430                     | )   
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|                                                   |                                                                             |                                                                            |                                                           | Net cash used in operating activities |       |                  | (834   | )       |       |                            | (754 | )
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|Cash flows from investing activities:              |                                                                             |                                                                            |                                                           |                                       |       |                  |        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of short-term investments                                         |                                                                            |                                                           | (11                                   | )     |                  |        | (69,877 | )    
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from sales and maturities of short-term investments                |                                                                            |                                                           |                                      |       |                  |        | 69,909  |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of property and equipment                                         |                                                                            |                                                           | (467                                  | )     |                  |        | (209    | )    
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|                                                   |                                                                             |                                                                            |                                                           | Net cash used in investing activities |       |                  | (478   | )       |       |                            | (177 | )
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|Cash flows from financing activities:              |                                                                             |                                                                            |                                                           |                                       |       |                  |        |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from sale of common stock, net of issuance costs                   |                                                                            |                                                           | 342                                   |       |                  |        | 539     |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of common stock                                                   |                                                                            |                                                           | (1,643                                | )     |                  |        | (672    | )    
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|                                                   |                                                                             |                                                                            |                                                           | Net cash used in financing activities |       |                  | (1,301 | )       |       |                            | (133 | )
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|Effect of exchange rate changes on cash            |                                                                             |                                                                            | 462                                                       |                                       |       |                  | 541    |        
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|Net decrease in cash and cash equivalents          |                                                                             |                                                                            | (2,151                                                    | )                                     |       |                  | (523   | )      
|                                                  
|                                                  
|                                                  
|                                                  
|Cash and cash equivalents, beginning of the period |                                                                             |                                                                            | 32,766                                                    |                                       |       |                  | 35,015 |        
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      
|Cash and cash equivalents, end of the period       |                                                                             | $                                                                          | 30,615                                                    |                                       |       | $                | 34,492 |        
|                                                   |                                                                             |                                                                            |                                                           |                                       |       |                  |        |         |      

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

6



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##### Table of Contents






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

1. Interim financial data

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

2. Consolidation

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

3.  Summary of significant accounting policies:

Use of estimates

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

Foreign currency translation, foreign exchange contracts and comprehensive loss

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

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

Cash and cash equivalents

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

Short-term investments

We account for our investments
under the provisions of Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, our investments are currently classified as
available-for-sale securities and are reported at fair value, with unrealized gains and
losses, net of tax, reported in our consolidated statement of other comprehensive income. Held-to-maturity
securities are valued using the amortized cost method. At
June 30, 2002 and 2001, the fair value of the time
deposit investments approximated amortized cost and, as such, gross unrealized holding gains and losses were
not material. The fair value of the available-for-sale securities was determined based on quoted market prices
at the reporting dates for those instruments.

Our
investment in KANA Software Inc. is included in Short-term
investments. (See Note 12.)

Prepaid expenses and other current assets

Prepaid expenses and
other current assets as of June 30, 2002 include a
$275,000 convertible bridge financing loan receivable, due
on December 31, 2002, from easyBASE, Ltd.

Other investments

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

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

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

Property and equipment

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





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

Accrued liabilities and restructuring

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

Software development costs

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

Concentrations of credit risk

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

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

Income taxes

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

Revenue recognition

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

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

We apply the provisions of
Statement of Position 97-2, Software Revenue
Recognition, and related amendments and interpretations to all transactions involving the sale of software
products and to hardware transactions where the software is not incidental.

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

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

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

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

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

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

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

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

Cost of revenues

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

7



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##### Table of Contents



4. Recent accounting pronouncements

In
June 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities,which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring).SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF
Issue No. 94-3,
a liability for an exit cost as defined in EITF Issue No. 94-3 was recognized at the date
of an entitys commitment to an exit plan. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value. We will
adopt the provisions of SFAS No. 146 for exit or disposal activities that are
initiated after December 31, 2002 and we do not expect that adoption will have
a material impact on our historical results of operations, our financial
position or our liquidity. SFAS No. 146 may affect the timing of recognizing
future restructuring costs as well as the amounts recognized.

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

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

5. Goodwill and other intangible assets, net



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

8



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##### Table of Contents



|                                               |                                  |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |       |  
|---------------------------------------------- | -------------------------------- | - | ------------------ | ----- | ---------------- | - | ------ | ----- | ---- | - | ------ | ----- | - | - | ------ | ----- | -
|                                               |                                  |   | Three months ended |       | Six months ended
|                                               |                                  |   | June 30,           |       | June 30,        
|                                               |                                  |   |                    |       |                 
|                                               |                                  |   | 2002               |       | 2001             |   | 2002   |       | 2001
|                                               |                                  |   |                    |       |                  |   |        |       |     
|Net loss, as reported                          |                                  | $ | (3,775             | )     |                  | $ | (4,514 | )     |      | $ | (4,262 | )     |   | $ | (9,983 | )    
|                                              
|                                              
|                                              
|                                              
|                                               | Goodwill amortization            |   |                    |      |                  |   |        | 664   |      |   |        |      |   |   |        | 1,328 |  
|                                              
|                                              
|                                              
|                                              
|                                               | Assembled workforce amortization |   |                    |      |                  |   |        | 20    |      |   |        |      |   |   |        | 40    |  
|                                               |                                  |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Net loss, as adjusted                          |                                  | $ | (3,775             | )     |                  | $ | (3,830 | )     |      | $ | (4,262 | )     |   | $ | (8,615 | )    
|                                               |                                  |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Net loss per share (Basic and diluted)         |                                  |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                              
|                                              
|                                              
|                                              
|                                               | As reported                      |   | $                  | (0.42 | )                |   | $      | (0.48 | )    |   | $      | (0.47 | ) |   | $      | (1.07 | )
|                                              
|                                              
|                                              
|                                              
|                                               | Goodwill
amortization            |   |                    |      |                  |   |        | 0.07  |      |   |        |      |   |   |        | 0.14  |  
|                                              
|                                              
|                                              
|                                              
|                                               | Assembled workforce amortization |   |                    |      |                  |   |        |      |      |   |        |      |   |   |        | 0.01  |  
|                                               |                                  |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                               | As adjusted                      |   | $                  | (0.42 | )                |   | $      | (0.41 | )    |   | $      | (0.47 | ) |   | $      | (0.92 | )
|                                               |                                  |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|Weighted
average common shares and equivalents |                                  |   |                    |       |                  |   |        |       |      |   |        |       |   |   |        |      
|                                              
|                                              
|                                              
|                                              
|                                               | Basic and diluted                |   |                    | 8,977 |                  |   |        | 9,353 |      |   |        | 9,031 |   |   |        | 9,335 |  

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

|                                  |                     |   |          |         |              |   |        |         |  
|--------------------------------- | ------------------- | - | -------- | ------- | ------------ | - | ------ | ------- | -
|                                  |                     |   | June 30, |         | December 31,
|                                  |                     |   | 2002     |         | 2001        
|                                  |                     |   |          |         |             
|Carrying amount of:               |                     |   |          |         |              |   |        |        
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill            |   | $        | 17,658  |              |   | $      | 17,658  |  
|                                 
|                                 
|                                 
|                                 
|                                  | Assembled workforce |   |          | 1,035   |              |   |        | 1,035   |  
|                                  |                     |   |          |         |             
|Gross carrying amount of goodwill |                     |   | 18,693   |         |              |   | 18,693 |        
|                                 
|                                 
|                                 
|                                 
|Less accumulated amortization:    |                     |   |          |         |              |   |        |        
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill            |   |          | (11,181 | )            |   |        | (11,181 | )
|                                 
|                                 
|                                 
|                                 
|                                  | Assembled workforce |   |          | (811    | )            |   |        | (811    | )
|                                  |                     |   |          |         |              |   |        |        
|Net carrying amount of goodwill   |                     | $ | 6,701    |         |              | $ | 6,701  |        
|                                  |                     |   |          |         |              |   |        |        

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

|                                           |                      |   |          |        |              |   |        |        |  
|------------------------------------------ | -------------------- | - | -------- | ------ | ------------ | - | ------ | ------ | -
|                                           |                      |   | June 30, |        | December 31,
|                                           |                      |   | 2002     |        | 2001        
|                                           |                      |   |          |        |             
|Carrying amount of:                        |                      |   |          |        |              |   |        |       
|                                          
|                                          
|                                          
|                                          
|                                           | Developed technology |   | $        | 12,154 |              |   | $      | 12,154 |  
|                                          
|                                          
|                                          
|                                          
|                                           | Customer base        |   |          | 3,315  |              |   |        | 3,315  |  
|                                          
|                                          
|                                          
|                                          
|                                           | RUMBA trade name     |   |          | 1,557  |              |   |        | 1,557  |  
|                                          
|                                          
|                                          
|                                          
|                                           | Patents & copyrights |   |          | 398    |              |   |        | 398    |  
|                                           |                      |   |          |        |              |   |        |       
|Gross carrying amount of other intangibles |                      |   | 17,424   |        |              |   | 17,424 |       
|                                          
|                                          
|                                          
|                                          
|Less accumulated amortization:             |                      |   |          |        |              |   |        |       
|                                          
|                                          
|                                          
|                                          
|                                           | Developed technology |   |          | (7,859 | )            |   |        | (6,710 | )
|                                          
|                                          
|                                          
|                                          
|                                           | Customer base        |   |          | (2,273 | )            |   |        | (1,991 | )
|                                          
|                                          
|                                          
|                                          
|                                           | RUMBA trade name     |   |          | (1,065 | )            |   |        | (935   | )
|                                          
|                                          
|                                          
|                                          
|                                           | Patents & copyrights |   |          | (282   | )            |   |        | (258   | )
|                                           |                      |   |          |        |              |   |        |       
|Net carrying amount of other intangibles   |                      | $ | 5,945    |        |              | $ | 7,530  |       
|                                           |                      |   |          |        |              |   |        |       

SFAS No. 142 also requires companies to perform an impairment test within
six months of adopting the statement. We conducted an impairment analysis of
goodwill and other intangible assets and determined that no impairment existed
at January 1, 2002, nor have there been any events or circumstances that would
have created an impairment during the six months ended June 30, 2002.

9



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##### Table of Contents



6. Net loss per share

On August 28, 2002, our stockholders approved a one-for-seven reverse
stock split of our common stock. The reverse stock split became
effective at the close of business on September 3, 2002. All share and per share
information in the accompanying financial statements has been adjusted to
retroactively give effect to the reverse stock split.

Basic net loss per share data has been computed using the weighted-average
number of shares of common stock outstanding during the applicable periods.
Diluted net 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 and six month periods ended June 30, 2002 and 2001, the
number of shares used in the computation of diluted loss per share were the
same as those used for the computation of basic loss per share. For the three
and six month periods ended June 30, 2002, potentially dilutive securities of
75,306 and 134,927 shares, respectively, were not included in the computation
of diluted net loss per common share as they would be anti-dilutive. For the
three and six month periods ended June 30, 2001, potentially dilutive
securities of 130,272 and 165,292 shares, respectively, were not included in
the computation of diluted net loss per common share as they would be
anti-dilutive.

7. Restructuring of operations

On August 3, 2000, we announced a restructuring of our operations, which
was designed to re-focus our core business functions and reduce operating
expenses. In connection with the restructuring, we reduced our workforce by
approximately 17% and made provisions for reductions in office space, related
overhead expenses and the write down of certain assets. The total amount of the
restructuring charge was $5.6 million which primarily consisted of
approximately $3.0 million of expenses for facilities-related charges, $1.6
million of employee-related expenses for employee terminations, approximately
$200,000 in other equipment and professional service costs and an $800,000
settlement to Verity Systems, Inc. for a software license that we no longer
planned to use. As of June 30, 2002, our total cash expenditures incurred were
$4.9 million. In June 2002, based on a review of our continuing obligations
associated with the original restructuring charge, we recorded a reduction in
estimate for facilities of approximately $566,000 and an increase in estimate
for other charges of approximately $267,000. As of June 30, 2002, our total
cash expenditures incurred were $4.9 million. The remaining reserve related to
this restructuring was approximately $0.4 million, and is included in accrued
liabilities as of June 30, 2002.

The following table lists the components of our August 2000 restructuring
reserve for the six month period ended June 30, 2002 (In
thousands):

|                                                             |  |            |      |       |  |       |     |   |  |   |      |  
|------------------------------------------------------------ |  | ---------- | ---- | ----- |  | ----- | --- | - |  | - | ---- | -
|                                                             |  | Excess     |      |       |  |       |     |   |  |  
|                                                             |  | Facilities |      | Other |  | Total
|                                                             |  |            |      |       |  |      
|Balance at December 31, 2001                                 |  | $          | 930  |       |  | $     | 27  |   |  | $ | 957  |  
|                                                            
|                                                            
|                                                            
|                                                            
|Reserve utilized in the six month period ended June 30, 2002 |  |            | (253 | )     |  |       | (52 | ) |  |   | (305 | )
|                                                            
|                                                            
|                                                            
|                                                            
|Change in estimate recorded to restructuring expense         |  |            | (566 | )     |  |       | 267 |   |  |   | (299 | )
|                                                             |  |            |      |       |  |       |     |   |  |   |      |  
|Balance at June 30, 2002                                     |  | $          | 111  |       |  | $     | 242 |   |  | $ | 353  |  
|                                                             |  |            |      |       |  |       |     |   |  |   |      |  

In the fourth quarter of 1999, following the acquisitions of Wall Data,
Inc., or Wall Data, and Simware, Inc., or Simware, we initiated a plan to
restructure our worldwide operations in order to integrate the operations of
the two acquired companies. In connection with this plan, we recorded a $3.8
million charge to operating expenses in 1999. The restructuring charge includes
approximately $1.9 million of estimated expenses for facilities-related charges
associated with the consolidation of redundant operations, $1.4 million of
employee-related expenses for employee terminations and $0.5 million for legal,
accounting, and other. We anticipated that the execution of the restructuring
actions would require total cash expenditures of approximately $3.8 million,
which we expected to be funded from internal operations. As of June 30, 2002,
our total cash expenditures incurred were approximately $2.9 million. In June
2002, based on a review of our continuing obligations associated with the
original restructuring reserve, we recorded a reduction in estimate for
facilities of approximately $348,000. The remaining reserve related to this
restructuring is approximately $0.6 million, and is included in accrued
liabilities as of June 30, 2002.

The
following table lists the change in our restructuring reserve for the
six month period ended June 30, 2002 (In thousands):

11



---



##### Table of Contents



|                                                             |  |            |      |  
|------------------------------------------------------------ |  | ---------- | ---- | -
|                                                             |  | Excess    
|                                                             |  | Facilities
|                                                             |  |           
|Balance at December 31, 2001                                 |  | $          | 958  |  
|                                                            
|                                                            
|                                                            
|                                                            
|Reserve utilized in the six month period ended June 30, 2002 |  |            | (57  | )
|                                                            
|                                                            
|                                                            
|                                                            
|Change in estimate recorded to restructuring expense         |  |            | (348 | )
|                                                             |  |            |      |  
|Balance at June 30, 2002                                     |  | $          | 553  |  
|                                                             |  |            |      |  

Prior to the acquisition by us, Wall Data had initiated a plan to
restructure their worldwide operations to re-focus Wall Data on their core
business functions and to reduce operating expenses. In conjunction with the
acquisition, we recorded the remaining restructuring accrual of approximately
$0.7 million for facilities-related expenses as an accrued liability. As of
June 30, 2002, we had incurred costs of approximately $0.5 million. In June
2002, based on a review of our continuing obligations associated with the
original restructuring charge, we recorded a reduction in estimate for
facilities of approximately $193,000. The remaining reserve related to this
restructuring was approximately $7,000 and is included in accrued liabilities
as of June 30, 2002.

The following table lists the change in the Wall Data restructuring
reserve for the six month period ended June 30, 2002 (In
thousands):

|                                                             |  |            |      |  
|------------------------------------------------------------ |  | ---------- | ---- | -
|                                                             |  | Excess    
|                                                             |  | Facilities
|                                                             |  |           
|Balance at December 31, 2001                                 |  | $          | 211  |  
|                                                            
|                                                            
|                                                            
|                                                            
|Reserve utilized in the six month period ended June 30, 2002 |  |            | (11  | )
|                                                            
|                                                            
|                                                            
|                                                            
|Change in estimate recorded to restructuring expense         |  |            | (193 | )
|                                                             |  |            |      |  
|Balance at June 30, 2002                                     |  | $          | 7    |  
|                                                             |  |            |      |  

In August 1998, following the acquisition of FTP Software, Inc., or FTP we
initiated a plan to restructure our worldwide operations as a result of
business conditions and in connection with the integration of the operations of
FTP. In connection with this plan, we recorded a $7.0 million charge to
operating expenses in 1998. In addition, prior to our acquisition of FTP, FTP
had recorded a restructuring charge. We assumed the remaining restructuring
liability of $9.7 million as of the date of acquisition for a total
restructuring liability of $16.7 million. We completed the majority of these
restructuring actions by the end of 1998. We anticipated that these
restructuring actions would require total cash expenditures of approximately
$13.7 million. In June 2002, based on a review of our continuing obligations
associated with the original restructuring charge, we recorded an increase in
the estimate for facilities of approximately $0.8 million. This increase
relates to lease obligations for facilities located in the United Kingdom that
we were not able to sublet as originally planned. The remaining reserve
related to this restructuring is approximately $1.0 million and is included in
accrued liabilities as of June 30, 2002.

The following table lists the change in the FTP restructuring charge for
the six month period ended June 30, 2002 (In thousands):

|                                                             |  |            |      |  
|------------------------------------------------------------ |  | ---------- | ---- | -
|                                                             |  | Excess    
|                                                             |  | Facilities
|                                                             |  |           
|Balance at December 31, 2001                                 |  | $          | 465  |  
|                                                            
|                                                            
|                                                            
|                                                            
|Reserve utilized in the six month period ended June 30, 2002 |  |            | (313 | )
|                                                            
|                                                            
|                                                            
|                                                            
|Change in estimate recorded to restructuring expense         |  |            | 840  |  
|                                                             |  |            |      |  
|Balance at June 30, 2002                                     |  | $          | 992  |  
|                                                             |  |            |      |  

12



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##### Table of Contents



8. Treasury stock

During
the first six months of 2002, we repurchased 279,855 shares of our
outstanding common shares on the open market at an average purchase price of
$5.87 per share for a total cost of approximately $1.6 million.
In the second quarter of 2002, we purchased
166,583 shares of our outstanding
common shares on the open market at an average purchase price of
$5.79 per
share for a total cost of approximately $1.0 million

9. Commitments and contingencies

Legal proceedings

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

On May 13, 2002, on an order of the court following defendants successful
motion to strike the second amended complaint filed by
Mr. Fisher on January 31, 2002, Mr. Fisher filed a Third
Amended Complaint, or Complaint, in the United States District Court of the
District of Columbia against NSA and NetSoft among numerous other defendants.
The Complaint alleges that NSA, NetSoft and the other defendants made false
claims to the government to obtain government contracts set aside for entities
owned and controlled by disadvantaged persons admitted to the Section 8(a)
Minority Small Business Development Program. Specifically, the Complaint
alleges that from 1987 to 1997, NSA, NetSoft, and the other defendants
presented false or fraudulent claims for payment or approval to the government
in violation of 31 U.S.C. § 3729 (a) (1), and used false records or statements
to get claims paid or approved by the government in violation of 31 U.S.C. §
3729 (a) (2) in connection with NSAs application and certification as a
Section 8 (a) minority owned and controlled company. In addition, the
Complaint alleges that NSA, NetSoft and the other defendants conspired to
defraud the government by fraudulently obtaining NSAs certification as a
Section 8 (a) entity for alleged use by NSAs Federal Systems Division, in
violation of 31 U.S.C. § 3729 (a) (3). Mr. Fisher alleges damages in excess of
$30,000,000.

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

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

10. Correspondence from the Nasdaq Stock Market

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

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

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

13



---



##### Table of Contents



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

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

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

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



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

Subsequent
to the issuance of our interim unaudited condensed
consolidated financial statements for the three months ended March 31, 2002, we
determined that the accounting treatment was inappropriate for certain
transactions that had been previously recorded in 2000, 2001, and the first
three months of 2002. Those transactions for 2000 and 2001 are
described below. Those transactions for the first three months of
2002 are described in the Form 10-Q/A for the quarter ended
March 31, 2002.

2001 adjustments

A loss of approximately $1.6 million in the Companys investment in Broadbase
had been recorded as unrealized loss in accumulated comprehensive loss as of the
business combination date between Broadbase and KANA in June 2001 rather than
as a loss recorded in the consolidated results of operations in accordance with
Emerging Issues Task Force Issue No. 91-5, Nonmonetary Exchange of Cost-Method
Investments. Furthermore, we recorded a realized loss of $0.2 million on this
investment in 2000 (see further discussion below), which should have been
recognized as an unrealized loss within accumulated comprehensive
loss until the date of the business combination between KANA and Broadbase, at
which time it should have been recorded as a realized loss. As a result, we
recorded an adjustment to recognize the total realized investment loss of $1.8
million for the year ended December 31, 2001 and the three and
six month periods ended
June 30, 2001.

During 2001, we recorded an income tax benefit of approximately $2.6 million
upon utilization of pre-acquisition net operating losses and tax credits of
Simware in Canada to offset Canadian taxable income. We determined that the
utilization of the related deferred tax assets, for which we had
previously established a full valuation allowance, should have been recorded as
a reduction to goodwill rather than as an income tax benefit.
Additionally, tax liabilities were adjusted by approximately $1.9 million to reflect a
favorable tax settlement in 2001 of a tax audit at the Haifa, Israel
subsidiary. As a result of the adjustment to goodwill, amortization expense
related to goodwill for the three and six month periods ended June 30,
2001 and the year ended December 31, 2001, has been reduced by approximately
$162,500, $325,000, and $650,000, respectively. The net increase to the
provision for income taxes resulting from the two tax adjustments described
above was $92,000, $279,000 and $650,000
for the three and six month
periods ended June 30, 2001, and the year ended December 31, 2001,
respectively.

Third party transactions were improperly included
within accumulated comprehensive loss as of December 31, 2001. Consequently, we recorded an adjustment to remove these transactions
from comprehensive loss, which decreased services revenue by a net amount of
approximately $355,000 in 2001. The net impact of this adjustment was
an increase to services revenue of $13,000 for the three months ended
March 31, 2001 and a decrease of $114,000 for the six months
ended June 30, 2001.

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

We had previously not reported cost of services revenue as a component of cost
of revenues. Accordingly, we recorded an adjustment to reclassify
$8.1 million in operating expense to cost of services revenue for fiscal 2001
to reflect the cost of services revenue as a component of cost of revenues. The
impact on cost of services revenue for the three and six month periods ended
June 30, 2001 was approximately $2.4 million and $4.3 million,
respectively.

In the third quarter of fiscal 2000, we wrote-off $10.0 million of goodwill and
other intangibles related to the 1998 acquisition of FTP. At that
time, we
should have reduced the amortization period of the remaining intangible assets
from the FTP acquisition. Consequently, we recorded an adjustment in 2001 to
increase amortization expense by $416,000, to recognize the impact of the
reduced amortization period for that year. The increase in amortization
expense for the three and six-month periods ended June 30,
2001 was $104,000 and $208,000, respectively.

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

2000 adjustments

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

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

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

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

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

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

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

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

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

Restated financial statements

As a result of the adjustments
described above, the accompanying interim condensed consolidated
financial statements for the three and six months ended June 30, 2001 have been restated from the amounts previously reported to
reflect the correction of the matters described above.

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

A summary of the significant effects
of the restatements, as adjusted for the one-for-seven reverse stock
split discussed in Note 6, is as follows (In thousands, except per share amounts):

14



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##### Table of Contents



|                                       |                                            |   |                                  |        |                                |   |           |        |                |   |        |        |  |   |        |        |  
|-------------------------------------- | ------------------------------------------ | - | -------------------------------- | ------ | ------------------------------ | - | --------- | ------ | -------------- | - | ------ | ------ |  | - | ------ | ------ | -
|                                       |                                            |   | Three months ended June 30, 2001 |        | Six months ended June 30, 2001
|                                       |                                            |   |                                  |        |                               
|                                       |                                            |   | (As previously                   |        |                                |   |           |        | (As previously |   |        |        | 
|                                       |                                            |   | reported)                        |        | (As restated)                  |   | reported) |        | (As restated) 
|                                       |                                            |   |                                  |        |                                |   |           |        |               
|Statement
of Operations Data:          |                                            |   |                                  |        |                                |   |           |        |                |   |        |        |  |   |        |       
|                                      
|                                      
|                                      
|                                      
|                                       | Total net revenues                         |   | $                                | 20,349 |                                |   | $         | 20,406 |                |   | $      | 42,080 |  |   | $      | 42,058 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Gross margin                               |   |                                  | 19,347 |                                |   |           | 17,024 |                |   |        | 40,273 |  |   |        | 35,988 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Research and development                   |   |                                  | 4,765  |                                |   |           | 4,777  |                |   |        | 10,474 |  |   |        | 10,500 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Sales and marketing                        |   |                                  | 13,535 |                                |   |           | 11,157 |                |   |        | 29,399 |  |   |        | 25,137 |  
|                                      
|                                      
|                                      
|                                      
|                                       | General and administrative                 |   |                                  | 2,815  |                                |   |           | 2,967  |                |   |        | 6,496  |  |   |        | 6,682  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Amortization of goodwill and intangibles   |   |                                  | 1,503  |                                |   |           | 1,444  |                |   |        | 3,005  |  |   |        | 2,888  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Interest income and other, net             |   |                                  | 940    |                                |   |           | 693    |                |   |        | 1,671  |  |   |        | 1,845  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Foreign
currency transaction gain (losses) |   |                                  |       |                                |   |           | 203    |                |   |        |       |  |   |        | (198   | )
|                                      
|                                      
|                                      
|                                      
|                                       | Loss
on investment exchange                |   |                                  |       |                                |   |           | (1,824 | )              |   |        |       |  |   |        | (1,824 | )
|                                      
|                                      
|                                      
|                                      
|Provision for income taxes             |                                            |   | 173                              |        |                                |   | 265       |        |                |   | 308    |        |  |   | 587    |       
|                                      
|                                      
|                                      
|                                      
|Net
loss                               |                                            |   | (2,504                           | )      |                                |   | (4,514    | )      |                |   | (7,738 | )      |  |   | (9,983 | )     
|                                      
|                                      
|                                      
|                                      
|Net
loss per share  basic and diluted |                                            | $ | (0.27                            | )      |                                | $ | (0.48     | )      |                | $ | (0.83  | )      |  | $ | (1.07  | )     

|                                                                   |                                                 |  |   |          |                |  |               |          |   |  | 
|------------------------------------------------------------------ | ----------------------------------------------- |  | - | -------- | -------------- |  | ------------- | -------- | - |  | 
|                                                                   |                                                 |  |   |          | (As previously |  |               |          |  
|                                                                   |                                                 |  |   |          | reported)      |  | (As restated)
|                                                                   |                                                 |  |   |          |                |  |              
|Balance
Sheet Data as of December 31, 2001:                        |                                                 |  |   |          |                |  |               |         
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Goodwill and other intangibles, net             |  | $ | 17,581   |                |  | $             | 14,231   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Total
assets                                    |  |   | 79,436   |                |  |               | 76,093   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Deferred revenue                                |  |   | 21,154   |                |  |               | 21,627   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Income taxes payable                            |  |   | 3,811    |                |  |               | 1,861    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated deficit                             |  |   | (112,668 | )              |  |               | (115,799 | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated comprehensive loss                  |  |   | (5,639   | )              |  |               | (4,372   | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Total
stockholders equity                      |  |   | 40,952   |                |  |               | 39,088   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Statement
of Operations Data for the year ended December 31, 2001: |                                                 |  |   |          |                |  |               |         
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Total net revenues                              |  | $ | 79,970   |                |  | $             | 79,249   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Gross margin                                    |  |   | 76,516   |                |  |               | 67,664   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Sales and marketing                             |  |   | 53,220   |                |  |               | 45,104   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | General and administrative                      |  |   | 10,579   |                |  |               | 10,792   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Amortization of goodwill and intangibles        |  |   | 6,077    |                |  |               | 5,843    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Interest income and other, net                  |  |   | 2,104    |                |  |               | 2,636    |  
|                                                                  
|                                                                  
|                                                                  
|
|                                                                   | Foreign currency transaction losses             |  |   |         |                |  |               | (419     | )
|                                                                  
|                                                                  
|                                                                  
|
|                                                                   | Loss on investment exchange                     |  |   |         |                |  |               | (1,824   | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Provision for income taxes                      |  |   | 78       |                |  |               | 728      |  
|                                                                  
|                                                                  
|                                                                  
|
|                                                                   | Net loss                                        |  |   | (9,294   | )              |  |               | (12,372  | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Net
loss per share  basic and diluted          |  | $ | (1.00    | )              |  | $             | (1.33    | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Balance
Sheet Data as of December 31, 2000:                        |                                                 |  |   |          |                |  |               |         
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Goodwill and other intangibles, net             |  | $ | 23,689   |                |  | $             | 22,705   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Total assets                                    |  |   | 109,981  |                |  |               | 108,988  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accounts payable                                |  |   | 5,050    |                |  |               | 4,937    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated deficit                             |  |   | (103,374 | )              |  |               | (103,427 | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Accumulated comprehensive loss                  |  |   | (3,990   | )              |  |               | (4,822   | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Total stockholders equity                      |  |   | 53,029   |                |  |               | 52,144   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Statement
of Operations Data for the year ended December 31, 2000: |                                                 |  |   |          |                |  |               |         
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Total net revenues                              |  | $ | 104,072  |                |  | $             | 102,865  |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Gross margin                                    |  |   | 99,845   |                |  |               | 84,510   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Research and development                        |  |   | 24,394   |                |  |               | 24,517   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Sales and marketing                             |  |   | 71,881   |                |  |               | 60,173   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | General and administrative                      |  |   | 18,740   |                |  |               | 17,047   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Goodwill and other intangible assets impairment |  |   | 42,164   |                |  |               | 39,844   |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Amortization of goodwill and intangibles        |  |   | 14,164   |                |  |               | 14,338   |  
|                                                                   | Interest income and other, net                  |  |   | 1,836    |                |  |               | 2,699    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Foreign currency transaction losses             |  |   |         |                |  |               | (370     | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Gain on investments                             |  |   | 1,973    |                |  |               | 2,282    |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Provision for income taxes                      |  |   | 737      |                |  |               | 737      |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Net loss                                        |  |   | (71,910  | )              |  |               | (71,019  | )
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                   | Net loss per share  basic and diluted          |  | $ | (7.76    | )              |  | $             | (7.66    | )

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

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12. Subsequent events

Loss on investments

In the third quarter of 2002, we determined that the investment in
easyBASE, Ltd. and fusionONE, Inc. was permanently impaired, as a result of
continued weakness in the software development industry and our analysis of
data provided to us by both companies. In the past, we have invested in a
number of companies which have developed technologies which we felt had related
use with our products, and had significant opportunity in their own markets. In
large part as a result of the current economy, we have determined
that our
investments in easyBASE and fusionONE have been permanently impaired
and have written them down by $1.5 million and
$0.3 million, respectively, to
expected net realizable values. In addition, we realized a loss of
approximately $700,000 on our
investment in Kana Software, Inc. As a result, we recorded an aggregate loss on
investments of approximately $2.5 million for the three months ended
September 30, 2002.

Restructuring charge

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

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##### Table of Contents



NETMANAGE, INC.




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

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

The
financial information for the three and six month periods ended
June 30, 2001 reflect the restatement adjustments described in
Note 11 to the unaudited condensed consolidated financial
statements.

Overview

We develop and market software and service solutions that are designed to
enable our customers to access and leverage the considerable investment they
have in their host-based business applications, processes and data. Our
business is primarily focused on providing a broad spectrum of specific
personal computer and network or application server-based software and tools.
These products are designed to allow our customers to access and use their
mission-critical line-of-business host applications and resources; to publish
information from existing host systems in a web presentation, particularly to
new users, via the Internet; to create new web-based applications that leverage
the corporations existing business processes and applications; and, to ensure
the continued operation of these solutions through the incorporation and
deployment of innovative, real-time, Internet-based support
solutions. The financial information for the three month periods
ended March 31, 2002 and 2001 reflect the restatement
adjustments described in Note 11 to the unaudited condensed
consolidated financial statements.

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

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

Our principal products are compatible with Microsoft Corporations, or
Microsofts, Windows XP, Windows 2000, Windows NT, Windows 98, Windows 95, and Windows 3.x
operating systems, IBM operating systems, Novell, Inc., or Novell, operating
systems and various implementations of the industry standard UNIX operating
system such as IBMs AIX, Hewlett Packard Corporations HP/UX, Sun Microsystems
Inc.s Solaris, and the open source Linux system.

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

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customers believe that we collectively benefit from the fact that the underlying technology
employed by our server-side Host Accessand server-side Host Integration
solutions is the same.

Critical accounting policies

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

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

We apply the provisions of Statement of Position 97-2, Software Revenue
Recognition, and related amendments and interpretations to all transactions
involving the sale of software products and to hardware transactions where the
software is not incidental.

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

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

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

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

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

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

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

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

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Allowances for doubtful accounts and litigation:The preparation of
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reported period. Specifically, management must
make estimates of the collectibility of our accounts receivables. We analyze
accounts receivable and analyze historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms, when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $13.3 million, net of allowance
for doubtful accounts of $2.1 million as of June 30, 2002.

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

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

Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities, and any valuation
allowance recorded against our net deferred tax assets. We have
recorded a full
valuation allowance as of June 30, 2002, due to uncertainties
related to our ability to utilize our deferred tax assets, primarily
consisting of certain net operating losses carried forward and foreign tax
credits, before they expire. The valuation allowance is based on our
history of losses and our judgement that it is more likely than not
that our
deferred tax assets will not be recoverable. In the event that actual results
differ from these estimates, we will adjust these estimates in future periods.

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

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

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

     significant
negative industry or economic trends; or

     our market capitalization relative to net book value.

When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we measure impairment based on a projected discounted cash flow
method using a discount rate determined by us to be commensurate with the risk
inherent in our current business model. Goodwill and other intangible assets
amounted to $12.6 million as of June 30, 2002, net of accumulated amortization.

On January 1, 2002, SFAS No. 142, Goodwill and Other Intangible Assets
became effective and as a result, we ceased to amortize approximately $6.7
million of goodwill. We recorded approximately $2.7 million of amortization of
goodwill during 2001 and would have recorded approximately $2.7 million of
amortization during 2002. In lieu of amortization, we are required to perform
an initial impairment review of our goodwill as of January 1, 2002, and on at
least an annual basis thereafter. As required by SFAS No. 142, we conducted an
impairment analysis of goodwill and other intangibles and determined that no
impairment existed at January 1, 2002, nor do we believe there have been any
events or circumstances that would have triggered an impairment during the six
months ended June 30, 2002.

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Operations

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

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

We experienced a reduction in incoming orders from the latter half of 2000
through the third quarter of 2001, and incoming orders did not begin to
increase until the fourth quarter of 2001. The slowdown in the North American
and European economies, as well as the events associated with the September 11,
2001 disaster, influenced customers willingness to place new orders for our
products. We experienced significant revenue reduction in each quarter of 2001,
compared to the same quarter of the previous year and this trend continued into
the second quarter of 2002. In some cases, customers chose to reduce the number
of desktop units at the time of annual maintenance renewal to reflect a
reduction-in-force at their facilities, or they continued to postpone their
buying decisions due to budget constraints. The reduction in revenue in the
second quarter of 2002 primarily was attributed to our North
American operations. Our second quarter 2002 revenues are approximately 20% less than
the amount recorded in the second quarter of 2001 and approximately 15% less
than the amount recorded in the first quarter of 2002. There can be no
assurance that revenues will increase at all in future periods.

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

We initiated restructuring plans as a result of our acquisitions of Wall
Data, Simware, and Aqueduct Software, Inc, or Aqueduct, including the $5.6
million restructuring plan announced on August 3, 2000 (see Note 7 -
Restructuring of operations). For most of 2000, we focused on the core
competencies of our key business lines  the Host Accessproduct line, the Web
Publishing, Integration and Development product line, referred to as Host
Integrationand the Real-time Interactive Support product line  each with
dedicated development, sales, marketing, and support resources. As part of the
restructuring, we announced on August 3, 2000 a reduction in our workforce of
approximately 17%, consisting mostly of Engineering and Customer Support
personnel who were focused primarily on our older technologies, predominantly
acquired through the Wall Data and FTP acquisitions. With the reduction in
personnel, knowledge levels with respect to certain products and our ability to
enhance and expand products acquired from Wall Data and FTP was reduced, thus
impacting future expected revenues from these product families. In connection
with the restructuring, we
made provisions for reductions in office space, related overhead expenses,
and the write-down of certain assets. The total amount of the restructuring
charge was $5.6 million. The restructuring charge includes approximately $3.0
million of estimated expenses for facilities-related charges, $1.6 million of
employee-related expenses for employee terminations, approximately $200,000 in
other equipment and professional service costs, and an $800,000 settlement to
Verity for a software license that we no longer plan to use. As of June 30,
2002, our total cash expenditures incurred were approximately
$5.4 million. (See Note 7  Restructuring of
Operations).

Our Host Accessproduct line is designed to provide the technology to make
the connection between personal computers and large corporate computers
possible. These products are designed to leverage the strengths and popularity
of the Internet, as well as corporate private networks, and offer features to
improve network manageability. Our Host Integrationproduct line is designed to
provide the technology to allow customers to leverage the investment they have
in existing host-based systems, applications and business processes for new
web-based presentations, applications and solutions. This product line includes
our products branded as OnWeb. Real-time Interactive Support, previously sold as
the standalone product SupportNow, is now built into our full line of products
and we believe adds value through increased functionality to the Host Access
and Host Integrationproduct offerings.

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

Because we generally ship software products within a short period after
receipt of an order, we do not have a material backlog of unfilled orders, and
revenues in any one quarter are substantially dependent on orders booked in
that quarter. Our operating expense levels are based in part on our expectation
of future revenues and, to a large extent, are fixed. Operating expenses are
expected to stabilize at those levels incurred in the last half of fiscal year
2001 and the first quarter of fiscal year 2002 and may fluctuate as a
percentage of net revenues as we develop and introduce new products.

In the third quarter of 2000, based on our analysis of revised product
directions, revenue forecasts and undiscounted future cash flows, taking into
account the estimated impact on product development and customer support
resulting from the reductions in personnel, we determined that there was a
permanent impairment of the long-lived assets related to the acquisitions of
Wall Data and FTP. In accordance with SFAS No. 121, we re-evaluated the fair
value of these long-lived assets and intangibles using estimated discounted
cash flows which was consistent with the methodology used at the time of the
acquisition. As a result, we determined an impairment of
$39.8 million in goodwill
and other intangibles which was charged to operations in the third quarter of
fiscal 2000. In the fourth quarter of 2000, we determined that we had
overestimated the liabilities assumed in the FTP and Wall Data acquisitions by
approximately $9.4 million. We reversed these liabilities against the remaining
goodwill and other intangibles acquired.

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

As
described below, under the heading Factors that may affect our future
results and financial condition, acquisitions involve a number of risks,
including risks relating to the integration of the acquired companys
operations, personnel, and products. There can be no assurance that the
integration of previously acquired companies, or the integration of any future
acquisitions, will be accomplished successfully, and the failure to accomplish
effectively any of these integrations could have a material adverse effect on
our results of operations and financial condition.

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##### Table of Contents



Three
and six months ended June 30, 2002 compared to June 30, 2001
(dollars in millions):

This selected financial data for the three and six months ended June 30,
2002 and 2001 contains certain financial information that has been restated. (See Note
11 to the unaudited condensed consolidated financial statements for further
discussion of this matter.)

|                                    |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |       |       |   
|----------------------------------- | ------------------------------- | ------------------ | ---- | --------------------------- | ----- | ------------------------- | ---- | ------ | ----- | ---- | ---- | ---- | ---- | ------ | ----- | ----- | ----- | -- | ---- | ----- | ----- | - | ----- | ----- | ----- | - | ---- | ---- | ---- | - | ------ | ----- | ----- | --
|                                    |                                 |                    |      | Three months ended June 30, |       | Six months ended June 30,
|                                    |                                 |                    |      | 2002                        |       | 2001                      |      | Change |       | 2002 |      | 2001 |      | Change
|                                    |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |       
|                                    |                                 |                    |      |                             |       |                          
|Net revenues                        |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |      
|                                   
|                                   
|                                   
|                                   
|                                    | License fees                    |                    | $    | 7.9                         |       |                           | $    | 9.4    |       |      | $    | (1.5 | )    |        |       | (16.0 | )%    |    | $    | 18.1  |       |   | $     | 20.8  |       |   | $    | (2.7 | )    |   |        | (13.0 | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | Services                        |                    |      | 8.3                         |       |                           |      | 11.0   |       |      |      | (2.7 | )    |        |       | (24.5 | )%    |    |      | 17.2  |       |   |       | 21.3  |       |   |      | (4.1 | )    |   |        | (19.2 | )%   
|                                    |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |      
|                                    |                                 | Total net revenues |      |                             | 16.2  |                           |      |        | 20.4  |      |      |      | (4.2 | )      |       |       | (20.6 | )% |      |       | 35.3  |   |       |       | 42.1  |   |      |      | (6.8 | ) |        |       | (16.2 | )%
|                                   
|                                   
|                                   
|                                   
|As a percentage of net revenues:    |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |      
|                                   
|                                   
|                                   
|                                   
|                                    | License fees                    |                    |      | 48.8                        | %     |                           |      | 46.1   | %     |      |      |      |      |        |       |       |       |    |      | 51.3  | %     |   |       | 49.4  | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Services                        |                    |      | 51.2                        | %     |                           |      | 53.9   | %     |      |      |      |      |        |       |       |       |    |      | 48.7  | %     |   |       | 50.6  | %     |   |      |      |      |   |        |       |      
|                                    |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |      
|                                    |                                 | Total net revenues |      |                             | 100.0 | %                         |      |        | 100.0 | %    |      |      |      |        |       |       |       |    |      |       | 100.0 | % |       |       | 100.0 | % |      |      |      |   |        |       |       |   
|                                   
|                                   
|                                   
|                                   
|Gross margin  license fees         |                                 | $                  | 7.3  |                             |       | $                         | 8.4  |        |       | $    | (1.1 | )    |      |        | (13.1 | )%    |       | $  | 16.7 |       |       | $ | 19.0  |       |       | $ | (2.3 | )    |      |   | (12.1  | )%   
|                                   
|                                   
|                                   
|                                   
|Gross margin  service              |                                 |                    | 6.7  |                             |       |                           | 8.6  |        |       | $    | (1.9 | )    |      |        | (22.1 | )%    |       |    | 13.9 |       |       |   | 17.0  |       |       | $ | (3.1 | )    |      |   | (18.2  | )%   
|                                    |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |      
|                                    |                                 | Total gross margin |      | $                           | 14.0  |                           |      | $      | 17.0  |      |      | $    | (3.0 | )      |       |       | (17.6 | )% |      | $     | 30.6  |   |       | $     | 36.0  |   |      | $    | (5.4 | ) |        |       | (15.0 | )%
|                                   
|                                   
|                                   
|                                   
|As a percentage of net revenue:     |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |      
|                                   
|                                   
|                                   
|                                   
|                                    | Gross margin  license fees     |                    |      | 45.1                        | %     |                           |      | 41.2   | %     |      |      |      |      |        |       |       |       |    |      | 47.3  | %     |   |       | 45.1  | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Gross margin  service          |                    |      | 41.3                        | %     |                           |      | 42.1   | %     |      |      |      |      |        |       |       |       |    |      | 39.4  | %     |   |       | 40.4  | %     |   |      |      |      |   |        |       |      
|                                    |                                 |                    |      |                             |       |                           |      |        |       |      |      |      |      |        |       |       |       |    |      |       |       |   |       |       |       |   |      |      |      |   |        |      
|                                    |                                 | Total gross margin |      |                             | 86.4  | %                         |      |        | 83.3  | %    |      |      |      |        |       |       |       |    |      |       | 86.7  | % |       |       | 85.5  | % |      |      |      |   |        |       |       |   
|                                   
|                                   
|                                   
|                                   
|Research and development            |                                 | $                  | 3.6  |                             |       | $                         | 4.8  |        |       | $    | (1.2 | )    |      |        | (25.0 | )%    |       | $  | 7.2  |       |       | $ | 10.5  |       |       | $ | (3.3 | )    |      |   | (31.4  | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | 22.2                        | %     |                           |      | 23.5   | %     |      |      |      |      |        |       |       |       |    |      | 20.4  | %     |   |       | 24.9  | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|Sales and marketing                 |                                 | $                  | 10.2 |                             |       | $                         | 11.2 |        |       | $    | (1.0 | )    |      |        | (8.9  | )%    |       | $  | 19.8 |       |       | $ | 25.1  |       |       | $ | (5.3 | )    |      |   | (21.1  | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | 63.0                        | %     |                           |      | 54.9   | %     |      |      |      |      |        |       |       |       |    |      | 56.1  | %     |   |       | 59.6  | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|General and administrative          |                                 | $                  | 2.5  |                             |       | $                         | 3.1  |        |       | $    | (0.6 | )    |      |        | (19.3 | )%    |       | $  | 5.0  |       |       | $ | 6.7   |       |       | $ | (1.7 | )    |      |   | (25.4  | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | 15.4                        | %     |                           |      | 15.2   | %     |      |      |      |      |        |       |       |       |    |      | 14.2  | %     |   |       | 15.9  | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|Amortization of intangible assets   |                                 | $                  | 0.8  |                             |       | $                         | 1.4  |        |       | $    | (0.6 | )    |      |        | (42.9 | )%    |       | $  | 1.6  |       |       | $ | 2.9   |       |       | $ | (1.3 | )    |      |   | (44.8  | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | 4.9                         | %     |                           |      | 6.9    | %     |      |      |      |      |        |       |       |       |    |      | 4.5   | %     |   |       | 6.9   | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|Loss on investment exchange         |                                 | $                  |     |                             |       | $                         | 1.8  |        |       | $    | (1.8 | )    |      |        |      | %     |       | $  |     |       |       | $ | 1.8   |       |       | $ | (1.8 | )    |      |   |       | %    
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | 0.0                         | %     |                           |      | 8.8    | %     |      |      |      |      |        |       |       |       |    |      | 0.0   | %     |   |       | 4.3   | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|Interest income and other, net      |                                 | $                  | 0.1  |                             |       | $                         | 0.7  |        |       | $    | (0.6 | )    |      |        | (85.7 | )%    |       | $  | 0.2  |       |       | $ | 1.8   |       |       | $ | (1.6 | )    |      |   | (88.9  | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | 0.1                         | %     |                           |      | 3.4    | %     |      |      |      |      |        |       |       |       |    |      | .1    | %     |   |       | 4.3   | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|Foreign
currency transaction losses |                                 | $                  | (0.7 | )                           |       | $                         | 0.2  |        |       | $    | (0.9 | )    |      |        | (450  | )%    |       | $  | (1.3 | )     |       | $ | (.2   | )     |       | $ | (1.1 | )    |      |   | (550.0 | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | (4.3                        | )%    |                           |      | 0.1    | %     |      |      |      |      |        |       |       |       |    |      | 3.7   | %     |   |       | .1    | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|Provision for income taxes          |                                 | $                  | 0.1  |                             |       | $                         | 0.3  |        |       | $    | (0.2 | )    |      |        | (66.7 | )%    |       | $  | 0.2  |       |       | $ | 0.67  |       |       | $ | (0.4 | )    |      |   | (66.7  | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | Effective tax rate              |                    |      | 0.6                         | %     |                           |      | 1.5    | %     |      |      |      |      |        |       |       |       |    |      | .1    | %     |   |       | 1.4   | %     |   |      |      |      |   |        |       |      
|                                   
|                                   
|                                   
|                                   
|Net income loss                     |                                 | $                  | (3.8 | )                           |       | $                         | (4.5 | )      |       | $    | 0.7  |      |      |        | (15.6 | )%    |       | $  | (4.3 | )     |       | $ | (10.0 | )     |       | $ | 5.7  |      |      |   | (57.0  | )%   
|                                   
|                                   
|                                   
|                                   
|                                    | As a percentage of net revenue: |                    |      | (23.5                       | )%    |                           |      | (22.1  | )%    |      |      |      |      |        |       |       |       |    |      | (12.2 | )%    |   |       | (23.8 | )%    |   |      |      |      |   |        |       |      

Net revenues

Our revenues are derived from the sale of software licenses and related
services, which include maintenance and support, consulting and training
services. License fees are earned under software license agreements with
end-users and resellers and are generally recognized as revenue upon shipment
of the software if collection of the resulting receivable is probable, the fee
is fixed and determinable and vendor-specific objective evidence exists to
allocate the total fee to all undelivered elements of the arrangement.
Certain of our sales are made to domestic distributors under agreements
allowing right-of-return and price protection on unsold merchandise.
Accordingly, we defer recognition of such sales until the distributor sells the
merchandise. Our international distributors generally do not have return rights
and, as such, we generally recognize sales to international distributors upon
shipment, if all other revenue recognition criteria have been met.

Services revenues are derived from software updates for existing software
products, user documentation and technical support, generally under annual
service agreements. These revenues are recognized ratably over the terms of
such agreements. If the services

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

License fees and services revenues decreased $1.5 million and $2.7
million, respectively, and $2.7 million and $4.1 million, respectively, for the
three and six month periods ended June 30, 2002 as compared to the same periods
in 2001. Total net revenues for the three and six month periods ended June 30,
2002 decreased $4.2 million and $6.8 million, respectively, from those
recorded in the three and six month periods ended June 30, 2001. These
decreases result from continued customer decisions to cancel or postpone
purchases of our products, due to the sluggish North American and European
economies, to competitive pressures on our average selling prices, and to
financial pressures experienced by our customers and targeted customers.

We have operations worldwide with sales offices located in the United
States, Europe, Canada, Latin America, and Israel. Revenues outside of North
America (United States and Canada) as a percentage of total net revenues were
approximately 30% and 28% for the three months ended June 30, 2002 and 2001,
respectively, and 28% and 27% for the six months ended June 30, 2002 and 2001,
respectively.

No customer accounted for 10% or more of net revenues in any of the three
or six month periods ended June 30, 2002 or 2001.

Gross margin

Gross
margin increased slightly as a percentage of net revenues to 86.3%
and 83.3% and to 86.7% from 85.6%, respectively, but declined 17.7% and 15.0%
respectively, in absolute dollars for the three and six month periods ended
June 30, 2002 as compared to the three and six month periods ended June 30,
2001. This decline in absolute dollars is primarily the result of the decrease
in net revenues of $4.2 million and $6.8 million,
respectively for the three and
six month periods ended June 30, 2002 compared to the three and six month
periods ended June 30, 2002 and reductions in cost of revenues for the three
and six month periods ended June 30, 2002 of $1.2 million and $1.4 million,
respectively, as compared to the three and six month periods ended June 30,
2001. Our cost of revenues for the three month period ended June 30, 2002
increased $0.2 million from those recorded in the three month period ended
March 31, 2002. Cost of revenues includes direct and
indirect expenses associated with
both license and service revenues.

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

Cost of revenues for license fees decreased as a percentage of net
license revenues to 7.3% and 7.6%, respectively, for the three and six month
periods ended June 30, 2002 as compared to 7.6% and 8.7% for the same periods
in 2001, and declined in absolute dollars for both the three and six month
periods ended June 30, 2002 as compared to the same periods in 2001. These
decreases in both percentage of revenues and in absolute dollars were primarily
the result of reductions in headcount of 6 full-time employees in operations
from the second quarter of 2001 to the second quarter of 2002, continuing cost
reduction efforts, and a reduction in net license revenue of $1.5 million and
$2.7 million, respectively, for the three and six month periods ended June 30,
2002 as compared to the same periods in 2001.

Cost of revenues for services decreased to 19.9% and 19.3%, respectively,
as a percentage of net services revenues for the three and six month periods
ended June 30, 2002 from 21.6% and 20.1% for the comparable periods in 2001 and
declined in absolute dollars for both the three and six month periods ended
June 30, 2002 as compared to the same periods in 2001. The decline in cost of
revenues for services primarily resulted from a reduction in head count of 28
full-time employees in customer service and consulting from the second quarter
of 2001 to the second quarter of 2002.

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

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Research and development

Research and development, or R & D, expenses primarily consist of salaries
and benefits, occupancy and travel expenses, and fees paid to outside
consultants. R & D expenses decreased, in absolute dollars and as a percentage
of net revenues for the three and six month periods ended June 30, 2002 as
compared to the three and six month periods ended June 30, 2001, primarily as a
result of a reduction in headcount of 6 full-time employees for research and
development activities from the second quarter of 2001 to the second quarter of
2002.

Software development costs are accounted for in accordance with SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed, under which we are required to capitalize software
development costs after technological feasibility is established, which we
define as a working model and further define as a beta version of the software.
The establishment of technological feasibility and the ongoing assessment of
the recoverability of these costs requires considerable judgment by management
with respect to certain external factors; including, but not limited to,
anticipated future gross product revenue, estimated economic life, and changes
in technology. Costs that do not qualify for capitalization are charged to R&D
expense when incurred. We did not capitalize any software development costs in
any of the three or six month periods ended June 30, 2002 or June 30, 2001.

Sales and marketing

Sales and marketing expenses consist primarily of salaries and commissions
of sales and marketing personnel, advertising, promotional expenses,
occupancy, and related costs. Sales and marketing expenses decreased in absolute
dollars for the three and six month periods ended June 30, 2002 as compared to
the same periods in 2001, primarily due to the reduction in sales and support
staff of 61 full-time employees from the second quarter of 2001 to the second
quarter of 2002 and our ongoing cost reduction efforts in 2001 and 2002. For
the three month period ended June 30, 2002, these expenses increased as a
percentage of net revenues as compared to the same period in 2001. However,
for the six month period ended June 30, 2002, expenses decreased as a
percentage of net revenues as compared to the same period in 2001 primarily
because of the decrease in absolute dollars spent on sales and marketing offset
in part by the decline in net revenues.

General and administrative

General and administrative expenses consist primarily of salaries,
benefits, accounting, operating, legal, and proportionate shares of occupancy
expenses for our human resources, legal, information technology, facilities and
general management functions as well as bad debt expense. General and
administrative expenses decreased in absolute dollars for the three and six
month periods ended June 30, 2002 as compared to the same periods in 2001. For
the three month period ended June 30, 2002, expenses increased as a percentage
of net revenues as compared to the same period in 2001 primarily as a result
of the decrease in net revenues. For the six month period ended June 30, 2002,
expenses decreased as a percentage of net revenues as compared to the same
period in 2001, primarily as a result of our ongoing cost reduction efforts.

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##### Table of Contents



Interest income and other, net

Interest income and other, net for the three and six month periods ended
June 30, 2002 and 2001, respectively, are as shown in the following table (In thousands):

|                       |                         |  |                              |     |                           |  |      |     |      |  |     |     |  |  |     |       | 
|---------------------- | ----------------------- |  | ---------------------------- | --- | ------------------------- |  | ---- | --- | ---- |  | --- | --- |  |  | --- | ----- | 
|                       |                         |  | Three
months ending
June 30, |     | Six
months endingJune 30,
|                       |                         |  |                              |     |                          
|                       |                         |  | 2002                         |     | 2001                      |  | 2002 |     | 2001
|                       |                         |  |                              |     |                           |  |      |     |     
|                       |                         |  |                              |     |                           |  |      |     |      |  |     |     | 
|Interest income:      
|                      
|                      
|                      
|                      
|                       | On cash and investments |  | $                            | 97  |                           |  | $    | 265 |      |  | $   | 196 |  |  | $   | 576   | 
|                      
|                      
|                      
|                      
|                       | On tax refunds          |  |                              | 2   |                           |  |      | 436 |      |  |     | 2   |  |  |     | 1,299 | 
|                      
|                      
|                      
|                      
|Interest expense       |                         |  | (3                           | )   |                           |  | (8   | )   |      |  | (22 | )   |  |  | (29 | )    
|                      
|                      
|                      
|                      
|Other income (expense) |                         |  | 26                           |     |                           |  |     |     |      |  | 27  |     |  |  | (1  | )    
|                       |                         |  |                              |     |                           |  |      |     |      |  |     |     |  |  |     |      
|
|                       | Total                   |  | $                            | 122 |                           |  | $    | 693 |      |  | $   | 203 |  |  | $   | 1,845 | 
|                       |                         |  |                              |     |                           |  |      |     |      |  |     |     |  |  |     |      

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

Interest income on tax refunds for 2001 includes $0.9 million received on
a $4.3 million income tax refund received in the first quarter of 2001 and $0.4
million received on a $3.1 million income tax refund received in the second
quarter of 2001. For the three and six month periods ended June 30, 2002,
interest income of $2,000 was received on an income tax refund of $20,000.

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

Foreign currency transaction losses

For the three and six month periods ended June 30, 2002, we recorded
transaction losses associated with inter-company accounts of
approximately $0.7
million and $1.3 million, respectively, almost exclusively as a result of the
decline in the value of the Israeli Shekel against the U.S. dollar and the
Euro. For the comparable three and six month periods of fiscal year 2001, the transaction gain
associated with inter-company accounts was approximately $0.2 million and the
transaction loss was $0.2 million respectively.

Provision for income taxes

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

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Liquidity and capital resources

|                                      |  |          |      |  
|------------------------------------- |  | -------- | ---- | -
|                                      |  | June 30,
|(In millions)                         |  | 2002    
|                                      |  |         
|As
of:                                |  |          |      |  
|                                     
|                                     
|                                     
|                                     
|Cash and cash equivalents             |  | $        | 30.6 |  
|                                     
|                                     
|                                     
|                                     
|Short-term investments                |  |          | 0.2  |  
|For
the six month period:             |  |          |      |  
|                                     
|                                     
|                                     
|                                     
|Net cash used in operating activities |  |          | (.8  | )
|                                     
|                                     
|                                     
|                                     
|Net cash used in investing activities |  |          | (0.5 | )
|                                     
|                                     
|                                     
|                                     
|Net cash used in financing activities |  |          | (1.3 | )

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

During the six months ended June 30, 2002, our aggregate cash, cash
equivalents and short-term investments decreased from
$33.6 million to $30.8 million. This decrease resulted primarily from operating losses, the reduction
in prepaids and other current assets, accounts payable and accrued
liabilities, deferred revenue offset in part by the decrease in
accounts receivable. Cash was also consumed for the purchase of
approximately $1.6 million of our common stock.

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

Net cash provided by and used in financing activities in the six month
periods ended June 30, 2002 reflects our purchases of our common stock, from
time to time, through the open market.

Our Board of Directors, or Board, has authorized the purchase from time to
time of up to 2,142,857 shares of our common stock through open market
purchases. In the twelve months ended December 31, 2001, we repurchased 337,221
shares of our common stock on the open market at an average purchase price of
$5.49 per share for a total cost of approximately $1.9 million. During the six
months ended June 30, 2002, we repurchased 279,855 shares of our common stock
on the open market at an average purchase price of $5.87 per share for a total
cost of approximately $1.6 million. Cumulatively, as of June 30, 2002, we had
repurchased 1,668,371 shares of our common stock at an average price of $11.90
per share for a total cost of approximately $19.9 million.

At June 30, 2002, we had working capital of $16.1 million. We believe that
our current cash balances and future operating cash flows will be sufficient to
meet our working capital and capital expenditure requirements for the
foreseeable future.

Disclosures about market risk

Interest rate risk

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

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

Foreign currency risk

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

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

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Factors that may affect our future results and financial condition

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

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

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



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

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

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

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

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

We had a net loss from operations of approximately $12.4 million for the
year ended December 31, 2001. Despite our operating profit in the first quarter
of 2002, we were not profitable in the second or third quarters of 2002 and
have not achieved profitability on an annual basis since 1995, and we may never
obtain sufficient revenues to sustain profitability in any future period. In
addition, price competition may make it difficult for us to achieve
profitability. Increasing competition may cause our prices to decline, which
would harm our operating results. We expect our prices for our software
products to decline over the next few years. We expect to face increased
competition in markets where we sell our products, which will make it more
difficult to increase or maintain our revenues or maintain our prices and
profit margins. We need to significantly increase our sales volume and/or
reduce our costs to be profitable in future periods. If anticipated increases
in sales volume do not keep pace with anticipated pricing pressures, our
revenues would decline and our business could be harmed. Despite our efforts to
introduce enhancements to our products, we may not be successful in maintaining
our pricing.

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

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

Furthermore, our results of operations can also be materially adversely
affected by changes in the inventory strategies of our resellers, which can
occur rapidly and may not be related to end-user demand. As part of our
continued strategy of selling through multiple distribution channels, we expect
to continue using indirect distribution channels, particularly value-added
resellers and system integrators, in addition to distributors and original
equipment manufacturers. Any material increase in our indirect sales as a
percentage of revenues may adversely affect our average selling prices and
gross margins due to lower unit costs that are typically charged when selling
through indirect channels. There can be no assurance that we will be able to
attract or retain resellers and distributors who will be able to market our
products effectively, will be qualified to provide timely and cost-effective
customer support and service, or will continue to represent our products. If we
are unable to recruit or retain important resellers or distributors or if they
decrease their sales of our products, we may suffer a material adverse effect
on our business, financial condition or results of operations.

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

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

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

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

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

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

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

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

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

We consummated several merger and acquisition transactions, including the
acquisitions of Wall Data and Simware in the fourth quarter of 1999, and the
acquisition of Aqueduct in the second quarter of 2000. These acquisitions were
motivated by various factors, including the desire to obtain new technologies,
expand and enhance our product offerings, expand our customer base, attract key
personnel, and strengthen our presence in the international and OEM
marketplaces. Product and technology acquisitions entail numerous risks,
including:



| |  |  | the diversion of managements attention away from day-to-day operations;                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | difficulties in the assimilation of acquired operations and personnel (such as sales, engineering, and customer support);
|
| |  |  | the integration of acquired products with existing product lines;                                                        
|
| |  |  | the failure to realize anticipated benefits of cost savings and synergies;                                               
|
| |  |  | the loss of customers;                                                                                                   
|
| |  |  | undisclosed liabilities;                                                                                                 
|
| |  |  | adverse effects on reported operating results;                                                                           
|
| |  |  | the amortization of acquired intangible assets;                                                                          

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| |  |  | the loss of key employees; and                         
| | - |  | -------------------------------------------------------
|
| |  |  | the difficulty of presenting a unified corporate image.

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

In
early December 1999, following our acquisitions of Wall Data and
Simware, we initiated a plan to restructure our worldwide operations in order
to integrate the operations of Wall Data and Simware. We undertook further
restructurings of our operations, primarily in North America, in
August 2000 and again in August 2002.
Both restructuring plans involved reductions in our worldwide workforce and the
consolidation of certain of our sales, customer support, and research and
development facilities. These restructuring plans may not be successful and may
not improve future operating results. Completion of the restructuring plans may
disrupt our operations and have a material adverse effect on our business,
financial condition and results of operations. We may also be required to
implement additional restructuring plans in the future.

The successful combination of companies requires coordination of sales and
marketing with research and development efforts, and can be difficult to
accomplish. The integration of both Wall Data and Simware involved
geographically separated organizations (in suburban Kirkland, Washington;
Boston, Massachusetts; Cupertino and Irvine, California; Ottawa, Ontario,
Canada; and Haifa, Israel), and personnel with diverse business backgrounds and
corporate cultures. We believe that factors such as the ongoing attention and
dedication of management and resources required to effect the complete
integration of both Wall Data and Simware, and the consequent disruption in the
business of all parties involved, contributed to interruptions and loss of
momentum in our business activities. Our ability to maintain or increase
revenues from the sale of products from Wall Data and Simware on an ongoing
basis depends in part on our ability to effectively respond to these factors.

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

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

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

Our success depends on the efforts and abilities of our senior management
and certain other key personnel. Many of our key employees are employed on an
at-will basis. If any of our key employees were to leave or were unable to work
and we were unable to find a suitable replacement, then our business, financial
condition and results from operations could be materially harmed.

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

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

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

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

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

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

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

From
time to time, many of our customers have delayed purchase decisions
due to the confusion in the marketplace relating to rapidly changing technology
and product introductions. To maintain or improve our position in our industry,
we must successfully develop, introduce, and market new products and product
enhancements on a timely and cost-effective basis. We have experienced
difficulty from time-to-time in developing and introducing new products and
enhancing existing products in a manner that satisfies customer requirements
and changing market demands. Any further failure by us to anticipate or respond
adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, could have a
material adverse effect on our business, financial condition, and results of
operations. The failure to develop products or product enhancements
incorporating new functionality on a timely basis could cause customers to
delay the purchase of our current products or cause customers to purchase
products from our competitors; either situation would adversely affect our
business, financial condition, and results of operations. We may not be
successful in developing new products or enhancing our existing products on a
timely basis, and

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any new products or product enhancements developed by us may not achieve
market acceptance. In addition, we incorporate software and other technologies
owned by third parties into certain of our products and as a result, we are
dependent upon such third parties ability to enhance their current products,
to develop new products that will meet changing customer needs on a timely and
cost-effective basis, and to respond to emerging industry standards and other
technological changes.

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

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

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

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

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

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

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

Software products as complex as those offered by us may contain undetected
errors or failures when first introduced or as new versions are released. The
likelihood of errors is higher when a new product is introduced or when new
versions or enhancements are released. Errors may also arise as a result of
defects in the products that are incorporated into our products. There can be
no assurance that, despite testing by us and by current and potential
customers, errors will not be found in new products or product enhancements
after commencement of commercial shipments, which could result in loss of or
delay in market acceptance. We may be required to devote significant financial
resources and personnel to correct any defects. Known or unknown errors or
defects that affect the operation of our products could result in the
following, any of which could have a material adverse effect on our business,
financial condition, and results of operations:



| |  |  | delay or loss of revenues;                                  
| | - |  | ------------------------------------------------------------
|
| |  |  | cancellation of a purchase order or contract due to defects;
|
| |  |  | diversion of development resources;                         
|
| |  |  | damage to our reputation;                                   

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| |  |  | failure of our products to achieve market acceptance;
| | - |  | -----------------------------------------------------
|
| |  |  | increased service and warranty costs; and            
|
| |  |  | litigation costs.                                    

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

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

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

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

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



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

Our pending patent applications may never be issued, and even if issued, may
provide us with little protection

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



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

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

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

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

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

We derived approximately 30% of our net revenues from sales outside of
North America (United States and Canada) during the three month period ended
March 31, 2002 and 25% during the six months ended June 30, 2002. While we
expect that international sales will continue to account for a significant
portion of our net revenues, there can be no assurance that we will be able
to maintain or increase international market demand for our products or that
our distributors will be able to effectively meet that demand. Risks inherent
in our international business activities generally include, among others:



| |  |  | unexpected changes in regulatory requirements;                                   
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | legal uncertainty, including reduced intellectual property protection;           
|
| |  |  | Increased prevalence of intellectual property piracy and
misappropriation;       
|
| |  |  | language barriers in business discussions;                                       
|
| |  |  | cultural differences in the negotiation of contracts and conflict resolution;    
|
| |  |  | time zone differences;                                                           
|
| |  |  | the limitations imposed by U.S. export laws;                                     
|
| |  |  | changes in markets caused by a variety of political, social and economic factors;
|
| |  |  | tariffs and other trade barriers;                                                
|
| |  |  | costs and risks of localizing products for foreign countries;                    
|
| |  |  | longer accounts receivable payment cycles;                                       
|
| |  |  | difficulties in managing international operations;                               
|
| |  |  | currency exchange rate fluctuations;                                             

36



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| |  |  | potentially adverse tax consequences;                        
| | - |  | -------------------------------------------------------------
|
| |  |  | repatriation of earnings; and                                
|
| |  |  | the burdens of complying with a wide variety of foreign laws.



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

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

The terrorist attacks in the U.S., the U.S. response to these attacks, the
threat of war in Iraq, and the related decline in consumer confidence and
continued economic weakness have had an adverse impact on our operations.
Recent consumer reports indicate that consumer confidence has reached its
lowest level since 1993. If consumer confidence continues to decline or does
not recover, our revenues and results of operations may continue to be
adversely impacted in the remainder of 2002 and beyond. Any escalation in
these events or any similar future events may disrupt our operations or those
of our customers. These events have had and may continue to have an adverse
impact on the U.S. and world economy in general and consumer confidence and
spending in particular, which has and could, continue to harm our sales. In
addition these events could increase volatility in the U.S. and worldwide
financial markets and economy, which could harm our stock price and may limit
the capital resources available to us and our customers. This could have
significant impact on our operating results, revenues and costs and may result
in the increased volatility in the market price of our common stock.

Uncertainties exist regarding our stock repurchase program

Previously, we announced that our board of directors had approved the
repurchase of up to 2,142,857 shares of our common stock. Stock repurchase
activities are subject to certain pricing restrictions, stock market forces,
management discretion and various regulatory requirements. In addition, such
repurchases are at the discretion of our management and may be reduced or
stopped altogether at any time. As a result, there can be no assurance as to
the timing and/or amount of shares that we may repurchase under this stock
repurchase program.

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

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



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

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

37



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##### Table of Contents



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

As
of August 28, 2002, our officers, directors and entities affiliated
with them, in the aggregate, beneficially owned approximately 1.7 million
shares, or approximately 19.8% of our outstanding common stock. These
stockholders, if acting together, would be able to exert significant influence
on all matters requiring approval by our stockholders, including the election
of directors, the approval of mergers or other business combination
transactions or a sale of all or substantially all of our assets.

Certain provisions of our stock option plan, our shareholder rights plan, and
our certificate of incorporation and bylaws make changes of control difficult
even if they would be beneficial to stockholders

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

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

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

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

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




Item 3. Quantitative and qualitative disclosures about market risk

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




Item 4. Controls and procedures

Not applicable

38



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##### Table of Contents






PART II OTHER INFORMATION




Item 1. Legal proceedings

Legal proceedings

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

On May 13, 2002, on an order of the court following defendants successful
motion to strike the second amended complaint filed by
Mr. Fisher on January 31, 2002, the Mr. Fisher filed a Third
Amended Complaint, or Complaint, in the United States District Court of the
District of Columbia against NSA and NetSoft among numerous other defendants.
The Complaint alleges that NSA, NetSoft and the other defendants made false
claims to the government to obtain government contracts set aside for entities
owned and controlled by disadvantaged persons admitted to the
Section 8 (a)
Minority Small Business Development Program. Specifically, the Complaint
alleges that from 1987 to 1997, NSA, NetSoft, and the other defendants
presented false or fraudulent claims for payment or approval to the government
in violation of 31 U.S.C. § 3729 (a) (1), and used false records or statements
to get claims paid or approved by the government in violation of 31 U.S.C. §
3729 (a) (2) in connection with NSAs application and certification as a
Section 8 (a) minority owned and controlled company. In addition, the
Complaint alleges that NSA, NetSoft and the other defendants conspired to
defraud the government by fraudulently obtaining NSAs certification as a
Section 8 (a) entity for alleged use by NSAs Federal Systems Division, in
violation of 31 U.S.C. § 3729 (a) (3). Mr. Fisher alleges damages in excess of
$30,000,000.

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

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




Item 2. Changes in securities
and use of proceeds

Not applicable




Item 3. Defaults upon senior securities

Not applicable




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

The 2002 Annual Meeting of Stockholders was held at our offices at 10725 N.
DeAnza Boulevard, Cupertino, California on Wednesday, June 5, 2002 at 9:00 a.m.
Pacific Daylight Time, for the following purposes:



|1. |  | To elect two directors to hold office until the Annual Meeting of
Stockholders in the year 2005.                                                                                                                                                                                                                                                                                                                                          
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | To ratify the selection of Arthur Andersen LLP as our independent
auditors for the fiscal year ending December 31, 2002.                                                                                                                                                                                                                                                                                                                  
|  
|3. |  | To approve a restatement to our 1992 Stock Option Plan to increase the
number of shares reserved for issuance under the Option Plan by 214,286
shares, to effect certain changes to the Option Plan including the
addition of an annual share increase provision to the Option Plan
beginning in the calendar year 2003 and continuing through the calendar
year 2007, and the extension of the term of the Option Plan to April 24,
2012.
|  
|4. |  | To approve an amendment to our Employee Stock Purchase Plan to increase
the number of shares reserved for issuance under the Purchase Plan by
214,286 shares, to add an annual share increase provision to the Purchase
Plan beginning in the calendar year 2003 and continuing through the
calendar year 2007, and the extension of the term of the Purchase Plan to
April 30, 2012                                                      

39



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##### Table of Contents



Stockholders of record at the close of business on April 15, 2002 were entitled
to vote at the meeting.



|a. |  | One the vote for the election of directors, the following individuals
received the number of votes indicated:
|-- |  | -------------------------------------------------------------------------------------------------------------

|                   |  |     |           |          |  |  |         |  | 
|------------------ |  | --- | --------- | -------- |  |  | ------- |  | 
|                   |  | For |           | Withheld
|Mr. Uzia Galil     |  |     | 7,870,939 |          |  |  | 649,613 | 
|                  
|                  
|                  
|                  
|Mr. Darrell Miller |  |     | 7,874,152 |          |  |  | 646,401 | 



|b. |  | On the motion with respect to the selection of Arthur Andersen LLP as our
independent auditors:
|-- |  | -----------------------------------------------------------------------------------------------

|          |  |         |         |         |  |  |        | 
|--------- |  | ------- | ------- | ------- |  |  | ------ | 
|For       |  | Against |         | Abstain
|7,620,947 |  |         | 878,717 |         |  |  | 20,889 | 



|c. |  | On the motion of the approval of the restatement to our 1992 Stock Option
Plan:
|-- |  | -------------------------------------------------------------------------------

|          |  |         |           |         |  |  |        | 
|--------- |  | ------- | --------- | ------- |  |  | ------ | 
|For       |  | Against |           | Abstain
|2,423,859 |  |         | 1,589,156 |         |  |  | 25,913 | 



|d. |  | On the motion of the approval of the amendment to our Employee Stock
Purchase Plan:
|-- |  | -----------------------------------------------------------------------------------

|          |  |         |         |         |  |  |        | 
|--------- |  | ------- | ------- | ------- |  |  | ------ | 
|For       |  | Against |         | Abstain
|3,024,526 |  |         | 990,863 |         |  |  | 25,540 | 




Item 5. Other information

Subsequent events

1.     On July 16, 2002, we filed a preliminary proxy statement that a special
meeting of stockholders would be held on Wednesday, August 28, 2002 at 9:00
a.m. local time to consider and act upon a proposed amendment to our
Certificate of Incorporation to effect a reverse stock split of our outstanding
common stock at a ratio ranging from one-for-three up to one-for-ten.

2.     On July 29, 2002, we filed a definitive proxy statement that a special
meeting of stockholders would be held on Wednesday, August 28, 2002 at 9:00
a.m. local time to consider and act upon a proposed amendment to our
Certificate of Incorporation to effect a reverse stock split of our outstanding
common stock at a ratio of one-for-seven.

3.     At our special meeting of stockholders held on August 28, 2002, our
stockholders approved a one-for-seven reverse split of our common
stock. The reverse stock split became effective at the close of
business on September 3, 2002.

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

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




Item 6. Exhibits and reports on Form 8-K

a.     None

b.     Reports on Form 8-K.

We filed three reports on Form 8-K during the quarter ended June 30, 2002:



|1. |  | On June 14, 2002, we filed Form 8-K, Item 4. Change in Registrants
Certifying Accountant announcing the dismissal of our independent public
accountants, Arthur Andersen LLP, and the selection of Deloitte & Touche
LLP to serve as our new independent accountants for the fiscal year ending
December 31, 2002.                                                                                                                                                                                                                 
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | On June 27, 2002, we filed Form 8-K, Item 4. Change in Registrants
Certifying Accountant, amending the June 14, 2002 filing by incorporating
Exhibits 99.2 and 99.3 to the original filing to incorporate by reference
a letter from Arthur Andersen LLP to the Securities and Exchange
Commission dated June 24, 2002 and a letter from Arthur Andersen LLP to
NetManage, Inc. dated June 24, 2002 into the original filing.                                                                                                      
|  
|3. |  | On June 27, 2002, we filed Form 8-K, Item 5. Other Events pertaining to
the receipt of a staff determination letter from The Nasdaq Stock Market,
Inc. indicating that we had not met the minimum bid price requirement for
continued listing, as set forth in Marketplace Rule 4450(a)(5), and that
our common stock was therefore subject to delisting from the Nasdaq
National Market. The Form 8-K also announced that we had appealed this determination by
requesting a hearing before a Nasdaq listing qualifications panel.

40



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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: November 20, 2002 |  |  |  | By:  /s/ Michael Peckham                                                                                                                         
|                        |  |  |  |                                                                                                                                                  
|                        |  |  |  | Michael
Peckham
Chief Financial Officer and Senior Vice President
(On behalf of the registrant and as Principal Financial and
Accounting Officer)

41



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##### Table of Contents






CERTIFICATIONS

I, Zvi Alon, certify that:

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

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

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

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

I, Michael Peckham, certify that:

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

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

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

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

42