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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q



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

For the quarterly period ended March 31, 2003

OR



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

For the transition period from
                 to

Commission file number 0-22158

NetManage, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

YES [  ]    NO [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes
[  ]    No [X]

Number of shares of registrants common stock outstanding as of April 30, 2003:
8,620,774



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TABLE OF CONTENTS



|                          |                                                                                               |                                                         |  |  |  |  |  | 
|------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                  
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS        
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
|                          |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS        
|                          |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS   
|                          | Item 2. Managements discussion and analysis of financial condition and results of operations
|                          | Item 3. Quantitative and qualitative disclosures about market risk                           
|                          | Item 4. Controls and procedures                                                              
|PART II OTHER INFORMATION
|                          | Item 1. Legal proceedings                                                                    
|                          | Item 2. Changes in securities and use of proceeds                                            
|                          | Item 3. Defaults upon senior securities                                                      
|                          | Item 4. Submission of matters to a vote of security holders                                  
|                          | Item 5. Other information                                                                    
|                          | Item 6. Exhibits and reports on Form 8-K                                                     
|SIGNATURE                
|CERTIFICATIONS           
|EXHIBIT INDEX            
|EXHIBIT 99.1             



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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, 2003 and December 31, 2002                                                      |  | 3   
|         |  | Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and
March 31, 2002 (as restated)         |  | 4   
|         |  | Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2003
and March 31, 2002 (as restated) |  | 5   
|         |  | Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and
March 31, 2002 (as restated)         |  | 6   
|         |  | Notes to Condensed Consolidated Financial Statements                                                                               |  | 7   
|Item 2.  |  | Managements discussion and analysis of financial condition and results of operations                                              |  | 16  
|Item 3.  |  | Quantitative and qualitative disclosures about market risk                                                                         |  | 32  
|Item 4.  |  | Controls and procedures                                                                                                            |  | 32  
|PART II. |  | OTHER INFORMATION                                                                                                                  |  |     
|Item 1.  |  | Legal proceedings                                                                                                                  |  | 34  
|Item 2.  |  | Changes in securities and use of proceeds                                                                                          |  | 34  
|Item 3.  |  | Defaults upon senior securities                                                                                                    |  | 34  
|Item 4.  |  | Submission of matters to a vote of security holders                                                                                |  | 35  
|Item 5.  |  | Other information                                                                                                                  |  | 35  
|Item 6.  |  | Exhibits and reports on Form 8-K                                                                                                   |  | 35  
|         |  | Signature                                                                                                                          |  | 35  
|         |  | Certifications                                                                                                                     |  | 36  

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

|                                       |                                                                         |                                                                        |                                            |          |           |        |              |          |         |        | 
|-------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------ | -------- | --------- | ------ | ------------ | -------- | ------- | ------ | 
|                                       |                                                                         |                                                                        |                                            |          | March 31, |        | December 31,
|                                       |                                                                         |                                                                        |                                            |          | 2003      |        | 2002        
|                                       |                                                                         |                                                                        |                                            |          |           |        |             
|ASSETS                                 |                                                                         |                                                                        |                                            |          |           |        |              |         
|Current assets:                        |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       | Cash and cash equivalents                                               |                                                                        | $                                          | 28,752   |           |        | $            | 24,014   |        
|                                       | Short-term investments                                                  |                                                                        |                                            | 231      |           |        |              | 80       |        
|                                       | Accounts receivable, net of allowances of $941 and $1,077, respectively |                                                                        |                                            | 6,904    |           |        |              | 18,332   |        
|                                       | Prepaid expenses and other current assets                               |                                                                        |                                            | 3,163    |           |        |              | 2,933    |        
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | Total current assets                       |          |           | 39,050 |              |          |         | 45,359 | 
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|Property and equipment, at cost:       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       | Computer software and equipment                                         |                                                                        |                                            | 1,717    |           |        |              | 1,106    |        
|                                       | Furniture and fixtures                                                  |                                                                        |                                            | 4,699    |           |        |              | 4,598    |        
|                                       | Leasehold improvements                                                  |                                                                        |                                            | 1,286    |           |        |              | 1,273    |        
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | 7,702                                      |          |           |        | 6,977        |         
|                                       | Less-accumulated depreciation                                           |                                                                        |                                            | (5,513   | )         |        |              | (4,654   | )      
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | Net property and equipment                 |          |           | 2,189  |              |          |         | 2,323  | 
|Goodwill                               |                                                                         |                                                                        | 1,762                                      |          |           |        | 1,762        |         
|Other intangibles, net                 |                                                                         |                                                                        | 2,970                                      |          |           |        | 3,573        |         
|Other assets                           |                                                                         |                                                                        | 203                                        |          |           |        | 221          |         
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | Total assets                               |          | $         | 46,174 |              |          | $       | 53,238 | 
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |          |        
|LIABILITIES AND STOCKHOLDERS EQUITY   |                                                                         |                                                                        |                                            |          |           |        |              |         
|Current liabilities:                   |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       | Accounts payable                                                        |                                                                        | $                                          | 1,961    |           |        | $            | 2,431    |        
|                                       | Accrued liabilities                                                     |                                                                        |                                            | 7,504    |           |        |              | 9,549    |        
|                                       | Accrued payroll and payroll-related expenses                            |                                                                        |                                            | 3,290    |           |        |              | 3,693    |        
|                                       | Deferred revenue                                                        |                                                                        |                                            | 15,808   |           |        |              | 18,551   |        
|                                       | Income taxes payable                                                    |                                                                        |                                            | 1,283    |           |        |              | 1,346    |        
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | Total current liabilities                  |          |           | 29,846 |              |          |         | 35,570 | 
|Long-term liabilities                  |                                                                         |                                                                        | 1,552                                      |          |           |        | 1,581        |         
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | Total liabilities                          |          |           | 31,398 |              |          |         | 37,151 | 
|Commitments and contingencies (Note 5) |                                                                         |                                                                        |                                            |          |           |        |              |         
|Stockholders equity:                  |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       | Common stock, $0.01 par value                                           |                                                                        |                                            |          |           |        |              |          |        
|                                       |                                                                         | Authorized  125,000,000 shares                                        |                                            |          |           |        |              |          |         |       
|                                       |                                                                         | Issued  10,698,025 shares                                             |                                            |          |           |        |              |          |         |       
|                                       |                                                                         | Outstanding  8,621,176, and 8,693,108 shares, respectively            |                                            |          | 107       |        |              |          | 107     |       
|                                       |                                                                         | Treasury stock, at cost  2,076,849 and 2,004,917 shares, respectively |                                            |          | (20,804   | )      |              |          | (20,629 | )     
|                                       | Additional paid-in capital                                              |                                                                        |                                            | 177,836  |           |        |              | 177,836  |        
|                                       | Accumulated deficit                                                     |                                                                        |                                            | (139,345 | )         |        |              | (138,157 | )      
|                                       | Accumulated comprehensive loss                                          |                                                                        |                                            | (3,018   | )         |        |              | (3,070   | )      
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | Total stockholders equity                 |          |           | 14,776 |              |          |         | 16,087 | 
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |         
|                                       |                                                                         |                                                                        | Total liabilities and stockholders equity |          | $         | 46,174 |              |          | $       | 53,238 | 
|                                       |                                                                         |                                                                        |                                            |          |           |        |              |          |        

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

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

|                                                |                   |                                   |                          |       |                    |        |        |       |                   |        | 
|----------------------------------------------- | ----------------- | --------------------------------- | ------------------------ | ----- | ------------------ | ------ | ------ | ----- | ----------------- | ------ | 
|                                                |                   |                                   |                          |       | Three months ended
|                                                |                   |                                   |                          |       | March 31,         
|                                                |                   |                                   |                          |       |                   
|                                                |                   |                                   |                          |       | 2003               |        | 2002  
|                                                |                   |                                   |                          |       |                    |        |       
|                                                |                   |                                   |                          |       |                    |        |        |       | (As restated, see
|                                                |                   |                                   |                          |       |                    |        |        |       | Note 8)          
|Net revenues:                                   |                   |                                   |                          |       |                    |        |        |      
|                                                |                   | License fees                      |                          | $     | 6,009              |        |        | $     | 10,163            |       
|                                                |                   | Services                          |                          |       | 8,109              |        |        |       | 8,857             |       
|                                                |                   |                                   |                          |       |                    |        |        |      
|                                                |                   |                                   | Total net revenues       |       |                    | 14,118 |        |       |                   | 19,020 | 
|                                                |                   |                                   |                          |       |                    |        |        |      
|Cost of revenues:                               |                   |                                   |                          |       |                    |        |        |      
|                                                |                   | License fees                      |                          |       | 518                |        |        |       | 803               |       
|                                                |                   | Services                          |                          |       | 1,321              |        |        |       | 1,665             |       
|                                                |                   |                                   |                          |       |                    |        |        |      
|                                                |                   |                                   | Total cost of revenues   |       |                    | 1,839  |        |       |                   | 2,468  | 
|                                                |                   |                                   |                          |       |                    |        |        |      
|Gross margin                                    |                   |                                   | 12,279                   |       |                    |        | 16,552 |      
|                                                |                   |                                   |                          |       |                    |        |        |      
|Operating expenses:                             |                   |                                   |                          |       |                    |        |        |      
|                                                |                   | Research and development          |                          |       | 2,613              |        |        |       | 3,597             |       
|                                                |                   | Sales and marketing               |                          |       | 7,461              |        |        |       | 9,439             |       
|                                                |                   | General and administrative        |                          |       | 2,737              |        |        |       | 2,471             |       
|                                                |                   | Restructuring charges, net        |                          |       | 581                |        |        |       |                  |       
|                                                |                   | Amortization of intangible assets |                          |       | 459                |        |        |       | 763               |       
|                                                |                   |                                   |                          |       |                    |        |        |      
|                                                |                   |                                   | Total operating expenses |       |                    | 13,851 |        |       |                   | 16,270 | 
|                                                |                   |                                   |                          |       |                    |        |        |      
|Income (loss) from operations                   |                   |                                   | (1,572                   | )     |                    |        | 282    |      
|Loss on investments, net                        |                   |                                   | (32                      | )     |                    |        |       |      
|Interest income and other, net                  |                   |                                   | 63                       |       |                    |        | 81     |      
|Foreign currency transaction gains (losses)     |                   |                                   | 36                       |       |                    |        | (595   | )    
|                                                |                   |                                   |                          |       |                    |        |        |      
|Loss before provision for income taxes          |                   |                                   | (1,505                   | )     |                    |        | (232   | )    
|Provision (benefit) for income taxes            |                   |                                   | (317                     | )     |                    |        | 247    |      
|                                                |                   |                                   |                          |       |                    |        |        |      
|Net loss                                        |                   | $                                 | (1,188                   | )     |                    | $      | (479   | )    
|                                                |                   |                                   |                          |       |                    |        |        |       |                   |       
|Net loss per share:                             |                   |                                   |                          |       |                    |        |        |      
|                                                | Basic and diluted |                                   | $                        | (0.14 | )                  |        | $      | (0.05 | )                
|Weighted average common shares and equivalents: |                   |                                   |                          |       |                    |        |        |      
|                                                | Basic and diluted |                                   |                          | 8,623 |                    |        |        | 9,085 |                  

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

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

|                                   |                                               |   |                    |     |      |   |               |     |  
|---------------------------------- | --------------------------------------------- | - | ------------------ | --- | ---- | - | ------------- | --- | -
|                                   |                                               |   | Three months ended
|                                   |                                               |   | March 31,         
|                                   |                                               |   |                   
|                                   |                                               |   | 2003               |     | 2002
|                                   |                                               |   |                    |     |     
|                                   |                                               |   |                    |     |      |   | (As restated,
|                                   |                                               |   |                    |     |      |   | see Note 8)  
|Net loss                           |                                               | $ | (1,188             | )   |      | $ | (479          | )  
|Other comprehensive income (loss): |                                               |   |                    |     |      |   |               |    
|                                   | Unrealized gain (loss) on investments, net    |   |                    | 86  |      |   |               | (60 | )
|                                   | Foreign currency translation adjustments, net |   |                    | (34 | )    |   |               | 209 |  
|                                   |                                               |   |                    |     |      |   |               |    
|Comprehensive loss                 |                                               | $ | (1,136             | )   |      | $ | (330          | )  
|                                   |                                               |   |                    |     |      |   |               |    

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          
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                   
|                                               |                                                                                 |                                                   |                                                           |                                           |     | 2003               |        | 2002
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |      |       | (As restated, see
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |      |       | Note 8)          
|Cash flows from operating activities:          |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|                                               | Net loss                                                                        |                                                   | $                                                         | (1,188                                    | )   |                    | $      | (479 | )    
|                                               | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                   |                                                           |                                           |     |                    |        |      |      
|                                               |                                                                                 | Depreciation and amortization                     |                                                           |                                           | 719 |                    |        |      | 1,276 |                  
|                                               |                                                                                 | Loss on disposal of property, plant and equipment |                                                           |                                           | 7   |                    |        |      | 136   |                  
|                                               |                                                                                 | Provision for doubtful accounts and returns       |                                                           |                                           | 5   |                    |        |      | 10    |                  
|                                               |                                                                                 | Loss on investments, net                          |                                                           |                                           | 32  |                    |        |      |      |                  
|                                               |                                                                                 | Changes in operating assets and liabilities:      |                                                           |                                           |     |                    |        |      |       |                  
|                                               |                                                                                 |                                                   | Accounts receivable                                       |                                           |     | 11,423             |        |      |       | 5,295             |      
|                                               |                                                                                 |                                                   | Prepaid expenses and other current assets                 |                                           |     | (219               | )      |      |       | (787              | )    
|                                               |                                                                                 |                                                   | Other assets                                              |                                           |     | 18                 |        |      |       | 227               |      
|                                               |                                                                                 |                                                   | Accounts payable                                          |                                           |     | (501               | )      |      |       | (749              | )    
|                                               |                                                                                 |                                                   | Accrued liabilities, payroll and payroll-related expenses |                                           |     | (2,503             | )      |      |       | 19                |      
|                                               |                                                                                 |                                                   | Deferred revenue                                          |                                           |     | (2,752             | )      |      |       | (2,578            | )    
|                                               |                                                                                 |                                                   | Income taxes payable                                      |                                           |     | 81                 |        |      |       | 150               |      
|                                               |                                                                                 |                                                   | Long-term liabilities                                     |                                           |     | (29                | )      |      |       | (565              | )    
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|                                               |                                                                                 |                                                   |                                                           | Net cash provided by operating activities |     |                    | 5,093  |      |       |                   | 1,923 |  
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|Cash flows from investing activities:          |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|                                               | Purchases of short-term investments                                             |                                                   |                                                           | (69                                       | )   |                    |        |     |      
|                                               | Purchases of property and equipment                                             |                                                   |                                                           | (138                                      | )   |                    |        | (261 | )    
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|                                               |                                                                                 |                                                   |                                                           | Net cash used in investing activities     |     |                    | (207   | )    |       |                   | (261  | )
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|Cash flows from financing activities:          |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|                                               | Purchases of common stock                                                       |                                                   |                                                           | (175                                      | )   |                    |        | (679 | )    
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|                                               |                                                                                 |                                                   |                                                           | Net cash used in financing activities     |     |                    | (175   | )    |       |                   | (679  | )
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|Effect of exchange rate changes on cash        |                                                                                 |                                                   | 27                                                        |                                           |     |                    | (181   | )   
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|Net increase in cash and cash equivalents      |                                                                                 |                                                   | 4,738                                                     |                                           |     |                    | 834    |     
|Cash and cash equivalents, beginning of period |                                                                                 |                                                   | 24,014                                                    |                                           |     |                    | 33,038 |     
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |     
|Cash and cash equivalents, end of period       |                                                                                 | $                                                 | 28,752                                                    |                                           |     | $                  | 33,872 |     
|                                               |                                                                                 |                                                   |                                                           |                                           |     |                    |        |      |      

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

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

1.      Interim financial data

The accompanying interim unaudited condensed consolidated financial
statements of NetManage, Inc. (the Company) have been prepared in accordance
with accounting principles generally accepted in the United States of America
(generally accepted accounting principles) for interim financial information
and in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation. Actual results for fiscal year 2003 could differ materially from
those reported in this Form 10-Q. The Company believes the results of
operations for interim periods are subject to fluctuation and may not be an
indicator of future financial performance.

2.      Consolidation

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

3.      Summary of significant accounting policies:

Use of estimates

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

Foreign currency translation, foreign exchange contracts and comprehensive loss

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

The Company currently does not enter into financial instruments for either
trading or speculative purposes.

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

Short-term investments

The Company accounts for its investments under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities.Under SFAS No. 115, the
Companys investments are currently classified as available-for-sale securities
and are reported at fair value, with unrealized gains and losses, net of tax,
reported in its Accumulated Other Comprehensive Loss. Held-to-maturity
securities are valued using the amortized cost method. At March 31, 2003 and
December 31, 2002, the fair value of the time deposit investments approximated
amortized cost and, as such, gross unrealized holding gains and losses were not
material. The fair value of the available-for-sale securities was determined
based on quoted market prices at the reporting dates for those instruments. The
carrying value of the Companys short-term investments by major security type
consisted of the following as of March 31, 2003 and December 31, 2002 (in
thousands):

|                    |  |           |     |              |  |   |    | 
|------------------- |  | --------- | --- | ------------ |  | - | -- | 
|                    |  | March 31, |     | December 31,
|Description         |  | 2003      |     | 2002        
|                    |  |           |     |             
|Time deposits       |  | $         | 68  |              |  | $ |   | 
|Kana Software, Inc. |  |           | 163 |              |  |   | 80 | 
|                    |  |           |     |              |  |   |    | 
|Total               |  | $         | 231 |              |  | $ | 80 | 
|                    |  |           |     |              |  |   |    | 

KANA Software Inc. is a publicly-traded company in which the Company owns
a minority interest of less than 1%.

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Goodwill and other intangible assets, net

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangibles Assets(SFAS No. 142).Under SFAS No. 142, goodwill is no
longer subject to amortization over its estimated useful life. Rather, SFAS No.
142 requires that goodwill and other intangible assets deemed to have an
indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142
(January 1, 2002) and at least annually thereafter.

Intangible assets with determinable useful lives are amortized on a
straight-line basis over their estimated useful lives ranging from two to seven
years. The following table provides a summary of the carrying amounts of other
intangible assets (in thousands).

|                                           |                      |   |           |        |              |   |        |        |  
|------------------------------------------ | -------------------- | - | --------- | ------ | ------------ | - | ------ | ------ | -
|                                           |                      |   | March 31, |        | December 31,
|                                           |                      |   | 2003      |        | 2002        
|                                           |                      |   |           |        |             
|Carrying amount of:                        |                      |   |           |        |              |   |        |       
|                                           | Developed technology |   | $         | 11,188 |              |   | $      | 11,332 |  
|                                           | Customer base        |   |           | 3,177  |              |   |        | 3,177  |  
|                                           | RUMBA trade name     |   |           | 1,492  |              |   |        | 1,492  |  
|                                           | Patents & copyrights |   |           | 399    |              |   |        | 399    |  
|                                           |                      |   |           |        |              |   |        |       
|Gross carrying amount of other intangibles |                      |   | 16,256    |        |              |   | 16,400 |       
|Less accumulated amortization:             |                      |   |           |        |              |   |        |       
|                                           | Developed technology |   |           | (9,213 | )            |   |        | (8,903 | )
|                                           | Customer base        |   |           | (2,554 | )            |   |        | (2,461 | )
|                                           | RUMBA trade name     |   |           | (1,200 | )            |   |        | (1,156 | )
|                                           | Patents & copyrights |   |           | (319   | )            |   |        | (307   | )
|                                           |                      |   |           |        |              |   |        |       
|Net carrying amount of other intangibles   |                      | $ | 2,970     |        |              | $ | 3,573  |       
|                                           |                      |   |           |        |              |   |        |        |  

In the first quarter of 2003, the Company recorded a reduction of $144,000
in developed technology acquired in connection with the purchase of Simware in
Canada, as a result of the estimated utilization of pre-acquisition net
operating losses and tax credits of Simware to reduce current tax liabilities
on Canadian taxable income.

Accrued liabilities and restructuring

Accrued liabilities at March 31, 2003 and December 31, 2002 consisted of
the following (in thousands):

|                           |       |      |           |       |              |   |       |       | 
|-------------------------- | ----- | ---- | --------- | ----- | ------------ | - | ----- | ----- | 
|                           |       |      | March 31, |       | December 31,
|Description                |       | 2003 |           | 2002 
|                           |       |      |           |      
|Restructuring (see Note 4) |       | $    | 4,110     |       |              | $ | 4,593 |      
|Other accruals             |       |      | 3,394     |       |              |   | 4,956 |      
|                           |       |      |           |       |              |   |       |      
|                           | Total |      | $         | 7,504 |              |   | $     | 9,549 | 
|                           |       |      |           |       |              |   |       |      

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

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Concentrations of credit risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash investments and trade
receivables. The Company has a cash investment policy that limits the amount of
credit exposure to any one issuer and restricts placement of these investments
to issuers evaluated as credit worthy. Concentrations of credit risk with
respect to trade receivables are limited due to the large number of customers
comprising the Companys customer base and their dispersion across many
different industries and geographies. There was one customer that accounted
for more than 10% of consolidated revenues in the first quarter of 2003, and no
customer accounted to more than 10% of consolidated revenues in the first
quarter of 2002.

The Company currently does not enter into any form of financial
instrument for either trading or speculative purposes.

Stock Compensation Plans

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

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

|                                                                                                                |  |                              |        |      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | ---- |  | - | ------ | -
|                                                                                                                |  | Three months ended March 31,
|                                                                                                                |  |                             
|                                                                                                                |  | 2003                         |        | 2002
|                                                                                                                |  |                              |        |     
|Net loss reported under APB 25                                                                                  |  | $                            | (1,188 | )    |  | $ | (479   | )
|Add: Stock-based employee compensation
expense included in reported net loss                                    |  |                              |       |      |  |   |       |  
|Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards |  |                              | (523   | )    |  |   | (826   | )
|                                                                                                                |  |                              |        |      |  |   |        |  
|Pro forma net loss                                                                                              |  | $                            | (1,711 | )    |  | $ | (1,305 | )
|                                                                                                                |  |                              |        |      |  |   |        |  
|Basic and diluted loss per share, as reported                                                                   |  | $                            | (0.14  | )    |  | $ | (0.05  | )
|Basic and diluted loss per share, pro forma                                                                     |  | $                            | (0.20  | )    |  | $ | (0.14  | )

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The fair value of each option grant and share granted is estimated on the date
of grant using the Black-Scholes model with the following assumptions used for
grants during the applicable period:

|                        |  |                  |           |                  |  |  |           |  
|----------------------- |  | ---------------- | --------- | ---------------- |  |  | --------- | -
|                        |  | March 31, 2003   |           | March 31, 2002  
|                        |  |                  |           |                 
|Volatility              |  |                  | 90.98     | %                |  |  | 88.61     | %
|Risk-free interest rate |  |                  | 3.81-4.05 | %                |  |  | 4.30-4.74 | %
|Dividend yield          |  |                  | 0.00      | %                |  |  | 0.00      | %
|Expected term           |  | 3 - 4 months     |           | 3 - 4 months    
|                        |  | beyond vest date |           | beyond vest date

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 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, 2003 and 2002, the number of shares used in the
computation of diluted loss per share was the same as those used for the
computation of basic loss per share. For the three month periods ended March
31, 2003 and 2002, potentially dilutive securities of 5,086 and 2,301 shares
respectively, were not included in the computation of diluted net loss per
share because to do so would have been anti-dilutive.

Income taxes

As part of the process of preparing its consolidated financial statements
the Company is required to estimate its income taxes in each of the
jurisdictions in which the Company operates. This process involves estimating
the Companys actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items, such as deferred
revenue, for tax and accounting purposes. These differences result in deferred
tax assets and liabilities, which are included in the Companys consolidated
balance sheet. The Company must then assess the likelihood that its deferred
tax assets will be recovered from future taxable income and to the extent
NetManage believes that recovery is not likely, the Company must establish a
valuation allowance. To the extent the Company establishes a valuation
allowance or its allowance in a period changes, the amount recognized as
provision for income taxes in the statement of operations could change. The
income tax benefit of $317,000 for the quarter ended March 31, 2003 resulted
primarily from international tax expense of $166,000, German tax refunds of
$481,000, and US state tax benefit of $2,000. The income tax provision of
$247,000 for the quarter ended March 31, 2002 resulted primarily from
international tax expense of $303,000 and US state tax benefit of $56,000.

Recent accounting pronouncements

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which addresses the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are
entered into or modified after December 31, 2002. The Company has adopted the
disclosure requirements of FIN 45 and will apply the recognition and
measurement provision for all material guarantees entered into or modified
after December 31, 2002. The adoption of FIN 45 had no
effect on the Companys financial statements. As an element of its standard commercial terms, the
Company includes an indemnification clause in its software licensing agreements
that indemnifies the licensee against liability and damages (including legal
defense costs) arising from any claims of patent, copyright, trademark, or
trade secret infringement by the Companys software.

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses consolidation by
business enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date; (1) the company will be the primary beneficiary of an
existing VIE that will require consolidation, or (2) the company will hold a
significant variable interest in, or have significant involvement with, an
existing VIE. The adoption of FIN 46 had no effect on the Companys financial
statements.

10



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4.        Restructuring of operations

On January 31, 2003, the Company announced a restructuring of operations
designed to refocus its business units around its core business functions, to
relocate certain of its functional operations to the Companys corporate
headquarters, and to reduce operating expenses. As part of the restructuring,
the Company reduced its workforce in excess of 30% and recorded a $2.0 million
charge to operating expenses in the first quarter of 2003. The distribution of
this reduction in workforce is as follows:

|                           |  |              |     |              |  |               |    |  |  |  |     | 
|-------------------------- |  | ------------ | --- | ------------ |  | ------------- | -- |  |  |  | --- | 
|                           |  | Terminations |     | Replacements |  | Net Reduction
|                           |  |              |     |              |  |              
|Operations                 |  |              | 10  |              |  |               | 6  |  |  |  | 4   | 
|Services                   |  |              | 16  |              |  |               | 1  |  |  |  | 15  | 
|Research and development   |  |              | 19  |              |  |               |   |  |  |  | 19  | 
|Sales and marketing        |  |              | 54  |              |  |               | 4  |  |  |  | 50  | 
|General and administrative |  |              | 24  |              |  |               | 5  |  |  |  | 19  | 
|                           |  |              |     |              |  |               |    |  |  |  |     | 
|Total                      |  |              | 123 |              |  |               | 16 |  |  |  | 107 | 
|                           |  |              |     |              |  |               |    |  |  |  |     | 

The restructuring charge included approximately $0.4 million of expenses
related to leased facilities no longer needed for company operations and $1.6
million of employee and other-related expenses for employee terminations. The
Company anticipates that the execution of the restructuring actions will
require total cash expenditures of $2.0 million, which is expected to be funded
from internal operations and existing cash balances. As of March 31, 2003, the
Company had incurred costs totaling $0.6 million related to the restructuring,
which required $0.6 million in cash expenditures. The remaining reserve
related to this restructuring is approximately $1.4 million, and is included in
accrued liabilities as of March 31, 2003.

The following table lists the components of the January 2003 restructuring
reserve for the three month period ended March 31, 2003 (in thousands):

|                                                      |  |          |       |            |  |       |     |   |  |   |       |  
|----------------------------------------------------- |  | -------- | ----- | ---------- |  | ----- | --- | - |  | - | ----- | -
|                                                      |  | Employee |       | Excess     |  |       |     |  
|                                                      |  | Costs    |       | Facilities |  | Total
|                                                      |  |          |       |            |  |      
|Balance at December 31, 2002                          |  | $        |      |            |  | $     |    |   |  | $ |      |  
|Initial reserve established                           |  |          | 1,641 |            |  |       | 379 |   |  |   | 2,020 |  
|Reserve utilized in three months ended March 31, 2003 |  |          | (507  | )          |  |       | (70 | ) |  |   | (577  | )
|                                                      |  |          |       |            |  |       |     |   |  |   |       |  
|Balance at March 31, 2003                             |  | $        | 1,134 |            |  | $     | 309 |   |  | $ | 1,443 |  
|                                                      |  |          |       |            |  |       |     |   |  |   |       |  

On August 8, 2002, the Company announced a restructuring of its operations
designed to re-align its core business functions and reduce operating expenses.
As part of the restructuring, the Company intended to reduce its workforce by
approximately 26% and recorded a $4.6 million charge to operating expenses in
the third quarter of 2002. The restructuring charge included approximately $2.6
million of expenses related to facilities no longer needed for Company
operations and $2.0 million of employee and other-related expenses for employee
terminations. In March 2003, based on a review of current operations, the
decision was made to revise the original restructuring plan by retaining
and certain related offices that had been slated for closure. This decision
resulted in a $1.3 million reversal of the restructuring accrual as of March
31, 2003, and a corresponding reduction of restructuring expense for the three
months then ended. Such reversal was comprised of expected employee costs of
approximately $0.9 million and expected facilities expenses of approximately
$0.4 million. The distribution of this reduction in workforce,
net of employees retained, is as follows:

|                           |  |               |     | 
|-------------------------- |  | ------------- | --- | 
|                           |  | Net Reduction
|                           |  |              
|Operations                 |  |               | 6   | 
|Services                   |  |               | 17  | 
|Research and development   |  |               | 53  | 
|Sales and marketing        |  |               | 14  | 
|General and administrative |  |               | 10  | 
|                           |  |               |     | 
|Total                      |  |               | 100 | 
|                           |  |               |     | 

As of March 31, 2003, NetManage had incurred costs totaling $1.6 million
related to the remainder of the original restructuring accrual which required
$1.6 million in cash expenditures. The remaining reserve related to this
restructuring is approximately $1.7 million, and is included in accrued
liabilities as of March 31, 2003.

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The following table lists the components of the August 2002 restructuring
reserve for the three month periods ended March 31, 2003 (in thousands):

|                                                      |  |          |       |            |  |       |       |   |  |   |        |  
|----------------------------------------------------- |  | -------- | ----- | ---------- |  | ----- | ----- | - |  | - | ------ | -
|                                                      |  | Employee |       | Excess     |  |       |       |  
|                                                      |  | Costs    |       | Facilities |  | Total
|                                                      |  |          |       |            |  |      
|Balance at December 31, 2002                          |  | $        | 1,123 |            |  | $     | 2,156 |   |  | $ | 3,279  |  
|Change in estimate                                    |  |          | (869  | )          |  |       | (395  | ) |  |   | (1,264 | )
|Reserve utilized in three months ended March 31, 2003 |  |          | (101  | )          |  |       | (190  | ) |  |   | (291   | )
|                                                      |  |          |       |            |  |       |       |   |  |   |        |  
|Balance at March 31, 2003                             |  | $        | 153   |            |  | $     | 1,571 |   |  | $ | 1,724  |  
|                                                      |  |          |       |            |  |       |       |   |  |   |        |  

On August 3, 2000, the Company announced a restructuring of its
operations designed to re-focus on its core business functions and reduce
operating expenses. In connection with the restructuring, the Company reduced
its workforce by approximately 20% and made provisions for reductions in office
space, related overhead expenses, and the write down of certain assets. The
total amount of the restructuring charge was $5.6 million. The restructuring
charge included approximately $3.0 million of estimated expenses for
facilities-related charges, $1.6 million of employee-related expenses for
employee terminations, approximately $200,000 in other equipment and
professional services and an $800,000 settlement to Verity for a software
license that NetManage does not plan to use. In September 2002, based on a
review of its continuing obligations associated with the original restructuring
charge, NetManage recorded a reduction in estimate for facilities of
approximately $521,000 and an increase in estimate for other charges of
approximately $249,000. As of March 31, 2003, total cash expenditures incurred
with respect to this restructuring reserve were $5.1 million.. The remaining
balance of the reserve was approximately $0.2 million, which is included in
accrued liabilities as of March 31, 2003.

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

|                                                      |  |            |     |       |  |       |     |   |  |   |     |  
|----------------------------------------------------- |  | ---------- | --- | ----- |  | ----- | --- | - |  | - | --- | -
|                                                      |  | Excess     |     |       |  |       |     |   |  |  
|                                                      |  | Facilities |     | Other |  | Total
|                                                      |  |            |     |       |  |      
|Balance at December 31, 2002                          |  | $          | 88  |       |  | $     | 119 |   |  | $ | 207 |  
|Reserve utilized in three months ended March 31, 2003 |  |            | (31 | )     |  |       | (7  | ) |  |   | (38 | )
|                                                      |  |            |     |       |  |       |     |   |  |   |     |  
|Balance at March 31, 2003                             |  | $          | 57  |       |  | $     | 112 |   |  | $ | 169 |  
|                                                      |  |            |     |       |  |       |     |   |  |   |     |  

In the fourth quarter of 1999, following the acquisitions of Wall Data,
Inc., or Wall Data, and Simware Inc., or Simware, the Company initiated a plan
to restructure its worldwide operations in order to integrate the operations of
the two acquired companies. In connection with this plan, the Company recorded
a $3.8 million charge to operating expenses in 1999. The restructuring charge
included 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. The Company anticipated that
the execution of the restructuring actions would require total cash
expenditures of approximately $3.6 million, which the Company expected to be
funded from internal operations. In 2002, in connection with a review of its
obligations for facilities, the Company recorded a reduction in the estimated
expenses of approximately $128,000. In March 2003, as a result of a
re-negotiated facilities lease, the Company recorded a reduction in the
estimate for facilities of approximately $129,000. The $128,000 and $129,000
reductions in the restructuring reserve were recorded with a corresponding
reduction to restructuring expense in 2002 and the first quarter of 2003,
respectively. As of March 31, 2003, total cash expenditures incurred with
respect to this restructuring reserve were approximately $3.4 million. The
remaining reserve is approximately $0.3 million, and is included in accrued
liabilities as of March 31, 2003.

The following table lists the components of the restructuring reserve for
the three month period ended March 31, 2003 (In thousands):

|                                                      |  |            |      |  
|----------------------------------------------------- |  | ---------- | ---- | -
|                                                      |  | Excess    
|                                                      |  | Facilities
|                                                      |  |           
|Balance at December 31, 2002                          |  | $          | 435  |  
|Reserve utilized in three months ended March 31, 2003 |  |            | (129 | )
|Change in estimate                                    |  |            | (37  | )
|                                                      |  |            |      |  
|Balance at March 31, 2003                             |  | $          | 269  |  
|                                                      |  |            |      |  

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In August 1998, following the acquisition of FTP Software, or FTP, the
Company initiated a plan to restructure its worldwide operations as a result
of business conditions and in connection with the integration of the
operations of FTP. In connection with this
plan, the Company recorded a $7.0 million charge to operating expenses in
1998. Additionally, prior to the acquisition, FTP had recorded a restructuring
charge. The Company assumed the remaining restructuring liability of $9.7
million as of the date of the acquisition for a total restructuring liability of
$16.7 million. In 2002, based on a review of all obligations, the Company
recorded an increase in this reserve, primarily for facilities expense of
approximately $691,000. In March 2003, based on a review of its continuing
facilities obligations, the Company recorded a $138,000 reduction in the
restructuring reserve with a corresponding reduction of restructuring expense.
The remaining reserve related to this restructuring at March 31, 2003 is
approximately $0.5 million and is included in accrued liabilities.

The following table lists the components of the FTP restructuring reserve
for the three month period ended March 31, 2003 (in thousands):

|                                                      |  |            |      |  
|----------------------------------------------------- |  | ---------- | ---- | -
|                                                      |  | Excess    
|                                                      |  | Facilities
|                                                      |  |           
|Balance at December 31, 2002                          |  | $          | 673  |  
|Reserve utilized in three months ended March 31, 2003 |  |            | (30  | )
|Change in estimate recorded to restructuring expense  |  |            | (138 | )
|                                                      |  |            |      |  
|Balance at March 31, 2003                             |  | $          | 505  |  
|                                                      |  |            |      |  

5.      Commitments and contingencies

Legal proceedings

On
November 22, 1999, Kenneth Fishers filed a complaint alleging
violations of the False Claims Act, 31 U.S.C. § 3729 et seq., against the
Company, and its affiliates Network Software Associates, Inc. or NSA, and
NetSoft Inc., or NetSoft, in the United States District Court of the District
of Columbia. Fisher purported to file the action on behalf of himself and the
Government. NetManage acquired NSA and NetSoft in 1997. The United States
government declined to pursue the action on its own behalf and, therefore, the
action was pursued by Kenneth Fisher, as relator, on behalf of himself and the
Government. NetManage, and its affiliates, first learned of the action when
NetManage was served with the amended complaint in May 2001. On September 5,
2001, Mr. Fisher agreed to voluntarily dismiss NetManage from this action,
without prejudice, in exchange for an agreement to suspend applicable statutes
of limitation as to Mr. Fishers claims.

On January 31, 2002, on an order of the court granting in part and denying
in part following defendants successful motion to dismiss the May 2001 amended
complaint, Mr. Fisher filed a Second Amended Complaint, or Second Complaint, in
the United States District Court of the District of Columbia against NSA and
NetSoft among numerous other defendants. On May 13, 2002, on an order of the
court following defendants successful motion to strike the Second Complaint,
Mr. Fisher filed a Third Amended Complaint, or Complaint, in the United States
District Court of the District of Columbia against NSA and NetSoft among
numerous other defendants. The Complaint alleges that NSA, NetSoft and the
other defendants made false claims to the government to obtain government
contracts set aside for entities owned and controlled by disadvantaged persons
admitted to the Section 8(a) Minority Small Business Development Program.
Specifically, the Complaint alleges that from 199387 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 working to fraudulently continue
obtaining NSAs certification as a Section 8 (a) entity for alleged use by
NSAs Federal Systems Division and by getting fraudulent claims allowed and
paid by virtue of the alleged fraudulent Section 8(a) status, in violation of
31 U.S.C. § 3729 (a) (3). NetManage did not acquire NSA until July 1997 and
had no involvement with the events alleged by Mr. Fisher. According to the
earlier amended complaint (although not alleged in the current Complaint), Mr.
Fishers theory was that the liabilities of NSA and NetSoft, including alleged
liability in this suit, liabilities of NSA and Netsoft passed to NetManage.
Discovery is presently continuing in this matter. It was previously reported
in NetManages 10-K filing that, on May 31, 2002, NSA, NetSoft and the other
defendants moved to strike Fishers Third Amended Complaint. That is
incorrect. On May 31, 2002, NSA and NetSoft and the other defendants answered
the complaint and filed a motion to strike the complaint. NetManage, and its
affiliates, vigorously dispute Mr. Fishers allegations. The Company has
insufficient information at this time to estimate the possible loss, if any,
which might result from this lawsuit.

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In addition, the Company may be contingently liable with respect to
certain asserted and unasserted claims that arise during the normal course of
business. Management believes the impact, if any, resulting from these matters
would not have a material impact on the Companys financial statements.

6.      Stockholders equity

During the first three months of 2003, the Company repurchased 71,932
shares of its outstanding common shares on the open market for a total cost of
$175,456 at an average price of $2.44 per share.

7.      Segment information

The Company operates in two market segments: Host Accessand Host
Integration. The Companys chief operating decision-maker evaluates these
market segments at the sales and bookings level.

The Companys Host Access product 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. These two product lines have similar economic
characteristics and are similar with respect to the nature of the products, the
nature of the production processes, the type of customer that the products are
sold to and the methods used to distribute the products. Net revenues for the
Host Accessand Host Integrationproduct lines was as follows for the three
months ended March 31, 2003 and 2002 (in thousands):

|                 |  |                              |        |      |  |               |        | 
|---------------- |  | ---------------------------- | ------ | ---- |  | ------------- | ------ | 
|                 |  | Three Months Ended March 31,
|                 |  |                             
|                 |  | 2003                         |        | 2002
|                 |  |                              |        |     
|                 |  |                              |        |      |  | (As restated)
|Host Access      |  | $                            | 12,065 |      |  | $             | 18,048 | 
|Host Integration |  |                              | 2,053  |      |  |               | 972    | 
|                 |  |                              |        |      |  |               |        | 
|Total            |  | $                            | 14,118 |      |  | $             | 19,020 | 
|                 |  |                              |        |      |  |               |        | 

8.      Restatement of financial statements

Subsequent to the issuance of the Companys previously restated interim
unaudited condensed consolidated financial statements for the three months
ended March 31, 2002, management determined that the accounting treatment was
inappropriate for certain transactions, and that the following adjustments were
required:



| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | a. License fees were reduced by approximately $12,000 to correct for
rebate expenses previously recorded as a selling expense.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. Selling expense was decreased by approximately $166,000 to record the
net effect of: (i.) a decrease in commission expense of $216,000 that should
have been expensed in 2001; (ii.) an increase of approximately $163,000 for
expenses associated with a corporate sales meeting held in the first quarter
of 2002; and (iii.) a decrease in rebate expenses of approximately $113,000
associated with sales returns that should have been recorded as a reduction
of the sales return reserve of approximately $101,000, and license revenue
of approximately $12,000.



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. Amortization expense was reduced by $30,000, as a result of a
purchase price adjustment recorded in 2000 with respect to the acquisition of
Wall Data.



| |                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | d. Provision for
income taxes was increased by a $176,000 to adjust for the
utilization of pre-acquisition net operating losses and tax credits of Simware
which had been previously recognized as a reduction of the provision for income
taxes instead of a reduction of intangible assets associated with the
acquisition of Simware.

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

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##### Table of Contents



A summary of the significant effects of the restatement is as follows (in
thousands, except per share amounts):

|                              |                                       |  |                                   |        |               |  |   |        |  
|----------------------------- | ------------------------------------- |  | --------------------------------- | ------ | ------------- |  | - | ------ | -
|                              |                                       |  | Three months ended March 31, 2002
|                              |                                       |  | (As previously                    |        | (As currently
|                              |                                       |  | restated)                         |        | restated)    
|                              |                                       |  |                                   |        |              
|Statement of Operations Data: |                                       |  |                                   |        |               |  |   |       
|                              | Total net revenues                    |  | $                                 | 19,032 |               |  | $ | 19,020 |  
|                              | Gross margin                          |  |                                   | 16,564 |               |  |   | 16,552 |  
|                              | Sales and marketing                   |  |                                   | 9,605  |               |  |   | 9,439  |  
|                              | Amortization
of intangible assets     |  |                                   | 793    |               |  |   | 763    |  
|                              | Provision for income taxes            |  |                                   | 71     |               |  |   | 247    |  
|                              | Net loss                              |  |                                   | (487   | )             |  |   | (479   | )
|                              | Net loss per share basic
and diluted |  | $                                 | (0.05  | )             |  | $ | (0.05  | )

9.      Related party transactions

On May 4, 2000 NetManage
invested $1.5 million in 2,812 Series B Preferred
shares of stock in easyBASE Ltd. that comprised approximately 12% of the total
ownership of easyBASE Ltd. NetManages Chairman and Chief Executive Officer,
Zvi Alon, also had a personal investment in easyBASE Ltd. and served as a
member of the easyBASE Ltd. Board of Directors. In the third quarter of 2002,
NetManage determined that the investment in easyBASE Ltd. was permanently
impaired and wrote-off the investment. In the fourth quarter of 2002,
NetManage fully-reserved a $275,000 bridge loan to easyBASE as it was deemed to
be uncollectible.

On February 10, 2003, NetManage invested an additional $30,000 in easyBASE
Ltd in exchange for a promissory note receivable to be secured by certain
fixed assets. As of March 31, 2003, NetManage was unable to secure title to the
fixed assets.. Consequently, the note receivable was written-off in the first
quarter of 2003 through a charge to operations.

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##### Table of Contents



NETMANAGE, INC.




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

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

The financial information for the three month period ended March 31, 2003
reflects the restatement adjustments described in Note 8 to the unaudited
condensed consolidated financial statements.

Overview

We have operations worldwide with sales offices located in the United
States, Europe, Canada, and Israel. 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 Corporation (IBM) corporate mainframe computers, and IBM
midrange computers such as iSeries (formerly AS/400) and on UNIX based servers.
We provide professional support, maintenance, and technical consultancy
services to our customers in association with the products we develop and
market. We provide professional applications and management 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 Windows .NET, Windows XP, Windows 2000, Windows NT, Windows 98,
Windows 95, and Windows 3.x operating systems, IBM operating systems, Novell,
Inc., or Novell, operating systems and various implementations of the industry
standard UNIX operating system such as IBMs AIX, Hewlett-Packard Companys
HP/UX, Sun Microsystems Inc.s Solaris, and the open source Linux system.

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##### Table of Contents



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

In order to ensure that our product
line is as simple as possible for our
customers to understand, and to ensure that purchasing decisions with respect
to NetManage products are as straightforward as possible, in the first quarter
of 2003 we have revised and updated our product packaging and market messaging.
As different solutions converge for providing new and extended value from host
applications, and our customers require a suite of solutions to address the
spectrum of needs that they have, we have evolved the market promotion of the
Rumba Host Access products and OnWeb Host Integration products under the
overall umbrella of The NetManage Host Access Platform(HAP). HAP shows our
customers that NetManage has a complete line of compatible and co-existing
products that allow host systems to be accessed and leveraged. From full
PC-based applications through to server solutions that leverage existing
business processes for new solutions built with environments such as
Microsoft.NET. As part of the HAP initiative, we have also reviewed and revised
our product licensing model to better fit the present market needs. We expect
that positive results may become apparent in the remainder of 2003 and beyond.

Operations

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

In the first three months of 2003, we continued to experience a reduction in
revenues, which we believe relates primarily to the worsening North American
and European economies. Customers continue to postpone or cancel decisions to
purchase technology products because of uncertainties within their own
businesses. We do not anticipate any improvements in the current business
environment through the remainder of 2003 and into 2004. As a result, we
believed it was necessary to refocus our operations and reduce our operating
expenses to bring them more in line with our revised anticipated revenue
levels, which we expect to be comparable or less than those of the previous
twelve months. Accordingly, on January 31, 2003 NetManage announced a
restructuring of its operations designed to meet those goals. As part of the
restructuring, NetManage reduced its workforce in excess of 30% and recorded a
$2.0 million charge to operating expenses in the first quarter of 2003. The
distribution of this reduction in workforce is as follows:

|                           |  |              |     |              |  |               |    |  |  |  |     | 
|-------------------------- |  | ------------ | --- | ------------ |  | ------------- | -- |  |  |  | --- | 
|                           |  | Terminations |     | Replacements |  | Net Reduction
|                           |  |              |     |              |  |              
|Operations                 |  |              | 10  |              |  |               | 6  |  |  |  | 4   | 
|Services                   |  |              | 16  |              |  |               | 1  |  |  |  | 15  | 
|Research and development   |  |              | 19  |              |  |               |   |  |  |  | 19  | 
|Sales and marketing        |  |              | 54  |              |  |               | 4  |  |  |  | 50  | 
|General and administrative |  |              | 24  |              |  |               | 5  |  |  |  | 19  | 
|                           |  |              |     |              |  |               |    |  |  |  |     | 
|Total                      |  |              | 123 |              |  |               | 16 |  |  |  | 107 | 
|                           |  |              |     |              |  |               |    |  |  |  |     | 

The restructuring charge includes approximately $0.4 million of expenses
related for leased facilities no longer needed for company operations and
approximately $1.6 million of employee and other-related expenses for employee
terminations. NetManage anticipates that the execution of these restructuring
actions will require total cash expenditures of $2.0 million, which is expected
to be funded from internal operations and existing cash balances. As of March
31, 2003, NetManage had incurred costs totaling $0.6 million related to the
restructuring, which required $0.6 million in cash expenditures. The remaining
reserve related to this restructuring is approximately $1.4 million, and is
included in accrued liabilities as of March 31, 2003. (See Note 4 
Restructuring of Operations).

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##### Table of Contents



On August 8, 2002, we announced a restructuring of our operations designed
to re-align our core business functions and reduce operating expenses. As part
of the restructuring, we intended to reduce our workforce by approximately 25%
and recorded a $4.6 million charge to operating expenses in the third quarter
of 2002. The restructuring charge included approximately $2.6 million of
expenses related to facilities no longer needed for company operations and $2.0
million of employee and other-related expenses for employee terminations. In
March 2003, based on a review of current operations, we decided to revise the
original restructuring plan by retaining certain personnel in European
locations who had been identified for termination and certain related offices
that had been slated for closure. This decision resulted in a $1.3 million
reversal of the restructuring accrual as of March 31, 2003, and a corresponding
reduction of restructuring expense for the three months then ended. Such
reversal was comprised of expected employee costs of approximately $0.9 million
and expected facilities expenses of approximately $0.4 million. The
distribution of this reduction, net of the impact of the decision in March
2003 to retain certain personnel in European locations, in workforce is as
follows:

|                           |  |              |     |          |  |               |   |  |  |  |     | 
|-------------------------- |  | ------------ | --- | -------- |  | ------------- | - |  |  |  | --- | 
|                           |  | Terminations |     | Retained |  | Net Reduction
|                           |  |              |     |          |  |              
|Operations                 |  |              | 6   |          |  |               |  |  |  |  | 6   | 
|Services                   |  |              | 17  |          |  |               |  |  |  |  | 17  | 
|Research and development   |  |              | 53  |          |  |               |  |  |  |  | 53  | 
|Sales and marketing        |  |              | 22  |          |  |               | 8 |  |  |  | 14  | 
|General and administrative |  |              | 11  |          |  |               | 1 |  |  |  | 10  | 
|                           |  |              |     |          |  |               |   |  |  |  |     | 
|Total                      |  |              | 109 |          |  |               | 9 |  |  |  | 100 | 
|                           |  |              |     |          |  |               |   |  |  |  |     | 

As of March 31, 2003, we had incurred costs totaling $1.6 million related
to the remainder of the original restructuring accrual which required $1.6
million in cash expenditures. The remaining reserve related to this
restructuring is approximately $1.7 million, and is included in accrued
liabilities as of March 31, 2003.

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. 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, predominantly acquired through the Wall Data and FTP
acquisitions. With the reduction in personnel, knowledge levels with respect to
certain products and our ability to enhance and expand products acquired from
Wall Data and FTP was reduced, thus impacting future expected revenues from
these product families. In connection with the restructuring, we made
provisions for reductions in office space, related overhead expenses, and the
write-down of certain assets. The total amount of the restructuring charge was
$5.6 million. The restructuring charge includes approximately $3.0 million of
expenses for facilities-related charges, $1.6 million of employee-related
expenses for employee terminations, approximately $200,000 in other equipment
and professional service costs, and an $800,000 settlement to Verity for a
software license that we no longer plan to use. As of March 31, 2003, our total
cash expenditures incurred were approximately $5.1 million.

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 quarter of 2001, compared to
the same quarter of the previous year and this trend continued into the third
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 2003
primarily was attributed to our North American operations. Our first quarter
2003 revenues were approximately 26% less than the amount recorded in the first
quarter of 2002 and approximately 15% less than the amount recorded in the
fourth quarter of 2002. There can be no assurance that revenues will increase
at all in future periods.

Because we generally ship software products within a short period after
receipt of an order, we do not have a material backlog of unfilled orders, and
revenues in any one quarter are substantially dependent on orders booked in
that quarter. Our operating expense levels are based, in part, on our
expectation of future revenues and, to a large extent, are fixed. In the first
quarter of 2003, operating expenses, excluding restructuring charges, continued
to decline when compared to the fourth quarter of 2002 and the first quarter of
2002, and may fluctuate as a percentage of net revenues as we develop and
introduce new products.

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

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##### Table of Contents



THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO MARCH 31, 2002 (DOLLARS IN
MILLIONS):

This selected unaudited financial data for the three months ended March
31, 2003 contains certain financial information that has been restated. (See
Note 8 to the unaudited condensed consolidated financial statements for further
discussion of this matter.)

|                                     |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |     |     |   
|------------------------------------ | ------------------------------- | ------------------ | ---- | ---------------------------- | ----- | ---- | ---- | ------ | ----- | - | ---- | ---- | ---- | - | ---- | --- | --- | --
|                                     |                                 |                    |      | Three months ended March 31,
|                                     |                                 |                    |      |                             
|                                     |                                 |                    |      | 2003                         |       | 2002 |      | Change
|                                     |                                 |                    |      |                              |       |      |      |       
|Net revenues                         |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |    
|                                     | License fees                    |                    | $    | 6.0                          |       |      | $    | 10.2   |       |   | $    | (4.2 | )    |   |      | (41 | )% 
|                                     | Services                        |                    |      | 8.1                          |       |      |      | 8.9    |       |   |      | (0.8 | )    |   |      | (9  | )% 
|                                     |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |    
|                                     |                                 | Total net revenues |      | $                            | 14.1  |      |      | $      | 19.1  |   |      | $    | (5.0 | ) |      |     | (26 | )%
|As a percentage of net revenues:     |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |    
|                                     | License fees                    |                    |      | 42.6                         | %     |      |      | 53.4   | %     |   |      |      |      |   |      |     |    
|                                     | Services                        |                    |      | 57.4                         | %     |      |      | 46.6   | %     |   |      |      |      |   |      |     |    
|                                     |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |    
|                                     |                                 | Total net revenues |      |                              | 100.0 | %    |      |        | 100.0 | % |      |      |      |   |      |     |     |   
|Gross margin  license fees          |                                 | $                  | 5.5  |                              |       | $    | 9.4  |        |       | $ | (3.9 | )    |      |   | (41  | )% 
|Gross margin  service               |                                 |                    | 6.8  |                              |       |      | 7.2  |        |       |   | (0.4 | )    |      |   | (6   | )% 
|                                     |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |    
|                                     |                                 | Total gross margin |      | $                            | 12.3  |      |      | $      | 16.6  |   |      | $    | (4.3 | ) |      |     | (26 | )%
|As a percentage of net revenue:      |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |    
|                                     | Gross margin  license fees     |                    |      | 39.1                         | %     |      |      | 49.2   | %     |   |      |      |      |   |      |     |    
|                                     | Gross margin  service          |                    |      | 48.1                         | %     |      |      | 37.7   | %     |   |      |      |      |   |      |     |    
|                                     |                                 |                    |      |                              |       |      |      |        |       |   |      |      |      |   |      |    
|                                     |                                 | Total gross margin |      |                              | 87.2  | %    |      |        | 86.9  | % |      |      |      |   |      |     |     |   
|Research and development             |                                 | $                  | 2.6  |                              |       | $    | 3.6  |        |       | $ | (1.0 | )    |      |   | (28  | )% 
|                                     | As a percentage of net revenue: |                    |      | 18.4                         | %     |      |      | 13.1   | %     |   |      |      |      |   |      |     |    
|Sales and marketing                  |                                 | $                  | 7.5  |                              |       | $    | 9.4  |        |       | $ | (1.9 | )    |      |   | (20  | )% 
|                                     | As a percentage of net revenue: |                    |      | 53.2                         | %     |      |      | 49.2   | %     |   |      |      |      |   |      |     |    
|General and administrative           |                                 | $                  | 2.7  |                              |       | $    | 2.5  |        |       | $ | 0.2  |      |      |   | 8    | %  
|                                     | As a percentage of net revenue: |                    |      | 19.1                         | %     |      |      | 13.1   | %     |   |      |      |      |   |      |     |    
|Restructuring charge, net            |                                 | $                  | 0.6  |                              |       | $    |     |        |       | $ | 0.6  |      |      |   | 0    | %  
|                                     | As a percentage of net revenue: |                    |      | 4.3                          | %     |      |      | 0.0    | %     |   |      |      |      |   |      |     |    
|Amortization of intangible assets    |                                 | $                  | 0.5  |                              |       | $    | 0.8  |        |       | $ | (0.3 | )    |      |   | (38  | )% 
|                                     | As a percentage of net revenue: |                    |      | 3.5                          | %     |      |      | 4.2    | %     |   |      |      |      |   |      |     |    
|Interest income and other, net       |                                 | $                  | 0.1  |                              |       | $    | 0.1  |        |       | $ |     |      |      |   | 0    | %  
|                                     | As a percentage of net revenue: |                    |      | 0.7                          | %     |      |      | 0.5    | %     |   |      |      |      |   |      |     |    
|Foreign currency transaction losses  |                                 | $                  |     |                              |       | $    | (0.6 | )      |       | $ | 0.6  |      |      |   | (100 | )% 
|                                     | As a percentage of net revenue: |                    |      | 0.0                          | %     |      |      | (3.1   | )%    |   |      |      |      |   |      |     |    
|Provision (benefit) for income taxes |                                 | $                  | (0.3 | )                            |       | $    | 0.3  |        |       | $ | (0.6 | )    |      |   | 200  | %  
|                                     | Effective tax rate              |                    |      | 2.1                          | %     |      |      | (1.6   | %)    |   |      |      |      |   |      |     |    
|Net loss                             |                                 | $                  | (1.2 | )                            |       | $    | (0.5 | )      |       | $ | (0.7 | )    |      |   | 140  | %  
|                                     | As a percentage of net revenue: |                    |      | (8.5                         | )%    |      |      | (2.6   | )%    |   |      |      |      |   |      |     |    

Net Revenues

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

License fees and service revenues decreased $5.0 million for the three
month period ended March 31, 2003 as compared to the same period in 2002. We
believe this decrease resulted primarily from customer decisions to cancel or
postpone purchases of our products, due to the sluggish North American and
European economies, competitive pressures on our average selling prices, and
financial pressures experienced by our customers and targeted customers.

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In fiscal year 2002, we experienced a general decline in revenues compared
to the prior year, a trend that has continued into the first quarter of 2003.
We believe that our revenues have been adversely impacted by the continued
slowdown in technology purchases due to current economic conditions in North
America and Europe. We continue to experience pricing pressures on our
products. There can be no assurance that revenues will increase at all in
future periods.

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 fair value of the services, based on vendor specific objective evidence, is
deferred and recognized ratably over the related service period. Service
revenues derived from consulting and training are deferred and recognized when
the services are performed and the collectibility is deemed probable.

We have operations worldwide with sales offices located in the United
States, Europe, Canada and Israel. Revenues outside of North
America (United States and Canada) as a percentage of total net revenues were
approximately 26% and 27% for the three months ended March 31, 2003 and 2002,
respectively.

One customer accounted for 10% or more of net revenues in the three month
periods ended March 31, 2003 and no customer accounted for 10% or more in the
three month periods ended March 31, 2002.

Gross margin

Gross margin increased as a percentage of net revenues to 87.2% from 86.9%
but declined 26% in absolute dollars for the three month period ended March 31,
2003 as compared to the three month period ended March 31, 2002. This decline
in absolute dollars is primarily the result of the decrease in revenues for
the three month period ended March 31, 2003 of $5.0 million, as compared to the
three month period ended March 31, 2002. This decrease in revenues is partially
offset by a reduction of approximately $0.7 million in cost of revenues for the
three month period ended March 31, 2003 as compared to the three month period
ended March 31, 2002. Cost of revenues includes direct and indirect expenses
associated with both license and service revenues.

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

Cost of revenues for license fees increased as a percentage of net license
revenues to 8.6% for the three month period ended March 31, 2003 as compared to
7.9% for the same period in 2002, and declined in absolute dollars by $0.3
million for the three month period ended March 31, 2003 as compared to the same
period in 2002. The increase in percentage of revenue was primarily the result
of the faster rate in the decreasing license revenues without the corresponding
decrease in costs. The decrease in absolute dollars resulted primarily from a
reduction in headcount of eight full-time employees in operations from the
first quarter of 2002, continuing cost reduction efforts, and a reduction in
net license revenues of $4.2 million, for the three month period ended March
31, 2003 as compared to the same period in 2002

Cost of revenues for services decreased to 16.3% as a percentage of net
services revenues for the three month period March 31, 2003 from 18.8% for the
comparable period in 2002 and declined in absolute dollars by $0.3 million for
the three month period ended March 31, 2003 as compared to the same period in
2002. The decline in cost of revenues for services primarily resulted from a
reduction in head count of 27 full-time employees in customer service and
consulting from 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.

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Research and development

Research and development, or R&D, expenses primarily consist of salaries
and benefits, occupancy and travel expenses, and fees paid to outside
consultants. R&D expenses decreased, in absolute dollars and as a percentage of
net revenues for the three month period ended March 31, 2003 as compared to the
three month period ended March 31, 2002, primarily as a result of a reduction
in headcount of 54 full-time employees for research and development activities
from the first quarter of 2002 to the first quarter of 2003.

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 for the three month period ended March 31, 2003 as compared to the same
period in 2002, primarily due to the reduction in sales and support staff of 54
full-time employees from the first quarter of 2002 to the first quarter of 2003
and our ongoing cost reduction efforts in 2002 and 2003. For the three month
period ended March 31, 2003, these expenses increased as a percentage of net
revenues as compared to the same period in 2002 primarily due to the decrease
in net revenues. Sales and marketing expenses for the first quarter of 2003
also include an allocation of approximately $111,000 for a Company sales
incentive goal for 2003. The total operating expense of this sales incentive we
anticipate to approximate $250,000. The $139,000 difference was distributed to
the other functional areas based on personnel count as of March 31, 2003.

General and administrative

General and administrative expenses consist primarily of salaries,
benefits, accounting, operating, legal, and proportionate shares of occupancy
expenses for our human resources, legal, information technology, facilities and
general management functions as well as bad debt expense. General and
administrative expenses increased in absolute dollars for the three month
period ended March 31, 2003 by $0.2 million, as compared to the same period in
2002. For the three month period ended March 31, 2003, expenses increased as a
percentage of net revenues by 8% as compared to the same period in 2002 as a
result of lower net revenue levels and increased legal expenses. The legal
expenses increased approximately $291,000 to cover on-going software compliance
litigation and a dispute concerning certain freight and furniture replacement
charges.

Interest income and other, net

Interest income and other, net for the three month periods ended March 31,
2003 and 2002, respectively, are as shown in the following table (in
thousands):

|                       |                       |  |                    |    |      |  |     |    | 
|---------------------- | --------------------- |  | ------------------ | -- | ---- |  | --- | -- | 
|                       |                       |  | Three months ended
|                       |                       |  | March 31,         
|                       |                       |  |                   
|                       |                       |  | 2003               |    | 2002
|                       |                       |  |                    |    |     
|Interest income        |                       |  |                    |    |      |  |     |   
|                       | On cash & investments |  | $                  | 64 |      |  | $   | 99 | 
|Interest expense       |                       |  |                   |    |      |  | (19 | ) 
|Other income (expense) |                       |  | (1                 | )  |      |  | 1   |   
|                       |                       |  |                    |    |      |  |     |   
|                       | Total                 |  | $                  | 63 |      |  | $   | 81 | 
|                       |                       |  |                    |    |      |  |     |   

The reduction in earned interest results from a reduction of our cash
balances and lower interest rates during the first quarter of 2003 compared to
the same period in 2002.

Foreign currency transaction losses

Foreign currency transactions losses decreased by $0.6 million for the
three month period ended March 31, 2003 as compared to the three month period
ended March 31, 2002, primarily as a result of the change in the currency
conversion between the Israeli Shekel against the US dollar and the EURO in the
first quarter of 2003 compared to the first quarter of 2002. The expense that
the Company records is primarily attributable to inter-company activity and in
the first quarter of 2002, the Israeli Shekel fell

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approximately 7% against the US dollar and approximately 5.6% against the
EURO. In the first quarter of 2003, the Israeli Shekel improved slightly
(0.6%) against the US dollar which was offset by approximately 2.1% loss
against the EURO.

Provision for income taxes

Our provision for income taxes primarily relates to international and
state taxes. The income tax benefit of $317,000 for the quarter ended March
31, 2003 resulted primarily from international taxes expense of $166,000, US
state taxes of $2,000 and a benefit of $481,000 resulting from German tax
refunds. The income tax provision of $247,000 for the quarter ended March 31,
2002 resulted primarily from international taxes of $303,000 and US state tax
benefits of $56,000.

Liquidity and capital resources

|                                  |                                           |  |               |      |  
|--------------------------------- | ----------------------------------------- |  | ------------- | ---- | -
|                                  |                                           |  | March 31,    
|                                  |                                           |  | 2003         
|                                  |                                           |  |              
|                                  |                                           |  | (In millions)
|As of:                            |                                           |  |               |     
|                                  | Cash and cash equivalents                 |  | $             | 28.8 |  
|                                  | Short-term investments                    |  |               | 0.2  |  
|For the three month period ended: |                                           |  |               |     
|                                  | Net cash provided by operating activities |  |               | 5.1  |  
|                                  | Net cash used in investing activities     |  |               | (0.2 | )
|                                  | Net cash used in financing activities     |  |               | (0.2 | )

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.

Our aggregate cash, cash equivalents and short-term investments increased
from $24.1 million as of December 31, 2002, to $30.0 million as of March 31,
2003. This increase resulted primarily from operating activities, in particular
the significant reduction in accounts receivable, offset by a reduction in our
accounts payable, payroll (restructuring costs), deferred revenue and long term
liabilities, and the repurchase of approximately $175,000 of our common stock.

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

Net cash used in financing activities in the three month period ended
March 31, 2003 reflects the 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 2,142,857 shares of our common stock through open market
purchases. During the three months ended March 31, 2003, we repurchased 71,932
shares of our common stock on the open market at an average purchase price of
$2.44 per share for a total cost of $175,456. Cumulatively, as of March 31,
2003, we had repurchased 2,076,849 shares of our common stock at an average
price of $10.02 per share for a total cost of approximately $20,804,681.

At March 31, 2003, we had working capital of $9.2 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.

Summary of Certain Contractual Obligations as of March 31, 2003

|                 |                  |   |                                                           |        |      |   |              |       |              |   |               |       |  |   |       |       |  |   |       |       | 
|---------------- | ---------------- | - | --------------------------------------------------------- | ------ | ---- | - | ------------ | ----- | ------------ | - | ------------- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                 |                  |   | Amount of Commitment Expiration Per Period (in thousands)
|                 |                  |   |                                                          
|                 |                  |   |                                                           |        |      |   | Less than 1  |       |              |   |               |       |  |   |       |       |  |   |      
|                 |                  |   | Total                                                     |        | year |   | 2 to 3 years |       | 4 to 5 years |   | After 5 years
|                 |                  |   |                                                           |        |      |   |              |       |              |   |              
|Capital leases   |                  | $ |                                                          |        |      | $ |             |       |              | $ |              |       |  | $ |      |       |  | $ |      |      
|Operating leases |                  |   | 12,897                                                    |        |      |   | 4,158        |       |              |   | 4,726         |       |  |   | 1,666 |       |  |   | 2,347 |      
|                 |                  |   |                                                           |        |      |   |              |       |              |   |               |       |  |   |       |       |  |   |       |      
|                 | Total Commitment |   | $                                                         | 12,897 |      |   | $            | 4,158 |              |   | $             | 4,726 |  |   | $     | 1,666 |  |   | $     | 2,347 | 

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Recent accounting pronouncements

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, which addresses the disclosures
to be made by a guarantor in its interim and annual financial statements about
its obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are
entered into or modified after December 31, 2002. The Company has adopted the
disclosure requirements of FIN 45 and will apply the recognition and
measurement provision for all material guarantees entered into or modified
after December 31, 2002. The adoption of FIN 45 had no
effect on the Companys financial statements. As an element of its standard commercial terms, the
Company includes an indemnification clause in its software licensing agreements
that indemnifies the licensee against liability and damages (including legal
defense costs) arising from any claims of patent, copyright, trademark, or
trade secret infringement by the Companys software.

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

In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which addresses consolidation by
business enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date; (1) the company will be the primary beneficiary of an
existing VIE that will require consolidation, or (2) the company will hold a
significant variable interest in, or have significant involvement with, an
existing VIE. The adoption of FIN 46 had no effect on the Companys financial
statements.

Critical accounting policies

There have been no significant changes to the Companys critical
accounting policies as described in the Companys 2002 Form 10-K.

Disclosures about market risk

Interest rate risk

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

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

Foreign currency risk

We conduct business in various foreign currencies, primarily in Europe and
Israel and are subject to the risks which result from the fluctuations of those
currencies in relation to the US dollar.

We have not entered into any foreign currency forward contracts in either
2003 or 2002.

Factors that may affect our future results and financial condition

Our business is subject to a number of risks and uncertainties. You should
carefully consider the risks described below, in addition to the other
information contained in this Report and in our other filings with the
Securities and Exchange Commission. The risks and uncertainties described below
are not the only ones facing our company. Additional risks and uncertainties
not presently known to us

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

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

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



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

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

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

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

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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 $1.2 million in the
first quarter of 2003 and $22.0 million for the year ended December 31, 2002.
Despite our operating profit in the first quarter of 2002, we were not
profitable in the second through fourth quarters of 2002 and have not achieved
profitability on an annual basis since 1995, and we may never obtain sufficient
revenues to sustain profitability in any future period. In addition, price
competition may make it difficult for us to achieve profitability. Increasing
competition may cause our prices to decline, which would harm our operating
results. We expect our prices for our software products to decline over the
next few years. We expect to face increased competition in markets where we
sell our products, which will make it more difficult to increase or maintain
our revenues or maintain our prices and profit margins. We need to
significantly increase our sales volume and/or reduce our costs to be
profitable in future periods. If anticipated increases in sales volume do not
keep pace with anticipated pricing pressures, our revenues would decline and
our business could be harmed. Despite our efforts to introduce enhancements to
our products, we may not be successful in maintaining our pricing.

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

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

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

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

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



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

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

In early December 1999, following our acquisitions of Wall Data and
Simware, we initiated a plan to restructure our worldwide operations in order
to integrate the operations of Wall Data and Simware. We undertook further
restructurings of our operations in August 2000, in August 2002, and most
recently in January 2003. These restructuring plans involved reductions in our
worldwide workforce and the consolidation of certain of our sales, customer
support, and research and development facilities. These restructuring plans may
not be successful and may not improve future operating results. Completion of
the restructuring plans may disrupt our operations and have a material adverse
effect on our business, financial condition and results of operations. We may
also be required to implement additional restructuring plans in the future.

The successful combination of companies requires coordination of sales and
marketing with research and development efforts, and can be difficult to
accomplish. The integration of both Wall Data and Simware involved
geographically separated organizations (in Kirkland, Washington; suburban
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. If any acquisitions are effected through the issuance of
stock, our stockholders will suffer dilution and any cash used would weaken our
balance sheet. No assurance can be given that any acquisition by us will or
will not occur, that if an acquisition does occur, that it will not materially
and adversely affect us, or that any such acquisition will be successful in
enhancing our business. If any acquisitions are effected through the issuance
of stock, our stockholders may suffer dilution and any cash used would weaken
our balance sheet.

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

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

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
26Table of Contents

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

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

Furthermore, our competitors could seek to expand their product offerings
by designing and selling products using technology that could render obsolete
or adversely affect sales of our products. These developments may adversely
affect sales of our products either by directly affecting customer-purchasing
decisions or by causing potential customers to delay their purchases of our
products. Several of our competitors have developed proprietary networking
applications and certain of such vendors, including Novell, provide a TCP/IP
protocol suite in their products at little or no additional cost. In
particular, Microsoft® has embedded a TCP/IP protocol suite in its Windows
95, Windows 98, Windows 2000, Windows ME, Windows NT, and Windows XP 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 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
27Table of Contents

would be able to replace the functionality provided by the third party
technologies currently offered in conjunction with our products, if those
technologies become unavailable to us, or obsolete, or incompatible with future
versions of our products or market standards.

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

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

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

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

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

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



| |  |  | delay or loss of revenues;                                  
| | - |  | ------------------------------------------------------------
|
| |  |  | cancellation of a purchase order or contract due to defects;
|
| |  |  | diversion of development resources;                         
|
| |  |  | damage to our reputation;                                   
|
| |  |  | failure of our products to achieve market acceptance;       
|
| |  |  | 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.

28



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

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

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

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



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

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

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



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

If we are not successful in asserting our patent rights, our business
could be substantially harmed. At the present time, we have 27 patents pending
and we have been issued approximately 35 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
29Table of Contents

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 26% of our net revenues from sales outside of
North America (United States and Canada) during the three month period ended
March 31, 2003. While we expect that international sales will continue to
account for a significant portion of our net revenues, there can be no
assurance that we will be able to maintain or increase international market
demand for our products or that our distributors will be able to effectively
meet that demand. Risks inherent in our international business activities
generally include, among others:



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

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

30



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

The terrorist attacks in the U.S., the U.S. response to these attacks, the
war in Iraq, and the related decline in consumer confidence and continued
economic weakness have had an adverse impact on our operations. Recent consumer
reports indicate that consumer confidence has reached its lowest level since
1993. If consumer confidence continues to decline or does not recover, our
revenues and results of operations may continue to be adversely impacted in the
remainder of 2003 and beyond. Any escalation in these events, or similar future
events may disrupt our operations or those of our customers. These events have
had and may continue to have an adverse impact on the U.S. and world economy in
general and consumer confidence and spending in particular, which has and could
continue to harm our sales. Any of these events could increase volatility in
the U.S. and worldwide financial markets and economy, which could harm our
stock price and may limit the capital resources available to us and our
customers. This could have significant impact on our operating results,
revenues and costs and may result in increased volatility in the market price
of our common stock and on the future price of our common stock.

The spread of severe acute respiratory syndrome may have a negative impact on
our business and results of operations.

The recent outbreak of severe acute respiratory syndrome, or SARS, which
has had particular impact in China, Hong Kong, and Singapore, could have a
negative effect on our operations. Our operations may be impacted by a number
of SARS-related factors, including, among other things, disrupting operations
at our customers located in those areas. If the number of SARS cases continues
to spread to other areas, our international and domestic sales and operations
could be harmed.

Uncertainties exist regarding our stock repurchase program

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

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

We may require substantial additional capital to finance our future growth
and fund our ongoing operations through the remainder of 2003 and beyond. Our
capital requirements will depend on many factors including, among other things:



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

Although our current business plan does not foresee the need for further
financing activities to fund our operations for the foreseeable future, due to
risks and uncertainties in the marketplace as well as a potential of pursuing
further acquisitions, we may need to raise additional capital. If we issue
additional stock to raise capital, particularly at our current low per share
price, 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, 2003, our officers, directors and entities affiliated with
them, in the aggregate, beneficially owned approximately 1.9 million shares, or
approximately 21.8% of our outstanding common stock. These stockholders, if
acting together, would be able to exert significant influence on all matters
requiring approval by our stockholders, including the election of directors,
the approval of mergers or other business combination transactions or a sale of
all or substantially all of our assets.

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

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

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

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

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

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




Item 3. Quantitative and qualitative disclosures about market risk

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




Item 4. Controls and procedures



| |                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Evaluation of disclosure controls and procedures. During the 90 day
period prior to the filing of this quarterly report, we performed an
evaluation under the supervision and with the participation of NetManages
management, including NetManages Chief Executive Officer

32



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and
operation of NetManages disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
Exchange Act), as amended). Following that evaluation, NetManages
management, including the CEO and CFO, concluded that based on the
evaluation, the design and operation of NetManages disclosure controls and
procedures were effective at that time, except with respect to
certain deficiencies that were disclosed in Item 14 of the
Companys 2002 Form 10-K which were still under review at the
time of the filing of the Form 10-K on February 27, 2003.



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of the date of the filing of this Form
10-Q, the remaining disclosure control deficiencies and resolution
status were as follows: (i)
complete implementation of the Companys code of conduct  recently
approved by the Board of Directors, and (ii.) complete implementation of
the whistleblower policy  recently approved by the Board of Directors.



| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | Management expects to have the remaining weaknesses noted above
corrected in the second quarter of 2003.

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

33



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##### Table of Contents






PART II OTHER INFORMATION




Item 1. Legal proceedings

Legal proceedings

On November 22, 1999, Kenneth
Fishers filed a complaint alleging violations of
the False Claims Act, 31 U.S.C. § 3729 et seq., against us, and
its affiliates
Network Software Associates, Inc. or NSA, and NetSoft Inc., or NetSoft, in the
United States District Court of the District of Columbia. Fisher purported to
file the action on behalf of himself and the Government. NetManage acquired
NSA and NetSoft in 1997. The United States government declined to pursue the
action on its own behalf and, therefore, the action was pursued by Kenneth
Fisher, as relator, on behalf of himself and the Government. NetManage, and
its affiliates, first learned of the action when NetManage was served with the
amended complaint in May
2001. On September 5, 2001, Mr. Fisher agreed to voluntarily dismiss NetManage
from this action, without prejudice, in exchange for an agreement to suspend
applicable statutes of limitation as to Mr. Fishers claims.

On January 31, 2002, on an order of the court granting in part and denying in
part following defendants successful motion to dismiss the May 2001 amended
complaint, Mr. Fisher filed a Second Amended Complaint, or Second Complaint, in
the United States District Court of the District of Columbia against NSA and
NetSoft among numerous other defendants. On May 13, 2002, on an order of the
court following defendants successful motion to strike the Second Complaint,
Mr. Fisher filed a Third Amended Complaint, or Complaint, in the United States
District Court of the District of Columbia against NSA and NetSoft among
numerous other defendants. The Complaint alleges that NSA, NetSoft and the
other defendants made false claims to the government to obtain government
contracts set aside for entities owned and controlled by disadvantaged persons
admitted to the Section 8(a) Minority Small Business Development Program.
Specifically, the Complaint alleges that from 199387 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 working to fraudulently continue
obtaining NSAs certification as a Section 8 (a) entity for alleged use by
NSAs Federal Systems Division and by getting fraudulent claims allowed and
paid by virtue of the alleged fraudulent Section 8(a) status, in violation of
31 U.S.C. § 3729 (a) (3). NetManage did not acquire NSA until July 1997 and
had no involvement with the events alleged by Mr. Fisher. According to the
earlier amended complaint (although not alleged in the current Complaint), Mr.
Fishers theory was that the liabilities of NSA and NetSoft, including alleged
liability in this suit, liabilities of NSA and NetSoft passed to NetManage.
Discovery is presently continuing in this matter. It was previously reported
in NetManages 10-K filing that, on May 31, 2002, NSA, NetSoft and the other
defendants moved to strike Fishers Third Amended Complaint. That is
incorrect. On May 31, 2002, NSA and NetSoft and the other defendants answered
the complaint. and filed a motion to strike the complaint. NetManage, and its
affiliates, vigorously dispute Mr. Fishers allegations. The Company has
insufficient information at this time to estimate the possible loss, if any,
which might result from this lawsuit.

In addition, NetManage may be contingently liable with respect to certain
asserted and unasserted claims that arise during the normal course of business.
Management believes the impact, if any, resulting from these matters would not
have a material impact on the Companys financial statements.




Item 2. Changes in securities and use of proceeds

Not applicable




Item 3. Defaults upon senior securities

Not applicable

34



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##### Table of Contents






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. We filed three reports on Form 8-K during the three months ended March 31,
2003.



| |    |                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | On February 14, 2003, the Company filed Form 8-K, Item 7(a) and (b),
Financial Statements and pro forma financial information announcing the
Companys fourth quarter and fiscal year 2002 results.



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | On February 27, 2003, the Company filed Form 8-K, Item 9, Regulation
FD Disclosure announcing that on February 27, 2003 that the Company had
filed its Annual Report on Form 10-K for the fiscal year ended December
31, 2002 with the Securities and Exchange Commission and that
accompanying the Annual Report were certifications of NetManages Chief
Executive Officer, Zvi Alon, and Chief Financial Officer, Michael
Peckham, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



| |    |                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. | On April 30, 2003, the Company filed Form 8-K, announcing our
first quarter fiscal 2003 financial results for the three months ending
March 31, 2003.




SIGNATURE

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 14, 2003 |  | By: |  | /s/ Michael Peckham                              
|                   |  |     |  |                                                  
|                   |  |     |  | Michael Peckham                                  
|                   |  |     |  | Chief Financial Officer and Senior Vice President
|                   |  |     |  | (Principal Financial and Accounting Officer)     

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CERTIFICATIONS

I, Zvi Alon, certify that:

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

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

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

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



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and

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

|                   |  |                        
|------------------ |  | -----------------------
|DATE: May 14, 2003 |  | /s/ Zvi Alon           
|                   |  |                        
|                   |  | Zvi Alon               
|                   |  | Chief Executive Officer

36



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##### Table of Contents



I, Michael Peckham, certify that:

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

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

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

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



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) Evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the Evaluation Date); and



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and



| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and

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

|                   |  |                        
|------------------ |  | -----------------------
|Date: May 14, 2003 |  | /s/ Michael Peckham    
|                   |  |                        
|                   |  | Michael Peckham        
|                   |  | Chief Financial officer

37



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##### Table of Contents






EXHIBIT INDEX



|        |  |                                                                                                             
|------- |  | ------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                             
|Number  |  | Description                                                                                                 
|        |  |                                                                                                             
|99.1    |  | Section 906 Certification of Zvi Alon, Chief Executive Officer and
Michael Peckham, Chief Financial Officer.