##### Table of Contents



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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549




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FORM 10-Q



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

For the quarterly period ended September 30, 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                        |  | 77-0252226         
|(State or other jurisdiction of |  | (IRS employer      
|Incorporation or organization)  |  | identification no.)

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [   ]

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 November 10,
2003: 8,708,961.



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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                                                                 
|                          | Item 3. Defaults upon Senior Securities                                                       
|                          | Item 4. Submission of Matters to a Vote of Security Holders                                   
|                          | Item 5. Other Information                                                                     
|                          | Item 6. Exhibits and Reports on Form 8-K                                                      
|SIGNATURES               
|EXHIBIT INDEX            
|EXHIBIT 31.1             
|EXHIBIT 31.2             
|EXHIBIT 32.1             



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##### Table of Contents



NetManage, Inc.
Table of Contents

|         |  |                                                                                                                                                     |  |     
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                                                     |  | Page
|         |  |                                                                                                                                                     |  |     
|Part I.  |  | Financial Information                                                                                                                               |  |     
|Item 1.  |  | Financial Statements                                                                                                                                |  |     
|         |  | Condensed Consolidated Balance Sheets at September 30, 2003 and December 31, 2002                                                                   |  | 3   
|         |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended
September 30, 2003 and September 30, 2002 (as restated)         |  | 4   
|         |  | Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine
Months ended September 30, 2003 and September 30, 2002 (as restated) |  | 5   
|         |  | Condensed Consolidated Statements of Cash Flows for the Nine Months ended September
30, 2003 and September 30, 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                                                               |  | 18  
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                          |  | 36  
|Item 4   |  | Controls and Procedures                                                                                                                             |  | 36  
|PART II. |  | OTHER INFORMATION                                                                                                                                   |  | 37  
|Item 1.  |  | Legal Proceedings                                                                                                                                   |  | 37  
|Item 2.  |  | Changes in Securities                                                                                                                               |  | 37  
|Item 3.  |  | Defaults upon Senior Securities                                                                                                                     |  | 38  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                                 |  | 38  
|Item 5.  |  | Other Information                                                                                                                                   |  | 38  
|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                                                    |  | 38  
|         |  | Signatures                                                                                                                                          |  | 39  

2



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##### Table of Contents






NetManage, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)

|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |              |     |        |        | 
|-------------------------------------- | ----------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------- | ------------------------------------------ | --- | ------------- | ------ | ------------ | --- | ------ | ------ | 
|                                       |                                                                         |                                                            |                                 |                                            |     | September 30, |        | December 31,
|                                       |                                                                         |                                                            |                                 |                                            |     | 2003          |        | 2002        
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|ASSETS                                 |                                                                         |                                                            |                                 |                                            |     |               |        |             
|Current Assets:                        |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       | Cash and cash equivalents                                               |                                                            | $                               | 21,529                                     |     |               | $      | 24,014       |    
|                                       | Short-term investments                                                  |                                                            |                                 | 221                                        |     |               |        | 80           |    
|                                       | Accounts receivable, net of allowances of $856 and $1,077, respectively |                                                            |                                 | 5,392                                      |     |               |        | 18,332       |    
|                                       | Prepaid expenses and other current assets                               |                                                            |                                 | 2,840                                      |     |               |        | 2,933        |    
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            |                                 | Total current assets                       |     |               | 29,982 |              |     |        | 45,359 | 
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|Property and equipment, at cost        |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            | Computer software and equipment |                                            |     | 1,027         |        |              |     | 1,106  |       
|                                       |                                                                         |                                                            | Furniture and fixtures          |                                            |     | 5,446         |        |              |     | 4,598  |       
|                                       |                                                                         |                                                            | Leasehold improvements          |                                            |     | 1,346         |        |              |     | 1,273  |       
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            | 7,819                           |                                            |     |               | 6,977  |             
|                                       |                                                                         |                                                            | Less-accumulated depreciation   |                                            |     | (5,841        | )      |              |     | (4,654 | )     
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            |                                 | Net property and equipment                 |     |               | 1,978  |              |     |        | 2,323  | 
|Goodwill                               |                                                                         |                                                            | 1,762                           |                                            |     |               | 1,762  |             
|Other intangibles, net                 |                                                                         |                                                            | 2,087                           |                                            |     |               | 3,573  |             
|Other assets                           |                                                                         |                                                            | 133                             |                                            |     |               | 221    |             
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            |                                 | Total assets                               |     | $             | 35,942 |              |     | $      | 53,238 | 
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|LIABILITIES AND STOCKHOLDERS EQUITY   |                                                                         |                                                            |                                 |                                            |     |               |        |             
|Current Liabilities:                   |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       | Accounts payable                                                        |                                                            | $                               | 1,848                                      |     |               | $      | 2,431        |    
|                                       | Accrued liabilities                                                     |                                                            |                                 | 6,429                                      |     |               |        | 9,549        |    
|                                       | Accrued payroll and related expenses                                    |                                                            |                                 | 2,552                                      |     |               |        | 3,693        |    
|                                       | Deferred revenue                                                        |                                                            |                                 | 11,670                                     |     |               |        | 18,551       |    
|                                       | Income taxes payable                                                    |                                                            |                                 | 1,473                                      |     |               |        | 1,346        |    
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            |                                 | Total current liabilities                  |     |               | 23,972 |              |     |        | 35,570 | 
|Long-term liabilities                  |                                                                         |                                                            | 1,278                           |                                            |     |               | 1,581  |             
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            |                                 | Total liabilities                          |     |               | 25,250 |              |     |        | 37,151 | 
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|Commitments and contingencies (Note 5) |                                                                         |                                                            |                                 |                                            |     |               |        |             
|Stockholders equity:                  |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       | Common stock, $0.01 par value -                                         |                                                            |                                 |                                            |     |               |        |              |    
|                                       |                                                                         | Authorized - 125,000,000 shares                            |                                 |                                            |     |               |        |              |     |       
|                                       |                                                                         | Issued - 10,741,748 and 10,698,025 shares, respectively    |                                 |                                            |     |               |        |              |     |       
|                                       |                                                                         | Outstanding - 8,664,900 and 8,693,108 shares, respectively |                                 |                                            | 107 |               |        |              | 107 |       
|                                       | Treasury stock, at cost - 2,076,848 and 2,004,917 shares, respectively  |                                                            |                                 | (20,804                                    | )   |               |        | (20,629      | )  
|                                       | Additional paid in capital                                              |                                                            |                                 | 177,935                                    |     |               |        | 177,836      |    
|                                       | Accumulated deficit                                                     |                                                            |                                 | (142,916                                   | )   |               |        | (138,157     | )  
|                                       | Accumulated other comprehensive loss                                    |                                                            |                                 | (3,630                                     | )   |               |        | (3,070       | )  
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            |                                 | Total stockholders equity                 |     |               | 10,692 |              |     |        | 16,087 | 
|                                       |                                                                         |                                                            |                                 |                                            |     |               |        |             
|                                       |                                                                         |                                                            |                                 | Total liabilities and stockholders equity |     | $             | 35,942 |              |     | $      | 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 |        | Nine Months Ended
|                                            |                                      |                          |        | September 30,      |        | September 30,    
|                                            |                                      |                          |        |                    |        |                  
|                                            |                                      |                          |        | 2003               |        | 2002              |         | 2003          |        | 2002
|                                            |                                      |                          |        |                    |        |                   |         |               |        |     
|                                            |                                      |                          |        |                    |        |                   |         | (As restated, |        |      |        |        |        | (As restated,
|                                            |                                      |                          |        |                    |        |                   |         | see Note 7)   |        |      |        |        |        | see Note 7)  
|Net revenues:                               |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            | License fees                         |                          | $      | 4,022              |        |                   | $       | 5,338         |        |      | $      | 14,258 |        |               | $       | 23,391 |       
|                                            | Services                             |                          |        | 7,355              |        |                   |         | 8,616         |        |      |        | 23,109 |        |               |         | 25,777 |       
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            |                                      | Total net revenues       |        |                    | 11,377 |                   |         |               | 13,954 |      |        |        | 37,367 |               |         |        | 49,168 | 
|Cost of revenues:                           |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            | License fees                         |                          |        | 277                |        |                   |         | 378           |        |      |        | 1,353  |        |               |         | 1,761  |       
|                                            | Services                             |                          |        | 1,066              |        |                   |         | 1,562         |        |      |        | 3,593  |        |               |         | 4,877  |       
|                                            | Amortization of developed technology |                          |        | 294                |        |                   |         | 562           |        |      |        | 953    |        |               |         | 1,684  |       
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            |                                      | Total cost of revenues   |        |                    | 1,637  |                   |         |               | 2,502  |      |        |        | 5,899  |               |         |        | 8,322  | 
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|Gross margin                                |                                      |                          | 9,740  |                    |        |                   | 11,452  |               |        |      | 31,468 |        |        |               | 40,846  |       
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|Operating expenses:                         |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            | Research and development             |                          |        | 1,831              |        |                   |         | 3,130         |        |      |        | 6,547  |        |               |         | 10,319 |       
|                                            | Sales and marketing                  |                          |        | 5,805              |        |                   |         | 8,244         |        |      |        | 19,440 |        |               |         | 27,695 |       
|                                            | General and administrative           |                          |        | 2,958              |        |                   |         | 3,729         |        |      |        | 8,727  |        |               |         | 8,699  |       
|                                            | Restructuring charges, net           |                          |        | 339                |        |                   |         | 4,614         |        |      |        | 1,829  |        |               |         | 4,614  |       
|                                            | Amortization of intangible assets    |                          |        | 150                |        |                   |         | 201           |        |      |        | 449    |        |               |         | 605    |       
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            |                                      | Total operating expenses |        |                    | 11,083 |                   |         |               | 19,918 |      |        |        | 36,992 |               |         |        | 51,932 | 
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|Loss from operations                        |                                      |                          | (1,343 | )                  |        |                   | (8,466  | )             |        |      | (5,524 | )      |        |               | (11,086 | )     
|Loss on investments, net                    |                                      |                          |       |                    |        |                   | (2,534  | )             |        |      | (32    | )      |        |               | (2,534  | )     
|Interest income (expense) and other, net    |                                      |                          | (109   | )                  |        |                   | 69      |               |        |      | 11     |        |        |               | 271     |       
|Foreign currency transaction gains (losses) |                                      |                          | (401   | )                  |        |                   | (79     | )             |        |      | 489    |        |        |               | (1,387  | )     
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|Loss before income taxes                    |                                      |                          | (1,853 | )                  |        |                   | (11,010 | )             |        |      | (5,056 | )      |        |               | (14,736 | )     
|Provision (benefit) for income taxes        |                                      |                          | 4      |                    |        |                   | 330     |               |        |      | (297   | )      |        |               | 917     |       
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|Net loss                                    |                                      | $                        | (1,857 | )                  |        | $                 | (11,340 | )             |        | $    | (4,759 | )      |        | $             | (15,653 | )     
|                                            |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |        |       
|Net loss per share                          |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            | Basic and diluted                    |                          | $      | (0.21              | )      |                   | $       | (1.28         | )      |      | $      | (0.55  | )      |               | $       | (1.74  | )     
|Weighted average common shares              |                                      |                          |        |                    |        |                   |         |               |        |      |        |        |        |               |         |       
|                                            | Basic and diluted                    |                          |        | 8,665              |        |                   |         | 8,878         |        |      |        | 8,646  |        |               |         | 8,980  |       

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 |     | Nine Months Ended
|                                   |                                               |   | September 30,      |     | September 30,    
|                                   |                                               |   |                    |     |                  
|                                   |                                               |   | 2003               |     | 2002              |   | 2003          |      | 2002
|                                   |                                               |   |                    |     |                   |   |               |      |     
|                                   |                                               |   |                    |     |                   |   | (As restated, |      |      |   |        |      | (As restated,
|                                   |                                               |   |                    |     |                   |   | see Note 7)   |      |      |   |        |      | see Note 7)  
|Net loss                           |                                               | $ | (1,857             | )   |                   | $ | (11,340       | )    |      | $ | (4,759 | )    |               | $ | (15,653 | )    
|Other comprehensive income (loss): |                                               |   |                    |     |                   |   |               |      |      |   |        |      |               |   |         |      
|                                   | Unrealized gain (loss) on investments, net    |   |                    | 36  |                   |   |               | 629  |      |   |        | 83   |               |   |         | (1    | )
|                                   | Foreign currency translation adjustments,
net |   |                    | 407 |                   |   |               | (184 | )    |   |        | (643 | )             |   |         | 1,827 |  
|                                   |                                               |   |                    |     |                   |   |               |      |      |   |        |      |               |   |         |      
|Total comprehensive loss           |                                               | $ | (1,414             | )   |                   | $ | (10,895       | )    |      | $ | (5,319 | )    |               | $ | (13,827 | )    
|                                   |                                               |   |                    |     |                   |   |               |      |      |   |        |      |               |   |         |      

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

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##### Table of Contents






NetManage, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |         |       |               |        |  
|-------------------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ----- | ----------------- | ------ | ------- | ----- | ------------- | ------ | -
|                                                   |                                                                                |                                              |                                                           |                                       |       | Nine Months Ended
|                                                   |                                                                                |                                              |                                                           |                                       |       | September 30,    
|                                                   |                                                                                |                                              |                                                           |                                       |       |                  
|                                                   |                                                                                |                                              |                                                           |                                       |       | 2003              |        | 2002   
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |         |       | (As restated,
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |         |       | see Note 7)  
|Cash flows from operating activities:              |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|                                                   | Net loss                                                                       |                                              | $                                                         | (4,759                                | )     |                   | $      | (15,653 | )    
|                                                   | Adjustments to reconcile net loss to net cash (used in ) operating activities: |                                              |                                                           |                                       |       |                   |        |         |      
|                                                   |                                                                                | Depreciation and amortization                |                                                           |                                       | 2,289 |                   |        |         | 3,707 |              
|                                                   |                                                                                | Provision for doubtful accounts and returns  |                                                           |                                       | 95    |                   |        |         | 24    |              
|                                                   |                                                                                | Stock
option compensation expense            |                                                           |                                       | 67    |                   |        |         |      |              
|                                                   |                                                                                | Loss on disposal of fixed assets             |                                                           |                                       | 22    |                   |        |         | 526   |              
|                                                   |                                                                                | Loss on exchange of marketable securities    |                                                           |                                       |      |                   |        |         | 758   |              
|                                                   |                                                                                | Loss on investments                          |                                                           |                                       | 32    |                   |        |         | 1,773 |              
|                                                   |                                                                                | Changes in operating assets and liabilities: |                                                           |                                       |       |                   |        |         |       |              
|                                                   |                                                                                |                                              | Accounts receivable                                       |                                       |       | 12,845            |        |         |       | 10,673        |       
|                                                   |                                                                                |                                              | Prepaid expenses and other current assets                 |                                       |       | 203               |        |         |       | 190           |       
|                                                   |                                                                                |                                              | Other assets                                              |                                       |       | 88                |        |         |       | (15           | )     
|                                                   |                                                                                |                                              | Accounts payable                                          |                                       |       | (699              | )      |         |       | (779          | )     
|                                                   |                                                                                |                                              | Accrued liabilities, payroll and payroll-related expenses |                                       |       | (4,554            | )      |         |       | 3,692         |       
|                                                   |                                                                                |                                              | Deferred revenue                                          |                                       |       | (7,130            | )      |         |       | (7,214        | )     
|                                                   |                                                                                |                                              | Income taxes payable                                      |                                       |       | 210               |        |         |       | 458           |       
|                                                   |                                                                                |                                              | Long-term liabilities                                     |                                       |       | (303              | )      |         |       | (615          | )     
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|                                                   |                                                                                |                                              |                                                           | Net cash used in operating activities |       |                   | (1,594 | )       |       |               | (2,475 | )
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|Cash flows from investing activities:              |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|                                                   | Purchases of short-term investments                                            |                                              |                                                           | (193                                  | )     |                   |        | (11     | )    
|                                                   | Proceeds from maturities of short-term investments                             |                                              |                                                           | 133                                   |       |                   |        | 11      |      
|                                                   | Purchases of property and equipment                                            |                                              |                                                           | (454                                  | )     |                   |        | (563    | )    
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|                                                   |                                                                                |                                              |                                                           | Net cash used in investing activities |       |                   | (514   | )       |       |               | (563   | )
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|Cash flows from financing activities:              |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|                                                   | Proceeds from sale of common stock, net of issuance costs                      |                                              |                                                           | 32                                    |       |                   |        | 342     |      
|                                                   | Repurchase of common stock                                                     |                                              |                                                           | (175                                  | )     |                   |        | (1,954  | )    
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|                                                   |                                                                                |                                              |                                                           | Net cash used in financing activities |       |                   | (143   | )       |       |               | (1,612 | )
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|Effect of exchange rate changes on cash            |                                                                                |                                              | (234                                                      | )                                     |       |                   | 420    |        
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|Net decrease in cash and cash equivalents          |                                                                                |                                              | (2,485                                                    | )                                     |       |                   | (4,230 | )      
|Cash and cash equivalents, beginning of the period |                                                                                |                                              | 24,014                                                    |                                       |       |                   | 33,038 |        
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |        
|Cash and cash equivalents, end of the period       |                                                                                | $                                            | 21,529                                                    |                                       |       | $                 | 28,808 |        
|                                                   |                                                                                |                                              |                                                           |                                       |       |                   |        |         |      

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 quarterly report on
Form 10-Q. The Company believes the results of operations for interim periods
are subject to fluctuation and may not be an indicator of future financial
performance. The financial statements should be read in conjunction with the
audited financial statements and notes thereto, included in the Companys
annual report on Form 10-K for the year ended December 31, 2002, as filed
with the Securities and Exchange Commission.

2. Consolidation

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

3. Summary of significant accounting policies

Use of estimates

The preparation of the condensed consolidated financial statements in
conformity with 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. Gains and losses resulting from foreign currency
transactions are included in net loss.

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, or SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities.Under SFAS No. 115, the Companys
investments classified as available-for-sale securities are reported at fair
value, with unrealized gains and losses, net of tax, reported in the balance
sheet as Accumulated other comprehensive loss. Held-to-maturity securities
are valued using the amortized cost method. At September 30, 2003 and December
31, 2002, the fair value of the time deposit investments, which have original
maturities in excess of 90 days, 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 September 30, 2003 and December 31, 2002 (in thousands):

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|                    |  |               |     |              |  |   |    | 
|------------------- |  | ------------- | --- | ------------ |  | - | -- | 
|                    |  | September 30, |     | December 31,
|Description         |  | 2003          |     | 2002        
|                    |  |               |     |             
|Time deposits       |  | $             | 61  |              |  | $ |   | 
|KANA Software, Inc* |  |               | 160 |              |  |   | 80 | 
|                    |  |               |     |              |  |   |    | 
|Total               |  | $             | 221 |              |  | $ | 80 | 
|                    |  |               |     |              |  |   |    | 

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

Goodwill and other intangible assets, net

Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and
Other Intangibles Assets.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 and at least annually
thereafter, SFAS No. 142 was adopted on January 1, 2002.

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).

|                                           |                      |   |               |        |              |   |        |        |  
|------------------------------------------ | -------------------- | - | ------------- | ------ | ------------ | - | ------ | ------ | -
|                                           |                      |   | September 30, |        | December 31,
|                                           |                      |   | 2003          |        | 2002        
|                                           |                      |   |               |        |             
|Carrying amount of:                        |                      |   |               |        |              |   |        |       
|                                           | Developed technology |   | $             | 11,249 |              |   | $      | 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 |                      |   | 16,317        |        |              |   | 16,400 |       
|Less accumulated amortization:             |                      |   |               |        |              |   |        |       
|                                           | Developed technology |   |               | (9,857 | )            |   |        | (8,903 | )
|                                           | Customer base        |   |               | (2,741 | )            |   |        | (2,461 | )
|                                           | RUMBA trade name     |   |               | (1,287 | )            |   |        | (1,156 | )
|                                           | Patents & copyrights |   |               | (345   | )            |   |        | (307   | )
|                                           |                      |   |               |        |              |   |        |       
|Net carrying amount of other intangibles   |                      | $ | 2,087         |        |              | $ | 3,573  |       
|                                           |                      |   |               |        |              |   |        |        |  

The aggregate amortization expense for the three and nine months ended
September 30, 2003 was $444,000, and $1,402,000, respectively. The aggregate
amortization expense for the three and nine months ended September 30, 2002 was
$763,000, and $2,289,000, respectively.

Minimum future amortization expense at September 30, 2003 is as follows:

|               |       |   |       |       | 
|-------------- | ----- | - | ----- | ----- | 
|Remainder 2003 |       | $ | 467   |      
|Fiscal 2004    |       |   | 1,620 |      
|               |       |   |       |      
|               | Total |   | $     | 2,087 | 
|               |       |   |       |      

Accrued liabilities and restructuring

Accrued liabilities at September 30, 2003 and December 31, 2002 consisted
of the following (in thousands):

|                           |       |      |               |       |              |   |       |       | 
|-------------------------- | ----- | ---- | ------------- | ----- | ------------ | - | ----- | ----- | 
|                           |       |      | September 30, |       | December 31,
|Description                |       | 2003 |               | 2002 
|                           |       |      |               |      
|Restructuring (see Note 4) |       | $    | 2,412         |       |              | $ | 4,593 |      
|Other accruals             |       |      | 4,017         |       |              |   | 4,956 |      
|                           |       |      |               |       |              |   |       |      
|                           | Total |      | $             | 6,429 |              |   | $     | 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

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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, which the Company adopted for
restructuring activities initiated after December 31, 2002, may affect the
timing of recognizing future restructuring costs as well as the amounts
recognized.

Concentrations of credit risk

Financial instruments, which 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 creditworthy. 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 were no customers that accounted for more than 10% of
consolidated revenues in the three and nine month periods ended September 30,
2003 and 2002.

Accounting for stock based compensation

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. The Company 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
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 provide pro forma disclosures of net loss and loss 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 |        | Nine Months Ended
|                                                                                                             |  | September 30,      |        | September 30,    
|                                                                                                             |  |                    |        |                  
|                                                                                                             |  | 2003               |        | 2002              |  | 2003 |         | 2002
|                                                                                                             |  |                    |        |                   |  |      |         |     
|Net loss as reported                                                                                         |  | $                  | (1,857 | )                 |  | $    | (11,340 | )    |  | $ | (4,759 | ) |  | $ | (15,653 | )
|Less: Stock-based employee compensation expense included in reported net
loss                                |  |                    |       |                   |  |      |        |      |  |   |       |   |  |   |        |  
|Add: Total stock-based employee compensation expense determined under fair
value based method for all awards |  |                    | (385   | )                 |  |      | (776    | )    |  |   | (1,087 | ) |  |   | (2,586  | )
|                                                                                                             |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |         |  
|Pro forma net loss                                                                                           |  | $                  | (2,242 | )                 |  | $    | (12,116 | )    |  | $ | (5,846 | ) |  | $ | (18,239 | )
|                                                                                                             |  |                    |        |                   |  |      |         |      |  |   |        |   |  |   |         |  
|Basic and diluted loss per share, as reported                                                                |  | $                  | (0.21  | )                 |  | $    | (1.28   | )    |  | $ | (0.55  | ) |  | $ | (1.74   | )
|Basic and diluted loss per share, pro forma                                                                  |  | $                  | (0.26  | )                 |  | $    | (1.36   | )    |  | $ | (0.68  | ) |  | $ | (2.03   | )

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

|                        |  |                    |           |                    |  |                    |           |                    |  |  |           |   |  |  |           |  
|----------------------- |  | ------------------ | --------- | ------------------ |  | ------------------ | --------- | ------------------ |  |  | --------- | - |  |  | --------- | -
|                        |  | Three Months Ended |           | Nine Months Ended  |  | Three Months Ended |           | Nine Months Ended 
|                        |  | September 30, 2003 |           | September 30, 2003 |  | September 30, 2002 |           | September 30, 2002
|                        |  |                    |           |                    |  |                    |           |                   
|Volatility              |  |                    | 63.82     | %                  |  |                    | 82.35     | %                  |  |  | 148.50    | % |  |  | 111.19    | %
|Risk-free interest rate |  |                    | 1.24-3.03 | %                  |  |                    | 1.00-3.03 | %                  |  |  | 1.23-3.28 | % |  |  | 1.23-4.69 | %
|Dividend yield          |  |                    | 0.00      | %                  |  |                    | 0.00      | %                  |  |  | 0.00      | % |  |  | 0.00      | %
|Expected term           |  | 3 - 4 months       |           | 3 - 4 months       |  | 3 - 4 months       |           | 3 - 4 months      
|                        |  | beyond vest date   |           | beyond vest date   |  | beyond vest date   |           | beyond vest date  

Stock option exchange offer

On May 16, 2003 the Company announced a voluntary stock option exchange
program for certain of its employees. The offer to exchange options, or Offer,
was open to eligible option holders, excluding non-employee members of the
board of directors and non-exempt employees, holding options to purchase shares
of the Companys common stock with an exercise price per share of $1.50 or
greater. In accordance with the terms of the Offer, participating employees
tendered eligible options in exchange for replacement options. These
replacement options will be granted to employees at least six months and
one day following the date their original options were exchanged and cancelled.
Under the terms of the Offer, replacement options will vest and become
exercisable for the balance of the option shares in accordance with the same
type of installment vesting schedule that was in effect for the cancelled
options, but measured from the grant date of the replacement options. In
addition, no vesting credit will be provided for the period between the date
the original options were tendered and the date the replacement options are
granted.

On June 13, 2003, employees tendered options to purchase an aggregate of
542,150 shares in connection with the Offer. These options were cancelled under
the Companys 1992 Stock Option Plan as amended and restated, and the 1999 Non-statutory
Stock Option Plan as amended following their exchange. Subject to the continued employment
of the employees who exchanged options, replacement options are expected to be
granted on or around December 16, 2003. As of September 30, 2003, the number of
tendered options eligible for replacement has been reduced to 531,047 due to
the termination of certain employees after June 13, 2003.

The exercise price of the replacement options will be based on the fair
market value of the Companys common stock on the date the replacement options
are granted. The fair market value of the Companys common stock will be equal
to the last reported sale price of its common stock on the Nasdaq National
Market on the date it grants the replacement options.

The exchange program is being accounted for in accordance with FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensationan Interpretation of APB Opinion No. 25and results in no
compensation expense.

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
and nine month periods ended September 30, 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 and nine month
periods ended September 30, 2003 and 2002, potentially dilutive securities
(primarily stock options) are as shown in the following table and were not
included in the computation of diluted net loss per share because to do so
would have been anti-dilutive.

|                            |  |                                  |        |                                 |  |      |    |      |  |  |        |  |  |  |       | 
|--------------------------- |  | -------------------------------- | ------ | ------------------------------- |  | ---- | -- | ---- |  |  | ------ |  |  |  | ----- | 
|                            |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                            |  |                                  |        |                                
|                            |  | 2003                             |        | 2002                            |  | 2003 |    | 2002
|                            |  |                                  |        |                                 |  |      |    |     
|Potentially dilutive shares |  |                                  | 96,844 |                                 |  |      | 67 |      |  |  | 29,918 |  |  |  | 1,201 | 

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

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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 the Company believes
that recovery is not likely, it 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 a provision for income taxes in the
statement of operations could change. The income tax provision of $4,000 for
the quarter ended September 30, 2003 resulted primarily from an international
tax benefit of $134,000 (consisting of French tax refunds of $142,000 net of
international tax expense of $8,000) and U.S. state tax expense of $138,000.
The income tax provision of $330,000 for the quarter ended September 30, 2002
resulted primarily from international tax expense of $254,000 and U.S. tax
expense of $76,000. The income tax benefit of $297,000 for the nine months
ended September 30, 2003 resulted primarily from German tax refunds of
$481,000, France tax refunds of $142,000, net of international tax expense of
$180,000 and U.S. tax expense of $146,000. The income tax provision of $917,000
for the nine months ended September 30, 2002 resulted primarily from
international tax expense of $939,000, net of U.S. tax benefits of $22,000.

Recent accounting pronouncements

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. This Statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company currently has
no financial instruments which meet these requirements.

In April 2003 the FASB issued SFAS No. 149, Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities.This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts. The
Statement clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative, clarifies when a
derivative contains a financing component, amends the definition of an
underlying derivative to conform it to language used in FASB Interpretation FIN
No. 45, and amends certain other existing pronouncements. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. All provisions of the
Statement, except those related to forward purchases or sales of when-issued
securities, should be applied prospectively. The Company currently has no
instruments that meet the definition of a derivative, and therefore, the
adoption of this Statement will have no impact on the Companys financial
position or results of operations.

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: (i) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (ii) 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: (i) the company will be the primary
beneficiary of an existing VIE that will require consolidation; or (ii) the
company will hold a significant variable interest in, or have significant
involvement with, an existing VIE. In October 2003 the FASB elected to defer
the effective date for applying the provisions of FIN 46 for interests held by
public entities in variable interest entities or potential variable interest
entitites until the end of the first interim or annual period ending after
December 15, 2003. The adoption of FIN 46 is not expected to have an impact on
the Companys financial statements.

In November 2002, the FASB issued 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 the adoption did not have a material affect on the
financial statements.

Reclassifications

Certain reclassifications have been made to the 2002 financial statements
to conform to the current year presentation.

4. Restructuring of operations

On January 31, 2003, the Company announced a restructuring of operations
designed to refocus its operations 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 $3.3 million
charge to

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operating expenses in the nine month period ending September 30, 2003. The
Company anticipates that an additional $0.1 million in employee related costs
will be recorded in the fourth quarter of 2003. The distribution of the
reduction in workforce was as follows:

|                           |  |              |     |              |  |               |    |  |  |  |    | 
|-------------------------- |  | ------------ | --- | ------------ |  | ------------- | -- |  |  |  | -- | 
|                           |  | Terminations |     | Replacements |  | Net Reduction
|                           |  |              |     |              |  |              
|Operations                 |  |              | 10  |              |  |               | 6  |  |  |  | 4  | 
|Services                   |  |              | 16  |              |  |               | 1  |  |  |  | 15 | 
|Research and development   |  |              | 19  |              |  |               |   |  |  |  | 19 | 
|Sales and marketing        |  |              | 45  |              |  |               | 4  |  |  |  | 41 | 
|General and administrative |  |              | 24  |              |  |               | 5  |  |  |  | 19 | 
|                           |  |              |     |              |  |               |    |  |  |  |    | 
|Total                      |  |              | 114 |              |  |               | 16 |  |  |  | 98 | 
|                           |  |              |     |              |  |               |    |  |  |  |    | 

The restructuring charge for the three month period ended September 30,
2003 includes approximately $0.4 million of employee severance and related
expenses plus approximately $40,000 facility expenses related to the closure of
a leased facility in Germany. The restructuring charge for the nine month
period ended September 30, 2003 includes approximately $0.6 million of expenses
related to leased facilities no longer needed for the Companys operations and
$2.7 million of employee severance and other related expenses. The Company
anticipates that the execution of the restructuring actions will require total
cash expenditures of $3.4 million, which is expected to be funded from
operations and existing cash balances. As of September 30, 2003, the Company
had incurred costs totaling $3.3 million related to the restructuring, which
required $2.4 million in cash expenditures. The remaining reserve related to
this restructuring is approximately $0.9 million, and is included in accrued
liabilities as of September 30, 2003.

The following table lists the components of the January 2003 restructuring
reserve for the nine month period ended September 30, 2003 (in thousands):

|                                                         |  |          |        |            |  |       |      |   |  |   |        |  
|-------------------------------------------------------- |  | -------- | ------ | ---------- |  | ----- | ---- | - |  | - | ------ | -
|                                                         |  | Employee |        | Excess     |  |       |      |  
|                                                         |  | Costs    |        | Facilities |  | Total
|                                                         |  |          |        |            |  |      
|Balance at December 31, 2002                             |  | $        |       |            |  | $     |     |   |  | $ |       |  
|Reserve established                                      |  |          | 2,662  |            |  |       | 630  |   |  |   | 3,292  |  
|Reserve utilized in nine months ended
September 30, 2003 |  |          | (2,098 | )          |  |       | (274 | ) |  |   | (2,372 | )
|                                                         |  |          |        |            |  |       |      |   |  |   |        |  
|Balance at September 30, 2003                            |  | $        | 564    |            |  | $     | 356  |   |  | $ | 920    |  
|                                                         |  |          |        |            |  |       |      |   |  |   |        |  

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 severance and other related expenses.
In March 2003, based on a review of current operations, the decision was made
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 identified for closure. This decision resulted in a $1.2
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
$0.8 million and expected facilities expenses of approximately $0.4 million. In
June 2003, the Company recorded an additional $40,000 in restructuring expense
relating to employee severance and other related expenses in Latin America. In
September 2003, the Company recorded a reduction in obligations of
approximately $25,000. This reduction resulted from the following: i) a
reduction of the estimate of excess facility costs of approximately $851,000
from the continued use of facilities scheduled for closure; ii) an offsetting
change in estimate of approximately $955,000 resulting from the Companys
inability to sublet its excess space at certain facilities as the result of the
short remaining lease term for these facilities and the slow real estate market
that does not support subleasing of the facilities; iii) a reduction of
approximately $46,000 in estimated property and equipment costs used in
on-going operations instead of disposal; iv) a reduction in the estimated exit
costs (moving, broker fees, travel, temporary labor costs) of approximately
$64,000; and v) a reduction in expected employee related costs of approximately
$19,000.

The distribution of the reduction in workforce was as follows:

|                         |  |              |    |          |  |               |   |  |  |  |    | 
|------------------------ |  | ------------ | -- | -------- |  | ------------- | - |  |  |  | -- | 
|                         |  | Terminations |    | Retained |  | Net Reduction
|                         |  |              |    |          |  |              
|Operations               |  |              | 6  |          |  |               |  |  |  |  | 6  | 
|Services                 |  |              | 17 |          |  |               |  |  |  |  | 17 | 
|Research and development |  |              | 53 |          |  |               |  |  |  |  | 53 | 
|Sales and marketing      |  |              | 22 |          |  |               | 8 |  |  |  | 14 | 

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|                           |  |              |     |          |  |               |   |  |  |  |     | 
|-------------------------- |  | ------------ | --- | -------- |  | ------------- | - |  |  |  | --- | 
|                           |  | Terminations |     | Retained |  | Net Reduction
|                           |  |              |     |          |  |              
|General and administrative |  |              | 11  |          |  |               | 1 |  |  |  | 10  | 
|                           |  |              |     |          |  |               |   |  |  |  |     | 
|Total                      |  |              | 109 |          |  |               | 9 |  |  |  | 100 | 
|                           |  |              |     |          |  |               |   |  |  |  |     | 

As of September 30, 2003, the Company had incurred costs totaling $2.3
million related to this restructuring accrual which required $2.3 million in
cash expenditures. The remaining reserve related to this restructuring is
approximately $1.1 million, and is included in accrued liabilities as of
September 30, 2003.

The following table lists the components of the August 2002 restructuring
reserve for the nine month periods ended September 30, 2003 (in thousands):

|                                                                        |  |          |       |            |  |       |       |   |  |   |        |  
|----------------------------------------------------------------------- |  | -------- | ----- | ---------- |  | ----- | ----- | - |  | - | ------ | -
|                                                                        |  | Employee |       | Excess     |  |       |       |  
|                                                                        |  | Costs    |       | Facilities |  | Total
|                                                                        |  |          |       |            |  |      
|Balance at December 31,
2002                                            |  | $        | 1,122 |            |  | $     | 2,156 |   |  | $ | 3,278  |  
|Net change in estimate recorded
as a reduction of restructuring
expense |  |          | (848  | )          |  |       | (400  | ) |  |   | (1,248 | )
|Reserve utilized in nine months
ended September 30,
2003                |  |          | (204  | )          |  |       | (771  | ) |  |   | (975   | )
|                                                                        |  |          |       |            |  |       |       |   |  |   |        |  
|Balance at September 30,
2003                                           |  | $        | 70    |            |  | $     | 985   |   |  | $ | 1,055  |  
|                                                                        |  |          |       |            |  |       |       |   |  |   |        |  

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 the Company does not plan to use. In September 2002, based on a
review of its continuing obligations associated with the original restructuring
charge, the Company recorded a reduction in estimate for facilities of
approximately $521,000 and an increase in estimate for other charges of
approximately $249,000. In June 2003, the Company recorded a further reduction
in the estimate for facilities of approximately $65,000 and in the estimate for
equipment of approximately $15,000. In September 2003, the Company recorded an
additional increase in the estimate of other expenses of approximately $3,000.
As of September 30, 2003, total cash expenditures incurred with respect to this
restructuring reserve were $5.2 million and the reserve for this restructuring
has been fully utilized.

The following table lists the components of the August 2000 restructuring
reserve for the nine month period ended September 30, 2003 (in thousands):

|                                                                        |  |            |     |       |  |       |      |   |  |   |      |  
|----------------------------------------------------------------------- |  | ---------- | --- | ----- |  | ----- | ---- | - |  | - | ---- | -
|                                                                        |  | Excess     |     |       |  |       |      |   |  |  
|                                                                        |  | Facilities |     | Other |  | Total
|                                                                        |  |            |     |       |  |      
|Balance at December 31, 2002                                            |  | $          | 88  |       |  | $     | 119  |   |  | $ | 207  |  
|Net change in estimate recorded as a reduction of restructuring expense |  |            | (65 | )     |  |       | (12  | ) |  |   | (77  | )
|Reserve utilized in nine months ended September 30, 2003                |  |            | (23 | )     |  |       | (107 | ) |  |   | (130 | )
|                                                                        |  |            |     |       |  |       |      |   |  |   |      |  
|Balance at September 30, 2003                                           |  | $          |    |       |  | $     |     |   |  | $ |     |  
|                                                                        |  |            |     |       |  |       |      |   |  |   |      |  

In the fourth quarter of 1999, following the acquisitions of Wall Data,
Incorporated and Simware Inc., 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 the six month period ended June 30, 2003, based on a review of its
continuing facilities obligations, the Company recorded a $157,000 increase in
the restructuring reserve with a corresponding increase of restructuring
expense. As of September 30, 2003, total cash expenditures incurred with
respect to this restructuring reserve were approximately $3.7 million. The
remaining reserve is approximately $0.1 million, and is included in accrued
liabilities as of September 30, 2003.

The following table lists the components of the restructuring reserve for
the nine month period ended September 30, 2003 (in thousands):

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|                                                         |  |            |      |  
|-------------------------------------------------------- |  | ---------- | ---- | -
|                                                         |  | Excess    
|                                                         |  | Facilities
|                                                         |  |           
|Balance at December 31, 2002                             |  | $          | 435  |  
|Change in estimate recorded to restructuring expense     |  |            | 157  |  
|Reserve utilized in nine months ended September 30, 2003 |  |            | (443 | )
|                                                         |  |            |      |  
|Balance at September 30, 2003                            |  | $          | 149  |  
|                                                         |  |            |      |  

In August 1998, following the acquisition of FTP Software Inc., 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 the six month period ended
June 30, 2003, based on a review of its continuing facilities obligations, the
Company recorded a $295,000 reduction in the restructuring reserve with a
corresponding reduction of restructuring expense. No adjustments other than
payments of facilities expenses were recorded in the three month period ended
September 30, 2003. The remaining reserve related to this restructuring at
September 30, 2003 is approximately $0.3 million and is included in accrued
liabilities.

The following table lists the components of the FTP restructuring reserve
for the nine month period ended September 30, 2003 (in thousands):

|                                                                    |  |            |      |  
|------------------------------------------------------------------- |  | ---------- | ---- | -
|                                                                    |  | Excess    
|                                                                    |  | Facilities
|                                                                    |  |           
|Balance at December 31, 2002                                        |  | $          | 673  |  
|Change in estimate recorded as a reduction of restructuring expense |  |            | (295 | )
|Reserve utilized in nine months ended September 30, 2003            |  |            | (90  | )
|                                                                    |  |            |      |  
|Balance at September 30,
2003                                       |  | $          | 288  |  
|                                                                    |  |            |      |  

5. Commitments and contingencies

Legal proceedings

On November 22, 1999, Kenneth Fisher filed a complaint alleging violations
of the False Claims Act, 31 U.S.C. § 3729 et seq., against 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. Mr.
Fisher purported to file the action on behalf of himself and the United States
federal 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 the Company was served with the amended complaint in May 2001. On
September 5, 2001, Mr. Fisher agreed to voluntarily dismiss the Company 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 defendants 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 1993 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 addition, the complaint alleges that NSA, NetSoft and
the other defendants conspired to defraud the government by working to
fraudulently continue 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

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not alleged in the current complaint), Mr.
Fishers theory was that the liabilities of NSA and NetSoft, including alleged
liability in this suit, passed to NetManage. On May 31, 2002, NSA and NetSoft
and the other defendants answered the complaint. The Company and its
affiliates, dispute Mr. Fishers allegations and discovery is presently
continuing in this matter. The Company has insufficient information at this
time to estimate the possible loss, if any, which might result from this
lawsuit.

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.

Leases

Facilities and equipment are leased under non-cancelable operating leases
expiring on various dates through the year 2011. The company does not have any
capital leases. As of September 30, 2003, future minimum rental and lease
payments, net of any sublease income, under non-cancelable operating leases are
as follows:

|                 |  |                                                           |       |      |  |              |       |              |  |               |     |  |  |   |       |  |  |   |       | 
|---------------- |  | --------------------------------------------------------- | ----- | ---- |  | ------------ | ----- | ------------ |  | ------------- | --- |  |  | - | ----- |  |  | - | ----- | 
|                 |  | Amount of Commitment Expiration Per Period (in thousands)
|                 |  |                                                          
|                 |  |                                                           |       |      |  | Less than 1  |       |              |  |               |     |  |  |   |       |  |  |  
|                 |  | Total                                                     |       | year |  | 2 to 3 years |       | 4 to 5 years |  | After 5 years
|                 |  |                                                           |       |      |  |              |       |              |  |              
|Operating leases |  | $                                                         | 7,488 |      |  | $            | 3,255 |              |  | $             | 981 |  |  | $ | 1,253 |  |  | $ | 1,999 | 
|                 |  |                                                           |       |      |  |              |       |              |  |               |     |  |  |   |       |  |  |   |       | 

Other

As an element of its standard commercial terms, the Company includes an
indemnification clause in its software licensing agreements that indemnifies
the licensee against liability and damages (including legal defense costs)
arising from any claims of patent, copyright, trademark, or trade secret
infringement by the Companys software. The Companys indemnification
limitation is the cost to defend any third party claim brought against our
customers and to the maximum a refund of the purchase price. The Company
licenses software on a perpetual basis.

6. Segment information

The Company operates in two market segments: Host Accessand Host
Integration. The Companys Chief Executive Officer evaluates these market
segments at the sales and bookings level.

The Companys Host Accessproduct line is designed to provide the
technology to make the connection between personal computers and large
corporate computers possible. These products are designed to leverage the
strengths and popularity of the Internet, as well as corporate private
networks, and offer features to improve network manageability. The Host
Integrationproduct line is designed to provide the technology to allow
customers to leverage the investment they have in existing host-based systems,
applications and business processes for new web-based presentations,
applications, and solutions. 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 and
nine month periods ended September 30, 2003 and 2002 (in thousands):

|                 |  |                                  |        |                                 |  |      |        |      |  |   |        |  |  |   |        | 
|---------------- |  | -------------------------------- | ------ | ------------------------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                 |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                 |  |                                  |        |                                
|                 |  | 2003                             |        | 2002                            |  | 2003 |        | 2002
|                 |  |                                  |        |                                 |  |      |        |     
|Host Access      |  | $                                | 11,049 |                                 |  | $    | 13,704 |      |  | $ | 34,348 |  |  | $ | 47,150 | 
|Host Integration |  |                                  | 328    |                                 |  |      | 250    |      |  |   | 3,019  |  |  |   | 2,018  | 
|                 |  |                                  |        |                                 |  |      |        |      |  |   |        |  |  |   |        | 
|Total            |  | $                                | 11,377 |                                 |  | $    | 13,954 |      |  | $ | 37,367 |  |  | $ | 49,168 | 
|                 |  |                                  |        |                                 |  |      |        |      |  |   |        |  |  |   |        | 

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7. Restatement of financial statements

Subsequent to the issuance of the Companys interim unaudited condensed
consolidated financial statements for the three and nine months ended September
30, 2002, management determined that the accounting treatment was inappropriate
for certain transactions, and that the following adjustments were
required (in thousands):

|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | ------------- |  | - | ------- | -
|                                       |                                                                                                                                                                                                                                                                                            |  | Three Months  |         | Nine Months  
|                                       |                                                                                                                                                                                                                                                                                            |  | Ended         |         | Ended        
|                                       |                                                                                                                                                                                                                                                                                            |  | September 30, |         | September 30,
|                                       |                                                                                                                                                                                                                                                                                            |  | 2002          |         | 2002         
|Total net revenues:                    |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported                                                                                                                                                                                                                                                                     |  | $             | 14,093  |               |  | $ | 49,365  |  
|                                       | Correction for rebate expense previously recorded as a selling expense                                                                                                                                                                                                                     |  |               | (139    | )             |  |   | (319    | )
|                                       | Release of excess returns reserves                                                                                                                                                                                                                                                         |  |               |        |               |  |   | 122     |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | 13,954  |               |  | $ | 49,168  |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|Cost of revenues                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported*                                                                                                                                                                                                                                                                    |  | $             | 2,514   |               |  | $ | 8,360   |  
|                                       | Decrease in amortization expense associated with purchase price adjustments recorded in 2000 for
developed technology with respect to the acquisition of Wall Data                                                                                                                         |  |               | (12     | )             |  |   | (38     | )
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | 2,502   |               |  | $ | 8,322   |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|Sales and marketing                    |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported                                                                                                                                                                                                                                                                     |  | $             | 8,448   |               |  | $ | 28,234  |  
|                                       | Correction for rebate expense charged against net revenues                                                                                                                                                                                                                                 |  |               | (139    | )             |  |   | (319    | )
|                                       | Correction for rebate expense charged against reserves                                                                                                                                                                                                                                     |  |               |        |               |  |   | (101    | )
|                                       | Adjustments for sales meeting expense held in the first quarter of 2002                                                                                                                                                                                                                    |  |               | (65     | )             |  |   | 98      |  
|                                       | Decrease in commission expenses charged in 2002 that should have been expensed in 2001                                                                                                                                                                                                     |  |               |        |               |  |   | (216    | )
|                                       | Other miscellaneous expense adjustments                                                                                                                                                                                                                                                    |  |               |        |               |  |   | (1      | )
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | 8,244   |               |  | $ | 27,695  |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|Amortization of intangible assets      |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported*                                                                                                                                                                                                                                                                    |  | $             | 219     |               |  | $ | 656     |  
|                                       | Purchase price adjustments recorded in 2000 with respect to the acquisition of Wall Data                                                                                                                                                                                                   |  |               | (18     | )             |  |   | (51     | )
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | 201     |               |  | $ | 605     |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|Interest income and other, net         |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported                                                                                                                                                                                                                                                                     |  | $             | 69      |               |  | $ | 272     |  
|                                       | Other miscellaneous expense adjustments                                                                                                                                                                                                                                                    |  |               |        |               |  |   | (1      | )
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | 69      |               |  | $ | 271     |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|Provision for income taxes             |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported                                                                                                                                                                                                                                                                     |  | $             | 160     |               |  | $ | 361     |  
|                                       | Increase in the quarterly income tax provision to account 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 goodwill and intangibles. |  |               | 170     |               |  |   | 556     |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | 330     |               |  | $ | 917     |  
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|Net loss                               |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported                                                                                                                                                                                                                                                                     |  | $             | (11,265 | )             |  | $ | (15,527 | )
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | (11,340 | )             |  | $ | (15,653 | )
|                                       |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |         |  
|Net
loss per share  basic and diluted |                                                                                                                                                                                                                                                                                            |  |               |         |               |  |   |        
|                                       | As previously reported                                                                                                                                                                                                                                                                     |  | $             | (1.27   | )             |  | $ | (1.73   | )
|                                       | As restated                                                                                                                                                                                                                                                                                |  | $             | (1.28   | )             |  | $ | (1.74   | )
|                                       | Weighted
average common shares  basic and diluted                                                                                                                                                                                                                                         |  |               | 8,878   |               |  |   | 8,980   |  

(*)  reflects certain
reclassifications to conform to the current period presentation

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##### Table of Contents



As a result of the adjustments described above, the accompanying interim
condensed consolidated financial statements for the three and nine months ended
September 30, 2002 have been restated to reflect the correction of the matters
as described above.

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

|                              |                                        |  |                                  |         |                                 |  |            |         |                |  |   |         |   |  |   |         |  
|----------------------------- | -------------------------------------- |  | -------------------------------- | ------- | ------------------------------- |  | ---------- | ------- | -------------- |  | - | ------- | - |  | - | ------- | -
|                              |                                        |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                              |                                        |  |                                  |         |                                
|                              |                                        |  | 2002                             |         | 2002                            |  | 2002       |         | 2002          
|                              |                                        |  |                                  |         |                                 |  |            |         |               
|                              |                                        |  | (As previously                   |         |                                 |  |            |         | (As previously |  |   |         |  
|                              |                                        |  | reported*)                       |         | (As restated)                   |  | reported*) |         | (As restated) 
|Statement of Operations Data: |                                        |  |                                  |         |                                 |  |            |         |                |  |   |         |   |  |   |        
|                              | Total net revenues                     |  | $                                | 14,093  |                                 |  | $          | 13,954  |                |  | $ | 49,365  |   |  | $ | 49,168  |  
|                              | Cost of revenues                       |  |                                  | 2,514   |                                 |  |            | 2,502   |                |  |   | 8,360   |   |  |   | 8,322   |  
|                              | Gross margin                           |  |                                  | 11,579  |                                 |  |            | 11,452  |                |  |   | 41,005  |   |  |   | 40,846  |  
|                              | Sales and marketing                    |  |                                  | 8,448   |                                 |  |            | 8,244   |                |  |   | 28,234  |   |  |   | 27,695  |  
|                              | Amortization of intangible assets      |  |                                  | 219     |                                 |  |            | 201     |                |  |   | 656     |   |  |   | 605     |  
|                              | Interest income and other, net         |  |                                  | 69      |                                 |  |            | 69      |                |  |   | 272     |   |  |   | 271     |  
|                              | Provision for income taxes             |  |                                  | 160     |                                 |  |            | 330     |                |  |   | 361     |   |  |   | 917     |  
|                              | Net
loss                               |  |                                  | (11,265 | )                               |  |            | (11,340 | )              |  |   | (15,527 | ) |  |   | (15,653 | )
|                              | Net loss per share
 basic and diluted |  |                                  | (1.27   | )                               |  |            | (1.28   | )              |  |   | (1.73   | ) |  |   | (1.74   | )

(*) Reflects certain reclassifications to conform to the current period
presentation.

8. Related party transactions

On
May 28, 2003, the Company entered into an independent contractor
services agreement with Dr. Shelley Harrison (a member of the
Companys Board of Directors), pursuant to which
Dr. Harrison will receive compensation in consideration for
consultancy and advisory services he is providing the Company over a two
year period. The terms of the agreement require the Company to pay
Dr. Harrison a fixed fee of $138,000 per year and a one time
grant to Dr. Harrison of an option to purchase 146,800 shares of
the Companys common stock, at an exercise price of $1.92 per
share (which represents the quoted market price of the stock at the
date of grant). The option vests on a monthly basis over the two year
term of the agreement. The option expires five years from the date of
issuance. The fair value of the option was determined using the
Black-Scholes option pricing model with the following assumptions:
stock price $2.95 - $4.00; no dividends; risk free interest rate of
2.00% - 2.41%; volatility of 63% - 90%; and a contractual life of
five years. The fair value of the option is subject to change over
the vesting period of the option based on changes in the underlying
assumptions (variable award accounting). Through September 30,
2003 the Company had recorded approximately $67,000 in compensation
expense under this agreement, based on the aggregate fair value of
$402,000. In connection with his entering into the agreement,
Dr. Harrison resigned from the Companys Audit Committee
effective May 28, 2003.

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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 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.

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 their 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 Web-based business processes,
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 processes, 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
external users, 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
compatibles, 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.

Our principal products are compatible with Microsoft Windows Sever 2003,
Windows XP, Windows 2000, Windows NT, Windows 98, Windows 95, and Windows 3.x
operating systems, on IBM operating systems, Novell, Inc. 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.

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. We also sell Host Accesssolutions under the
OnWeb® brand name that
deliver connectivity for web browser users without requiring software on the
users device other than the browser, collectively known as zero footprint
solutions. 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. These products also allow our
customers to integrate existing legacy

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applications with new platform solutions such as those built using
Microsofts .NET Framework, IBMs WebSphere, or BEAs WebLogic.

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 revised and updated our product packaging and market messaging. We
believe that different solutions can converge to provide new and extended value
from host applications. Because our customers require a suite of solutions to
address the spectrum of needs that they have, we have broadened the market
promotion of the Rumba and OnWeb products to our NetManage Host Access Platform
(HAP). The Host Access Platform ties together the NetManage Rumba desktop host
access technologies and our server-based OnWeb solution for access,
presentation, and integration services. As a result, customers can extend host
applications to support new Web-based business initiatives, consolidate and
integrate host-based information, and operate normal business processes as they
migrate to packaged applications using a variety of Web services.

Results of 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.

For the nine month period ended September 30, 2003, we continued to
experience a reduction in revenues, which we believe relate to the continuing
depressed North American and European economies. Customers, because of
uncertainties within their own businesses, have postponed or canceled decisions
to purchase technology. We do not anticipate any improvements in the current
business environment through the remainder of 2003 and into 2004. Therefore, we
felt it was necessary to refocus our operations and reduce our operating
expenses to bring them more in line with our revised anticipated revenue
levels. 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 has recorded a $3.3
million charge to operating expenses as of September 30, 2003, consisting of
approximately $0.6 million of expenses related to leased facilities no longer
needed for the Companys operations and $2.7 million of employee severance and
other related expenses (See Note 4 to Financial Statements- Restructuring of
operations).

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 this restructuring, we intended to reduce our workforce by
approximately 20%
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 severance 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 identified for closure. This decision
resulted in a $1.2 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 $0.8 million and expected facilities expenses of approximately
$0.4 million. In June 2003, NetManage recorded an additional $40,000 in
restructuring expense relating to employee termination costs in Latin America.
In September 2003, the Company recorded a reduction in obligations of
approximately $25,000 associated with the August 2002 restructuring. The
reduction resulted from the following: (i) a reduction of facility costs of
approximately $851,000 from the continued use of facilities scheduled for
closure; (ii) an offsetting change in estimate of approximately $955,000
resulting from the Companys inability to sublet its excess space as a result
of the short remaining lease term for these facilities and the slow real estate
market that does not support subleasing of the facilities; (iii) a reduction of
approximately $46,000 in estimated property, plant, and equipment costs used in
on-going operations instead of being disposed; (iv) a reduction in the estimated
exit costs (moving, broker fees, travel, temporary labor costs) of
approximately $64,000, and ; (v) a reduction in expected employee related costs
of approximately $19,000.

We initiated restructuring plans as a result of our acquisitions of Wall
Data, Simware, and Aqueduct Software, Inc, including a $5.6 million
restructuring plan announced on August 3, 2000. As part of the restructuring,
we reduced our workforce by approximately 20%, 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

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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. In September 2002,
based on a review of our continuing obligations associated with the original
restructuring charge, we recorded a reduction in estimate for facilities of
approximately $521,000 and an increase in estimate for other charges of
approximately $249,000. In June 2003, we recorded a further reduction in the
estimate for facilities of approximately $65,000 and in the estimate for
equipment of approximately $15,000. In September 2003, we recorded an increase
in reserves of approximately $3,000 for professional/legal expenses. All
expenses associated with this restructuring event have now been captured and
there is no remaining balance of this restructuring obligation as of September
30, 2003. (See Note 4 to Financial Statements  Restructuring of operations).

Since the latter half of 2000 and through the third quarter of 2001
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 2002, compared to the same quarter of the previous year. 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 buying decisions due to budget constraints. Our
second quarter 2003 revenues were approximately 27% less than the amount
recorded in the second quarter of 2002. Our third quarter revenues of 2003 were
approximately 19% less than the amount recorded in the third quarter of 2002
and less than the amount recorded in the second quarter of 2003. There can be
no assurance that revenues will increase at all in future periods, but we are
encouraged about recent positive changes to the North America economy.

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 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 third quarter of
2003, operating expenses, excluding restructuring charges, continued to decline
when compared to the first and second quarters of 2003 and the third quarter of
2002, and may fluctuate as a percentage of net revenues as we develop and
introduce new products.

As described herein, 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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Three and nine months ended September 30, 2003 compared to September 30, 2002
(dollars in millions):

|                                                    |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |     |     |  
|--------------------------------------------------- | --------------------------------------------------- | ------------------ | ---- | -------------------------------- | ----- | ---- | ----- | ------------- | ----- | - | ---- | ---- | ---- | - | ---- | --- | --- | -
|                                                    |                                                     |                    |      | Three months ended September 30,
|                                                    |                                                     |                    |      |                                 
|                                                    |                                                     |                    |      | 2003                             |       | 2002 |       | Change       
|                                                    |                                                     |                    |      |                                  |       |      |       |              
|                                                    |                                                     |                    |      |                                  |       |      |       | (As restated) |       |   |      |      |      |   |      |    
|Net revenues                                        |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |    
|                                                    | License fees                                        |                    | $    | 4.0                              |       |      | $     | 5.3           |       |   | $    | (1.3 | )    |   |      | -25 | %  
|                                                    | Services                                            |                    |      | 7.4                              |       |      |       | 8.7           |       |   |      | (1.3 | )    |   |      | -15 | %  
|                                                    |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |    
|                                                    |                                                     | Total net revenues |      |                                  | 11.4  |      |       |               | 14.0  |   |      |      | (2.6 | ) |      |     | -19 | %
|As a percentage of net revenues:                    |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |    
|                                                    | License fees                                        |                    |      | 35.1                             | %     |      |       | 37.9          | %     |   |      |      |      |   |      |     |    
|                                                    | Services                                            |                    |      | 64.9                             | %     |      |       | 62.1          | %     |   |      |      |      |   |      |     |    
|                                                    |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |    
|                                                    |                                                     | Total net revenues |      |                                  | 100.0 | %    |       |               | 100.0 | % |      |      |      |   |      |     |     |  
|Gross margin - license fees                         |                                                     | $                  | 3.7  |                                  |       | $    | 5.0   |               |       | $ | (1.3 | )    |      |   | -26  | %  
|Gross margin - service                              |                                                     |                    | 6.3  |                                  |       |      | 7.1   |               |       |   | (0.8 | )    |      |   | -11  | %  
|Gross margin - amortization of developed technology |                                                     |                    | (0.3 | )                                |       |      | (0.6  | )             |       |   | 0.3  |      |      |   | 50   | %  
|                                                    |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |    
|                                                    |                                                     | Total gross margin |      | $                                | 9.7   |      |       | $             | 11.5  |   |      | $    | (1.8 | ) |      |     | -16 | %
|As a percentage of net revenue                      |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |    
|                                                    | Gross margin - license fees                         |                    |      | 32.5                             | %     |      |       | 35.7          | %     |   |      |      |      |   |      |     |    
|                                                    | Gross margin - service                              |                    |      | 55.3                             | %     |      |       | 50.6          | %     |   |      |      |      |   |      |     |    
|                                                    | Gross margin - amortization of developed technology |                    |      | -2.6                             | %     |      |       | -4.3          | %     |   |      |      |      |   |      |     |    
|                                                    |                                                     |                    |      |                                  |       |      |       |               |       |   |      |      |      |   |      |    
|                                                    |                                                     | Total gross margin |      |                                  | 85.2  | %    |       |               | 82.0  | % |      |      |      |   |      |     |     |  
|Research and development                            |                                                     | $                  | 1.8  |                                  |       | $    | 3.1   |               |       | $ | (1.3 | )    |      |   | -42  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 15.8                             | %     |      |       | 22.1          | %     |   |      |      |      |   |      |     |    
|Sales and marketing                                 |                                                     | $                  | 5.8  |                                  |       | $    | 8.3   |               |       | $ | (2.5 | )    |      |   | -30  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 50.9                             | %     |      |       | 59.3          | %     |   |      |      |      |   |      |     |    
|General and administrative                          |                                                     | $                  | 3.0  |                                  |       | $    | 3.7   |               |       | $ | (0.7 | )    |      |   | -19  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 26.3                             | %     |      |       | 26.4          | %     |   |      |      |      |   |      |     |    
|Restructuring charge, net                           |                                                     | $                  | 0.3  |                                  |       | $    | 4.6   |               |       | $ | (4.3 | )    |      |   | -93  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 2.6                              | %     |      |       | 32.9          | %     |   |      |      |      |   |      |     |    
|Amortization of intangibles                         |                                                     | $                  | 0.2  |                                  |       | $    | 0.2   |               |       | $ |     |      |      |   | 0    | %  
|                                                    | As a percentage of net revenue                      |                    |      | 1.8                              | %     |      |       | 1.4           | %     |   |      |      |      |   |      |     |    
|Interest income (expense) and other, net            |                                                     | $                  | (0.1 | )                                |       | $    | 0.0   |               |       | $ | (0.1 | )    |      |   | 0    | %  
|                                                    | As a percentage of net revenue                      |                    |      | -0.9                             | %     |      |       | 0.7           | %     |   |      |      |      |   |      |     |    
|Loss on investment, net                             |                                                     | $                  |     |                                  |       | $    | (2.5  | )             |       | $ | 2.5  |      |      |   | -100 | %  
|                                                    | As a percentage of net revenue                      |                    |      | 0.0                              | %     |      |       | -17.9         | %     |   |      |      |      |   |      |     |    
|Foreign currency transaction losses                 |                                                     | $                  | (0.4 | )                                |       | $    | (0.1  | )             |       | $ | (0.3 | )    |      |   | 300  | %  
|                                                    | As a percentage of net revenue                      |                    |      | -3.5                             | %     |      |       | -0.7          | %     |   |      |      |      |   |      |     |    
|Provision for income taxes                          |                                                     | $                  |     |                                  |       | $    | 0.3   |               |       | $ | (0.3 | )    |      |   | -100 | %  
|                                                    | Effective tax rate                                  |                    |      | 0.0                              | %     |      |       | 2.1           | %     |   |      |      |      |   |      |     |    
|Net loss                                            |                                                     | $                  | (1.9 | )                                |       | $    | (11.3 | )             |       | $ | 9.4  |      |      |   | 83   | %  
|                                                    | As a percentage of net revenue                      |                    |      | -16.7                            | %     |      |       | -80.7         | %     |   |      |      |      |   |      |     |    

[Additional columns below]

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##### Table of Contents



[Continued from above table, first column(s) repeated]

|                                                    |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |     |     |  
|--------------------------------------------------- | --------------------------------------------------- | ------------------ | ---- | ------------------------------- | ----- | ---- | ----- | ------ | ----- | - | ---- | ---- | ----- | - | ---- | --- | --- | -
|                                                    |                                                     |                    |      | Nine months ended September 30,
|                                                    |                                                     |                    |      |                                
|                                                    |                                                     |                    |      | 2003                            |       | 2002 |       | Change
|                                                    |                                                     |                    |      |                                 |       |      |       |       
|                                                    |                                                     |                    |      | (As restated)                  
|Net revenues                                        |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |    
|                                                    | License fees                                        |                    | $    | 14.3                            |       |      | $     | 23.4   |       |   | $    | (9.1 | )     |   |      | -39 | %  
|                                                    | Services                                            |                    |      | 23.1                            |       |      |       | 25.8   |       |   |      | (2.7 | )     |   |      | -10 | %  
|                                                    |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |    
|                                                    |                                                     | Total net revenues |      |                                 | 37.4  |      |       |        | 49.2  |   |      |      | (11.8 | ) |      |     | -24 | %
|As a percentage of net revenues:                    |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |    
|                                                    | License fees                                        |                    |      | 38.2                            | %     |      |       | 47.6   | %     |   |      |      |       |   |      |     |    
|                                                    | Services                                            |                    |      | 61.8                            | %     |      |       | 52.4   | %     |   |      |      |       |   |      |     |    
|                                                    |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |    
|                                                    |                                                     | Total net revenues |      |                                 | 100.0 | %    |       |        | 100.0 | % |      |      |       |   |      |     |     |  
|Gross margin - license fees                         |                                                     | $                  | 12.9 |                                 |       | $    | 21.6  |        |       | $ | (8.7 | )    |       |   | -40  | %  
|Gross margin  service                              |                                                     |                    | 19.5 |                                 |       |      | 20.9  |        |       |   | (1.4 | )    |       |   | -7   | %  
|Gross margin - amortization of developed technology |                                                     |                    | (1.0 | )                               |       |      | (1.7  | )      |       |   | 0.7  |      |       |   | -41  | %  
|                                                    |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |    
|                                                    |                                                     | Total gross margin |      | $                               | 31.4  |      |       | $      | 40.8  |   |      | $    | (9.4  | ) |      |     | -23 | %
|As a percentage of net revenue                      |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |    
|                                                    | Gross margin - license fees                         |                    |      | 34.5                            | %     |      |       | 43.9   | %     |   |      |      |       |   |      |     |    
|                                                    | Gross margin - service                              |                    |      | 52.1                            | %     |      |       | 42.5   | %     |   |      |      |       |   |      |     |    
|                                                    | Gross margin - amortization of developed technology |                    |      | -2.7                            | %     |      |       | -3.5   | %     |   |      |      |       |   |      |     |    
|                                                    |                                                     |                    |      |                                 |       |      |       |        |       |   |      |      |       |   |      |    
|                                                    |                                                     | Total gross margin |      |                                 | 83.9  | %    |       |        | 82.9  | % |      |      |       |   |      |     |     |  
|Research and development                            |                                                     | $                  | 6.5  |                                 |       | $    | 10.3  |        |       | $ | (3.8 | )    |       |   | -37  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 17.4                            | %     |      |       | 20.9   | %     |   |      |      |       |   |      |     |    
|Sales and marketing                                 |                                                     | $                  | 19.5 |                                 |       | $    | 27.7  |        |       | $ | (8.2 | )    |       |   | -30  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 52.1                            | %     |      |       | 56.3   | %     |   |      |      |       |   |      |     |    
|General and administrative                          |                                                     | $                  | 8.7  |                                 |       | $    | 8.7   |        |       | $ | 0.0  |      |       |   | 0    | %  
|                                                    | As a percentage of net revenue                      |                    |      | 23.3                            | %     |      |       | 17.7   | %     |   |      |      |       |   |      |     |    
|Restructuring charge, net                           |                                                     | $                  | 1.8  |                                 |       | $    | 4.6   |        |       | $ | (2.8 | )    |       |   | -61  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 4.8                             | %     |      |       | 9.3    | %     |   |      |      |       |   |      |     |    
|Amortization of intangibles                         |                                                     | $                  | 0.4  |                                 |       | $    | 0.6   |        |       | $ | (0.2 | )    |       |   | -33  | %  
|                                                    | As a percentage of net revenue                      |                    |      | 1.1                             | %     |      |       | 1.2    | %     |   |      |      |       |   |      |     |    
|Interest income and other, net                      |                                                     | $                  |     |                                 |       | $    | 0.2   |        |       | $ | (0.2 | )    |       |   | -100 | %  
|                                                    | As a percentage of net revenue                      |                    |      | 0.0                             | %     |      |       | 0.4    | %     |   |      |      |       |   |      |     |    
|Loss on investment, net                             |                                                     | $                  |     |                                 |       | $    | (2.5  | )      |       | $ | 2.5  |      |       |   | -100 | %  
|                                                    | As a percentage of net revenue                      |                    |      | 0.0                             | %     |      |       | -5.1   | %     |   |      |      |       |   |      |     |    
|Foreign currency transaction gains (losses)         |                                                     | $                  | 0.5  |                                 |       | $    | (1.4  | )      |       | $ | 1.9  |      |       |   | -136 | %  
|                                                    | As a percentage of net revenue                      |                    |      | 1.3                             | %     |      |       | -2.8   | %     |   |      |      |       |   |      |     |    
|Provision (benefit) for income taxes                |                                                     | $                  | (0.3 | )                               |       | $    | 0.9   |        |       | $ | (1.2 | )    |       |   | -133 | %  
|                                                    | Effective tax rate                                  |                    |      | -0.8                            | %     |      |       | 1.8    | %     |   |      |      |       |   |      |     |    
|Net loss                                            |                                                     | $                  | (4.8 | )                               |       | $    | (15.7 | )      |       | $ | 10.9 |      |       |   | 69   | %  
|                                                    | As a percentage of net revenue                      |                    |      | -12.8                           | %     |      |       | -31.9  | %     |   |      |      |       |   |      |     |    

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Net revenues

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

Services revenues are derived from software updates for existing software
products, user documentation and technical support, generally under annual
service agreements. These revenues are recognized ratably over the terms of
such agreements. If the services are included in the initial licensing fee, the
fair value of the services is unbundled and recognized ratably over the related
service period. Service revenues derived from consulting and training are
deferred and subsequently recognized when the services are performed, and the
collection is deemed probable.

License
fees decreased $1.3 million and $9.1 million, and services revenues
decreased $1.3 million and $2.7 million, respectively, for the three and nine
month periods ended September 30, 2003 as compared to the same periods in 2002.
Total net revenues for the three and nine month periods ended September 30,
2003 decreased $2.6 million and $11.8 million, respectively, from those
recorded in the three and nine month periods ended September 30, 2002. We
believe these decreases result 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.

We have operations worldwide with sales offices located in the United
States, Europe, Canada and support and R&D facilities in Canada and Israel.
Revenues outside of the United States and Canada as a percentage of total net
revenues were approximately 29% and 28% for the three months ended September
30, 2003 and 2002, respectively, and 28% for each of the nine month periods
ended September 30, 2003 and 2002.

There were no customers that accounted for more than 10% of consolidated
revenues in each of the three and nine month periods ended September 30, 2003
and 2002.

Gross margin

Gross margin increased as a percentage of net revenues to 85% from 82%,
for the three months ended September 30, 2003, compared to September 30, 2002
and to 84% from 83% for the nine months ended September 30, 2003, compared to
September 30, 2002. Cost of revenues decreased for the three and nine month
periods ended September 30, 2003 by $0.9 million and $2.4 million,
respectively, as compared to the three and nine month periods ended September
30, 2002. Cost of revenues declined in the third quarter of 2003 compared to
the second quarter of 2003 primarily as a result of a reduction in headcount in
our operations group and a VAT refund of approximately $50,000 received in
the quarter. Cost of revenues includes all direct expenses associated with both
license and service revenues as well as the amortization of developed
technology purchased through our acquisition of Wall Data and Simware.

Cost of license revenues primarily includes costs associated with order
processing, product packaging, documentation and software duplication,
amortization and write-down of acquired technology, and royalties paid to third
parties for licensed software incorporated into our products. Cost of service
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, as a percentage of net license
revenues, were 6.9% and 9.5% respectively for the three and nine month periods
ended September 30, 2003 compared to 7.1% and 7.5% for the same periods in
2002, and declined in dollar amounts of $0.1 million and $0.4 million,
respectively, for both the three and nine month periods ended September 30,
2003 as compared to the same periods in 2002. The decrease was a result of a
reduction in headcount of 8 full-time employees in operations from the third
quarter of 2002 compared to the third quarter of 2003, and continuing cost
reduction efforts.

Cost of revenues for services decreased to 14.5% and 15.5% respectively as
a percentage of net services revenues for the three and nine month periods
ended September 30, 2003 compared to 18.1% and 18.9% for the same periods in
2002 and declined in dollar

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amounts of $0.5 million and $1.3 million, respectively, for both the three
and nine month periods ended September 30, 2003 as compared to the same periods
in 2002. The decline in cost of revenue for services primarily resulted from a
reduction in headcount of 14 full-time employees in customer service and
consulting from the third quarter of 2002 to the third quarter of 2003 and the
ongoing cost reduction efforts in 2002 and 2003. This was offset in part by a
reduction in services revenues of $1.2 million and $2.7 million for the three
and nine month periods ended September 30, 2003, respectively.

Amortization of developed technology consists of developed software
capitalized in our acquisitions and is amortized using the straight-line method
over the useful life, generally five years. Beginning in 2003, we revised the
classification of amortization of developed technology from operating expenses
to cost of revenue. The revision in expense classification has been applied to
all periods presented. Amortization decreased for the three and nine month
periods ended September 30, 2003, by approximately $0.3 million and $0.7
million, respectively, compared to the same periods in 2002 due to the
reduction of the carrying mount of developed technology resulting from the
utilization of pre-acquisition ITC credits from the acquisition of Simware.
Current tax accounting requires the utilization of the ITC credits first be
applied against any remaining intangible assets resulting from the acquisition
of Simware before applying the credits to our tax provision.

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 distribution channels, which generally carry lower margins.

Research and development

Research and development, or R&D, expenses primarily consist of salaries
and benefits, occupancy and travel expenses, and fees paid to outside
consultants. R&D expenses decreased in dollar amounts and as a percentage of
net revenues for the three and nine month periods ended September 30, 2003 as
compared to the same periods in 2002, primarily as a result of a reduction in
headcount of 39 full-time employees, and the ongoing cost reduction efforts in
2003 and 2002.

Software development costs are accounted for in accordance with SFAS No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed,under which we are required to capitalize software
development costs after technological feasibility is established, which we
categorize as a working model and beta version of the software. The
establishment of technological feasibility and the ongoing assessment of the
recoverability of these costs requires considerable judgment by management with
respect to certain external factors; including, but not limited to, anticipated
future gross product revenue, estimated economic life, and changes in
technology. Costs that do not qualify for capitalization are charged to R&D
expense when incurred. We did not capitalize any software development costs in
either of the three or nine month periods ended September 30, 2003 or September
30, 2002.

Sales and marketing

Sales and marketing expenses consist primarily of the salaries of sales
and marketing personnel, commissions, advertising and promotional expenses,
occupancy and related costs. Sales and marketing expenses decreased in dollar
amounts and as a percentage of net revenues for the three and nine month
periods ended September 30, 2003 as compared to the same periods in 2002,
primarily due to a reduction in headcount of 54 full-time sales employees and
support staff from the third quarter of 2002 to the third quarter of 2003 and
our ongoing cost reduction efforts in 2002 and 2003. Sales and marketing
expenses for the three and nine month periods ended September 30, 2003 also
include an allocation of approximately $111,000 and $334,000, respectively, for
a Company sales incentive goal for 2003. An additional $139,000 and $416,000
related to this sales incentive is included in other functional areas for the
three and nine month periods ended September 30, 2003, respectively. We
anticipate the total expense for this sales incentive, if achieved, to
approximate $1.0 million for the year ending December 31, 2003.

General and administrative

General and administrative expenses consist primarily of salaries,
benefits, accounting, operating, legal, and proportionate shares of occupancy
and IT expenses for our human resources, legal, finance and general management
functions. General and administrative expenses decreased in the third quarter
to $3.0 million from $3.7 million in the same period in
2002, and were comparable as
a percentage of net revenues for the three month period ended September 30,
2003 as compared to the same periods in 2002. General and administrative
expenses increased as a percentage of net revenues for the nine month period
ended September 30, 2003, as compared
to the same period in 2002. This increase in percentage of net revenues
is attributable to the decrease in net revenues over the same

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period of time.
The primary reason for the decrease in general and administrative expenses was
the reduction of 22 full-time general and administrative employees from the
third quarter of 2002 to the third quarter of 2003, our continuing cost
reduction efforts, and a VAT refund in France, offset in part by higher legal
expenses.

Interest income (expense) and other, net

Interest income (expense) and other, net for the three and nine month
periods ended September 30, 2003 and 2002, respectively, are comprised of
the following table:

|                       |                         |   |                    |    |                   |   |      |    |      |   |      |     |  |   |     |     | 
|---------------------- | ----------------------- | - | ------------------ | -- | ----------------- | - | ---- | -- | ---- | - | ---- | --- |  | - | --- | --- | 
|                       |                         |   | Three months ended |    | Nine months ended
|                       |                         |   | September 30,      |    | September 30,    
|                       |                         |   |                    |    |                  
|                       |                         |   | 2003               |    | 2002              |   | 2003 |    | 2002
|                       |                         |   |                    |    |                   |   |      |    |     
|Interest income:       |                         |   |                    |    |                   |   |      |    |      |   |      |     |  |   |     |    
|                       | On cash and
investments |   | $                  | 39 |                   |   | $    | 72 |      |   | $    | 160 |  |   | $   | 268 | 
|                       | On tax refunds          |   |                    |   |                   |   |      |   |      |   |      |    |  |   |     | 2   | 
|Interest expense       |                         |   | (148               | )  |                   |   | (3   | )  |      |   | (148 | )   |  |   | (25 | )  
|Other income
(expense) |                         |   |                   |    |                   |   |     |    |      |   | (1   | )   |  |   | 26  |    
|                       |                         |   |                    |    |                   |   |      |    |      |   |      |     |  |   |     |    
|Total                  |                         | $ | (109               | )  |                   | $ | 69   |    |      | $ | 11   |     |  | $ | 271 |    
|                       |                         |   |                    |    |                   |   |      |    |      |   |      |     |  |   |     |     | 

The reduction in earned interest results from a reduction of our cash
balances, and approximately 26% lower effective annual interest rates during
the nine month period ended September 30, 2003 as compared to the same period
in 2002.

For the three and nine month periods ended September 30, 2002 interest
income of $2,000 was related to an income tax refund. For the same periods in
2003, the Company did not record any interest income on tax refunds.

Interest
expense of $148,000 in the third quarter of 2003 resulted from a
VAT assessment in France relating to the 1997 and 1998 fiscal years.

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

Foreign currency transaction gains (losses)

For the three and nine month periods ended September 30, 2003, we
recorded a transaction loss of approximately $0.4 million and a net transaction
gain of $0.5 million, respectively. For the three and nine month periods ended
September 30, 2002, we recorded transaction losses of approximately $0.1
million and $1.4 million, respectively. These transaction gains and losses are
attributable to fluctuations related primarily to the Israeli
Shekel. For the three and nine month periods ended September 30, 2003 and 2002,
the relationship of the Israeli Shekel to the Euro and to the USD was as
follows:

|              |  |                                  |     |                                 |  |      |     |      |  |  |      |   |  |  |      |  
|------------- |  | -------------------------------- | --- | ------------------------------- |  | ---- | --- | ---- |  |  | ---- | - |  |  | ---- | -
|              |  | Three months ended September 30, |     | Nine months ended September 30,
|              |  | 2003                             |     | 2002                            |  | 2003 |     | 2002
|              |  |                                  |     |                                 |  |      |     |     
|USD % Change  |  |                                  | 2.4 | %                               |  |      | 0.4 | %    |  |  | -6.3 | % |  |  | 10.2 | %
|Euro % Change |  |                                  | 3.8 | %                               |  |      | 0.8 | %    |  |  | 3.7  | % |  |  | 22.0 | %

In those periods where the foreign currency change is positive, we
recorded a transaction loss related to fluctuations related primarily
to the Israeli Shekel. Conversely,
in those periods where the foreign currency change is negative, we recorded a
transaction gain.

Provision for income taxes

Our effective tax rate for 2003 is less than 1% due to our current tax
loss position. Income taxes primarily include international withholding taxes
and state taxes. The income tax provision of $4,000 for the quarter ended
September 30, 2003 resulted primarily from an international tax benefit of
$134,000 (consisting of French tax refunds of $142,000 net of international tax
expense of

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$8,000), and U.S. state tax expense of $138,000. The income tax
benefit of $297,000 for the nine months ended September 30, 2003 resulted
primarily from tax refunds in Germany and France of $481,000 and $142,000,
respectively, net of international tax expense of $180,000, and U.S. state tax
expense of $146,000. The income tax provision of $330,000 for the three months
ended September 30, 2002 resulted primarily from international tax expense of
$254,000 and U.S. state tax expense of $76,000. The income tax provision of
$917,000 for the nine months ended September 30, 2002 resulted primarily from
international tax expense of $939,000, net of U.S. state tax benefits of
$22,000.

Liquidity and capital resources

|                           |                                       |      |               |      |  
|-------------------------- | ------------------------------------- | ---- | ------------- | ---- | -
|                           |                                       |      | September 30,
|(In millions)              |                                       | 2003
|                           |                                       |     
|Consists of:               |                                       |      |               |     
|                           | Cash and cash equivalents             |      | $             | 21.6 |  
|                           | Short-term investments                |      |               | 0.2  |  
|For the nine month period: |                                       |      |               |     
|                           | Net cash used in operating activities |      |               | (1.6 | )
|                           | Net cash used in investing activities |      |               | (0.5 | )
|                           | Net cash used in financing activities |      |               | (0.1 | )

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 decreased
from $24.1 million as of December 31, 2002 to $21.8 million as of September 30,
2003. The decrease from operating activities, resulted primarily from the net
loss, the reduction in accounts payable, accrued liabilities, payroll and
payroll-related expenses, deferred revenues, and long-term liabilities, offset
in part by the reduction in accounts receivable and the increase in income
taxes payable.

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 material commitments with regard to future
capital expenditures at this time.

Net cash used in financing activities in the three and nine month periods
ended September 30, 2003 reflects our repurchase of our common stock in the
first quarter of 2003, offset by proceeds from the sale of common stock through
our Employee Stock Purchase Plan.

Our Board of Directors 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 September 30, 2003, we did not repurchase any shares of
our common stock. For the nine month period ended September 30, 2003, we
repurchased 71,932 shares of our common stock at an average price of $2.44 per
share for a total cost of approximately $175,456. Cumulatively as of
September 30, 2003, we have repurchased 2,076,848 shares of our common stock at an
average price of $10.02 per share for an approximate total cost of $20.8
million.

At September 30, 2003, we had working capital of $6.0 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
at least the next twelve months. We do not use off balance sheet financing
arrangements as a source of liquidity or financing.

Stock option exchange offer

On May 16, 2003 the Company announced a voluntary stock option exchange
program for certain of its employees. The offer to exchange options, or Offer,
was open to eligible option holders, excluding non-employee members of the
board of directors and non-exempt employees, holding options to purchase shares
of the Companys common stock with an exercise price per share of $1.50 or
greater. In accordance with the terms of the Offer, participating employees
tendered eligible options in exchange for replacement options. These
replacement options will then be granted to employees at least six months and
one day following the date their original options were exchanged and cancelled.
Under the terms of the Offer, replacement options will vest and become
exercisable for the balance of the option shares in accordance with the same
type of installment vesting schedule that was in effect for the cancelled
options, but measured from the grant date of the replacement options, and no
vesting credit will be provided for the period between the date the original
options were tendered and the date the replacement options are granted.

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The Company has issued options under the Company Plans to provide
employees with an opportunity to acquire or increase their ownership interest
in NetManage, thereby creating a stronger incentive for them to continue their
employment with the Company and to contribute to the attainment of the
Companys business and financial objectives and the creation of value for all
the Companys stockholders. The reason for this offer was that many of the
outstanding options, whether or not they were currently exercisable, had
exercise prices that were significantly higher than the current market price of
the Companys Common Stock. For this reason, the Company believed that these
options did not effectively retain and motivate employees and were unlikely to
be exercised in the foreseeable future. By making the offer to exchange
outstanding options for replacement options that will have an exercise price
equal to the market value of our Common Stock on the grant date, the Company
intends to provide its employees with the benefit of owning options that over
time may have a greater potential to increase in value and thereby provide them
with a more meaningful incentive to remain with the Company and to contribute
to the attainment of the Companys business and financial objectives and to
create value for all the Companys stockholders.

On June 13, 2003, employees tendered options to purchase a total of
542,150 shares in connection with the Offer, which were cancelled under our
1992 Stock Option Plan as amended, and our 1999 Non-statutory Stock Option Plan
following their exchange. Subject to the continued employment of the employees
who exchanged options, replacement options are expected to be granted on or
around December 16, 2003. As of September 30, 2003, the number of tendered
options eligible for replacement has been reduced to 531,476 due to the
termination of certain NetManage employees after June 13, 2003.

The exercise price of the replacement options will be based on the fair
market value of the Companys common stock on the date the replacement options
are granted. The fair market value of the Companys common stock will be equal
to the last reported sale price of its common stock on the Nasdaq National
Market on the date it grants the replacement options.

The exchange program is being accounted for in accordance with FIN 44,
Accounting for Certain Transactions Involving Stock Compensationan
Interpretation of APB Opinion No. 25and results in no compensation expense.

Critical accounting policies

Reference is made to Critical Accounting Policies included in our Annual
Report on Form 10-K for the year ended December 31, 2002 as filed with the SEC
on February 27, 2003. As of the date of the filing of this Quarterly Report,
the Company has not identified any critical accounting policies other than
those discussed in our Annual Report for the year ended December 31, 2002.

Disclosures about market risk

Interest rate risk

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

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

Foreign currency risk

We transact business in various foreign currencies, primarily in Europe
and Israel and are subject to the risks resulting from the fluctuations of
those currencies in relation to the U.S. 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 SEC. The
risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or that
we currently deem

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

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

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



| |  |  | general economic conditions, in particular, the recent slowdown of
purchases of information technology due to current economic conditions
in North America, Europe, 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, and
the amortization of acquired intangible assets.

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 $22.0 million for the
year ended December 31, 2002. We have not been profitable in the first three
quarters of 2003 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 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 to 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. This could occur
despite our efforts to introduce and enhance our existing products.

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

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

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In early December 1999, following our acquisition of Wall Data and
Simware, we initiated a plan to restructure our worldwide operations in order
to integrate the operations of Wall Data and Simware. We undertook further
restructurings of our operations, primarily in North America, in August 2000,
August 2002 and again in January 2003. All 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, and personnel with diverse business
backgrounds and corporate cultures. We believe that factors such as the ongoing
attention and dedication of management and resources required to effect the
complete integration of both Wall Data and Simware, and the consequent
disruption in the business of all parties involved, contributed to
interruptions and loss of momentum in our business activities. Our ability to
maintain or increase revenues from the sale of products from Wall Data and
Simware on an ongoing basis depends in part on our ability to effectively
respond to these factors.

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

We have very limited experience in acquiring or making investments in
companies, technologies or services. We regularly evaluate product and
technology acquisition opportunities and anticipate that we may make additional
acquisitions in the future if we determine that an acquisition would further
our corporate strategy. Acquisitions in our industry are particularly difficult
to assess because of the rapidly changing technological standards in our
industry. If we make any acquisitions, we will be required to assimilate the
personnel, operations and products of the acquired business and train, retain
and motivate key personnel from the acquired business. However, the key
personnel of the acquired business may decide not to work for us. Moreover, if
the operations of an acquired company or business do not meet our expectations,
we may be required to restructure the acquired business, or write-off the value
of some or all of the assets of the acquired business as we did in the third
quarter of 2000 and the fourth quarter of 2002. 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 shareholders 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 face significant competition and competition in our market is likely to
increase and could harm our business.

The market for our products is intensely competitive and characterized by
rapidly changing technology, evolving industry standards, price erosion,
changes in customers needs and frequent new product introductions. We
anticipate continued growth and competition in our industry and the entrance of
new competitors into our market. 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 software products
compete with major computer system, and software vendors, including
Microsoft, IBM, and Sun Microsystems, Inc., as well as software
companies such as Jacada Ltd, Seagull, Hummingbird Communications
Ltd, 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.
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

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by directly affecting customer-purchasing
decisions or by causing potential customers to delay purchases of our products.
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. Occasionally, we have experienced
difficulty 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. 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 the ability of these parties 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 our
products, and our business would be materially harmed. For example, we have a
license agreement with Dart Communications, Inc. for Power TCP Telnet and Power
TCP VT320 for 5 years, which we use in the OnWeb product line. There can be no
assurance that we would be able to replace the functionality provided by the
third party technologies currently offered in conjunction with our products if
those technologies become unavailable to us or obsolete or incompatible with
future versions of our products or market standards.

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

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

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

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

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

Complex software products may contain undetected errors or failures when
first introduced, or as new versions are released. The likelihood of errors or
failures 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.

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.

Furthermore, 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.

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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 two patents pending
and we have been issued approximately thirty-five patents from the U.S. Patent
Office.

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

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

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

We derived approximately 29% and 28% of our net revenues from sales
outside of North America (United States and Canada) during the three and nine
month periods ended September 30, 2003, respectively. 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;                                

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| |  |  | cultural differences in the negotiation of contracts and conflict resolution;    
| | - |  | ---------------------------------------------------------------------------------
|
| |  |  | 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.

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, and
the related decline in consumer confidence, and continued economic weakness
have had an adverse impact on our operations. 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 any similar future events may disrupt our
operations or those of our customers. These events have had and may continue to
have an adverse impact on the U.S. and world economy in general and consumer
confidence and spending in particular, which has and could, continue to harm
our sales. In addition these events could increase volatility in the U.S. and
worldwide financial markets and economy, which could harm our stock price and
may limit the capital resources available to us, and our customers. This
could have significant impact on our operating results, revenues and costs
and may result in the increased volatility in the market price of our common
stock.

Uncertainties exist regarding our stock repurchase program.

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

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

We may require substantial additional capital to finance our future growth
and fund our ongoing operations through the remainder of 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;                                   

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| |  |  | the costs associated with our expansion; and                                          
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | the extent to which we invest in new technology and research and development projects.

Although our current business plan does not foresee the need for further
financing activities to fund our operations for the foreseeable future, due to
risks and uncertainties in the marketplace as well as a potential of pursuing
further acquisitions, we may need to raise additional capital. If we issue
additional stock to raise capital particularly at our current low price per
share, our stockholders percentage ownership in NetManage would be reduced.
Additional financing may not be available when needed and, if such financing is
available, it may not be available on terms favorable to us.

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

As of September 30, 2003, our officers, directors and entities affiliated
with them, in the aggregate, beneficially owned approximately 1.5 million
shares, or approximately 17.4% of our outstanding common stock. These
stockholders, if acting together, would be able to exert significant influence
on all matters requiring approval by our stockholders, including the election
of directors, the approval of mergers or other business combination
transactions or a sale of all or substantially all of our assets.

Certain provisions of our stock option plan, our stockholder 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 and our 1999 Nonstatutory Stock Option Plan
currently provide that, in the event of a change of control of NetManage, all
options outstanding under those plans would become fully vested and exercisable
for at least 10 days prior to the consummation of such a change of control
transaction. This 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.

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Item 3. Quantitative and qualitative disclosures about market risk

There have been no material changes in reported market risks since
December 31, 2002. Information regarding interest rate risk and foreign
currency risk is discussed herein in Item 2 under Disclosure of Market Risk.




Item 4. Controls and procedures

Evaluation of disclosure controls and procedures.

As of the end of the period covered by this filing, we performed an
evaluation under the supervision and with the participation of NetManages
management, including NetManages 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 CFO, concluded that
based on the evaluation, the design and operation of NetManages disclosure
controls and procedures were effective at that time.

An internal control system is designed to provide reasonable, but not
absolute, assurance that the objectives of our control system are met,
including, but not limited to, ensuring that our transactions are properly
authorized, our assets are safeguarded against unauthorized or improper use and
our transactions are properly recorded and reported.

Changes in internal controls.

There have been no significant changes in our internal controls during the
Companys most recent quarter, or in other factors that could significantly
affect these controls, including any corrective actions with regard to
significant deficiencies and material weaknesses.

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PART II OTHER INFORMATION




Item 1. Legal Proceedings

Legal proceedings

On November 22, 1999, Kenneth Fisher filed a complaint alleging violations
of the False Claims Act, 31 U.S.C. § 3729 et seq., against 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. Mr.
Fisher purported to file the action on behalf of himself and the United States
federal 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 the Company was served with the amended complaint in May 2001. On
September 5, 2001, Mr. Fisher agreed to voluntarily dismiss the Company 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 defendants 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 1993 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 addition, the complaint alleges that NSA, NetSoft and
the other defendants conspired to defraud the government by working to
fraudulently continue 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, passed to NetManage. On May 31, 2002, NSA and NetSoft
and the other defendants answered the complaint. The Company and its
affiliates, dispute Mr. Fishers allegations and discovery is presently
continuing in this matter. The Company has insufficient information at this
time to estimate the possible loss, if any, which might result from this
lawsuit.

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.




Item 2. Changes in Securities

On May 16, 2003 the Company announced a voluntary stock option exchange
program for certain of its employees. The offer to exchange options, or Offer,
was open to eligible option holders, excluding non-employee members of the
board of directors and non-exempt employees, holding options to purchase shares
of the Companys common stock with an exercise price per share of $1.50 or
greater. In accordance with the terms of the Offer, participating employees
tendered eligible options in exchange for replacement options. These
replacement options will then be granted to employees at least six months and
one day following the date their original options were exchanged and cancelled.
Under the terms of the Offer, replacement options will vest and become
exercisable for the balance of the option shares in accordance with the same
type of installment vesting schedule that was in effect for the cancelled
options, but measured from the grant date of the replacement options, and no
vesting credit will accordingly be provided for the period between the date the
original options were tendered and the date the replacement options are
granted.

On June 13, 2003, employees tendered options to purchase a total of
542,150 shares in connection with the Offer, which were cancelled under our
1992 Stock Option Plan as amended, and our 1999 Non-statutory Stock Option Plan
following their exchange. Subject to the continued employment of the employees
who exchanged options, replacement options are expected to be granted on or
around December 16, 2003. As of September 30, 2003, the number of tendered
options eligible for replacement has been reduced to 531,047 due to the
termination of certain NetManage employees after June 13, 2003.

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The exercise price of the replacement options will be based on the fair
market value of the Companys common stock on the date the replacement options
are granted. The fair market value of the Companys common stock will be equal
to the last reported sale price of its common stock on the Nasdaq National
Market on the date it grants the replacement options.

The exchange program is being accounted for in accordance with FIN 44,
Accounting for Certain Transactions Involving Stock Compensationan
Interpretation of APB Opinion No. 25and results in no compensation expense.




Item 3. Defaults upon Senior Securities

Not applicable




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

Not applicable




Item 5. Other Information

We file electronically with the Securities and Exchange Commission (SEC)
our annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K pursuant to Section 13(a) or 15(d) of the 1934 Act. The
public may read or copy any materials we file with the SEC at the SECs Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information statements,
and other information regarding issuers that file electronically with the SEC.
The address of that site is http:// www.sec.gov.

On October 27, 2003, the Company
filed a current report on Form 8-K, announcing its third quarter
fiscal 2003 financial results for the three and nine months ended
September 30, 2003. Subsequent to filing the earnings release
and prior to filing this Form 10-Q, the Company determined that
options granted to Dr. Harrison on May 28, 2003 for
consulting services should be accounted for using the fair value
based method under SFAS No. 123. The effect of accounting for
the option grant under the fair value based method on the
October 27, 2003 earnings release is as follows (in thousands,
except per share amounts):

|                                       |                                     |  |                    |        |                    |  |   |        |  
|-------------------------------------- | ----------------------------------- |  | ------------------ | ------ | ------------------ |  | - | ------ | -
|                                       |                                     |  | Three Months Ended |        | Nine Months Ended 
|                                       |                                     |  | September 30, 2003 |        | September 30, 2003
|                                       |                                     |  |                    |        |                   
|General and administrative             |                                     |  |                    |        |                    |  |   |        |  
|                                       | As reported in the earnings release |  | $                  | 2,891  |                    |  | $ | 8,660  |  
|                                       | As reported in Form 10-Q            |  | $                  | 2,958  |                    |  | $ | 8,727  |  
|Net loss                               |                                     |  |                    |        |                    |  |   |        |  
|                                       | As reported in the earnings release |  | $                  | (1,790 | )                  |  | $ | (4,692 | )
|                                       | As reported in Form 10-Q            |  | $                  | (1,857 | )                  |  | $ | (4,759 | )
|Net loss per share  basic and diluted |                                     |  |                    |        |                    |  |   |        |  
|                                       | As reported in the earnings release |  | $                  | (0.21  | )                  |  | $ | (0.54  | )
|                                       | As reported in Form 10-Q            |  | $                  | (0.21  | )                  |  | $ | (0.55  | )




Item 6. Exhibits and Reports on Form 8-K

a. Exhibits

|     |  |                                                                                                                                                                           
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                                      
|     |  |                                                                                                                                                                           
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                                      
|     |  |                                                                                                                                                                           
|32.1 |  | Chief Executive Officer and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.

b. Reports on Form 8-K.

|                                                                                                                                                                                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. On July 28, 2003, the Company filed a current report on Form 8-K,
announcing its second quarter fiscal 2003 financial results for the three
months ended June 30, 2003.       
|                                                                                                                                                                                 
|2. On October 27, 2003, the Company filed a current report on Form 8-K,
announcing its third quarter fiscal 2003 financial results for the three
months ended September 30, 2003.

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SIGNATURES

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

|                        |  |                 |  |                                                  
|----------------------- |  | --------------- |  | -------------------------------------------------
|                        |  | NETMANAGE, INC.
|                        |  | (Registrant)   
|                        |  |                 |  |                                                  
|DATE: November 13, 2003 |  | By:             |  | /s/ Michael Peckham                              
|                        |  |                 |  |                                                  
|                        |  |                 |  | Chief Financial Officer and Senior Vice President
|                        |  |                 |  | (On behalf of the registrant and as Principal    
|                        |  |                 |  | Financial and Accounting Officer)                

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EXHIBIT INDEX

|        |  |                                                                                                                                                                           
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                           
|Number  |  | Description                                                                                                                                                               
|        |  |                                                                                                                                                                           
|31.1    |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a).                                                                                                      
|        |  |                                                                                                                                                                           
|31.2    |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a).                                                                                                      
|        |  |                                                                                                                                                                           
|32.1    |  | Chief Executive Officer and Chief Financial Officer Certification
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley act of 2002.

40