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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549



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FORM 10-Q


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

For the quarterly period ended March 31, 2002

OR

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

For the transition period from ___________________ to __________________

Commission file number 0-22158

NetManage, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

YES [X] NO [   ]

Number of shares of registrants common stock outstanding as of May 1, 2002:
62,887,536



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TABLE OF CONTENTS



|                          |                                                                                                 |                                                               |  |  |  |  |  | 
|------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                                 | CONDENSED CONSOLIDATED BALANCE SHEETS                        
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS              
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF OTHER 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.
|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               



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NETMANAGE, INC.

Table of Contents

|         |  |                                                                                                                            |  |     
|-------- |  | -------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                            |  | Page
|         |  |                                                                                                                            |  |     
|PART I.  |  | FINANCIAL INFORMATION                                                                                                      |  |     
|Item 1.  |  | Financial Statements                                                                                                       |  |     
|         |  | Condensed Consolidated Balance Sheets at March 31, 2002 and December 31, 2001                                              |  | 3   
|         |  | Condensed Consolidated Statements of Operations for the three months ended
March 31, 2002 and March 31, 2001               |  | 4   
|         |  | Condensed Consolidated Statements of Other Comprehensive Loss for the three
months ended March 31, 2002 and March 31, 2001 |  | 5   
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and March 31, 2001               |  | 6   
|         |  | Notes to Condensed Consolidated Financial Statements                                                                       |  | 7   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                      |  | 12  
|Item 3.  |  | Factors that May Affect Future Results and Financial Condition                                                             |  | 20  
|PART II. |  | OTHER INFORMATION                                                                                                          |  |     
|Item 1.  |  | Legal Proceedings                                                                                                          |  | 31  
|Item 2.  |  | Changes in Securities                                                                                                      |  | 31  
|Item 3.  |  | Defaults upon Senior Securities                                                                                            |  | 31  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                        |  | 31  
|Item 5.  |  | Other Information                                                                                                          |  | 31  
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                           |  | 31  
|         |  | Signatures                                                                                                                 |  | 32  

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NETMANAGE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |              |         |        |        | 
|-------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | -------------------------- | ------------------------------------------ | ------- | ----------- | ------ | ------------ | ------- | ------ | ------ | 
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         | March 31,   |        | December 31,
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         | 2002        |        | 2001        
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         | (Unaudited) |        |              |         |       
|ASSETS                                
|Current Assets:                        |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       | Cash and cash equivalents                                                                                                                                                          |                                 | $                          | 33,601                                     |         |             | $      | 32,766       |        
|                                       | Short-term investments                                                                                                                                                             |                                 |                            | 732                                        |         |             |        | 792          |        
|                                       | Accounts receivable, net of allowances of $2,363 and $2,488, respectively                                                                                                          |                                 |                            | 12,389                                     |         |             |        | 17,794       |        
|                                       | Prepaid expenses and other current assets                                                                                                                                          |                                 |                            | 4,058                                      |         |             |        | 3,487        |        
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    | Total current assets            |                            |                                            | 50,780  |             |        |              | 54,839  |       
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|Property and equipment, at cost        |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    | Computer software and equipment |                            |                                            | 9,140   |             |        |              | 9,259   |       
|                                       |                                                                                                                                                                                    | Furniture and fixtures          |                            |                                            | 6,103   |             |        |              | 6,138   |       
|                                       |                                                                                                                                                                                    | Leasehold improvements          |                            |                                            | 1,826   |             |        |              | 2,805   |       
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    |                                 | 17,069                     |                                            |         |             | 18,202 |             
|                                       |                                                                                                                                                                                    | Less-accumulated depreciation   |                            |                                            | (13,617 | )           |        |              | (14,319 | )     
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    |                                 | Net property and equipment |                                            |         | 3,452       |        |              |         | 3,883  |       
|Goodwill and other intangibles, net    |                                                                                                                                                                                    |                                 | 16,738                     |                                            |         |             | 17,581 |             
|Other assets                           |                                                                                                                                                                                    |                                 | 3,060                      |                                            |         |             | 3,133  |             
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    |                                 |                            | Total assets                               |         | $           | 74,030 |              |         | $      | 79,436 | 
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|LIABILITIES AND STOCKHOLDERS EQUITY  
|Current Liabilities:                   |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       | Accounts payable                                                                                                                                                                   |                                 | $                          | 1,942                                      |         |             | $      | 2,691        |        
|                                       | Accrued liabilities                                                                                                                                                                |                                 |                            | 6,547                                      |         |             |        | 7,262        |        
|                                       | Accrued payroll and related expenses                                                                                                                                               |                                 |                            | 3,423                                      |         |             |        | 3,280        |        
|                                       | Deferred revenue                                                                                                                                                                   |                                 |                            | 18,327                                     |         |             |        | 21,154       |        
|                                       | Income taxes payable                                                                                                                                                               |                                 |                            | 3,747                                      |         |             |        | 3,811        |        
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    |                                 | Total current liabilities  |                                            |         | 33,986      |        |              |         | 38,198 |       
|Long-term liabilities                  |                                                                                                                                                                                    |                                 | 210                        |                                            |         |             | 286    |             
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    |                                 | Total liabilities          |                                            |         | 34,196      |        |              |         | 38,484 |       
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|Commitments and contingencies (Note 5) |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|Stockholders equity:                  |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       | Common stock, $0.01 par value -
Authorized - 125,000,000 shares
Issued - 73,700,415 and 73,699,646 shares respectively
Outstanding - 63,187,901 and 63,980,803 shares respectively |                                 |                            | 737                                        |         |             |        | 737          |        
|                                       | Treasury stock, at cost - 10,512,514 and 9,719,612 shares respectively                                                                                                             |                                 |                            | (18,946                                    | )       |             |        | (18,267      | )      
|                                       | Additional paid in capital                                                                                                                                                         |                                 |                            | 176,789                                    |         |             |        | 176,789      |        
|                                       | Accumulated deficit                                                                                                                                                                |                                 |                            | (113,201                                   | )       |             |        | (112,668     | )      
|                                       | Accumulated other comprehensive loss                                                                                                                                               |                                 |                            | (5,545                                     | )       |             |        | (5,639       | )      
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    | Total stockholders equity      |                            |                                            | 39,834  |             |        |              | 40,952  |       
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             
|                                       |                                                                                                                                                                                    |                                 |                            | Total liabilities and stockholders equity |         | $           | 74,030 |              |         | $      | 79,436 | 
|                                       |                                                                                                                                                                                    |                                 |                            |                                            |         |             |        |             

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

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

|                                             |                                   |                          |        |                    |        |      |        |        |        | 
|-------------------------------------------- | --------------------------------- | ------------------------ | ------ | ------------------ | ------ | ---- | ------ | ------ | ------ | 
|                                             |                                   |                          |        | Three Months Ended
|                                             |                                   |                          |        | March 31,         
|                                             |                                   |                          |        |                   
|                                             |                                   |                          |        | 2002               |        | 2001
|                                             |                                   |                          |        |                    |        |     
|Net Revenues:                                |                                   |                          |        |                    |        |      |        |       
|                                             | License                           |                          | $      | 10,174             |        |      | $      | 11,409 |       
|                                             | Services                          |                          |        | 8,823              |        |      |        | 10,322 |       
|                                             |                                   |                          |        |                    |        |      |        |       
|                                             |                                   | Total net revenues       |        |                    | 18,997 |      |        |        | 21,731 | 
|Cost of Revenues:                            |                                   |                          |        |                    |        |      |        |       
|                                             | License                           |                          |        | 803                |        |      |        | 805    |       
|                                             | Services                          |                          |        | 1,666              |        |      |        | 1,884  |       
|                                             |                                   |                          |        |                    |        |      |        |       
|                                             |                                   | Total cost of revenues   |        |                    | 2,469  |      |        |        | 2,689  | 
|                                             |                                   |                          |        |                    |        |      |        |       
|Gross margin                                 |                                   |                          | 16,528 |                    |        |      | 19,042 |       
|                                             |                                   |                          |        |                    |        |      |        |       
|Operating Expenses:                          |                                   |                          |        |                    |        |      |        |       
|                                             | Research and development          |                          |        | 3,597              |        |      |        | 5,723  |       
|                                             | Sales and marketing               |                          |        | 9,605              |        |      |        | 13,791 |       
|                                             | General and administrative        |                          |        | 2,471              |        |      |        | 3,856  |       
|                                             | Amortization of intangible assets |                          |        | 843                |        |      |        | 1,502  |       
|                                             |                                   |                          |        |                    |        |      |        |       
|                                             |                                   | Total operating expenses |        |                    | 16,516 |      |        |        | 24,872 | 
|                                             |                                   |                          |        |                    |        |      |        |       
|Income (loss) from operations                |                                   |                          | 12     |                    |        |      | (5,830 | )     
|Interest income and other, net               |                                   |                          | 34     |                    |        |      | 801    |       
|Transaction
loss on intercompany accounts    |                                   |                          | (546   | )                  |        |      | (70    | )     
|                                             |                                   |                          |        |                    |        |      |        |       
|Loss before income taxes                     |                                   |                          | (500   | )                  |        |      | (5,099 | )     
|Provision for income taxes                   |                                   |                          | 33     |                    |        |      | 135    |       
|                                             |                                   |                          |        |                    |        |      |        |       
|Net loss                                     |                                   | $                        | (533   | )                  |        | $    | (5,234 | )     
|                                             |                                   |                          |        |                    |        |      |        |       
|Net Loss Per Share                           |                                   |                          |        |                    |        |      |        |       
|                                             | Basic                             |                          | $      | (0.01              | )      |      | $      | (0.08  | )     
|                                             | Diluted                           |                          | $      | (0.01              | )      |      | $      | (0.08  | )     
|Weighted Average Common Shares & Equivalents |                                   |                          |        |                    |        |      |        |       
|                                             | Basic                             |                          |        | 63,594             |        |      |        | 65,223 |       
|                                             | Diluted                           |                          |        | 63,594             |        |      |        | 65,223 |       

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

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

|                                 |                                               |   |                    |     |      |   |        |        |  
|-------------------------------- | --------------------------------------------- | - | ------------------ | --- | ---- | - | ------ | ------ | -
|                                 |                                               |   | Three Months Ended
|                                 |                                               |   | March 31,         
|                                 |                                               |   |                   
|                                 |                                               |   | 2002               |     | 2001
|                                 |                                               |   |                    |     |     
|Net loss                         |                                               | $ | (533               | )   |      | $ | (5,234 | )     
|Other comprehensive gain (loss): |                                               |   |                    |     |      |   |        |       
|                                 | Unrealized loss on investments, net           |   |                    | (60 | )    |   |        | (1,656 | )
|                                 | Foreign currency translation adjustments, net |   |                    | 154 |      |   |        | 176    |  
|                                 |                                               |   |                    |     |      |   |        |       
|Other comprehensive loss         |                                               | $ | (439               | )   |      | $ | (6,714 | )     
|                                 |                                               |   |                    |     |      |   |        |       

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

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

|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |         |       |        |     |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------- | ----- | ------------------ | ------ | ------- | ----- | ------ | --- | -
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       | Three Months Ended
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       | March 31,         
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                   
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       | 2002               |        | 2001   
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|                                                     | Net loss                                                                        |                                                                            | $                                                         | (533                                                | )     |                    | $      | (5,234  | )    
|                                                     | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                            |                                                           |                                                     |       |                    |        |         |      
|                                                     |                                                                                 | Depreciation and amortization                                              |                                                           |                                                     | 1,357 |                    |        |         | 2,811 |       
|                                                     |                                                                                 | Provision for doubtful accounts and returns                                |                                                           |                                                     | 10    |                    |        |         |      |       
|                                                     |                                                                                 | Write-off of property, plant & equipment                                   |                                                           |                                                     | 136   |                    |        |         |      |       
|                                                     |                                                                                 | Changes in operating assets and liabilities, net of business combinations: |                                                           |                                                     |       |                    |        |         |       |       
|                                                     |                                                                                 |                                                                            | Accounts receivable                                       |                                                     |       | 5,395              |        |         |       | 6,095  |    
|                                                     |                                                                                 |                                                                            | Prepaids and other current assets                         |                                                     |       | (571               | )      |         |       | 4,471  |    
|                                                     |                                                                                 |                                                                            | Other assets                                              |                                                     |       | 73                 |        |         |       |       |    
|                                                     |                                                                                 |                                                                            | Accounts payable                                          |                                                     |       | (749               | )      |         |       | 164    |    
|                                                     |                                                                                 |                                                                            | Accrued liabilities, payroll and payroll-related expenses |                                                     |       | (530               | )      |         |       | (4,524 | )  
|                                                     |                                                                                 |                                                                            | Deferred revenue and other long-term liabilities          |                                                     |       | (2,827             | )      |         |       | (1,734 | )  
|                                                     |                                                                                 |                                                                            | Income taxes payable                                      |                                                     |       | (64                | )      |         |       | 5      |    
|                                                     |                                                                                 |                                                                            | Long-term liabilities                                     |                                                     |       | (76                | )      |         |       | (1,374 | )  
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|                                                     |                                                                                 |                                                                            |                                                           | Net cash provided by operating activities           |       |                    | 1,621  |         |       |        | 680 |  
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|Cash Flows From Investing Activities:                |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|                                                     | Purchases of short-term investments                                             |                                                                            |                                                           |                                                    |       |                    |        | 70,562  |      
|                                                     | Proceeds from maturities of short-term investments                              |                                                                            |                                                           |                                                    |       |                    |        | (69,877 | )    
|                                                     | Purchases of property and equipment                                             |                                                                            |                                                           | (261                                                | )     |                    |        | (46     | )    
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|                                                     |                                                                                 |                                                                            |                                                           | Net cash provided by (used in) investing activities |       |                    | (261   | )       |       |        | 639 |  
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|Cash Flows From Financing Activities:                |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|                                                     | Proceeds from sale of common stock, net of issuance costs                       |                                                                            |                                                           |                                                    |       |                    |        | 2       |      
|                                                     | Repurchase of common stock                                                      |                                                                            |                                                           | (679                                                | )     |                    |        | (44     | )    
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|                                                     |                                                                                 |                                                                            |                                                           | Net cash used in financing activities               |       |                    | (679   | )       |       |        | (42 | )
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|Effect of exchange rate changes on cash              |                                                                                 |                                                                            | 154                                                       |                                                     |       |                    | 65     |        
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|Net increase (decrease) in cash and cash equivalents |                                                                                 |                                                                            | 835                                                       |                                                     |       |                    | 1,342  |        
|Cash and cash equivalents, beginning of the period   |                                                                                 |                                                                            | 32,766                                                    |                                                     |       |                    | 35,017 |        
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        
|Cash and cash equivalents, end of the period         |                                                                                 | $                                                                          | 33,601                                                    |                                                     |       | $                  | 36,359 |        
|                                                     |                                                                                 |                                                                            |                                                           |                                                     |       |                    |        |        

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

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

1. Interim financial data

The interim financial statements for the three month period ended March
31, 2002 and 2001 for NetManage, Inc. (NetManage) have been prepared on the
same basis as our fiscal 2001 year-end financial statements as reported in our
fiscal year 2001 Annual Report on Form 10-K and, in our opinion, include all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial information set forth therein, in accordance with
accounting principles generally accepted in the United States. As discussed
under the heading Critical accounting policies in Part 1, Item 2 Managements
discussion and analysis of financial condition and results of operations,
actual results for the fiscal year 2002 could differ materially from those
reported in this Form 10-Q. The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with the instructions to
Form 10-Q but do not include all the information and footnotes required by
accounting principles generally accepted in the United States and should,
therefore, be read in conjunction with our fiscal year 2001 Annual Report on
Form 10-K. We believe the results of operations for the interim periods are
subject to fluctuation and may not be an indicator of future financial
performance.

2. Consolidation

The consolidated financial statements include our accounts and those of
our wholly owned subsidiaries. All intercompany accounts and transactions have
been eliminated.

3. 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 based licenses include the first year of
maintenance and support. To date such term based licenses have been
insignificant.

We apply the provisions of Statement of Position ,or SOP, 97-2, Software
Revenue Recognition, as amended by SOP 98-9 Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions to all
transactions involving the license of software products.

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

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

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

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

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

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transaction-by-transaction basis.

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

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

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

4. Goodwill and other intangible assets, net

Goodwill and other intangible assets acquired were amortized through
December 31, 2001 on a straight-line basis over their estimated useful lives
ranging from two to seven years. We adopted Statement of Financial Accounting
Standards, or SFAS, No. 142, Goodwill and Other Intangible
Assets and SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, on January 1,
2002 and therefore, under the provisions of SFAS No. 144, we no longer amortize goodwill
but rather conduct an assessment for impairment on at least an annual
basis, applying a fair-value based
test. Accumulated amortization for Goodwill and other intangible assets was
approximately $22.8 million and $21.9 million at March 31, 2002 and December
31, 2001, respectively. The increase in accumulated amortization for the
period ended March 31, 2002 is attributable solely to the amortization of other
intangible assets. Goodwill amortization for the three-month period ended March
31, 2002 would have been approximately $0.7 million if SFAS No. 142 had not
been effective January 1, 2002, Goodwill amortization for the three-month
period ended March 31, 2001 was approximately $0.7 million, and for the year
ended December 31, 2001 was approximately $2.7 million.

Subsequent to our acquisitions, we assess long-lived assets acquired for
impairment under Financial Accounting Standards Boards, or FASBs, SFAS No.
121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of. Under those rules, we review long-lived assets and
certain identifiable intangibles to be held and used, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. We evaluate any possible impairment of long-lived
assets using estimates of undiscounted future cash flows. If an impairment loss
is to be recognized, it is measured as the amount by which the carrying amount
of the asset exceeds the fair value of the asset. We evaluate the fair value of
our long-lived assets and intangibles using primarily the estimated discounted
future cash flows method. We use other alternative valuation techniques
whenever the estimated discounted future cash flows method is not applicable.

5. Net loss per share

Basic net loss per share data has been computed using the weighted-average
number of shares of common stock outstanding during the 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-month periods ended March 31, 2002 and 2001, the number of
shares used in the computation of diluted loss per share were the same as those
used for the computation of basic loss per share. Potentially dilutive
securities of 1,151,962 and 508,726 shares were not included in the computation
of diluted net loss

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per common share because to do so would have been anti-dilutive for the
three-month periods ended March 31, 2002 and 2001 respectively.

6. 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 estimated expenses for facilities-related
charges, $1.6 million of employee-related expenses for employee terminations
and an $800,000 settlement to Verity Systems, Inc. for a software license that
we no longer planned to use and, accordingly, wrote-off. As of March 31, 2002,
we had incurred costs totaling approximately $4.8 million related to the
restructuring, which required $4.8 million in cash expenditures. The remaining
reserve related to this restructuring was approximately $0.8 million, which is
included in accrued liabilities.

The following table lists the components of our August 2000 restructuring
charge for the three-month period ended March 31, 2002 (in thousands):

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

In the fourth quarter of 1999, following the acquisitions of Wall Data,
Inc., or Wall Data, and Simware, Inc., or Simware, we initiated a plan to
restructure our worldwide operations in connection with the integration of
operations of the two acquired companies. In connection with this plan, we
recorded a $3.8 million charge to operating expenses in 1999. The restructuring
charge includes approximately $1.9 million of estimated expenses for
facilities-related charges associated with the consolidation of redundant
operations, $1.4 million of employee-related expenses for employee terminations
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 were expected to be funded from internal
operations. As of March 31, 2002, we have incurred costs totaling approximately
$2.9 million related to the restructuring, which required $2.9 million in cash
expenditures. The remaining reserve related to this restructuring was
approximately $0.9 million, which is included in accrued liabilities.

The following table lists the change in our restructuring charge from 1999
for the three-month period ended March 31, 2002 (in thousands):

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

Prior to the acquisition 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. We
anticipated that the execution of the restructuring actions would require total
cash expenditures of approximately $0.7 million that were expected to be funded
from internal operations. As of March 31, 2002, we had incurred costs totaling
approximately $0.5 million. The remaining reserve related to this restructuring
is approximately $0.2 million and is included in accrued liabilities.

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

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

7. 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 a relator, Kenneth Fisher. We, and our
affiliates, first learned of the action when we were served with the amended
complaint in May 2001. On September 5, 2001, the relator agreed to voluntarily
dismiss us from this action in exchange for our agreement to toll applicable
statutes of limitation as to the relators claims.

On January 31, 2002, on an order of the court following defendants
successful motion to dismiss the amended complaint, the relator filed a Second
Amended Complaint, or Complaint, 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). The relator alleges damages in excess of $30,000,000.

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

Moreover, we may be contingently liable with respect to certain asserted
and unasserted claims that arise during the normal course of
business. However, in the opinion of management, the outcome of these
and the items above will not have a material adverse impact on the
consolidated financial statements.

8. Treasury stock

During the first three months of 2002, we purchased 792,902 shares of our
outstanding common shares on the open market at an average purchase price of
$0.86 per share for a total cost of approximately $0.7 million.

9. Correspondence from Nasdaq Stock Market

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

If we are unable to demonstrate compliance with the minimum bid price
listing requirement for ten consecutive trading days on or before June 19,
2002, Nasdaq will provide us with written notification that our common stock
will be de-listed from the Nasdaq

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National Market. At that time we may appeal the staffs decision to a
Nasdaq Listing Qualification Panel. We intend to pursue all options available
to us to meet the Nasdaq listing requirements.

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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 future results and
financial conditions 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 on Form
10-Q are based on information available to us on the date hereof, and we assume
no obligation to update any such forward-looking statements.

Overview

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

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

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

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Host Accesssolutions that deliver connectivity for web browser users
without the requirement for software on the users device other than the
browser, collectively known as zero footprint solutions. Our Host Integration
products 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 the new platform
solutions such as those built using IBMs WebSphere or BEAs WebLogic. Host
Integrationproducts are marketed and sold under the OnWeb® brand name. We and
our customers believe that we collectively benefit from the fact that the
underlying technology employed by our server-side Host Accessand server-side
Host Integrationsolutions is the same.

Critical accounting policies

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

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

We apply the provisions of Statement of Position, or SOP, 97-2, Software
Revenue Recognition, as amended by SOP 98-9 Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions to all
transactions involving the licensing of software products.

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

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

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

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

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

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

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are included in the initial licensing fee, the value of the services
determined based on vendor specific objective evidence is unbundled and
recognized ratably over the related service period. Service revenues derived
from consulting and training are deferred and recognized when the services are
performed and the collectibility is deemed probable. To date, consulting
revenue has not been significant.

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

Managements current estimated range of liability related to some of the
pending litigation is based on claims for which our management can estimate the
amount and range of loss. Because of the uncertainties related to both the
amount and range of loss on the remaining pending litigation, the actual
outcome may significantly differ from management estimates. As additional
information becomes available, we will assess the potential liability related
to 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 within our consolidated balance
sheet. We must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe that recovery
is not likely, we must establish a valuation allowance. To the extent we
establish a valuation allowance or increase this allowance in a period, we must
include an expense within the tax provision in the statement of operations.

Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities, and any valuation
allowance recorded against our net deferred tax assets. We have recorded a
valuation allowance of $57.0 million as of March 31, 2002, due to uncertainties
related to our ability to utilize some of our deferred tax assets, primarily
consisting of certain net operating losses carried forward and foreign tax
credits, before they expire. The valuation allowance is based on our estimates
of taxable income by jurisdiction in which we operate and the period over which
our deferred tax assets will be recoverable. In the event that actual results
differ from these estimates, we will adjust these estimates in future periods.

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



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

When we determine that the carrying value of intangibles, long-lived
assets and related goodwill and enterprise level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, we measure impairment based on a projected discounted cash flow
method using a discount rate determined by us to be commensurate with the risk
inherent in our current business model. Net intangible assets, long-lived
assets, and goodwill amounted to $16.7 million as of March 31, 2002.

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In 2002, SFAS No. 142, Goodwill and Other Intangible Assets became
effective and as a result, we ceased to amortize approximately $7.8 million of
goodwill. We had recorded approximately $2.7 million of amortization on these
amounts during 2001 and would have recorded approximately $2.7 million of
amortization during 2002. In lieu of amortization, we are required to perform
an initial impairment review of our goodwill in 2002 and at least an annual
impairment review thereafter. We are in the process of performing this review
and expect to complete the test during the second quarter of fiscal 2002.

Operations

During the past several years, we have taken a number of initiatives
intended to control costs and reduce operating expenses, including the
discontinuance of several low revenue generating products and the
implementation of a worldwide restructuring of our operations 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 Access product line
includes our products branded Rumba and ViewNow. The Host Integration product
line is designed to provides the technology to allow customers to leverage the
investment they have in existing host based systems, applications and business
processes for new web-based presentation, applications, and solutions. The Host
Integration product line includes our products branded OnWeb. The Realtime
Interactive Support functionality, previously sold as the standalone product
Support Now, is being incorporated into our full line of products and we
believe adds value to the Host Accessand Web Publishing Integration and
Development product offerings.

We experienced a reduction in incoming orders from the latter half of 2000
through the third quarter of 2001, and incoming orders did not begin to
increase until the fourth quarter of 2001. The slowdown in the North American
economy, as well as the events associated with the September 11, 2001 disaster,
influenced customers willingness to place new orders for our products. We
experienced significant revenue reduction in each of the quarters of 2001,
compared to the same quarter of the previous year and this trend continued into
the first quarter of 2002. In some cases, customers chose to reduce the number
of desktop units at the time of annual maintenance renewal to reflect a
reduction-in-force at their facilities, or they continued to postpone their
buying decisions due to budget constraints. The reduction in revenue in the
first quarter of 2002 primarily was attributed to our international operations.
Our first quarter 2002 revenues are approximately 12% less than those recorded
in the first quarter of 2001 and approximately 4% less than those recorded in
the fourth quarter of 2001.

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 messaging 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. We expect the positive results of the product simplification to become
more apparent in fiscal 2002. 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. In the first quarter of 2002,
we recorded approximately $1.1 million in revenue related to this compliance
program.

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 6 
Restructuring of operations, above). 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 Realtime
Interactive Support product line  each with dedicated development, sales,
marketing, and support resources.

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. 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 presentations, applications and
solutions. This product line includes our products branded as OnWeb. Realtime
Interactive Support, previously sold as the standalone product Support Now, is
now built into our full line of products and we believe adds value through
increased functionality to the Host Accessand Host Integrationproduct offerings.

In fiscal year 2001, we experienced a general decline in revenues compared
to the prior year, a trend that has continued into the first quarter of 2002.
We believe that our revenues have been adversely impacted by the general
slowdown in technology purchases due to current economic conditions in North
America and further by the events of September 11, 2001. We continue to experience pricing

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pressures on our products. There can be no assurance that revenues will
increase at all in future periods. See Factors that may affect future results
and financial condition  Marketing and Distribution below.

Because we generally ship software products within a short period after
receipt of an order, we do not have a material backlog of unfilled orders, and
revenues in any one-quarter are substantially dependent on orders booked in
that quarter. Our operating expense levels are based in part on our expectation
of future revenues and, to a large extent, are fixed. Operating expenses are
expected to stabilize at those levels incurred in the last half of fiscal year
2001 and the first quarter of fiscal year 2002 and may fluctuate as a
percentage of net revenues as we develop and introduce new products. While we
continue to adjust our operations to address these issues, there can be no
assurance that net revenues or net loss will improve in the future.

We announced a restructuring on August 3, 2000. As part of the
restructuring, we reduced our workforce by approximately 17%, consisting mostly
of Engineering and Customer Support personnel who were focused primarily on our
older technologies, primarily acquired through the Wall Data and FTP
acquisitions. With the reduction in personnel, knowledge levels with respect to
certain products, 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, an $800,000 settlement to Verity for a
software license that we no longer plan to use and accordingly wrote-off and
approximately $200,000 in other equipment and professional service costs. As of
March 31, 2002, we had incurred costs totaling approximately $4.8 million
related to the restructuring which required $4.8 million in cash expenditures.

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 primarily the estimated discounted cash
flows method. We used the same methodology to evaluate the fair value of our
long-lived assets and intangibles to allocate purchase price at the time of
acquisition. As a result, we wrote off $42.2 million of goodwill and other
intangibles through a charge to operations in the third quarter of fiscal 2000.
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 1,121,495 shares of our
common stock and issued warrants and options to purchase an additional 727,237
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 the three employees of Aqueduct who subsequently left our employ.
The acquisition was accounted for as a purchase.

On December 29, 1999, we completed our acquisition of Wall Data, a leader
in the PC-to-IBM host connectivity market. We acquired a total of 10,203,344
outstanding shares of Wall Data common stock and paid cash to qualifying Wall
Data option holders and employee stock purchase plan participants pursuant to a
cash tender offer of $9.00 per common share. Total aggregate payments pursuant
to the cash tender offer amounted to approximately $94.0 million. We completed
the transaction in two stages. The acquisition was accounted for as a
purchase.

On December 10, 1999, we completed our acquisition of Simware, a leading
provider of e-commerce solutions and web integration servers. We acquired a
total of 7,503,372 shares of Simware common stock and paid cash to qualifying
Simware option holders and employee stock purchase plan participants pursuant
to a cash tender offer of $3.75 per common share. Total aggregate payments
pursuant to the cash tender offer amounted to approximately $29.2 million. The
acquisition was accounted for as a purchase.

As described in detail below, under the heading Factors that may affect
future results and financial condition, acquisitions involve a number of
risks, including risks relating to the integration of the acquired companys
operations, personnel, and products. There can be no assurance that the
integration of previously acquired companies, or the integration of any future
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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Three months ended March 31, 2002 compared to March 31, 2001 (dollars in
millions):

|                                          |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |     |     |  
|----------------------------------------- | ------------------------------ | ------------------ | ---- | ---------------------------- | ----- | ---- | ---- | --------------------- | ----- | - | ---- | ---- | ---- | - | ---- | --- | --- | -
|                                          |                                |                    |      | Three months ended March 31,
|                                          |                                |                    |      |                             
|                                          |                                |                    |      | 2002                         |       | 2001 |      | Change               
|                                          |                                |                    |      |                              |       |      |      |                      
|                                          |                                |                    |      |                              |       |      |      | (Dollars in millions) |       |   |      |     
|Net revenues                              |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |    
|                                          | License fees                   |                    | $    | 10.2                         |       |      | $    | 11.4                  |       |   | $    | (1.2 | )    |   |      | -11 | %  
|                                          | Services                       |                    |      | 8.8                          |       |      |      | 10.3                  |       |   |      | (1.5 | )    |   |      | -15 | %  
|                                          |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |    
|                                          |                                | Total net revenues |      |                              | 19.0  |      |      |                       | 21.7  |   |      |      | (2.7 | ) |      |     | -12 | %
|As a percentage of net revenues:          |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |    
|                                          | License fees                   |                    |      | 53.7                         | %     |      |      | 52.5                  | %     |   |      |      |      |   |      |     |    
|                                          | Services                       |                    |      | 46.3                         | %     |      |      | 47.5                  | %     |   |      |      |      |   |      |     |    
|                                          |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |    
|                                          |                                | Total net revenues |      |                              | 100.0 | %    |      |                       | 100.0 | % |      |      |      |   |      |     |     |  
|Gross margin  license fees               |                                | $                  | 9.4  |                              |       | $    | 10.6 |                       |       | $ | (1.2 | )    |      |   | -11  | %  
|Gross margin  service                    |                                |                    | 7.1  |                              |       |      | 8.4  |                       |       | $ | (1.3 | )    |      |   | -15  | %  
|                                          |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |    
|                                          |                                | Total gross margin |      | $                            | 16.5  |      |      | $                     | 19.0  |   |      | $    | (2.5 | ) |      |     | -13 | %
|As a percentage of net revenue            |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |    
|                                          | Gross margin  license fees    |                    |      | 49.5                         | %     |      |      | 48.8                  | %     |   |      |      |      |   |      |     |    
|                                          | Gross margin  service         |                    |      | 37.3                         | %     |      |      | 38.8                  | %     |   |      |      |      |   |      |     |    
|                                          |                                |                    |      |                              |       |      |      |                       |       |   |      |      |      |   |      |    
|                                          |                                | Total gross margin |      |                              | 86.8  | %    |      |                       | 87.6  | % |      |      |      |   |      |     |     |  
|Research and development                  |                                | $                  | 3.6  |                              |       | $    | 5.7  |                       |       | $ | (2.1 | )    |      |   | -37  | %  
|                                          | As a percentage of net revenue |                    |      | 18.9                         | %     |      |      | 26.3                  | %     |   |      |      |      |   |      |     |    
|Sales and marketing                       |                                | $                  | 9.6  |                              |       | $    | 13.8 |                       |       | $ | (4.2 | )    |      |   | -30  | %  
|                                          | As a percentage of net revenue |                    |      | 50.5                         | %     |      |      | 63.6                  | %     |   |      |      |      |   |      |     |    
|General and administrative                |                                | $                  | 2.5  |                              |       | $    | 3.8  |                       |       | $ | (1.3 | )    |      |   | -34  | %  
|                                          | As a percentage of net revenue |                    |      | 13.2                         | %     |      |      | 17.5                  | %     |   |      |      |      |   |      |     |    
|Amortization of goodwill                  |                                | $                  | 0.8  |                              |       | $    | 1.5  |                       |       | $ | (0.7 | )    |      |   | -47  | %  
|                                          | As a percentage of net revenue |                    |      | 4.2                          | %     |      |      | 6.9                   | %     |   |      |      |      |   |      |     |    
|Interest income and other, net            |                                | $                  |     |                              |       | $    | 0.8  |                       |       | $ | (0.8 | )    |      |   | -100 | %  
|                                          | As a percentage of net revenue |                    |      | 0.0                          | %     |      |      | 3.7                   | %     |   |      |      |      |   |      |     |    
|Transaction loss on intercompany accounts |                                | $                  | (0.5 | )                            |       | $    | (0.1 | )                     |       | $ | (0.4 | )    |      |   | 400  | %  
|                                          | As a percentage of net revenue |                    |      | -2.6                         | %     |      |      | -0.5                  | %     |   |      |      |      |   |      |     |    
|Provision (benefit) for income taxes      |                                | $                  |     |                              |       | $    | 0.1  |                       |       | $ | (0.1 | )    |      |   | -100 | %  
|                                          | Effective tax rate             |                    |      | 0.0                          | %     |      |      | 0.5                   | %     |   |      |      |      |   |      |     |    
|Net income (loss)                         |                                | $                  | (0.5 | )                            |       | $    | (5.2 | )                     |       | $ | 4.7  |      |      |   | -90  | %  
|                                          | As a percentage of net revenue |                    |      | -2.6                         | %     |      |      | -24.0                 | %     |   |      |      |      |   |      |     |    

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. We offer our customers a 30-day right-of-return on sales and
record an estimate of such returns at the time of product delivery based on
historical experience. To date, such returns have been insignificant. 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 a portion 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.

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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 the services are included in the initial licensing fee, the
residual 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 revenues and service revenues decreased for the three-month period
ended March 31, 2002 as compared to the same period in 2001. This decrease
resulted from customer decisions to cancel or postpone purchases of our
products, due to the sluggish North American economy, and competitive pressures on our
average selling prices.

We have operations worldwide with sales offices located in the United
States, Europe, Canada, Latin America, Israel and Japan. Revenues outside of
North America (United States and Canada) as a percentage of total net revenues
were approximately 27% and 26% for the three months ended March 31, 2002 and
2001.

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

Gross margin

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

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

Cost of revenue for license increased slightly as a percentage of net
revenues to 7.9% in the three-month period ended March 31, 2002 from 7.1% for
the first quarter of 2001. This increase was primarily the result of an
increase in localization costs, that is the conversion of product and
documentation into languages other than English, relating to the increased
number of product releases, and a reduction in net license revenue ($1.2
million) for the first quarter of 2002 as compared to the same quarter in 2001.

Cost of revenue for services also increased slightly to 18.9% from 18.1%
as a percentage of net revenues but declined in absolute dollars for the
three-month period ended March 31, 2002 as compared to the same period in 2001.
This increase resulted primarily from a decline in service revenues ($1.5
million) offset in part by a decrease in customer service expenses ($0.2
million) for the first quarter of 2002 as compared to the same quarter in 2001.
The decline in cost of revenue for service expenses primarily resulted from a
reduction in head count of 17 full-time employees in customer service from the
first quarter of 2001 to the end of the first 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.

Research and development

Research and development, or R & D, expenses primarily consist of
salaries and benefits, occupancy and travel expenses, and fees paid to outside
consultants. R & D expenses decreased, in absolute dollars and as a percentage
of net revenues for the three-month period ended March 31, 2002 as compared to
the three month period ended March 31, 2001, primarily as a result of a
reduction in headcount of 45 full time employees for research and development
activities.

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

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

Sales and marketing

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

General and administrative

General and administrative expenses consist primarily of salaries,
benefits, accounting, travel, legal, and occupancy expenses. General and
administrative expenses decreased in absolute dollars and as a percentage of
net revenues for the three month period ended March 31, 2002, as compared to
the three month period ended March 31, 2001, primarily as a result of our ongoing
cost reduction efforts in fiscal year 2001.

Interest income and other, net

Interest income and
other, net for the three-month period ended March 31, 2002
includes approximately $0.1 million of earned interest on cash
and investments offset slightly by interest expense and transaction
losses of approximately $69,000 that are not related to intercompany
accounts (see Transaction loss on intercompany accounts
below). For the comparable period in 2001, interest income and other,
net included approximately $0.9 million of interest income
related to a $5.1 million income tax refund received during that
period and earned interest of approximately $0.2 million on
cash and investments offset by approximately $0.4 million in
interest expense and transaction losses. The reduction in earned
interest results from a reduction in our cash balances and in
interest rates throughout 2001.

Transaction loss on intercompany accounts

In the first quarter of fiscal year 2002, we recorded a transaction loss
associated with intercompany accounts of approximately $0.5 million, almost
exclusively as a result of the decline in the value of the Israeli Shekel
against the U.S. dollar and against the Euro. For the comparable quarter in
fiscal year 2001, the transaction loss associated with intercompany accounts
was approximately $70,000.

Provision for income taxes

Our effective tax rate for 2002 is less than 1% due to our current tax
loss position. Income taxes primarily include international withholding taxes
and state taxes. In the first quarter of 2002, the provision includes
approximately $0.1 million for estimated income taxes offset by income tax
refunds of approximately $69,000. In the first quarter of 2001, the provision
reflected the estimated expense of approximately $0.1 million for income taxes
attributable to that quarter.

Liquidity and capital resources

|                                                    |  |           |      |              |  |   |      | 
|--------------------------------------------------- |  | --------- | ---- | ------------ |  | - | ---- | 
|                                                    |  | March 31, |      | December 31,
|(In millions)                                       |  | 2002      |      | 2001        
|                                                    |  |           |      |             
|Cash and cash equivalents                           |  | $         | 33.6 |              |  | $ | 32.8 | 
|Short-term investments                              |  |           | 0.7  |              |  |   | 0.8  | 
|Net cash provided by (used in) operating activities |  |           | 1.5  |              |  |   | 0.6  | 
|Net cash provided by (used in) investing activities |  |           | (0.3 | )            |  |   | 0.6  | 
|Net cash provided by (used in) financing activities |  |           | (0.7 | )            |  |   |     | 

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

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During the three months ended March 31, 2002, our aggregate cash, cash
equivalents and short-term investments increased from $33.6 million to $34.3
million. This increase was due primarily to the collection of outstanding
receivables offset by an increase in prepaid expenses, a reduction in accounts
payable, an unrealized loss of $0.1 million in marketable securities, and the
purchase of approximately $0.7 million in treasury 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 and used in financing activities in the three-month
period ended March 31, 2002 reflects our repurchase 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 fifteen million shares of our common stock through open market
purchases. In the twelve months ended December 31, 2001, we repurchased
2,360,547 shares of our common stock on the open market at an average purchase
price of $0.79 per share for a total cost of approximately $1.9 million. During
the three months ended March 31, 2002, we repurchased 792,902 shares of our
common stock on the open market at an average purchase price of $0.86 per share
for a total cost of approximately $0.7 million. Cumulatively, as of March 31,
2002, we had repurchased 10,512,514 shares of our common stock at an average
price of $1.80 per share for a total cost of approximately $18.9 million.

At March 31, 2002, we had working capital of $16.8 million. We believe
that our current cash balances and future operating cash flows will be
sufficient to meet our working capital and capital expenditure requirements 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 transact business in various foreign currencies, primarily in Europe
and Israel. Prior to 2000, we had established a foreign currency-hedging
program, utilizing foreign currency forward exchange contracts (forward
contracts) to hedge certain foreign currency exposures in certain European
countries. Under 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 do not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period were marked-to-market with unrealized
gains and losses included in interest income and, thus, were recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts matured, the realized gains and losses were recorded and were
included in net income (loss) as a component of interest income. Our ultimate
realized gain or loss with respect to currency fluctuations depended upon the
currency exchange rates and other factors in effect as the contracts mature.

We have not used foreign currency forward contracts in 2002.

Item 3  Factors that may affect 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

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immaterial may also affect our business operations. If any of these risks
actually occur, our business, financial condition or results of operations
could be seriously harmed. In that event, the market price for our common stock
could decline and you may lose part or all of your investment.

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

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



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

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

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

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

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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 $11.3 million for the
year ended December 31, 2001. Despite our operating profit in the first quarter of
2002, we have not achieved profitability on an annual basis since 1995 and we
may never obtain sufficient revenues to sustain profitability in any future
period. In addition, we cannot be certain that we can remain profitable or ever
increase profitability, particularly to the extent that we face price
competition. Increasing competition may cause our prices to decline, which
would harm our operating results. We expect our prices for our software
products to decline over the next few years. We expect to face increased
competition in markets where we sell our products, which will make it more
difficult to maintain our prices and profit margins even if our sales volumes
increase. 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 certain elements of the marketing
and distribution of our products. The agreements in place with these
organizations are generally non-exclusive, of limited duration, are terminable
with little or no notice by either party and generally do not contain minimum
purchase requirements. These distributors of our products are not within our
control and generally represent competing product lines of other companies in
addition to our products. There can be no assurance that these organizations
will give a high priority to the marketing of our products, and they may give a
higher priority to the products of our competitors.

Furthermore, our results of operations can also be materially adversely
affected by changes in the inventory strategies of our resellers, which can
occur rapidly and may not be related to end-user demand. As part of our
continued strategy of selling through multiple distribution channels, we expect
to continue using indirect distribution channels, particularly value-added
resellers and system integrators, in addition to distributors and original
equipment manufacturers. Indirect sales may grow as a percentage of both
domestic and total net revenues during 2002 and beyond, as a result of
acquisitions or increased market penetration. Any material increase in our
indirect sales as a percentage of revenues may adversely affect our average
selling prices and gross margins due to lower unit costs that are typically
charged when selling through indirect channels. There can be no assurance that
we will be able to attract or retain resellers and distributors who will be
able to market our products effectively, will be qualified to provide timely
and cost-effective customer support and service, or will continue to represent
our products. If we are unable to recruit or retain important resellers or
distributors or if they decrease their sales of our products, we may suffer a
material adverse effect on our business, financial condition or results of
operations.

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

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

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

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



| |  |  | net tangible assets of $4,000,000;
| | - |  | ----------------------------------
|
| |  |  | a public float of 750,000 shares; 

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| |  |  | a market value of the public float of $5,000,000; 
| | - |  | --------------------------------------------------
|
| |  |  | a minimum bid price of $1 per share;              
|
| |  |  | 400 round lot shareholders;                       
|
| |  |  | two market makers; and                            
|
| |  |  | compliance with Nasdaq corporate governance rules.

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

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

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

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

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

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

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



| |  |  | the diversion of managements attention away from day-to-day operations;
| | - |  | ------------------------------------------------------------------------

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| |  |  | difficulties in the assimilation of acquired operations and personnel (such as sales, engineering, and customer support);
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the integration of acquired products with existing product lines;                                                        
|
| |  |  | the failure to realize anticipated benefits of cost savings and synergies;                                               
|
| |  |  | the loss of customers;                                                                                                   
|
| |  |  | undisclosed liabilities;                                                                                                 
|
| |  |  | adverse effects on reported operating results;                                                                           
|
| |  |  | the amortization of acquired intangible assets;                                                                          
|
| |  |  | the loss of key employees; and                                                                                           
|
| |  |  | the difficulty of presenting a unified corporate image.                                                                  

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

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

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

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

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

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

Our success depends on the efforts and abilities of our senior management
and certain other key personnel. Many of our key employees are employed on an
at-will basis. If any of our key employees 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 competitor. 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 patents may never be issued, and even if issued, may provide us
with little protection

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



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

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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 27% of our net revenues from sales outside of
North America (United States and Canada) during the three-month period ended
March 31, 2002. While we expect that international sales will continue to
account for a significant portion of our net revenues, there can be no
assurance that we will be able to maintain or increase international market
demand for our products or that our distributors will be able to effectively
meet that demand. Risks inherent in our international business activities
generally include, among others:



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

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| |  |  | 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

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

Uncertainties exist regarding our stock repurchase program

Previously, we announced that our board of directors had approved the
repurchase of up to fifteen million shares of our common stock. Stock
repurchase activities are subject to certain pricing restrictions, stock market
forces, management discretion and various regulatory requirements. 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 throughout 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, your percentage ownership in NetManage would
be reduced. Additional financing may not be available when needed and, if such
financing is available, it may not be available on terms favorable to us.

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

As of April 15, 2002, our officers, directors and entities affiliated with
them, in the aggregate, beneficially owned approximately 12.2 million shares,
or approximately 19.6% 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

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

Our financial statements are audited by Arthur Andersen LLP, which has been
indicted by the Department of Justice, and we may need to change auditors,
which would be expensive and could have other adverse consequences.

Arthur Andersen LLP, or Arthur Andersen, has audited our financial
statements since our inception in 1990. Arthur Andersen has been indicted by
the Department of Justice on federal obstruction of justice charges arising
from the governments investigation of Enron Corporation. The SEC has stated
that it will continue accepting financial statements audited, and interim
financial statements reviewed by, Arthur Andersen, so long as Arthur Andersen
makes certain representations concerning audit quality controls. If Arthur
Andersen is unable to meet SEC auditing requirements or is otherwise unable to
perform required audit-related services for us in a timely manner in the
future, or if our board of directors decides that it is in our and our
stockholders best interests to disengage Arthur Andersen, we may have reduced
access to capital markets, we could incur significant costs and delays in
filing audited financial statements and we may be unable to satisfy our SEC
filing requirements, any of which could harm our business. Certain investors,
including significant mutual funds and institutional investors, may choose not
to hold or invest in securities of issuers that engage Arthur Andersen as
auditors or that do not have then current financial reports available.
Furthermore, relief that may be available to stockholders under the federal
securities laws against auditing firms may not be available as a practical
matter against Arthur Andersen should it cease to operate or be financially
impaired.

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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 a relator, Kenneth Fisher. We, and our
affiliates, first learned of the action when we were served with the amended
complaint in May 2001. On September 5, 2001, the relator agreed to voluntarily
dismiss us from this action in exchange for our agreement to toll applicable
statutes of limitation as to the relators claims.

On January 31, 2002, on an order of the court following defendants
successful motion to dismiss the amended complaint, the relator filed a Second
Amended Complaint, or Complaint, 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). The relator alleges damages in excess of $30,000,000.

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

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




Item 2. Changes in Securities

Not applicable




Item 3. Defaults upon Senior Securities

Not applicable




Item 4. Submission of Matters to a Vote of Security Holders

Not applicable




Item 5. Other Information

Not applicable




Item 6. Exhibits and Reports on Form 8-K

a. Exhibits

None

b. Reports on Form 8-K.

None

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##### Table of Contents






SIGNATURES

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

|                   |                              |                                                                                                                                                  
|------------------ | ---------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------
|                   | NETMANAGE, INC.
(Registrant)
|                  
|                  
|DATE: May 10, 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)

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