##### 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 June 30, 2001

OR



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

For the transition period from ___________________ to __________________

Commission file number 0-22158

NetManage, Inc.

(Exact name of registrant as specified in its charter)


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

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

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

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

YES [X]      NO [   ]


Number of shares of registrants common stock outstanding as of July 31, 2001:
65,208,579



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1



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TABLE OF CONTENTS



|                          |                                                                                                 |                                                               |  |  |  |  |  | 
|------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------------------------- |  |  |  |  |  | 
|                          |                                                                                                 | CONDENSED CONSOLIDATED BALANCE SHEETS                        
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS              
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
|                          |                                                                                                 | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS              
|                          |                                                                                                 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS         
|                          | ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|                          | Item 3   Quantitative and Qualitative Disclosures About Market Risk.                          
|PART II OTHER INFORMATION
|                          | Item 1. Legal Proceedings                                                                      
|                          | Item 2. Changes in Securities                                                                  
|                          | Item 3. Defaults upon Senior Securities                                                        
|                          | Item 4. Submission of Matters to a Vote of Security Holders                                    
|                          | Item 5. Other Information                                                                      
|                          | Item 6. Exhibits and Reports on Form 8-K                                                       
|SIGNATURES               



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##### Table of Contents



NETMANAGE, INC.
Table of Contents

|        |  |                                                                                                                                  |  |     
|------- |  | -------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                                  |  | Page
|        |  |                                                                                                                                  |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                                                            |  |     
|       
|       
|       
|       
|Item 1. |  | Financial Statements                                                                                                             |  |     
|       
|       
|       
|       
|        |  | Condensed Consolidated Balance Sheets at June 30, 2001 and
December 31, 2000                                                     |  | 3   
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2001 and June 30, 2000               |  | 4   
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Other Comprehensive Loss
for the three and six months ended June 30, 2001 and June 30, 2000 |  | 5   
|       
|       
|       
|       
|        |  | Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and June 30, 2000                         |  | 6   
|       
|       
|       
|       
|        |  | Notes to Condensed Consolidated Financial Statements                                                                             |  | 7   
|       
|       
|       
|       
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                            |  | 12  
|       
|       
|       
|       
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                                                                       |  | 25  
|       
|       
|       
|       
|PART II |  | OTHER INFORMATION                                                                                                                |  |     
|       
|       
|       
|       
|Item 1. |  | Legal Proceedings                                                                                                                |  | 26  
|       
|       
|       
|       
|Item 2. |  | Changes in Securities                                                                                                            |  | 26  
|       
|       
|       
|       
|Item 3. |  | Defaults upon Senior Securities                                                                                                  |  | 27  
|       
|       
|       
|       
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                                                              |  | 27  
|       
|       
|       
|       
|Item 5. |  | Other Information                                                                                                                |  | 28  
|       
|       
|       
|       
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                                 |  | 30  
|       
|       
|       
|       
|        |  | Signatures                                                                                                                       |  | 31  

2



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##### Table of Contents



NETMANAGE, INC.




CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)


|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |        |          |              |         |        | 
|---------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | -------------------------- | --- | ----------- | ------ | -------- | ------------ | ------- | ------ | 
|                                                                       |                                                                                                                                                                                      |                                              |                            |     | June 30,    |        |          | December 31, |        
|                                                                       |                                                                                                                                                                                      |                                              |                            |     | 2001        |        |          | 2000         |        
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |        |          |              |        
|                                                                       |                                                                                                                                                                                      |                                              |                            |     | (Unaudited) |        |          |              |         |       
|ASSETS                                                                
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|CURRENT ASSETS:                                                        |                                                                                                                                                                                      |                                              |                            |     |             |        |          |             
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Cash and cash equivalents                    |                            | $   | 35,312      |        |          | $            | 35,017  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Short-term investments                       |                            |     | 747         |        |          |              | 3,033   |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Accounts receivable, net                     |                            |     | 17,412      |        |          |              | 26,081  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Prepaid expenses and other current assets    |                            |     | 4,014       |        |          |              | 11,591  |       
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                       |                                                                                                                                                                                      |                                              | Total current assets       |     |             | 57,485 |          |              |         | 75,722 | 
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|PROPERTY AND EQUIPMENT:                                                |                                                                                                                                                                                      |                                              |                            |     |             |        |          |             
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Computer software and equipment              |                            |     | 10,206      |        |          |              | 10,005  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Furniture and fixtures                       |                            |     | 6,268       |        |          |              | 6,268   |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Leasehold improvements                       |                            |     | 3,302       |        |          |              | 3,302   |       
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                       |                                                                                                                                                                                      |                                              | 19,776                     |     |             |        | 19,575   |             
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Less  Accumulated depreciation              |                            |     | (14,845     | )      |          |              | (12,581 | )     
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                       |                                                                                                                                                                                      |                                              | Net property and equipment |     |             | 4,931  |          |              |         | 6,994  | 
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|GOODWILL AND OTHER INTANGIBLES, net                                    |                                                                                                                                                                                      |                                              | 20,670                     |     |             |        | 23,689   |             
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|OTHER ASSETS                                                           |                                                                                                                                                                                      |                                              | 3,156                      |     |             |        | 3,576    |             
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                       |                                                                                                                                                                                      | $                                            | 86,242                     |     |             | $      | 109,981  |             
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                  
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|CURRENT LIABILITIES:                                                   |                                                                                                                                                                                      |                                              |                            |     |             |        |          |             
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Accounts payable                             |                            | $   | 2,715       |        |          | $            | 5,050   |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Accrued liabilities                          |                            |     | 11,222      |        |          |              | 17,426  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Accrued payroll and payroll-related expenses |                            |     | 3,859       |        |          |              | 4,500   |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Deferred revenue                             |                            |     | 20,466      |        |          |              | 24,453  |       
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       |                                                                                                                                                                                      | Income taxes payable                         |                            |     | 4,084       |        |          |              | 4,000   |       
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                       |                                                                                                                                                                                      |                                              | Total current liabilities  |     |             | 42,346 |          |              |         | 55,429 | 
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|LONG-TERM LIABILITIES                                                  |                                                                                                                                                                                      |                                              | 93                         |     |             |        | 1,523    |             
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|STOCKHOLDERS EQUITY:                                                  |                                                                                                                                                                                      |                                              |                            |     |             |        |          |             
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|                                                                       | Common stock, $0.01 par value 
Authorized  125,000,000 shares
Issued  73,379,189 and 72,625,520 shares,
respectively
Outstanding  65,208,579 and 65,266,455 shares,
respectively |                                              |                            | 734 |             |        |          | 726          |        
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Treasury stock, at cost  8,170,610 and 7,359,065 shares,
respectively |                                                                                                                                                                                      |                                              | (17,086                    | )   |             |        | (16,414  | )           
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Additional paid-in capital                                             |                                                                                                                                                                                      |                                              | 176,612                    |     |             |        | 176,081  |             
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Accumulated deficit                                                    |                                                                                                                                                                                      |                                              | (111,112                   | )   |             |        | (103,374 | )           
|                                                                      
|                                                                      
|                                                                      
|                                                                      
|Accumulated other comprehensive loss                                   |                                                                                                                                                                                      |                                              | (5,345                     | )   |             |        | (3,990   | )           
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                       |                                                                                                                                                                                      |                                              | Total stockholders equity |     |             | 43,803 |          |              |         | 53,029 | 
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       
|                                                                       |                                                                                                                                                                                      | $                                            | 86,242                     |     |             | $      | 109,981  |             
|                                                                       |                                                                                                                                                                                      |                                              |                            |     |             |       

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

3



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##### Table of Contents



NETMANAGE, INC.




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


|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |        |        |   |         |        |        | 
|----------------------------------------------------- | ------------------------------------------------ | ------------------ | ------ | ------------------ | ------ | - | ---------------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                      |                                                  |                    |        | Three Months Ended |        |   | Six Months Ended |       
|                                                      |                                                  |                    |        | June 30,           |        |   | June 30,         |       
|                                                      |                                                  |                    |        |                    |        |   |                  |       
|                                                      |                                                  |                    |        | 2001               |        |   | 2000             |        |        | 2001 |        |        | 2000   |  
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |        |        |  
|Net revenues:                                         |                                                  |                    |        |                    |        |   |                  |        |        |      |        |        |        |   |         |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | License fees                                     |                    | $      | 9,398              |        |   | $                | 12,427 |        |      | $      | 20,807 |        |   | $       | 27,369 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Services                                         |                    |        | 10,951             |        |   |                  | 12,204 |        |      |        | 21,273 |        |   |         | 24,692 |       
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |       
|                                                      |                                                  | Total net revenues |        |                    | 20,349 |   |                  |        | 24,631 |      |        |        | 42,080 |   |         |        | 52,061 | 
|                                                     
|                                                     
|                                                     
|                                                     
|Cost of revenues                                      |                                                  |                    | 1,002  |                    |        |   | 1,186            |        |        |      | 1,807  |        |        |   | 2,313   |       
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |       
|Gross margin                                          |                                                  |                    | 19,347 |                    |        |   | 23,445           |        |        |      | 40,273 |        |        |   | 49,748  |       
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |       
|Operating expenses:                                   |                                                  |                    |        |                    |        |   |                  |        |        |      |        |        |        |   |         |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Research and development                         |                    |        | 4,765              |        |   |                  | 7,227  |        |      |        | 10,474 |        |   |         | 13,809 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Sales and marketing                              |                    |        | 13,535             |        |   |                  | 18,906 |        |      |        | 29,399 |        |   |         | 38,412 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | General and administrative                       |                    |        | 2,815              |        |   |                  | 5,480  |        |      |        | 6,496  |        |   |         | 11,440 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Insurance recovery                               |                    |        |                   |        |   |                  |       |        |      |        |       |        |   |         | (2,516 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Write-off of in-process research and development |                    |        |                   |        |   |                  | 1,700  |        |      |        |       |        |   |         | 1,700  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Amortization of goodwill and intangibles         |                    |        | 1,503              |        |   |                  | 4,542  |        |      |        | 3,005  |        |   |         | 9,034  |       
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |       
|Total operating expenses                              |                                                  |                    | 22,618 |                    |        |   | 37,855           |        |        |      | 49,374 |        |        |   | 71,879  |       
|                                                     
|                                                     
|                                                     
|                                                     
|Loss from operations                                  |                                                  |                    | (3,271 | )                  |        |   | (14,410          | )      |        |      | (9,101 | )      |        |   | (22,131 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|Interest income and other, net                        |                                                  |                    | 940    |                    |        |   | 920              |        |        |      | 1,671  |        |        |   | 1,373   |       
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |       
|Loss before provision for income taxes                |                                                  |                    | (2,331 | )                  |        |   | (13,490          | )      |        |      | (7,430 | )      |        |   | (20,758 | )     
|                                                     
|                                                     
|                                                     
|                                                     
|Provision for income taxes                            |                                                  |                    | 173    |                    |        |   | 178              |        |        |      | 308    |        |        |   | 312     |       
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |       
|Net loss                                              |                                                  | $                  | (2,504 | )                  |        | $ | (13,668          | )      |        | $    | (7,738 | )      |        | $ | (21,070 | )     
|                                                      |                                                  |                    |        |                    |        |   |                  |        |        |      |        |       
|Net loss per share
 Basis                             |                                                  | $                  | (0.04  | )                  |        | $ | (0.21            | )      |        | $    | (0.12  | )      |        | $ | (0.33   | )     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Diluted                                          |                    | $      | (0.04              | )      |   | $                | (0.21  | )      |      | $      | (0.12  | )      |   | $       | (0.33  | )     
|                                                     
|                                                     
|                                                     
|                                                     
|Weighted average common shares
and equivalents
 Basis |                                                  |                    | 65,471 |                    |        |   | 64,547           |        |        |      | 65,347 |        |        |   | 64,343  |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Diluted                                          |                    |        | 65,471             |        |   |                  | 64,547 |        |      |        | 65,347 |        |   |         | 64,343 |       

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

4



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##### Table of Contents



NETMANAGE, INC.




CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(In thousands)
(Unaudited)


|                          |                                          |   |                    |    |  |                  |         |     |      |   |        |        |   |   |         |     |  
|------------------------- | ---------------------------------------- | - | ------------------ | -- |  | ---------------- | ------- | --- | ---- | - | ------ | ------ | - | - | ------- | --- | -
|                          |                                          |   | Three months ended |    |  | Six months ended |        
|                          |                                          |   | June 30,           |    |  | June 30,         |        
|                          |                                          |   |                    |    |  |                  |        
|                          |                                          |   | 2001               |    |  | 2000             |         |     | 2001 |   |        | 2000   |  
|                          |                                          |   |                    |    |  |                  |         |     |      |   |        |        |  
|Net Loss                  |                                          | $ | (2,504             | )  |  | $                | (13,668 | )   |      | $ | (7,738 | )      |   | $ | (21,070 | )  
|                         
|                         
|                         
|                         
|Other comprehensive loss: |                                          |   |                    |    |  |                  |         |     |      |   |        |        |   |   |         |    
|                         
|                         
|                         
|                         
|                          | Unrealized gain (loss) on investments    |   |                    | 68 |  |                  |         | 168 |      |   |        | (1,568 | ) |   |         | (44 | )
|                         
|                         
|                         
|                         
|                          | Foreign currency translation adjustments |   |                    | 57 |  |                  |         | 505 |      |   |        | 213    |   |   |         | 202 |  
|                          |                                          |   |                    |    |  |                  |         |     |      |   |        |       
|Other comprehensive loss  |                                          | $ | (2,379             | )  |  | $                | (12,995 | )   |      | $ | (9,093 | )      |   | $ | (20,912 | )  
|                          |                                          |   |                    |    |  |                  |         |     |      |   |        |       

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

5



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##### Table of Contents



NETMANAGE, INC.




CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


|                                                     |                                                                                 |   |                                                                  |                                                           |   |                  |         |         |      |        |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | - | ---------------------------------------------------------------- | --------------------------------------------------------- | - | ---------------- | ------- | ------- | ---- | ------ | ------- | -
|                                                     |                                                                                 |   |                                                                  |                                                           |   | Six months ended |        
|                                                     |                                                                                 |   |                                                                  |                                                           |   | June 30,         |        
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                  |        
|                                                     |                                                                                 |   |                                                                  |                                                           |   | 2001             |         |         | 2000 |       
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                  |         |         |      |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                 |   |                                                                  |                                                           |   |                  |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                        |   | $                                                                | (7,738                                                    | ) |                  | $       | (21,070 | )   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash provided by operating activities: |   |                                                                  |                                                           |   |                  |         |         |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   | Depreciation and amortization                                    |                                                           |   | 5,267            |         |         |      | 12,183 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   | Provision for doubtful accounts and returns                      |                                                           |   | 334              |         |         |      | 210    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   | Write-off of in-process research and development                 |                                                           |   |                 |         |         |      | 1,700  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   | Changes in assets and liabilities, net of business combinations: |                                                           |   |                  |         |         |      |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   |                                                                  | Accounts receivable                                       |   |                  | 8,335   |         |      |        | 8,056   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   |                                                                  | Prepaid expenses and other assets                         |   |                  | 7,997   |         |      |        | 4,852   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   |                                                                  | Accounts payable                                          |   |                  | (2,335  | )       |      |        | (1,425  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   |                                                                  | Accrued liabilities, payroll and payroll-related expenses |   |                  | (6,845  | )       |      |        | (15,474 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   |                                                                  | Deferred revenue                                          |   |                  | (3,987  | )       |      |        | (4,034  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   |                                                                  | Income taxes payable                                      |   |                  | 84      |         |      |        | (5,042  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |   |                                                                  | Long-term liabilities                                     |   |                  | (1,430  | )       |      |        | (1,266  | )
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|                                                     |                                                                                 |   |                                                                  | Net cash provided by (used in) operating activities       |   |                  | (318    | )       |      |        | (21,310 | )
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                 |   |                                                                  |                                                           |   |                  |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of short-term investments                                             |   |                                                                  | (69,877                                                   | ) |                  |         | (23,854 | )   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales and maturities of short-term investments                    |   |                                                                  | 70,575                                                    |   |                  |         | 23,654  |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property and equipment                                             |   |                                                                  | (201                                                      | ) |                  |         | (425    | )   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of equity investment at cost                                           |   |                                                                  |                                                          |   |                  |         | (1,500  | )   
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|                                                     |                                                                                 |   |                                                                  | Net cash provided by (used in) investing activities       |   |                  | 497     |         |      |        | (2,125  | )
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                 |   |                                                                  |                                                           |   |                  |         |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of common stock, net of issuance costs                       |   |                                                                  | 539                                                       |   |                  |         | 1,599   |     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repurchase of common stock                                                      |   |                                                                  | (672                                                      | ) |                  |         |        |     
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|                                                     |                                                                                 |   |                                                                  | Net cash provided by (used in) financing activities       |   |                  | (133    | )       |      |        | 1,599   |  
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|EFFECT OF EXCHANGE RATE CHANGES ON CASH              |                                                                                 |   | 249                                                              |                                                           |   |                  | (59     | )      
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                 |   | 295                                                              |                                                           |   |                  | (21,895 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|CASH AND CASH EQUIVALENTS, beginning of period       |                                                                                 |   | 35,017                                                           |                                                           |   |                  | 63,079  |        
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 
|CASH AND CASH EQUIVALENTS, end of period             |                                                                                 | $ | 35,312                                                           |                                                           |   | $                | 41,184  |        
|                                                     |                                                                                 |   |                                                                  |                                                           |   |                 

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

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NETMANAGE, INC.




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. INTERIM FINANCIAL DATA

The interim financial statements for the three and six month periods ended June
30, 2001 and 2000 for NetManage, Inc. (the Company) have been prepared on the
same basis as the year end financial statements and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the financial information set forth
therein, in accordance with accounting principles generally accepted in the
United States. The Company believes the results of operations for the interim
periods are subject to fluctuation and may not be an indicator of future
financial performance.

2. CONSOLIDATION

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

3. REVENUE RECOGNITION

The Company has recognized revenue in accordance with Statement of Position
(SOP) 97-2, Software Revenue Recognition. Additionally, effective January 1,
2000, the Company recognized revenue in accordance with SOP 98-9, Modification
of SOP 97-2, Software Revenue Recognition.

The Companys 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
to 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 delivered and undelivered elements of the
arrangement. The Company offers its customers a 30-day right of return on sales
and records an estimate of such returns at the time of product delivery based
on historical experience. To date, such returns have been insignificant.
Certain of the Companys sales are made to domestic distributors under
agreements allowing rights of return and price protection on unsold
merchandise. Accordingly, the Company defers recognition of such sales until
the merchandise is sold by the distributor. The Companys international
distributors generally do not have return rights and, as such, the Company
generally recognizes sales to international distributors upon shipment, if all
other revenue recognition criteria have been met.

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

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets acquired are being amortized on a
straight-line basis over their estimated useful lives ranging from two to seven
years. Accumulated amortization was approximately $28.8 and $25.8 million at
June 30, 2001 and December 31, 2000, respectively.

Subsequent to its acquisitions, the Company assesses long-lived assets acquired
for impairment under Financial Accounting Standards Boards (FASB) Statement of
Financial Accounting Standards (SFAS) No. 121 Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Under those
rules, the Company reviews long-lived assets and certain identifiable
intangibles to be held and used, for impairment

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

whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The Company evaluates any possible
impairment of long-lived assets using estimates of undiscounted future cash
flows. If an impairment loss is to be recognized, it is measured as the amount
by which the carrying amount of the asset exceeds the fair value of the asset.
Management evaluates the fair value of its long-lived assets and intangibles
using primarily the estimated discounted future cash flows method. Management
uses other alternative valuation techniques whenever the estimated discounted
future cash flows method is not applicable.

5. NET LOSS PER SHARE

Basic net loss per share data has been computed using the weighted-average
number of shares of common stock outstanding during the 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 common
shares include dilutive shares issuable upon the exercise of outstanding common
stock options computed using the treasury stock method. For the three and six
month periods ended June 30, 2001 and June 30, 2000, the number of shares used
in the computation of diluted loss per share were the same as those used for
the computation of basic loss per share. Potentially dilutive securities of
6,237,113 and 8,466,834 were not included in the computation of
diluted net loss per common share because to do so would have been
anti-dilutive for the three and six month periods ended June 30, 2001 and 2000,
respectively.

6. RESTRUCTURING OF OPERATIONS

On August 3, 2000, the Company announced a restructuring of its operations
designed to re-focus the Company on core business functions and reduce
operating expenses. In connection with the restructuring, the Company reduced
its workforce by approximately 17% and made provisions for reductions in office
space, related overhead expenses and the writedown 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 and an $800,000 settlement to Verity for a software
license that the Company does not plan to use and, accordingly, has
written-off. As of June 30, 2001, the Company had incurred costs totaling
approximately $4.1 million related to the restructuring, which required $4.1
million in cash expenditures. The remaining reserve related to this
restructuring was approximately $1.5 million which is included in accrued
liabilities.

The following table lists the components of the August 2000 NetManage
restructuring charge for the six month period ended June 30, 2001 (in
thousands):

|                                                   |  |          |      |   |            |   |       |       |  |   |       |   |  |   |       |  
|-------------------------------------------------- |  | -------- | ---- | - | ---------- | - | ----- | ----- |  | - | ----- | - |  | - | ----- | -
|                                                   |  | Employee |      |   | Excess     |   |       |       |  |   |       |   |  |  
|                                                   |  | Costs    |      |   | Facilities |   |       | Other |  |   | Total |  
|                                                   |  |          |      |   |            |   |       |       |  |   |       |  
|Balance at December 31, 2000                       |  | $        | 100  |   |            | $ | 1,884 |       |  | $ | 100   |   |  | $ | 2,084 |  
|                                                  
|                                                  
|                                                  
|                                                  
|Reserve utilized in six
months ended June 30, 2001 |  |          | (100 | ) |            |   | (406  | )     |  |   | (38   | ) |  |   | (544  | )
|                                                   |  |          |      |   |            |   |       |       |  |   |       |  
|Balance at June 30, 2001                           |  | $        |     |   |            | $ | 1,478 |       |  | $ | 62    |   |  | $ | 1,540 |  
|                                                   |  |          |      |   |            |   |       |       |  |   |       |  

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

In the fourth quarter of 1999, following the acquisitions of Wall Data, Inc.
(Wall Data) and Simware, Inc. (Simware), the Company initiated a plan to
restructure its worldwide operations in connection with the integration of
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 includes approximately $1.9 million of
estimated expenses for facilities-related charges associated with the
consolidation of redundant operations, $1.4 million of employee-related
expenses for employee terminations and $0.5 million for legal, accounting and
other. The Company anticipates that the execution of the restructuring actions
will require total cash expenditures of approximately $3.8 million, which is
expected to be funded from internal operations. As of June 30, 2001, the
Company had incurred costs totaling approximately $2.6 million related to the
restructuring, which required $2.6 million in cash expenditures. The remaining
reserve related to this restructuring was approximately $1.2 million.

The following table lists the change in the NetManage restructuring charge from
1999 for the six month period ended June 30, 2001 (in thousands):

|                                                   |  |            |       |   |       |   |      |       |  |   |       |  
|-------------------------------------------------- |  | ---------- | ----- | - | ----- | - | ---- | ----- |  | - | ----- | -
|                                                   |  | Excess     |       |   |       |   |      |       |  |   |      
|                                                   |  | Facilities |       |   | Other |   |      | Total | 
|                                                   |  |            |       |   |       |   |      |       | 
|Balance at December 31, 2000                       |  | $          | 1,139 |   |       | $ | 300  |       |  | $ | 1,439 |  
|                                                  
|                                                  
|                                                  
|                                                  
|Reserve utilized in six
months ended June 30, 2001 |  |            | (28   | ) |       |   | (254 | )     |  |   | (282  | )
|                                                   |  |            |       |   |       |   |      |       | 
|Balance at June 30, 2001                           |  | $          | 1,111 |   |       | $ | 46   |       |  | $ | 1,157 |  
|                                                   |  |            |       |   |       |   |      |       | 

In August 1998, following the acquisition of FTP Software, Inc. (FTP), the
Company initiated a plan to restructure its worldwide operations as a result of
business conditions and in connection with the integration of the operations of
FTP. In connection with this plan, the Company recorded a $7.0 million charge
to operating expenses in 1998. Additionally, prior to the acquisition of FTP by
the Company, FTP recorded a restructuring charge. The remaining restructuring
liability of $9.7 million as of the date of the acquisition was assumed by the
Company. The $7.0 million restructuring charge includes approximately $5.5 million of
estimated expenses for the write-off of excess equipment and leasehold
improvements as NetManage facilities are downsized or closed,
facilities-related expenses associated with the consolidation of redundant
operations and $1.5 million of employee-related expenses for employee
terminations. The Company completed the majority of the restructuring actions
by the end of 1998. The Company anticipated that the execution of the
restructuring actions would require total cash expenditures of approximately
$13.7 million, which was expected to be funded from internal operations. At
June 30, 2001, the remaining FTP reserve related to this restructuring
plan was approximately $0.9 million.

9



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

The following table lists the components of the 1998 NetManage restructuring
charge for the six month period ended June 30, 2001 (in thousands):

|                                                   |  |            |       |  
|-------------------------------------------------- |  | ---------- | ----- | -
|                                                   |  | Excess     |      
|                                                   |  | Facilities |      
|                                                   |  |            |      
|Balance at December 31, 2000                       |  | $          | 1,108 |  
|                                                  
|                                                  
|                                                  
|                                                  
|Reserve utilized in six
months ended June 30, 2001 |  |            | (191  | )
|                                                   |  |            |      
|Balance at June 30, 2001                           |  | $          | 917   |  
|                                                   |  |            |      

7. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On November 22, 1999, Kenneth Fisher filed a complaint alleging violations of
the False Claims Act, 31 U.S.C. § 3729 et seq.,against NetManage, Inc.
(NetManage), and its affiliates Network Software Associates, Inc. (NSA) and
Netsoft, among numerous other defendants in United States of America ex rel.
Kenneth Fisher v. Network Software Associates, Inc., a California corporation,
et al., United States District Court for the District of Columbia, Case No.
99-3095. The United States government declined to pursue the action on its own
behalf and, therefore, the action is pursued by a realtor, Kenneth Fisher.
NetManage and its affiliates first learned of the action when they were served
with the amended complaint (Complaint) in May 2001. The Complaint alleges
that defendants made false claims to the government to obtain government
contracts set aside for entities owned and controlled by disadvantaged persons
admitted to the Section 8(a) Minority Small Business Development Program.
Specifically, the Complaint alleges that from 1987 to 1997 NetManage and its
affiliates presented false or fraudulent claims for payment or approval to the
government (31 U.S.C. § 3729(a)(1)), and used false records or statements to
get claims paid or approved by the government (31 U.S.C. § 3729(a)(2)) in
connection with NSAs application and certification as a Section 8(a) minority
owned and controlled company. In addition, the Complaint alleges that NSA and
Netsoft conspired to defraud the government by fraudulently obtaining NSAs
certification as a Section 8(a) entity for alleged use by NSAs Federal Systems
Division (31 U.S.C. § 3729(a)(3)). Plaintiff alleges damages in excess of
$30,000,000 to $45,000,000.

NetManage did not acquire NSA until July 1997 and had no involvement with the
events alleged by plaintiff. However, plaintiff alleges that any liabilities
of NSA and Netsoft passed to NetManage. NetManage and its affiliates find
plaintiffs allegations to be without merit and intend to vigorously defend
against this action. On June 15, 2001, the defendants, including NetManage and
its affiliates, filed a motion to dismiss the action which is currently pending
before the Court. NetManage has made a demand that plaintiff voluntarily
dismiss it as a party in this action and plaintiff has agreed to
dismiss NetManage without prejudice.

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

NetManage is not involved in any other legal proceedings

The Company may be
contingently liable with respect to certain asserted and unasserted claims that
arise during the normal course of business. In the opinion of management, the
outcome of such matters presently known to management will not have a material
adverse effect on the Companys business, financial position or results of
operations.

8. TREASURY STOCK

During the first six months of 2001, the Company purchased 811,545 shares of
its outstanding common shares for approximately $0.7 million.

9. ACCOUNTING PRONOUNCEMENT

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 (SFAS 141), Business Combinations, which supersedes Accounting
Principles Board (APB) Opinion No. 16, Business Combinations".SFAS 141
eliminates the pooling-of-interests method of accounting for business
combinations and modifies the application of the purchase accounting method.
The elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions of SFAS
141 will be effective for transactions accounted for using the purchase method
that are completed after June 30, 2001. The Company believes that the adoption
of this Statement will not have a material impact on the financial position or
the results of operations of the Company.

In July 2001, the FASB also issued SFAS No. 142, (SFAS 142), Goodwill and
Intangible Assets, which supersedes APB Opinion No. 17, Intangible Assets".
Under this statement, goodwill and intangible assets with indefinite lives are
not amortized but are tested for impairment annually using the fair value
approach, except in certain circumstances, and whether there is an impairment
indicator; other intangible assets will continue to be valued and amortized
over their estimated lives; in-process research and development will continue
to be written off immediately; all acquired goodwill must be assigned to
reporting units for purposes of impairment testing and segment
reporting; and
effective January 1, 2002, existing goodwill will no longer be subject to
amortization. Goodwill arising between June 29, 2001 and December 31, 2001 will
not be subject to amortization.

Upon adoption of SFAS 142, on January 1, 2002, the Company will no longer
amortize goodwill, thereby eliminating annual goodwill amortization of
approximately $2.7 million based on anticipated amortization for 2002.
Goodwill amortization for the six months ended June 30, 2001 was approximately
$1.4 million.

11



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NETMANAGE, INC.




ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Forward-looking statements include assumptions
regarding expected revenues from products recently introduced or acquired as a
result of recent acquisitions of other companies, expected changes in operating
expenses and capital spending, the Companys expectation that sales may
fluctuate modestly through the remainder of 2001, and the Companys expectation
that research and development and sales and marketing expenses remain flat or
decline as a
percentage of revenues in line with the implementation of cost reduction
measures. The Companys actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, among other things, a realization in
the future that the markets for the Companys products, including but not
limited to Rumba, ViewNow, OnWeb and SupportNow could grow more slowly than the
Company or market analysts believe, or the Company will not be able to compete
effectively in those markets. In addition, there is no assurance that the
Companys products for real-time customer support over the Internet will
receive customer acceptance, that the Company will not suffer increased
competitive pressures, that buying decisions by the Companys customers will
not be adversely influenced by the actions of the Companys competitors or
other market factors, that the Company will be able to realize new business
opportunities that may exist as a result of the acquisition of Wall Data,
Simware, or Aqueduct, that the Company will be able to execute on its revised
business plan in a manner that will allow it to improve its financial position,
or that economic difficulties in the United States and Asia will not adversely
affect sales of the Companys products in those regions. The timely completion
of the Companys restructuring of operations described below is dependent upon
a number of factors, including risks associated with the integration of the
remaining operations of Wall Data, Simware, and Aqueduct, and the Companys
ability to complete the integration of the operations and technologies of Wall
Data, Simware and Aqueduct in a timely, efficient and cost-effective manner.
Additional factors that could affect the Companys business, financial
condition and results of operations include those discussed below under
Factors That May Affect Future Results and Financial Condition. The following
discussion should be read in conjunction with the accompanying condensed
consolidated financial statements and notes to condensed consolidated financial
statements.

OVERVIEW

The Company develops and markets software applications that allow its customers
to implement host computer access from a range of internal or external desktop
or web-based client computers, to publish information from existing
host-centric applications to Internet and web-based client computer users, and
to create new applications that leverage existing host applications and data
sources. The Company develops and markets these software solutions for UNIX®,
IBM AS/400 midrange and IBM corporate mainframe computers. The Company also
develops and markets software that increases the productivity of corporate call
centers, and allows real-time application sharing on corporate networks and
across the Internet. The Company provides professional support, maintenance and
consultancy services to its customers in association with the products the
Company develops and markets.

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NETMANAGE, INC.

ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OPERATIONS

During the past several years, the Company has taken a number of initiatives
intended to control costs and reduce operating expenses, including the
discontinuance of several low revenue generating products, and implementing
worldwide restructuring of its operations as a result of acquisitions and
prevailing market conditions.

For most of 2000,
the Company focused on the core competencies of its key business lines  the
PC Connectivity product line, the Web Publishing, Integration and Development
product line, and the Realtime Interactive Support product line  each with
dedicated development, sales, marketing, and support resources. The PC
Connectivity product line provides the technology to make the connection
between personal computers and large corporate computers possible. These
products leverage the strengths and popularity of the Internet, as well as
corporate private networks, and offer features to improve network
manageability. The Web Publishing, Integration and Development product line
provides the technology to allow customers to leverage the investment they have
in existing host based systems, applications and business processes for new
web-based presentations, applications and solutions. The Publishing,
Integration and Development product line includes the companys latest product
branded OnWeb. The Realtime Interactive Support products add value to the PC
Connectivity and Web Publishing, Integration and Development product offerings,
and are also targeted at new market segments. Products included SupportNow
Enterprise and SupportNow SDK  real-time software tools that help reduce the
length of support phone calls from end-users and augment application help and
training.

In the first six months of 2001, the Company experienced a decline in revenues
compared to the same period in the prior year. The Company believes that its
revenues were adversely impacted by the general slowdown in technology
purchases due to current economic conditions in North America. The Company
continues to experience pricing pressures on its products. There can be no
assurance that revenues will increase at all, in future periods. See Factors
That May Affect Future Results and Financial Condition  Marketing and
Distribution below.

Because the Company generally ships software products within a short period
after receipt of an order, the Company does not have a material backlog of
unfilled orders, and revenues in any one quarter are substantially dependent on
orders booked in that quarter. The Companys operating expense levels are based
in part on the Companys expectations as to future revenues and to a large
extent are fixed. Operating expenses are expected to decrease from those levels
incurred in the first quarter and may fluctuate as a percentage of net revenues
as the Company develops and introduces new products, which may contribute more
significantly to revenue. While the Company continues to adjust its operations
to address these issues, there can be no assurance that net revenues or net
loss will stabilize or improve in the future.

13



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NETMANAGE, INC.

ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

In the first six months of 2000, revenues, primarily from Wall Data and FTP
products, fell short of the level of revenues anticipated prior to the
acquisitions. In managements judgment, this short-fall in the level of revenue
was not a temporary condition. As a result, the Company revisited its strategy
to refocus itself on core competencies and revised its business plan, and its
projected future revenues for each family of products. Management believed it
was necessary to restructure the Company and reduce operating expenses in line
with the revised anticipated level of revenues, which were expected to be less
than or comparable to revenues generated during the first half of fiscal 2000.

As a result, the Company announced a restructuring on August 3, 2000. As part
of the restructuring, the Company reduced its workforce by approximately 17%,
consisting mostly of Engineering and Customer Support personnel who were
focussed primarily on the Companys older technologies, acquired through the
Wall Data and FTP acquisitions. With the reduction in personnel, knowledge
levels with respect to certain products, the Companys 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, the Company also made provisions for reductions in office space,
related overhead expenses, and the write-down of certain assets. The total
amount of the restructuring charge was $5.6 million. The restructuring charge
includes approximately $3.0 million of estimated expenses for
facilities-related charges and $1.6 million of employee-related expenses for
employee terminations. As of June 30, 2001 the Company had incurred costs
totaling approximately $4.1 million related to the restructuring which required
$4.1 million in cash expenditures.

Based on managements analysis of revised product directions, revenue forecasts
and undiscounted future cash flows, taking into account the estimated impact on
product development and customer support resulting from the reductions in
personnel, the Company determined that there was a permanent impairment of the
long-lived assets related to the acquisitions of Wall Data and FTP Software. In
accordance with Statement of Financial Standards (SFAS) No. 121, the Company
re-evaluated the fair value of these long-lived assets and intangibles using
primarily the estimated discounted cash flows method. Management used the same
methodology to evaluate the fair value of its long-lived assets and intangibles
to allocate purchase price at the time of acquisition. As a result, the Company
wrote off $42.2 million of goodwill and other intangibles through a charge to
operations in the third quarter of fiscal 2000. In the fourth quarter of 2000,
the Company determined that it had overestimated the liabilities assumed in the
FTP and Wall Data acquisitions by approximately $9.4 million. The Company
reversed these liabilities against the remaining goodwill and other intangibles
acquired.

On June 5, 2000, the Company completed its acquisition of Aqueduct Software,
Inc. (Aqueduct), an early stage web-based application intelligence company.
The Company issued 1,121,495 shares of NetManage common stock and issued
warrants and options to purchase an additional 727,237 shares for all the
outstanding stock of Aqueduct including the retirement of $2.2 million of notes
payable and accrued interest. The Company also hired the three employees of
Aqueduct who subsequently left the Company. The acquisition was accounted for
as a purchase.

In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations
in connection with the integration of operations of the acquisitions. 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 termination costs, and $500,000 in
accounting and legal fees related to the acquisitions. The Company anticipates
that the execution of the restructuring actions will require total cash
expenditures of approximately $3.8 million, which is expected to be funded from
internal operations. As of June 30, 2001, the Company had made cash payments
totaling approximately $2.6 million related to the restructuring.

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##### Table of Contents



NETMANAGE, INC.

ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

On November 26, 1999, the Company acquired approximately 89% of the outstanding
shares of Wall Data pursuant to a cash tender offer. The Company acquired the
remaining outstanding shares of Wall Data by means of a merger completed in
accordance with Washington law on December 29, 1999. The acquisition was
accounted for as a purchase.

On December 10, 1999, the Company completed its acquisition of Simware Inc.
(Simware), a leading provider of e-commerce solutions and web integration
servers. The Company acquired a total of 7,503,372 shares of Simware common
stock and paid cash to qualifying Simware option holders and employee stock
purchase plan participants pursuant to a cash tender offer of $3.75 per common
share. Total aggregate payments pursuant to the cash tender offer amounted to
approximately $29.2 million. The Company completed the transaction in two
stages. On November 2, 1999, the Company acquired approximately 91% of the
outstanding shares of Simware pursuant to the cash tender offer. The Company
acquired the remaining outstanding shares of Simware by means of a compulsory
acquisition completed in accordance with Canadian law on December 10, 1999. The
acquisition was accounted for as a purchase.

In December 1998, the Company sold its equity interest in NetVision Ltd.
(NetVision), an Internet service provider in Israel, for $17 million, and
recognized a gain of $11.7 million.

On August 27, 1998, the Company acquired all of the outstanding common stock of
FTP in exchange for NetManage stock for an aggregate purchase price of $78.3
million. The acquisition was accounted for as a purchase. In late August 1998,
following the acquisition of FTP, the Company initiated a plan to restructure
its worldwide operations as a result of current 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. The restructuring charge included approximately $5.5 million of estimated
expenses for the write-off of excess equipment and leasehold improvements as
NetManage facilities are downsized or closed, facilities-related expenses
associated with the consolidation of redundant operations, and $1.5 million of
employee-related expenses for employee terminations. Additionally, prior to the
acquisition of FTP by the Company, FTP recorded a restructuring charge. The
remaining restructuring liability of $9.7 million as of the date of acquisition
was assumed by the Company in connection with the acquisition. As of December
31, 2000, the restructuring had been substantially completed with the exception
of certain lease obligations. See Note 6 of Notes to Condensed Consolidated
Financial Statements.

As described in detail below, under the heading Factors That May Affect Future
Results and Financial Condition, acquisitions involve a number of risks,
including risks relating to the integration of the acquired companys
operations, personnel, and products. There can be no assurance that the
integration of previously acquired companies, or the integration of any future
acquisitions, will be accomplished successfully, and the failure to accomplish
effectively any of these integrations could have a material adverse effect on
NetManages results of operations and financial condition. As discussed above,
the Company already incurred significant restructuring charges and asset
impairments in connection with the acquisition of Wall Data and FTP.

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NETMANAGE, INC.

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

Three and six months ended June 30, 2001 compared to June 30, 2000 (dollars in millions):

|                               |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |      |       |   |       |       |       |  
|------------------------------ | ---------------------------- | ------------------ | ---- | --------------------------- | ----- | - | ------------------------- | ---- | ----- | -------- | ----- | ----- | ----- | - | ---- | ---- | ----- | - | -------- | ---- | ----- | - | ----- | ----- | ----- | -
|                               |                              |                    |      | Three months ended June 30, |       |   | Six months ended June 30, |     
|                               |                              |                    |      |                             |       |   |                           |     
|                               |                              |                    |      | 2001                        |       |   | 2000                      |      |       | Change % |       |       | 2001  |   |      | 2000 |       |   | Change % |     
|                               |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |     
|Net revenues:                  |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |      |       |   |       |      
|                              
|                              
|                              
|                              
|                               | License fees                 |                    | $    | 9.4                         |       |   | $                         | 12.4 |       |          |       | -24.2 | %     |   | $    | 20.8 |       |   | $        | 27.4 |       |   |       | -24.1 | %    
|                              
|                              
|                              
|                              
|                               | Services                     |                    |      | 10.9                        |       |   |                           | 12.2 |       |          |       | -10.7 | %     |   |      | 21.3 |       |   |          | 24.7 |       |   |       | -13.8 | %    
|                               |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |     
|                               |                              | Total net revenues |      | $                           | 20.3  |   |                           | $    | 24.6  |          |       |       | -17.5 | % |      | $    | 42.1  |   |          | $    | 52.1  |   |       |       | -19.2 | %
|                               |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |     
|As a percentage of revenues:   |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |      |       |   |       |      
|                              
|                              
|                              
|                              
|                               | License fees                 |                    |      | 46.3                        | %     |   |                           | 50.4 | %     |          |       |       |       |   |      | 49.4 | %     |   |          | 52.6 | %     |   |       |       |      
|                              
|                              
|                              
|                              
|                               | Services                     |                    |      | 53.7                        | %     |   |                           | 49.6 | %     |          |       |       |       |   |      | 50.6 | %     |   |          | 47.4 | %     |   |       |       |      
|                               |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |     
|                               |                              | Total net revenues |      |                             | 100.0 | % |                           |      | 100.0 | %        |       |       |       |   |      |      | 100.0 | % |          |      | 100.0 | % |       |       |       |  
|                               |                              |                    |      |                             |       |   |                           |      |       |          |       |       |       |   |      |      |       |   |          |     
|Gross margin                   |                              | $                  | 19.3 |                             |       | $ | 23.4                      |      |       |          | -17.5 | %     |       | $ | 40.3 |      |       | $ | 49.8     |      |       |   | -19.1 | %    
|                              
|                              
|                              
|                              
|                               | As a percentage of revenues: |                    |      | 95.1                        | %     |   |                           | 95.1 | %     |          |       |       |       |   |      | 95.7 | %     |   |          | 95.6 | %     |   |       |       |      
|                              
|                              
|                              
|                              
|Research and development       |                              | $                  | 4.8  |                             |       | $ | 7.3                       |      |       |          | -34.2 | %     |       | $ | 10.5 |      |       | $ | 13.8     |      |       |   | -23.9 | %    
|                              
|                              
|                              
|                              
|                               | As a percentage of revenues: |                    |      | 23.6                        | %     |   |                           | 29.7 | %     |          |       |       |       |   |      | 24.9 | %     |   |          | 26.5 | %     |   |       |       |      
|                              
|                              
|                              
|                              
|Sales and marketing            |                              | $                  | 13.5 |                             |       | $ | 18.9                      |      |       |          | -28.6 | %     |       | $ | 29.4 |      |       | $ | 38.4     |      |       |   | -23.4 | %    
|                              
|                              
|                              
|                              
|                               | As a percentage of revenues: |                    |      | 66.5                        | %     |   |                           | 76.8 | %     |          |       |       |       |   |      | 69.8 | %     |   |          | 73.7 | %     |   |       |       |      
|                              
|                              
|                              
|                              
|General and administrative     |                              | $                  | 2.8  |                             |       | $ | 5.5                       |      |       |          | -49.1 | %     |       | $ | 6.5  |      |       | $ | 11.4     |      |       |   | -43.0 | %    
|                              
|                              
|                              
|                              
|                               | As a percentage of revenues: |                    |      | 13.8                        | %     |   |                           | 22.4 | %     |          |       |       |       |   |      | 15.4 | %     |   |          | 21.9 | %     |   |       |       |      
|                              
|                              
|                              
|                              
|Interest income and other, net |                              | $                  | 0.9  |                             |       | $ | 0.9                       |      |       |          | 0.0   | %     |       | $ | 1.7  |      |       | $ | 1.4      |      |       |   | 21.4  | %    
|                              
|                              
|                              
|                              
|                               | As a percentage of revenues: |                    |      | 4.4                         | %     |   |                           | 3.7  | %     |          |       |       |       |   |      | 4.0  | %     |   |          | 2.7  | %     |   |       |       |      
|                              
|                              
|                              
|                              
|Provision for income taxes     |                              | $                  | 0.2  |                             |       | $ | 0.2                       |      |       |          |       |       |       | $ | 0.3  |      |       | $ | 0.3      |      |       |   | 0.0   | %    
|                              
|                              
|                              
|                              
|                               | Effective tax rate           |                    |      |                            |       |   |                           |     |       |          |       |       |       |   |      |     |       |   |          |     |       |   |       |       |      

Net Revenues

Historically, a substantial portion of the Companys net revenues has been
derived from software license fees. Service revenues have been primarily
attributable to maintenance agreements associated with licenses.

License revenues and service revenues decreased for the three and six month
periods ended June 30, 2001 as compared to the same periods in 2000 due to
customer decisions to delay or postpone purchases of the Companys products and
because of the slowing North American economy.

The Company has operations worldwide with sales offices located in the United
States, Europe, Canada, Latin America, Israel and Japan. Revenues outside of
the United States as a percentage of total net revenues were

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NETMANAGE, INC.

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

approximately 28% and 31% for the three months ended June 30, 2001 and 2000,
respectively, and 28% and 33% for the six months ended June 30, 2001 and 2000,
respectively.

Software license fees are generally recognized as revenue upon shipment if the
fee is considered fixed and determinable, the arrangement does not include
significant customization of the software and collectibility is probable.
Allowances for returns and doubtful accounts are provided based on historical
rates of returns and write-offs. Certain of the Companys sales to
distributors are under agreements providing rights of return and price
protection on unsold merchandise. Accordingly, the Company defers recognition
of such sales until the merchandise is sold by the distributor.

The Company provides ongoing maintenance and support to its customers,
generally under annual service agreements. Maintenance and support is comprised
of software updates for existing products and telephone support. Service
revenues are recognized on a pro-rata basis over the terms of such agreements.
The Company also provides training and consulting services to selected
customers. Revenue from such services is recognized as the related services are
performed. No customer accounted for 10% or more of net revenues in any of the
three or six month periods ended June 30, 2001 or 2000.

Gross margin

Cost of revenues primarily includes royalties paid to third parties for
licensed software incorporated into the Companys products as well as costs
associated with order processing, product packaging, documentation and software
duplication.

Gross margin decreased in absolute dollars and remained relatively flat as a
percentage of net revenues for the three and six month periods ended June 30,
2001 as compared to the same periods in 2000, primarily as a result of the
decrease in revenue and the impact of the Companys cost reduction efforts
related to software procurement and distribution.

Research and development

Research and development (R&D) expenses consist primarily of salaries and
benefits, occupancy and travel expenses, as well as fees paid to outside
consultants. R&D expenses decreased in absolute dollars and as a percentage of
net revenues primarily as a result of the reduction in headcount due to the
Companys restructuring in August 2000.

Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, under which the Company is
required to capitalize software development costs after technological
feasibility is established, which the Company defines as a working model and
further defines as a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, anticipated future
gross product revenue, estimated economic life and changes in technology. Costs
that do not qualify for capitalization are charged to R&D expenses when
incurred. To date, internal software development costs that were
eligible for capitalization have not been significant, and the Company has
charged all internal software developments costs to R&D expenses as incurred.

Sales and marketing

Sales and marketing (S&M) expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotion
expenses, and customer service and support costs. S&M expenses decreased in
absolute dollars and as a percentage of net revenues primarily as a result of
the reduction in sales staff headcount, and to a lesser extent, actions as a
result of the Companys restructuring in August 2000.

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NETMANAGE, INC.

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

General and administrative

General and administrative (G&A) expenses decreased in absolute dollars
primarily as a result of certain Change of Control payments to former Wall
Data executives and higher legal fees in the first quarter of 2000 as compared
to the first quarter of 2001, and to a lesser extent, the timing of attrition
and replacement of the Companys G&A staff.

Interest income and other, net

Interest income in the first quarter of 2001 includes the Companys receipt of
a $5.1 million income tax refund which included $863,000 of unaccrued interest
income. Interest income in the second quarter of 2001 includes the Companys
receipt of a $3.6 million income tax refund which included $436,000 of
unaccrued interest income. Offsetting interest income are translation losses
in international subsidiaries and sundry miscellaneous charges.

Provision for income taxes

The Companys effective tax rate for 2001 is less than 1% due to the Companys
current consolidated loss position. Income taxes primarily include
international withholding taxes and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

|                          |  |          |      |  |              |   |      | 
|------------------------- |  | -------- | ---- |  | ------------ | - | ---- | 
|                          |  | June 30, |      |  | December 31, |  
|                          |  | 2001     |      |  | 2000         |  
|                          |  |          |      |  |              |  
|(In millions)             | 
|                         
|                         
|                         
|                         
|Cash and cash equivalents |  | $        | 35.3 |  |              | $ | 35.0 | 
|                         
|                         
|                         
|                         
|Short-term investments    |  |          | 0.7  |  |              |   | 3.0  | 
|                          |  |          |      |  |              |  
|Total                     |  | $        | 36.0 |  |              | $ | 38.0 | 
|                          |  |          |      |  |              |  

Since the Companys inception, growth has been financed primarily through cash
provided by operations and sales of capital stock. The Companys primary
financing activities to date consist of its initial and secondary stock
offerings and preferred stock issuances, which aggregated net proceeds to the
Company of approximately $72.5 million. The Company does not have a bank line
of credit.

During the six months ended June 30, 2001, the Companys aggregate cash, cash
equivalents and short-term investments decreased from $38.0 million to $36.0
million. This decrease was due primarily to an unrealized loss of $1.6 million
in marketable securities, offset slightly by an increase in the Companys cash
and cash equivalents.

The Companys principal investing activities to date have been the purchase of
short-term and long-term investments, business acquisitions, and equipment
purchases. The Company does not have any specific commitments with regard to
future capital expenditures.

Net cash provided and used in financing activities in 2001 reflects the
issuance of shares under the Companys employee stock purchase program and the
purchase of the Companys common stock, from time to time, through open market
purchases.

The Companys Board of Directors authorized the repurchase from time to time of
up to nine million shares of the Companys common stock through open market
purchases. In the twelve months ended December 31, 2000, the Company
purchased 1,004,765 shares of its common stock on the open market at an average
purchase price of $0.85 per share for a total cost of approximately $0.9
million. During the six months ended June 30, 2001, the Company purchased
811,545 shares of its common stock on the open market at an average purchase
price of $0.83 per share for a total cost of approximately $0.7 million.
Cumulatively, as of June 30, 2001, the Company has purchased 8,170,610 shares
of its common stock at an average price of $2.09 per share for a total cost of
approximately $17.1 million.

At June 30, 2001, the Company had working capital of $15.2 million. The Company
believes that its current cash balances and future operating cash flows will be
sufficient to meet the Companys working capital and capital expenditure
requirements.

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NETMANAGE, INC.

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

DISCLOSURES ABOUT MARKET RISK

Interest rate risk

The Companys exposure to market risk for changes in interest rates relates
primarily to the Companys investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, liquidity risk, and territory risk.

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

Foreign currency risk

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

The Company does not use forward contracts for trading purposes. All
outstanding forward contracts at the end of a period were marked-to-market with
unrealized gains and losses included in interest income and, thus, were
recognized in income in advance of the actual foreign currency cash flows. As
these forward contracts matured, the realized gains and losses were recorded
and were included in net income (loss) as a component of interest income. The
Companys ultimate realized gain or loss with respect to currency fluctuations
depended upon the currency exchange rates and other factors in effect as the
contracts mature. The Company did not use foreign currency forward contracts
during the the six month period ended June 30, 2001.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS

The Company has experienced, and expects to experience in future periods,
significant fluctuations in operating results that may be caused by many
factors including, among others, general economic conditions, in particular the
recent slowdown of purchases of information technology due to current economic
conditions in North America, demand for the Companys products, introduction or
enhancements of products by the Company or its 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 the Companys products are sold, impact of, or failure
to enter into, strategic alliances to promote the Companys products, quality
control of products, changes in the Companys operating expenses, personnel
changes and foreign
currency exchange rates. In addition, the Companys acquisition of
complementary businesses, products or technologies may cause fluctuations in
operating results due to in-process research and development charges, the
amortization of acquired intangible assets, and integration costs such as those
recorded in connection with the acquisitions of FTP, Wall Data, Simware, and
Aqueduct.

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NETMANAGE, INC.

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

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

Based on the foregoing, the Company believes that period-to-period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.

RESTRUCTURING; INTEGRATION OF OPERATIONS OF WALL DATA, SIMWARE AND AQUEDUCT

In early December 1999, following its acquisition of Wall Data and Simware, the
Company initiated a plan to restructure its worldwide operations in connection
with the need to integrate the operations of Wall Data and Simware. The Company
undertook a further restructuring of its operations, primarily in North America
in August 2000. The restructuring related primarily to former Wall Data
operations. Both restructuring plans involved reductions in the Companys
worldwide workforce and the consolidation of certain of the Companys sales,
customer support, and research and development facilities. No assurance can be
given that these restructurings will prove to be successful, that future
operating results will improve, or that the completion of the restructurings
will not disrupt the Companys operations and have a material adverse effect on
its business, financial condition and results of operations. Further, we cannot
assure you that additional reorganizations of the Companys operations will not
be required in the future.

The successful combination of companies requires coordination of sales and
marketing with research and development efforts, and may be difficult to
accomplish. The integration of both Wall Data and Simware has involved
geographically separated organizations (in suburban Kirkland, Washington;
Boston, Massachusetts; Cupertino and Irvine, California; Ottawa, Ontario,
Canada; and Haifa, Israel), and personnel with diverse business backgrounds and
corporate cultures. The Company believes that factors such as the ongoing
attention and dedication of management, resources required to effect the
complete integration of both Wall Data and Simware, resulting from the
announcement and consummation of the acquisition, and the consequent disruption
in the business of these companies, have contributed to interruptions and loss
of momentum in their business activities. The Companys ability to maintain or
increase revenues from the sale of products from Wall Data and Simware on an
ongoing basis will depend in part on its ability to effectively respond to
these factors.

RISKS OF ACQUISITIONS

The Companys 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, have been motivated by various factors,
including the desire to obtain new technologies, expand and enhance the
Companys product offerings, expand the Companys customer base, attract key
personnel, and strengthen the Companys presence in the international and OEM
marketplaces. Product and technology acquisitions entail numerous risks,
including the diversion of managements attention away from day-to-day
operations, difficulties in the assimilation of acquired operations and
personnel (such as sales, engineering, and customer support), the integration
of acquired products with existing product lines, the failure to realize
anticipated benefits in terms of cost savings and synergies, undisclosed
liabilities, adverse short-term effects on reported operating results, the
amortization of acquired intangible assets, the potential loss of key employees
from acquired companies, and the difficulty of presenting a unified corporate
image.

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NETMANAGE, INC.

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

The Company regularly evaluates product and technology acquisition
opportunities and anticipates that it may make additional acquisitions in the
future if it determines that an acquisition would further its corporate
strategy. No assurance can be given that any acquisition by the Company will or
will not occur, that if an acquisition does occur, that it will not materially
and adversely affect the Company, or that any such acquisition will be
successful in enhancing the Companys business. If the operations of an
acquired company or business do not meet the Companys expectations, the
Company 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 the Company did
in the third quarter of 2000.

CHANGES IN PERSONNEL

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

PRODUCT DEVELOPMENT AND COMPETITION

The market for the Companys products is intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
changes in customers needs and frequent new product introductions. From time
to time over the past three years, many customers have delayed purchase
decisions due to the confusion in the marketplace
relating to rapidly changing technology and product introductions. To maintain
or improve its position in this industry, the Company must successfully
develop, introduce, and market new products and product enhancements on a
timely and cost-effective basis. The Company has experienced difficulty from
time to time in developing and introducing new products and enhancing existing
products, in a manner which satisfies customer requirements and changing market
demands. Any further failure by the Company 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
the Companys business, financial condition, and results of operations. The
failure to develop on a timely basis products or product enhancements
incorporating new functionality could cause customers to delay purchase of the
Companys current products or cause customers to purchase products from the
Companys competitors; either situation would adversely affect the Companys
business, financial condition, and results of operations. There can be no
assurance that the Company will be successful in developing new products or
enhancing its existing products on a timely basis, or that such new products or
product enhancements will achieve market acceptance.

Because certain of the Companys products incorporate software and other
technologies developed and maintained by third parties, the Company is, to a
certain extent, dependent upon such third parties ability to enhance their
current products, to develop new products that will meet changing customer
needs on a timely and cost-effective basis, and to respond to emerging industry
standards and other technological changes. There can be no assurance that the
Company would be able to replace the functionality provided by the third party
technologies currently offered in conjunction with its products if those
technologies become unavailable to it or obsolete or incompatible with future
versions of the Companys products or market standards. For example,
substantially all of NetManages

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##### Table of Contents



NETMANAGE, INC.

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

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 the
Companys products might be negatively impacted by developments adverse to
Microsofts Windows products. In addition, the Companys strategy of developing
products based on the Windows operating environment is substantially dependent
on its ability to gain pre-release access to, and to develop expertise in,
current and future Windows developments by Microsoft. No assurance can be given
as to the ability of the Company to provide, on a timely basis, products
compatible with future Windows releases.

The Companys ability to internally develop new products and product
enhancements is dependent upon its ability to attract and retain qualified
employees. See Changes in Personnel above. In addition to internal
development of new products and technologies, the future success of the
Company may depend on the ability of the Company to enter into and implement
strategic alliances and OEM relationships to develop necessary products or
technologies, to expand the Companys distribution channels or to jointly
market or gain market awareness for the Companys products. There can be no
assurance that the Company will be successful in identifying or developing such
alliances and relationships or that such alliances and relationships will
achieve their intended purposes.

Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company 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. Such loss or delay could have
a material adverse effect on the Companys business, financial condition, and
results of operations.

The Companys connectivity software products compete with major computer and
communication systems vendors, including Microsoft, IBM, Novell and Sun
Microsystems, Inc., as well as smaller networking software companies such as
Hummingbird Communications Ltd. The Company also faces competition from makers
of terminal emulation software such as Attachmate Corporation, and WRQ, Inc.
Many of the Companys competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name or
product recognition and a larger customer base, than the Company. The market
for the Companys products is characterized by significant price competition
and the Company anticipates that it will face increasing pricing pressures from
its current and new competitors in the future. Moreover, given that there are
low barriers to entry into the software market and that the market is rapidly
evolving and subject to rapid technological change, the Company believes that
competition will persist and intensify in the future. There can be no assurance
that the Company will be able to provide new products that compare favorably
with the new products of the Companys competitors or that competitive
pressures will not require the Company to reduce its prices. The Company has
experienced price declines for its products since 1997. Any further material
reduction in the prices of the Companys products would require the Company to
increase unit sales in order to maintain revenues at existing levels. There can
be no assurance that the Company will be successful in doing so.

The Companys competitors could seek to expand their product offerings by
designing and selling products using technology that could render obsolete or
adversely affect sales of the Companys products. These developments may
adversely affect the Companys sales of its own products either by directly
affecting customer purchasing decisions or by causing potential customers to
delay their purchases of the Companys products. Several of the Companys
competitors have developed proprietary networking applications and certain of
such vendors, including Novell, provide a TCP/IP protocol suite in their
products at little or no additional cost. In particular, Microsoft has embedded
a TCP/IP protocol suite in its Windows 95, Windows 98, Windows 2000, Windows
ME, and Windows NT operating systems. The Company has 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 the Companys business, financial condition or results of
operations.

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NETMANAGE, INC.

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

MARKETING AND DISTRIBUTION

Historically, the Company has relied significantly on its independent
distributors, systems integrators and value-added resellers for certain
elements of the marketing and distribution of its products. The agreements in
place with
these organizations are generally non-exclusive. These organizations are not
within the control of the Company, may represent other product lines in
addition to those of the Company and are not obligated to purchase products
from the Company. There can be no assurance that such organizations will give a
high priority to the marketing of the Companys products, and such
organizations may give a higher priority to other products, which may include
those of the Companys competitors. Actions of this nature by such
organizations could result in a lower sales effort being applied to the
Companys products and a consequent reduction in the Companys operating
results. The Companys results of operations can also be materially adversely
affected by changes in the inventory strategies of its resellers, which can
occur rapidly and may not be related to end-user demand. As part of its
continued strategy of selling through multiple distribution channels, the
Company expects to continue its use of indirect distribution channels,
particularly value-added resellers and system integrators, in addition to
distributors and original equipment manufacturers. Indirect sales may grow as a
percentage of both domestic and total net revenues during 2001 and beyond, as a
result of acquisitions or increased market penetration. Any material increase
in the Companys indirect sales as a percentage of revenues may adversely
affect the Companys average selling prices and gross margins due to the lower
unit costs that are typically charged when selling through indirect channels.
There can be no assurance that the Company will be able to attract or retain
resellers and distributors who will be able to market the Companys products
effectively, will be qualified to provide timely and cost-effective customer
support and service, or will continue to represent the Companys products, and
any inability on the part of the Company to recruit or retain important
resellers or distributors could adversely affect the Companys business,
financial condition or results of operations.

PROPRIETARY RIGHTS

The Company relies primarily on a combination of copyright and trademark laws,
trade secrets, confidentiality procedures, and contractual provisions to
protect its proprietary rights. The Company seeks to protect its 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 the Companys efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Companys products or
to obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Companys products is difficult and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In selling
its products, the Company relies 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 the Companys proprietary rights to as great an extent
as do the laws of the United States. There can be no assurance that the
Companys means of protecting its proprietary rights will be adequate or that
the Companys competitors will not independently develop similar technology. In
addition, the number of patents applied and granted for software inventions is
increasing. Consequently, there is a growing risk of third parties asserting
patent claims against the Company. The Company has received, and may receive in
the future, communications from third parties asserting that the Companys
products infringe, or may infringe, the proprietary rights of such third
parties, seeking indemnification against such infringement or indicating that
the Company may be interested in obtaining a license from such third parties.
There can be no assurance that any of such claims would not result in
protracted and costly litigation.

If any claims or actions were to be asserted against the Company, and it were
required to seek a license of a third partys intellectual property, there can
no assurance that it would be able to acquire such a license on reasonable
terms or at all, and no prediction can be made about the effect that such a
license might have on its business,

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NETMANAGE, INC.

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

financial condition or results of operations. Should litigation with respect to
any such claim commence, such litigation could be extremely expensive and time
consuming, and could materially adversely affect the Companys business,
financial condition and results of operations regardless of the outcome of the
litigation.

GLOBAL MARKET RISKS

The Company derived approximately 28% of net revenues from international sales
during the six months ended quarter ended June 30, 2001. While the Company
expects that international sales will continue to account for a significant
portion of its net revenues, there can be no assurance that the Company will be
able to maintain or increase international market demand for the Companys
products or that the Companys distributors will be able to effectively meet
that demand. Risks inherent in the Companys international business activities
generally include unexpected changes in regulatory requirements, the
limitations imposed by U.S. export laws (see Government Regulation and Legal
Uncertainties below), 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.
There can be no assurance that such factors will not have an adverse effect on
the Companys future international sales and, consequently, on the Companys
business, financial condition or results of operations. Additionally, the
recent slowdown in North America of purchases of information technology due to
current economic conditions will affect the Companys ability to generate
revenues and profit, and could adversely affect the Companys financial
condition and results of operations.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

The Company is 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 the Companys products, increase the Companys cost of doing business or
otherwise have an adverse effect on its 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
the Companys 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 the Companys ability to
distribute products outside of the United States or electronically. While the
Company takes 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 the Companys 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 the
Companys business, financial condition, or results of operations.

REQUIREMENTS FOR CONTINUED LISTING ON THE NASDAQ NATIONAL MARKET

The Company received a letter dated June 5, 2001, from the staff of the Nasdaq
Stock Market (Nasdaq) which notified the Company that the
bid price for its
common stock had been below $1.00 per share for a period of thirty consecutive
days. Nasdaq advised the Company that it would be given a period of
ninety days within which to comply with the minimum bid price requirement in
order to maintain its listing on the Nasdaq National Market.

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NETMANAGE, INC.

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

If the Company is unable to demonstrate compliance with the minimum bid
requirement for ten consecutive days on or before September 3,
2001, Nasdaq will provide the Company with written notification that
its common stock will
be delisted. At that time the Company may appeal the staffs decision to a
Nasdaq Listing Qualification Panel. The Company intends to pursue all
options available to it to meet Nasdaq listing requirements.

If the Companys common stock is delisted from the Nasdaq National Market,
sales of the Companys common stock would likely be conducted only in the
over-the-counter market or potentially in regional exchanges. This may have a
negative impact on the liquidity and price of the common stock and investors
may find it more difficult to purchase or dispose of, or to obtain accurate
quotations as to the market value of, the Companys common stock. See Item 5
below.




Item 3   Quantitative and Qualitative Disclosures About Market Risk.

The information required by Item 3. is incorporated by reference from the
section entitled Disclosures about Market Risk found above, under Item 2,
Managements Discussion and Analysis of Financial Conditions and Results of
Operations.

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NETMANAGE, INC.




PART II OTHER INFORMATION




Item 1. 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 NetManage, Inc.
(NetManage), and its affiliates Network Software Associates, Inc. (NSA) and
Netsoft, among numerous other defendants in United States of America ex rel.
Kenneth Fisher v. Network Software Associates, Inc., a California corporation,
et al., United States District Court for the District of Columbia, Case No.
99-3095. The United States government declined to pursue the action on its own
behalf and, therefore, the action is pursued by a realtor, Kenneth Fisher.
NetManage and its affiliates first learned of the action when they were served
with the amended complaint (Complaint) in May 2001. The Complaint alleges
that defendants made false claims to the government to obtain government
contracts set aside for entities owned and controlled by disadvantaged persons
admitted to the Section 8(a) Minority Small Business Development Program.
Specifically, the Complaint alleges that from 1987 to 1997 NetManage and its
affiliates presented false or fraudulent claims for payment or approval to the
government (31 U.S.C. § 3729(a)(1)), and used false records or statements to
get claims paid or approved by the government (31 U.S.C. § 3729(a)(2)) in
connection with NSAs application and certification as a Section 8(a) minority
owned and controlled company. In addition, the Complaint alleges that NSA and
Netsoft conspired to defraud the government by fraudulently obtaining NSAs
certification as a Section 8(a) entity for alleged use by NSAs Federal Systems
Division (31 U.S.C. § 3729(a)(3)). Plaintiff alleges damages in excess of
$30,000,000 to $45,000,000.

NetManage did not acquire NSA until July 1997 and had no involvement with the
events alleged by plaintiff. However, plaintiff alleges that any liabilities
of NSA and Netsoft passed to NetManage. NetManage and its affiliates find
plaintiffs allegations to be without merit and intend to vigorously defend
against this action. On June 15, 2001, the defendants, including NetManage and
its affiliates, filed a motion to dismiss the action which is currently pending
before the Court. NetManage has made a demand that plaintiff voluntarily
dismiss it as a party in this action. Plaintiff has expressed an intention to
dismiss NetManage without prejudice, and NetManage and plaintiff are currently
in the process of negotiating limited conditions associated with such a
dismissal (i.e., a tolling agreement, and limited discovery that NetManage may
remain subject to).

NetManage is not involved in any other legal proceedings. The Company may be
contingently liable with respect to certain asserted and unasserted claims that
arise during the normal course of business. In the opinion of management, the
outcome of such matters presently known to management will not have a material
adverse effect on the Companys business, financial position or results of
operations.




Item 2. Changes in Securities

Not applicable

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NETMANAGE, INC.

PART II OTHER INFORMATION




Item 3. Defaults upon Senior Securities

Not applicable




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

The 2000 Annual Meeting of Stockholders was held at the offices of the Company
at 10725 N. DeAnza Boulevard, Cupertino, California on May 30, 2001 at 9:00
a.m. local time, for the following purposes:



|1. |  | To elect two directors to hold office until the Annual Meeting of
Stockholders in the year 2004.                                                                
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | To ratify the selection of Arthur Andersen LLP as the independent
auditors of the Company for the fiscal year ended December 31, 2001.                          
|  
|3. |  | To approve an amendment to the Companys 1992 Stock Option Plan to
increase the number of shares reserved for issuance under the plan by
1,000,000 shares.      
|  
|4. |  | To approve an amendment to the Companys Employee Stock Purchase
Plan to increase the number of shares reserved for issuance under the plan
by 2,000,000 shares.

Stockholders as of record at the close of business on April 20, 2001 were
entitled to vote at the meeting.



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

|                     |  |  |            |  |  |  |           | 
|-------------------- |  |  | ---------- |  |  |  | --------- | 
|                     |  |  | For        |  |  |  | Against   | 
|John Bosch           |  |  | 54,657,862 |  |  |  | 4,084,716 | 
|                    
|                    
|                    
|                    
|Dr. Shelley Harrison |  |  | 54,656,225 |  |  |  | 4,086,317 | 



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

|               |  |                 |  |                
|-------------- |  | --------------- |  | ---------------
|For
57,702,713 |  | Against
907,340 |  | Abstain
132,489



|c. |  | On the motion of the approval of the amendment to the Companys 1992
Stock Option Plan:
|-- |  | ---------------------------------------------------------------------------------------

|               |  |                   |  |                
|-------------- |  | ----------------- |  | ---------------
|For
51,134,505 |  | Against
7,463,290 |  | Abstain
144,747



|d. |  | On the motion of the approval of the amendment to the Companys 1993
Employee Stock Purchase Plan:
|-- |  | --------------------------------------------------------------------------------------------------

|               |  |                   |  |                
|-------------- |  | ----------------- |  | ---------------
|For
56,384,978 |  | Against
2,231,944 |  | Abstain
125,620

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NETMANAGE, INC.

PART II OTHER INFORMATION




Item 5. Other Information

REQUIREMENTS FOR CONTINUED LISTING ON THE NASDAQ NATIONAL MARKET

The Companys common stock must maintain a minimum bid price of $1.00 per share
in order to remain eligible for continued listing on the Nasdaq National
Market. The Company received a letter dated June 5, 2001, from the staff of
the Nasdaq Stock Market (Nasdaq) which notified the Company that the bid
price for its common stock had been below $1.00 per share for a period of
thirty consecutive days. Nasdaq advised the Company that it would be
given a period of ninety days within which to comply with the minimum bid price
requirement for at least ten consecutive trading days in order to maintain its
listing on the Nasdaq National Market.

If the Company is unable to comply with
the minimum bid requirement on or before September 3, 2001,
Nasdaq will
provide the Company with written notification that its common stock will be delisted. At
that time the Company may appeal Nasdaqs decision to a Nasdaq Listing Qualification
Panel. The Company intends to pursue all
options available to it to meet Nasdaq listing requirements.

Previously, in an attempt to remedy the stock price deficiency, the Company had
been actively supporting a repurchase program of its stock in the open market.

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



| | (1) |  | Net tangible assets of $4,000,000;                
| | --- |  | --------------------------------------------------
|
| | (2) |  | a public float of 750,000 shares;                 
|
| | (3) |  | a market value of public float of $5,000,000;     
|
| | (4) |  | a minimum bid price of $1 per share;              
|
| | (5) |  | 400 round lot shareholders;                       
|
| | (6) |  | two market makers; and                            
|
| | (7) |  | compliance with Nasdaq corporate governance rules.

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NETMANAGE, INC.

PART II OTHER INFORMATION

Item 5. Other Information

In the event the Company is unable to satisfy this or other requirements for
continued listing on the Nasdaq National Market, the Company may not be able
to satisfy the requirements for listing on the Nasdaq SmallCap Market on an
ongoing basis. The requirements for listing on the Nasdaq SmallCap Market are
listed below:



|(1) |  | either (a) net tangible assets of $2,000,000, (b) net income in two of
the last three years of $500,000, or (c) a market capitalization of
$35,000,000;
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | a public float of 500,000 shares;                                                                                                                      
|   
|(3) |  | a market value of public float of $1,000,000;                                                                                                          
|   
|(4) |  | a minimum bid price of $1.00 per share;                                                                                                                
|   
|(5) |  | two market makers;                                                                                                                                     
|   
|(6) |  | 300 round lot shareholders; and                                                                                                                        
|   
|(7) |  | compliance with Nasdaq corporate governance rules.                                                                                                     

The Company believes that maintaining the listing of its Common Stock on the
Nasdaq National Market is in its best interest and in the best interest of its
stockholders. Inclusion in the Nasdaq National Market increases liquidity and
may potentially minimize the spread between the bid and asked prices quoted
by market makers. Further, a Nasdaq National Market listing may enhance the
Companys access to capital and increase our flexibility in responding to
anticipated capital requirements. The Company believes that prospective
investors will view an investment in its common stock more favorably if its
shares qualify for listing on the Nasdaq National Market.

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

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

In addition, if the common stock is not listed on the Nasdaq National Market
and the trading price of the common stock were to remain below $1.00 per share,
trading in the common stock would also be subject to the requirements of
certain rules promulgated under the Exchange Act which require additional
disclosures by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, a non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). In

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NETMANAGE, INC.

PART II OTHER INFORMATION

Item 5. Other Information

such event, the additional burdens imposed upon broker-dealers to effect transactions in the common stock
could further limit the market liquidity of the common stock and the ability of
investors to trade the common stock.

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




Item 6. Exhibits and Reports on Form 8-K

a.     Exhibits

None

b.     The Company filed one report on Form 8-K, Item 5. Other Events on June 13,
2001 during the three months ended June 30, 2001.

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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: | August 14, 2001 | By: | /s/   Michael Peckham
Michael Peckham
Chief Financial Officer
and Senior Vice President (Principal Financial and
Accounting Officer)
|----- | --------------- | --- | ------------------------------------------------------------------------------------------------------------------------------------

31