##### 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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|           |  |                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------
|(CHECKBOX) |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

OR

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

For the transition period from ___________________ to __________________

Commission file number 0-22158

NetManage, Inc.

(Exact name of registrant as specified in its charter)

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

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

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

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

Number of shares of registrants common stock outstanding as of September 30,
2001: 64,848,541



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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

|         |  |                                                                                                                                             |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                                                                                                                                             |  |     
|        
|        
|        
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|PART I.  |  | FINANCIAL INFORMATION                                                                                                                       |  | Page
|        
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|         |  |                                                                                                                                             |  |     
|        
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|Item 1.  |  | Financial Statements                                                                                                                        |  |     
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
|        
|        
|        
|        
|         |  | Condensed Consolidated Balance Sheets at September 30, 2001 and
December 31, 2000                                                           |  | 3   
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
|        
|        
|        
|        
|         |  | Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2001 and September 30, 2000               |  | 4   
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
|        
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|         |  | Condensed Consolidated Statements of Other Comprehensive Loss
for the three and nine months ended September 30, 2001 and
September 30, 2000 |  | 5   
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
|        
|        
|        
|        
|         |  | Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2001 and September 30, 2000                         |  | 6   
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
|        
|        
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|        
|         |  | Notes to Condensed Consolidated Financial Statements                                                                                        |  | 7   
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|         |  |                                                                                                                                             |  |     
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|        
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                                       |  | 13  
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
|        
|        
|        
|        
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                  |  | 27  
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
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|PART II. |  | OTHER INFORMATION                                                                                                                           |  |     
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
|        
|        
|        
|        
|Item 1.  |  | Legal Proceedings                                                                                                                           |  | 27  
|        
|        
|        
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|         |  |                                                                                                                                             |  |     
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|Item 2.  |  | Changes in Securities                                                                                                                       |  | 28  
|        
|        
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|         |  |                                                                                                                                             |  |     
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|Item 3.  |  | Defaults upon Senior Securities                                                                                                             |  | 28  
|        
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|         |  |                                                                                                                                             |  |     
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|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                         |  | 28  
|        
|        
|        
|        
|         |  |                                                                                                                                             |  |     
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|Item 5.  |  | Other Information                                                                                                                           |  | 28  
|        
|        
|        
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|         |  |                                                                                                                                             |  |     
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|Item 6.  |  | Exhibits and Reports on Form 8-K                                                                                                            |  | 29  
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|        
|        
|         |  |                                                                                                                                             |  |     
|        
|        
|        
|        
|         |  | Signatures                                                                                                                                  |  | 30  

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##### Table of Contents






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

|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |        |         | 
|----------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------------------------ | -------- | ------------- | ------ | ------------ | -------- | ------ | ------- | 
|                                    |  |                                                                                                                                                                                      |                            |                                            |          | September 30, |        | December 31,
|                                    |  |                                                                                                                                                                                      |                            |                                            |          | 2001          |        | 2000        
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |             
|                                    |  |                                                                                                                                                                                      |                            |                                            |          | (Unaudited)   |        |              |          |       
|                                    |  |                                                                                                                                                                                      |                            | ASSETS                                     |          |               |        |              |          |        |         | 
|                                   
|                                   
|                                   
|                                   
|Current Assets:                     |  |                                                                                                                                                                                      |                            |                                            |          |               |        |             
|                                   
|                                   
|                                   
|                                   
|                                    |  | Cash and cash equivalents                                                                                                                                                            |                            | $                                          | 35,404   |               |        | $            | 35,017   |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Short-term investments                                                                                                                                                               |                            |                                            | 132      |               |        |              | 3,033    |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Accounts receivable, net                                                                                                                                                             |                            |                                            | 13,888   |               |        |              | 26,081   |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Prepaid expenses and other current assets                                                                                                                                            |                            |                                            | 3,679    |               |        |              | 11,591   |       
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      |                            | Total current assets                       |          |               | 53,103 |              |          |        | 75,722  | 
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|Property and equipment, at cost:    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |             
|                                   
|                                   
|                                   
|                                   
|                                    |  | Computer software and equipment                                                                                                                                                      |                            |                                            | 9,983    |               |        |              | 10,005   |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Furniture and fixtures                                                                                                                                                               |                            |                                            | 6,325    |               |        |              | 6,268    |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Leasehold improvements                                                                                                                                                               |                            |                                            | 3,236    |               |        |              | 3,302    |       
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      | 19,544                     |                                            |          |               | 19,575 |             
|                                   
|                                   
|                                   
|                                   
|                                    |  | Less  Accumulated depreciation                                                                                                                                                      |                            |                                            | (15,410  | )             |        |              | (12,581  | )     
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      |                            | Net property and equipment                 |          |               | 4,134  |              |          |        | 6,994   | 
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|Goodwill and other intangibles, net |  |                                                                                                                                                                                      | 19,150                     |                                            |          |               | 23,689 |             
|                                   
|                                   
|                                   
|                                   
|Other assets                        |  |                                                                                                                                                                                      | 3,174                      |                                            |          |               | 3,576  |             
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      |                            | Total assets                               |          | $             | 79,561 |              |          | $      | 109,981 | 
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      |                            | LIABILITIES AND STOCKHOLDERS EQUITY       |          |               |        |              |          |        |         | 
|                                   
|                                   
|                                   
|                                   
|Current Liabilities:                |  |                                                                                                                                                                                      |                            |                                            |          |               |        |             
|                                   
|                                   
|                                   
|                                   
|                                    |  | Accounts payable                                                                                                                                                                     |                            | $                                          | 3,152    |               |        | $            | 5,050    |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Accrued liabilities                                                                                                                                                                  |                            |                                            | 9,300    |               |        |              | 17,426   |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Accrued payroll and payroll-related expenses                                                                                                                                         |                            |                                            | 3,054    |               |        |              | 4,500    |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Deferred revenue                                                                                                                                                                     |                            |                                            | 18,870   |               |        |              | 24,453   |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Income taxes payable                                                                                                                                                                 |                            |                                            | 4,055    |               |        |              | 4,000    |       
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      |                            | Total current liabilities                  |          |               | 38,431 |              |          |        | 55,429  | 
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|Long-term liabilities               |  |                                                                                                                                                                                      | 187                        |                                            |          |               | 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  64,848,541 and 65,266,455 shares, respectively |                            |                                            | 734      |               |        |              | 726      |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Treasury stock, at cost  8,529,879 and 7,359,065 shares, respectively                                                                                                               |                            |                                            | (17,378  | )             |        |              | (16,414  | )     
|                                   
|                                   
|                                   
|                                   
|                                    |  | Additional paid-in capital                                                                                                                                                           |                            |                                            | 176,612  |               |        |              | 176,081  |       
|                                   
|                                   
|                                   
|                                   
|                                    |  | Accumulated deficit                                                                                                                                                                  |                            |                                            | (113,023 | )             |        |              | (103,374 | )     
|                                   
|                                   
|                                   
|                                   
|                                    |  | Accumulated other comprehensive loss                                                                                                                                                 |                            |                                            | (6,002   | )             |        |              | (3,990   | )     
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      | Total stockholders equity |                                            |          | 40,943        |        |              |          | 53,029 |        
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       
|                                    |  |                                                                                                                                                                                      |                            | Total liabilities and stockholders equity |          | $             | 79,561 |              |          | $      | 109,981 | 
|                                    |  |                                                                                                                                                                                      |                            |                                            |          |               |        |              |          |       

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

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##### Table of Contents






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

|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |        |        |         | 
|---------------------------------------------- | ------------------------------------------------ | ------------------ | ------------------------ | ------ | ------------------ | ------ | ----------------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------- | 
|                                               |                                                  |                    |                          |        | Three Months Ended |        | Nine Months Ended
|                                               |                                                  |                    |                          |        | September 30,      |        | September 30,    
|                                               |                                                  |                    |                          |        |                    |        |                  
|                                               |                                                  |                    |                          |        | 2001               |        | 2000              |        | 2001   |        | 2000   
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |        
|Net revenues:                                  |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|                                              
|                                              
|                                              
|                                              
|                                               | License fees                                     |                    | $                        | 8,190  |                    |        | $                 | 13,992 |        |        | $       | 28,997 |        |        | $       | 41,361 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Services                                         |                    |                          | 9,904  |                    |        |                   | 11,727 |        |        |         | 31,177 |        |        |         | 36,419 |       
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|                                               |                                                  | Total net revenues |                          |        | 18,094             |        |                   |        | 25,719 |        |         |        | 60,174 |        |         |        | 77,780 |        
|                                              
|                                              
|                                              
|                                              
|Cost of revenues                               |                                                  |                    | 791                      |        |                    |        | 1,027             |        |        |        | 2,598   |        |        |        | 3,340   |       
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|Gross margin                                   |                                                  |                    | 17,303                   |        |                    |        | 24,692            |        |        |        | 57,576  |        |        |        | 74,440  |       
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|Operating expenses:                            |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|                                              
|                                              
|                                              
|                                              
|                                               | Research and development                         |                    |                          | 3,840  |                    |        |                   | 5,902  |        |        |         | 14,314 |        |        |         | 19,711 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Sales and marketing                              |                    |                          | 11,648 |                    |        |                   | 17,737 |        |        |         | 41,047 |        |        |         | 56,149 |       
|                                              
|                                              
|                                              
|                                              
|                                               | General and administrative                       |                    |                          | 2,046  |                    |        |                   | 3,875  |        |        |         | 8,542  |        |        |         | 15,315 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Insurance recovery                               |                    |                          |       |                    |        |                   | (1,300 | )      |        |         |       |        |        |         | (3,816 | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Write-off of in-process research and development |                    |                          |       |                    |        |                   |       |        |        |         |       |        |        |         | 1,700  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Restructuring charge                             |                    |                          |       |                    |        |                   | 5,600  |        |        |         |       |        |        |         | 5,600  |       
|                                              
|                                              
|                                              
|                                              
|                                               | Goodwill impairment                              |                    |                          |       |                    |        |                   | 42,164 |        |        |         |       |        |        |         | 42,164 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Amortization of goodwill and intangibles         |                    |                          | 1,503  |                    |        |                   | 2,980  |        |        |         | 4,508  |        |        |         | 12,014 |       
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|                                               |                                                  |                    | Total operating expenses |        |                    | 19,037 |                   |        |        | 76,958 |         |        |        | 68,411 |         |        |        | 148,837 | 
|                                              
|                                              
|                                              
|                                              
|Loss from operations                           |                                                  |                    | (1,734                   | )      |                    |        | (52,266           | )      |        |        | (10,835 | )      |        |        | (74,397 | )     
|                                              
|                                              
|                                              
|                                              
|Interest income and other, net                 |                                                  |                    | 2                        |        |                    |        | 340               |        |        |        | 1,673   |        |        |        | 1,713   |       
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |        |       
|Loss before provision for income taxes         |                                                  |                    | (1,732                   | )      |                    |        | (51,926           | )      |        |        | (9,162  | )      |        |        | (72,684 | )     
|                                              
|                                              
|                                              
|                                              
|Provision for income taxes                     |                                                  |                    | 179                      |        |                    |        | 140               |        |        |        | 487     |        |        |        | 452     |       
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|Net loss                                       |                                                  | $                  | (1,911                   | )      |                    | $      | (52,066           | )      |        | $      | (9,649  | )      |        | $      | (73,136 | )     
|                                               |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|Net loss per share                             |                                                  |                    |                          |        |                    |        |                   |        |        |        |         |        |        |        |         |       
|                                               | Basic                                            |                    | $                        | (0.03  | )                  |        | $                 | (0.80  | )      |        | $       | (0.15  | )      |        | $       | (1.13  | )     
|                                              
|                                              
|                                              
|                                              
|                                               | Diluted                                          |                    | $                        | (0.03  | )                  |        | $                 | (0.80  | )      |        | $       | (0.15  | )      |        | $       | (1.13  | )     
|                                              
|                                              
|                                              
|                                              
|Weighted average common shares
and equivalents
|                                              
|                                              
|                                              
|                                              
|                                               | Basic                                            |                    |                          | 64,969 |                    |        |                   | 64,717 |        |        |         | 65,221 |        |        |         | 64,468 |       
|                                              
|                                              
|                                              
|                                              
|                                               | Diluted                                          |                    |                          | 64,969 |                    |        |                   | 64,717 |        |        |         | 65,221 |        |        |         | 64,468 |       
|                                              
|                                              
|                                              
|                                              

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 |      | Nine months ended
|                          |                                          |   | September 30,      |      | September 30,    
|                          |                                          |   |                    |      |                  
|                          |                                          |   | 2001               |      | 2000              |   | 2001    |        | 2000
|                          |                                          |   |                    |      |                   |   |         |        |     
|Net Loss                  |                                          | $ | (1,911             | )    |                   | $ | (52,066 | )      |      | $ | (9,649  | )      |   | $ | (73,136 | )     
|                         
|                         
|                         
|                         
|Other comprehensive loss: |                                          |   |                    |      |                   |   |         |        |      |   |         |        |   |   |         |       
|                         
|                         
|                         
|                         
|                          | Unrealized gain (loss) on investments    |   |                    | (685 | )                 |   |         | 35     |      |   |         | (2,253 | ) |   |         | 79     |  
|                         
|                         
|                         
|                         
|                          | Foreign currency translation adjustments |   |                    | 28   |                   |   |         | (2,373 | )    |   |         | 241    |   |   |         | (2,171 | )
|                          |                                          |   |                    |      |                   |   |         |        |      |   |         |        |   |   |         |       
|Other comprehensive loss  |                                          | $ | (2,568             | )    |                   | $ | (54,404 | )      |      | $ | (11,661 | )      |   | $ | (75,228 | )     
|                          |                                          |   |                    |      |                   |   |         |        |      |   |         |        |   |   |         |       

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)

|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |          |        |         |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | --------------------------------- | --------------------------------------------------- | ----- | ----------------- | ------- | -------- | ------ | ------- | ------- | -
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       | Nine Months Ended
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       | September 30,    
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                  
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       | 2001              |         | 2000    
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                        |                                                                           | $                                 | (9,649                                              | )     |                   | $       | (73,136  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss to net cash provided by operating activities: |                                                                           |                                   |                                                     |       |                   |         |          |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 | Depreciation and amortization                                             |                                   |                                                     | 7,595 |                   |         |          | 16,878 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 | Provision for doubtful accounts and returns                               |                                   |                                                     | 334   |                   |         |          | 820    |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 | Write-off of in-process research and development                          |                                   |                                                     |      |                   |         |          | 1,700  |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 | Goodwill impairment                                                       |                                   |                                                     |      |                   |         |          | 42,164 |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 | Write-off
of property, plant & equipment, and other intellectual property |                                   |                                                     | 31    |                   |         |          |       |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 | Changes in assets and liabilities:                                        |                                   |                                                     |       |                   |         |          |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Accounts receivable               |                                                     |       | 11,859            |         |          |        | 3,447   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Prepaids and other current assets |                                                     |       | 7,912             |         |          |        | 6,971   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Other assets                      |                                                     |       | 402               |         |          |        |        |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Accounts payable                  |                                                     |       | (1,898            | )       |          |        | (755    | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Accrued liabilities & payroll     |                                                     |       | (9,572            | )       |          |        | (17,558 | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Deferred revenue                  |                                                     |       | (5,583            | )       |          |        | (3,584  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Income taxes payable              |                                                     |       | 55                |         |          |        | (4,787  | )      
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           | Long-term liabilities             |                                                     |       | (1,336            | )       |          |        | (1,397  | )      
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|                                                     |                                                                                 |                                                                           |                                   | Net Cash Provided By (Used In) Operating Activities |       |                   | 150     |          |        |         | (29,237 | )
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|CASH FLOWS FROM INVESTING ACTIVITIES                 |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of short term investments                                             |                                                                           |                                   | (111,830                                            | )     |                   |         | (114,404 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sales and maturities of short term investments                    |                                                                           |                                   | 114,731                                             |       |                   |         | 114,204  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Unrealized loss on marketable securities                                        |                                                                           |                                   | (2,253                                              | )     |                   |         |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of property and equipment                                              |                                                                           |                                   | (227                                                | )     |                   |         | (550     | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of equity investment at cost                                           |                                                                           |                                   |                                                    |       |                   |         | (1,500   | )     
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|                                                     |                                                                                 |                                                                           |                                   | Net Cash Provided By (Used In) Investing Activities |       |                   | 421     |          |        |         | (2,250  | )
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|CASH FLOWS FROM FINANCING ACTIVITIES                 |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of common stock, net of issuance costs                       |                                                                           |                                   | 539                                                 |       |                   |         | 1,718    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of common stock                                                       |                                                                           |                                   | (964                                                | )     |                   |         |         |       
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|                                                     |                                                                                 |                                                                           |                                   | Net Cash Provided By (Used In) Financing Activities |       |                   | (425    | )        |        |         | 1,718   |  
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|EFFECT OF EXCHANGE RATE CHANGES ON CASH              |                                                                                 |                                                                           | 241                               |                                                     |       |                   | (235    | )       
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                 |                                                                           | 387                               |                                                     |       |                   | (30,004 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|                                                    
|                                                    
|                                                    
|                                                    
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |                                                                                 |                                                                           | 35,017                            |                                                     |       |                   | 63,079  |         
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |                                                                                 | $                                                                         | 35,404                            |                                                     |       | $                 | 33,075  |         
|                                                     |                                                                                 |                                                                           |                                   |                                                     |       |                   |         |         

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

6



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##### Table of Contents






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



|1. |  | INTERIM FINANCIAL DATA
|-- |  | ----------------------

The interim financial statements for the three and nine month periods ended
September 30, 2001 and 2000 for NetManage, Inc. (the Company or NetManage)
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. 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 a portion of such
sales until the distributor sells the merchandise. 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 are derived from software updates for existing software
products, user documentation and technical support, generally under annual
service agreements. These revenues are recognized ratably over the terms of
such agreements. If such services are included in the initial licensing fee,
the residual value of the services is unbundled and recognized ratably over the
related service period. Service revenues derived from consulting and training
are deferred and recognized when the services are performed and the
collectibility is deemed probable.



|4. |  | GOODWILL
|-- |  | --------

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 $30.3 million and $25.8
million at September 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

7



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##### Table of Contents



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

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 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
dilutive common shares include dilutive shares issuable upon the exercise of
outstanding common stock options computed using the treasury stock method. For
the three and nine month periods ended September 30, 2001 and September 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. For
the three and nine month periods ended September 30, 2001, potentially dilutive
securities of 6,943,003 and 5,574,632, respectively, were not included in the
computation of diluted net loss per share because to do so would have been
anti-dilutive.



|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 write down of certain assets. The
total amount of the restructuring charge was $5.6 million. The restructuring
charge included approximately $3.0 million of estimated expenses for
facilities-related charges, $1.6 million of employee-related expenses for
employee terminations 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 September 30, 2001, the Company had incurred costs totaling
approximately $4.3 million related to the restructuring, which required $4.3
million in cash expenditures. The remaining reserve related to this
restructuring was approximately $1.3 million, which is included in accrued
liabilities.

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

|                                                         |  |          |      |            |  |       |       |       |  |   |     |   |  |   |       |  
|-------------------------------------------------------- |  | -------- | ---- | ---------- |  | ----- | ----- | ----- |  | - | --- | - |  | - | ----- | -
|                                                         |  | Employee |      | Excess     |  |       |       |       |  |   |     |  
|                                                         |  | Costs    |      | Facilities |  | Other |       | Total
|                                                         |  |          |      |            |  |       |       |      
|Balance at December 31, 2000                             |  | $        | 100  |            |  | $     | 1,884 |       |  | $ | 100 |   |  | $ | 2,084 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Reserve utilized in nine
months ended September 30, 2001 |  |          | (100 | )          |  |       | (626  | )     |  |   | (73 | ) |  |   | (799  | )
|                                                         |  |          |      |            |  |       |       |       |  |   |     |   |  |   |       |  
|Balance at September 30, 2001                            |  | $        |     |            |  | $     | 1,258 |       |  | $ | 27  |   |  | $ | 1,285 |  
|                                                         |  |          |      |            |  |       |       |       |  |   |     |   |  |   |       |  

8



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##### Table of Contents



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 September 30, 2001, the Company had incurred
costs totaling approximately $2.8 million related to the restructuring, which
required $2.8 million in cash expenditures. The remaining reserve related to
this restructuring was approximately $1.0 million.

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

|                                                         |  |            |       |       |  |       |      |   |  |   |       |  
|-------------------------------------------------------- |  | ---------- | ----- | ----- |  | ----- | ---- | - |  | - | ----- | -
|                                                         |  | Excess     |       |       |  |       |      |   |  |  
|                                                         |  | Facilities |       | Other |  | Total
|                                                         |  |            |       |       |  |      
|Balance at December 31, 2000                             |  | $          | 1,139 |       |  | $     | 300  |   |  | $ | 1,439 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Reserve utilized in nine
months ended September 30, 2001 |  |            | (174  | )     |  |       | (300 | ) |  |   | (474  | )
|                                                         |  |            |       |       |  |       |      |   |  |   |       |  
|Balance at September 30, 2001                            |  | $          | 965   |       |  | $     |     |   |  | $ | 965   |  
|                                                         |  |            |       |       |  |       |      |   |  |   |       |  

Prior to its acquisition by the Company, Wall Data had initiated a plan to
restructure its worldwide operations to re-focus Wall Data on its core business
functions and to reduce operating expenses. In conjunction with the
acquisition, the Company recorded as an accrued liability the remaining
restructuring accrual of approximately $.7 million for facilities related
expenses. The Company anticipated that the execution of the restructuring
actions would require total cash expenditures of approximately $.7 million,
which were expected to be funded from internal operations. As of September 30,
2001, the Company had incurred costs totaling approximately $.4 million. The
remaining reserve related to this restructuring is approximately $.3 million.

The following table lists the change in the NetManage restructuring charge from
Wall Data for the nine-month period ended September 30, 2001 (in thousands):

|                                                         |  |            |      |  
|-------------------------------------------------------- |  | ---------- | ---- | -
|                                                         |  | Excess    
|                                                         |  | Facilities
|                                                         |  |           
|Balance at December 31, 2000                             |  | $          | 417  |  
|                                                        
|                                                        
|                                                        
|                                                        
|Reserve utilized in nine
months ended September 30, 2001 |  |            | (159 | )
|                                                         |  |            |      |  
|Balance at September 30, 2001                            |  | $          | 258  |  
|                                                         |  |            |      |  

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
September 30 2001, the remaining FTP reserve related to this restructuring plan
was approximately $0.9 million.

9



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##### Table of Contents



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

|                                                         |  |            |       |  
|-------------------------------------------------------- |  | ---------- | ----- | -
|                                                         |  | Excess    
|                                                         |  | Facilities
|                                                         |  |           
|Balance at December 31, 2000                             |  | $          | 1,108 |  
|                                                        
|                                                        
|                                                        
|                                                        
|Reserve utilized in nine
months ended September 30, 2001 |  |            | (224  | )
|                                                         |  |            |       |  
|Balance at September 30, 2001                            |  | $          | 884   |  
|                                                         |  |            |       |  

10



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##### Table of Contents



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

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., in the
United States District Court for the District of Columbia. The United States
government declined to pursue the action on its own behalf and, therefore, the
action is pursued by a 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. In response to NetManages request that Plaintiff
voluntarily dismiss it as a party in this action, plaintiff voluntarily
dismissed NetManage from this action without prejudice on August 14, 2001.
This dismissal was approved by the Court and filed on September 5, 2001.
Pursuant to the dismissal, NetManage agreed to a tolling arrangement such that
November 22, 1999 shall be deemed the filing date should Plaintiff seek to
reassert against NetManage the claims alleged in the First Amended Complaint
and NetManage agreed not to assert statute of limitations, laches, estoppel, or
any similar defense with reference to any date after November 22, 1999.

In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., was filed in the United States District Court for the
Northern District of California against Firefox Communications Inc. (Firefox)
and certain of its former officers and directors. FTP acquired Firefox in July
1996. The complaint alleged that, between July 20, 1995 and January 2, 1996,
the defendants violated the federal securities laws by making false or
misleading statements about Firefoxs operations and financial results. On May
8, 1997, the district court granted defendants motion to dismiss without leave
to amend. Plaintiffs filed a notice of appeal. Oral argument on the appeal
was held on September 14, 1998. On November 1, 1999, the Court of Appeals for
the Ninth Circuit issued an order vacating the judgment of the district court
and remanded the case back to the district court for reconsideration in light
of its recently issued landmark decision in the securities litigation case of
Janas v. McCraken (In re Silicon Graphics Inc.). After remand, the Company
renewed its motion to dismiss. On March 22, 2000, a hearing on the Companys
motion to dismiss was held by the district court and on March 20, 2001, the
Court of Appeals for the Ninth Circuit affirmed the dismissal.

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.

11



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##### Table of Contents



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

8. TREASURY STOCK

During the first nine months of 2001, the Company purchased 1,170,814 shares of
its outstanding common shares for approximately $1.0 million.

9. ACCOUNTING PRONOUNCEMENTS

In October 2001, the FASB issued SFAS 144 (SFAS 144) Accounting for
the Impairment or Disposal of Long-Lived Assets. SFAS 144 supercedes the
SFAS No. 121 by requiring that one accounting model to be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. SFAS 144 will be effective for fiscal
years beginning after December 15, 2001. The Company has not yet determined
the effect SFAS 144 will have on its financial position, results of
operations, or cash flows.

In August 2001, the FASB issued SFAS 143 (SFAS 143) Accounting for
Obligations Associated with the Retirement of Long-Lived Assets. SFAS 143
address financial accounting reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset
retirement cost, at its fair value, as part of the cost of the asset and
classify the accrued amount as a liability in the condensed consolidated
balance sheet. The asset retirement liability is then accreted to the ultimate
payout as interest expense. The initial measurement of the liability would be
subsequently updated for revised estimates of the discounted cash outflows.
SFAS 143 will be effective for fiscal years beginning after June 15, 2002.
The Company has not yet determined the effect SFAS 143 will have on its
financial position, results of operations, or cash flows.

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 SFAS 142, 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 nine months ended September 30, 2001 was
approximately $2.0 million.

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 SFAS 141 will not have a material impact on the financial position or
the results of operations of the Company.

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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 will remain flat
or increase slightly as a percentage of revenues. 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, and OnWeb
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. 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
provides professional support, maintenance and consultancy services to its
customers in association with the products the Company develops and markets.

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 the
implementation of a worldwide restructuring of its operations as a result of
acquisitions and prevailing market conditions.

The Company had initiated other restructuring plans as a result of the
acquisitions of Wall Data, Simware, and Aqueduct including the $5.6 million
restructuring plan announced on August 3, 2000 (see Note 6 above). 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.

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NETMANAGE, INC.

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

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 Web Publishing,
Integration and Development product line includes the Companys product branded
OnWeb. The Realtime Interactive Support functionality, previously sold as the
standalone product Support Now, is now built into the Companys full line of
products and adds value to the PC Connectivity and Web Publishing, Integration
and Development product offerings.

In the first nine 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 and the tragic
events of September 11, 2001. 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 stabilize at those levels
incurred in the third 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 improve in the future.

As a result, the Company announced a restructuring of the Company 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 focused 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 September 30, 2001, the Company had
incurred costs totaling approximately $4.3 million related to the restructuring
which required $4.3 million in cash expenditures.

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NETMANAGE, INC.

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

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), and 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.

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 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.

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##### Table of Contents



NETMANAGE, INC.

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

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.

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##### Table of Contents



NETMANAGE, INC.

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

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

|                               |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |          |   |       |      |      |      |      |       |      |      |      |       |       |   |       |   | 
|------------------------------ | ------------ | ---------------------------- | ------------------ | ------------------ | ---- | -------------------------------- | ----- | ------------------------------- | ---- | ---- | ------ | -------- | - | ----- | ---- | ---- | ---- | ---- | ----- | ---- | ---- | ---- | ----- | ----- | - | ----- | - | 
|                               |              |                              |                    |                    |      | Three months ended September 30, |       | Nine months ended September 30,
|                               |              |                              |                    |                    |      |                                  |       |                                
|                               |              | 2001                         |                    | 2000               |      | Change %                         |       | 2001                            |      | 2000 |        | Change %
|                               |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |         
|Net revenues:                  |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |          |   |       |      |      |      |      |       |      |      |      |       |      
|                               | License fees |                              | $                  | 8.2                |      |                                  | $     | 14.0                            |      |      |        | -41.4    | % |       | $    | 29.0 |      |      | $     | 41.4 |      |      |       | -30.0 | %
|                              
|                              
|                              
|                              
|                               | Services     |                              |                    | 9.9                |      |                                  |       | 11.7                            |      |      |        | -15.4    | % |       |      | 31.2 |      |      |       | 36.4 |      |      |       | -14.3 | %
|                               |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |          |   |       |      |      |      |      |       |      |      |      |       |      
|                               |              |                              | Total net revenues |                    | $    | 18.1                             |       |                                 | $    | 25.7 |        |          |   | -29.6 | %    |      | $    | 60.2 |       |      | $    | 77.8 |       |       |   | -22.6 | %
|                               |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |          |   |       |      |      |      |      |       |      |      |      |       |      
|As a percentage of revenues:   |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |          |   |       |      |      |      |      |       |      |      |      |       |      
|                              
|                              
|                              
|                              
|                               |              | License fees                 |                    |                    | 45.3 | %                                |       |                                 | 54.5 | %    |        |          |   |       |      |      | 48.2 | %    |       |      | 53.2 | %    |       |       |   |      
|                              
|                              
|                              
|                              
|                               |              | Services                     |                    |                    | 54.7 | %                                |       |                                 | 45.5 | %    |        |          |   |       |      |      | 51.8 | %    |       |      | 46.8 | %    |       |       |   |      
|                               |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |          |   |       |      |      |      |      |       |      |      |      |       |      
|                               |              |                              |                    | Total net revenues |      |                                  | 100.0 | %                               |      |      | 100.0  | %        |   |       |      |      |      |      | 100.0 | %    |      |      | 100.0 | %     |   |       |   | 
|                               |              |                              |                    |                    |      |                                  |       |                                 |      |      |        |          |   |       |      |      |      |      |       |      |      |      |       |      
|Gross margin                   |              | $                            | 17.3               |                    |      | $                                | 24.7  |                                 |      |      | -30.0  | %        |   | $     | 57.6 |      |      | $    | 74.4  |      |      |      | -22.6 | %    
|                              
|                              
|                              
|                              
|                               |              | As a percentage of revenues: |                    |                    | 95.6 | %                                |       |                                 | 96.1 | %    |        |          |   |       |      |      | 95.7 | %    |       |      | 95.6 | %    |       |       |   |      
|                              
|                              
|                              
|                              
|Research and development       |              | $                            | 3.8                |                    |      | $                                | 5.9   |                                 |      |      | -35.6  | %        |   | $     | 14.3 |      |      | $    | 19.7  |      |      |      | -27.4 | %    
|                              
|                              
|                              
|                              
|                               |              | As a percentage of revenues: |                    |                    | 21.0 | %                                |       |                                 | 23.0 | %    |        |          |   |       |      |      | 23.8 | %    |       |      | 25.3 | %    |       |       |   |      
|                              
|                              
|                              
|                              
|Sales and marketing            |              | $                            | 11.7               |                    |      | $                                | 17.7  |                                 |      |      | -33.9  | %        |   | $     | 41.0 |      |      | $    | 56.1  |      |      |      | -26.9 | %    
|                              
|                              
|                              
|                              
|                               |              | As a percentage of revenues: |                    |                    | 64.6 | %                                |       |                                 | 68.9 | %    |        |          |   |       |      |      | 68.1 | %    |       |      | 72.1 | %    |       |       |   |      
|                              
|                              
|                              
|                              
|General and administrative     |              | $                            | 2.0                |                    |      | $                                | 3.9   |                                 |      |      | -48.7  | %        |   | $     | 8.5  |      |      | $    | 15.3  |      |      |      | -44.4 | %    
|                              
|                              
|                              
|                              
|                               |              | As a percentage of revenues: |                    |                    | 11.0 | %                                |       |                                 | 15.2 | %    |        |          |   |       |      |      | 14.1 | %    |       |      | 19.7 | %    |       |       |   |      
|                              
|                              
|                              
|                              
|Interest income and other, net |              | $                            |                   |                    |      | $                                | 0.3   |                                 |      |      | -100.0 | %        |   | $     | 1.7  |      |      | $    | 1.7   |      |      |      | 0.0   | %    
|                              
|                              
|                              
|                              
|                               |              | As a percentage of revenues: |                    |                    | 0.0  | %                                |       |                                 | 1.2  | %    |        |          |   |       |      |      | 2.8  | %    |       |      | 2.2  | %    |       |       |   |      
|                              
|                              
|                              
|                              
|Provision for income taxes     |              | $                            | 0.2                |                    |      | $                                | 0.1   |                                 |      |      | 100.0  | %        |   | $     | 0.5  |      |      | $    | 0.5   |      |      |      | 0.0   | %    
|                              
|                              
|                              
|                              
|                               |              | Effective tax rate           |                    |                    | 1.1  | %                                |       |                                 | 0.4  | %    |        |          |   |       |      |      | 0.8  | %    |       |      | 0.6  | %    |       |       |   |      

Net Revenues

Historically, a substantial portion of the Companys net revenues have 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 nine-month
periods ended September 30, 2001 as compared to the same periods in 2000. This
decrease resulted from customer decisions to cancel or postpone purchases of
the Companys products, due to the slowing North American economy, and the
tragic events of September 11, 2001.

The Company has operations worldwide with sales offices located in the United
States, Europe, Canada, Latin America, Israel and Japan. Revenues outside of
North America (United States and Canada) as a percentage of total net revenues
were approximately 31% and 22% for the three months ended September 30, 2001
and 2000, respectively, and 28% and 27% for the nine months ended September
30, 2001 and 2000, respectively.

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NETMANAGE, INC.

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

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

No customer accounted for 10% or more of net revenues in any of the three or
nine month periods ended September 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 nine month periods ended September
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 as a result of the reduction in headcount for research and
development activities due to the Companys restructuring in August 2000 and
from ongoing cost reduction efforts.

Sales and marketing

Sales and marketing (S&M) expenses consist primarily of salaries and
commissions of sales, consulting 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 lower sales levels, the reduction in sales and support staff as
part of the ongoing cost reduction efforts, and to a lesser extent, actions as
a result of the Companys restructuring in August 2000.

General and administrative

General and administrative (G&A) expenses decreased in absolute dollars and
as a percentage of net revenues primarily as a result of the reduction in
administrative staff as part of the ongoing cost reduction efforts, and to a
lesser extent, the allocation of some G&A costs to other functional areas.

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NETMANAGE, INC.

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

Interest income and other, net

During the nine month period ended September 30, 2001, the company received
$8.7 million in income tax refunds that included $1.3 million in interest
income.

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

|                          |  |               |      |              |  |   |      | 
|------------------------- |  | ------------- | ---- | ------------ |  | - | ---- | 
|                          |  | September 30, |      | December 31,
|(In millions)             |  | 2001          |      | 2000        
|                          |  |               |      |             
|Cash and cash equivalents |  | $             | 35.4 |              |  | $ | 35.0 | 
|                         
|                         
|                         
|                         
|Short-term investments    |  |               | 0.1  |              |  |   | 3.0  | 
|                          |  |               |      |              |  |   |      | 
|Total                     |  | $             | 35.5 |              |  | $ | 38.0 | 
|                          |  |               |      |              |  |   |      | 

Since the Companys inception, its operations have 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 nine months ended September 30, 2001, the Companys aggregate cash,
cash equivalents and short-term investments decreased from $38.0 million to
$35.5 million. This decrease was due primarily to an unrealized loss of $2.2
million in marketable securities and the purchase of approximately $1.0 million
in Treasury Stock, 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, the
stock option plans 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 9,000,000 shares of the Companys common stock through open market
purchases. In the twelve months ended December 31, 2000, the Company
repurchased 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 nine months ended September 30, 2001, the Company
purchased 1,170,814 shares of its common stock on the open market at an average
purchase price of $0.82 per share for a total cost of approximately $1.0
million. Cumulatively, as of September 30, 2001, the Company has purchased
8,529,879 shares of its common stock at an average price of $2.04 per share for
a total cost of approximately $17.4 million. Subsequent to September 30, 2001,
the Board of Directors authorized the repurchase of an additional 6,000,000
shares of the Companys common stock from time-to-time on the open market.

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NETMANAGE, INC.

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

At September 30, 2001, the Company had working capital of $14.7 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.

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 nine month period ended September 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.

TERRORIST ATTACKS AND THREATS OR ACTUAL WAR

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

RESTRUCTURING; INTEGRATION OF OPERATIONS OF WALL DATA AND SIMWARE

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.

CHANGES IN PERSONNEL

The majority of the Companys employee workforce is located in the 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. From the latter half of 1996 until recently, 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 had resulted in
substantial demands on the Companys management resources and increased the
difficulty of hiring, training, and assimilating new employees.

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 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.

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NETMANAGE, INC.

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

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 Original Equipment Manufacturer 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 those 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 last quarter 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, 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.

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NETMANAGE, INC.

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

GLOBAL MARKET RISKS

The Company derived approximately 31% and 28% of net revenues from sales
outside of North America (United States and Canada) during the three and nine
months ended September 30, 2001, respectively. 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

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NETMANAGE, INC.

Item 2 
Managements Discussion and Analysis of Financial Condition and 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. The staff later 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 its listing on the Nasdaq National Market.

The Company was unable to demonstrate compliance with the minimum bid
requirement for ten consecutive days before September 4, 2001, and on September
10, 2001 the Company received written notification from Nasdaq that the
Companys common stock would be delisted on September 18, 2001. The Company
issued a letter to Nasdaq on September 14, 2001 requesting a hearing before the
Nasdaq Listing Qualification Panel. A subsequent letter from Nasdaq on
September 17, 2001 granted an oral hearing date of October 18, 2001 in
Washington, D.C. for the Company to demonstrate its ability to sustain
long-term compliance with all applicable maintenance listing criteria.

In anticipation of a hearing before the Nasdaq Listing Qualification Board, a
Special Meeting of the Stockholders had been set for October 22, 2001 for the
approval of a Reverse Stock Split. A Preliminary Proxy was filed with
the SEC on September
14, 2001 for a Special Meeting of the Companys Stockholders on October 22,
2001 to approve the Reverse Stock Split proposal.

The Company received a letter from Nasdaq,dated September 27, 2001, notifying
the Company that Nasdaq had implemented a moratorium on the minimum bid price
and market value of public float requirements for continued listing on Nasdaq.
The letter stated that the hearing scheduled for October 18, 2001 in
Washington, D.C. for the Company to demonstrate its ability to sustain
long-term compliance with all applicable maintenance listing criteria had been
canceled by Nasdaq. The letter further stated that the moratorium on the
minimum bid price and market value of public float requirements would be
suspended until January 2, 2002, at which time the 30 and 90 day periods
provided by marketplace Rule 4310(c)(8)(B) would start anew. In light of the
correspondence from Nasdaq, the Company canceled the Special Meeting of the
Stockholders scheduled to be held on October 22, 2001 and will not proceed with
the proposed Reverse Stock Split at this time.

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NETMANAGE, INC.




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.




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., in the United States District Court for the District of Columbia. The
United States government declined to pursue the action on its own behalf and,
therefore, the action is pursued by a 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. In response to NetManages request that Plaintiff
voluntarily dismiss it as a party in this action, plaintiff voluntarily
dismissed NetManage from this action without prejudice on August 14, 2001.
This dismissal was approved by the Court and filed on September 5, 2001.
Pursuant to the dismissal, NetManage agreed to a tolling arrangement such that
November 22, 1999 shall be deemed the filing date should Plaintiff seek to
reassert against NetManage the claims alleged in the First Amended Complaint
and NetManage agreed not to assert statute of limitations, laches, estoppel, or
any similar defense with reference to any date after November 22, 1999.

In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., was filed in the United States District Court for the
Northern District of California against Firefox Communications Inc. (Firefox)
and certain of its former officers and directors. FTP acquired Firefox in July
1996. The complaint alleged that, between July 20, 1995 and January 2, 1996,
the defendants violated the federal securities laws by making false or
misleading statements about Firefoxs operations and financial results. On May
8, 1997, the district court granted defendants motion to dismiss without leave
to amend. Plaintiffs filed a notice of appeal. Oral argument on the appeal
was held on September 14, 1998. On November 1, 1999, the Court of Appeals for
the Ninth Circuit issued an order vacating the judgment of the district court
and remanded the case back to the district court for reconsideration in light
of its recently issued landmark decision in the securities litigation case of
Janas v. McCraken (In re Silicon Graphics Inc.). After remand, the Company
renewed its motion to dismiss. On March 22, 2000, a hearing on the Companys
motion to dismiss was held by the district court and on March 20, 2001, the
Court of Appeals for the Ninth Circuit affirmed the dismissal.

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.

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NETMANAGE, INC.




Item 2. Changes in Securities

Not applicable




Item 3. Defaults upon Senior Securities

Not applicable




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

Not applicable




Item 5. Other Information

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. The staff later 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 its listing on the Nasdaq National Market.

The Company was unable to demonstrate compliance with the minimum bid
requirement for ten consecutive days before September 4, 2001, and on September
10, 2001 the Company received written notification from Nasdaq that the
Companys common stock would be delisted on September 18, 2001. The Company
issued a letter to Nasdaq on September 14, 2001 requesting a hearing before the
Nasdaq Listing Qualification Panel. A subsequent letter from Nasdaq on
September 17, 2001 granted an oral hearing date of October 18, 2001 in
Washington, D.C. for the Company to demonstrate its ability to sustain
long-term compliance with all applicable maintenance listing criteria.

In anticipation of a hearing before the Nasdaq Listing Qualification Board, a
Special Meeting of the Stockholders had been set for October 22, 2001 for the
approval of a Reverse Stock Split. A Preliminary Proxy was filed with
the SEC on September
14, 2001 for a Special Meeting of the Companys Stockholders on October 22,
2001 to approve the Reverse Stock Split proposal.

The Company received a letter from Nasdaq,dated September 27, 2001, notifying
the Company that Nasdaq had implemented a moratorium on the minimum bid price
and market value of public float requirements for continued listing
on Nasdaq. The letter stated that the hearing scheduled for October
18, 2001 in Washington, D.C. for the Company to demonstrate its ability to
sustain long-term compliance with all applicable maintenance listing criteria
had been canceled by Nasdaq. The letter further stated that the moratorium on
the minimum bid price and market value of public float requirements would be
suspended until January 2, 2002, at which time the 30 and 90 day periods
provided by marketplace Rule 4310(c)(8)(B) would start anew. In light of the
correspondence from Nasdaq, the Company canceled the Special Meeting of the
Stockholders scheduled to be held on October 22, 2001 and will not proceed with
the proposed Reverse Stock Split at this time.

PRESS RELEASE DATED FRIDAY, NOVEMBER 2,
2001

In the Companys press released dated Friday, November 2, 2001, the Company
inadvertently reported certain services revenues for the three and nine month
periods ended September 30, 2001 of $606,000 and $2,008,000, respectively, as
License fees. These revenues should have been reported as Services. The
reclassification of these revenues does not change the Total net revenues as
reported by the Company for the three and nine month periods ending September
30, 2001. The adjusted revenue classifications are as shown on the Condensed
Consolidated Statements of Operations as reported in Part I, Financial
Information of this filing.

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NETMANAGE, INC.




Item 6. Exhibits and Reports on Form 8-K

a. Exhibits

None

B Reports on Form 8-K.

The Company filed a report on Form 8-K, Item 5. Other Events, on September 14,
2001, announcing that it received a staff determination letter, dated September
10, 2001, from The Nasdaq Stock Market, Inc., indicating that the Company no
longer complied with the minimum bid price requirement for continued listing,
as set forth in Marketplace Rule 4450 (a) (5), and that the Companys stock was
therefore subject to delisting from The Nasdaq National Market. The Form 8-K
also announced that the Company was appealing this determination by immediately
requesting a hearing before a Nasdaq listing qualifications panel.

The Company filed a report on Form 8-K, Item 5. Other Events, on October 14,
2001, announcing that it was advised by staff of The
Nasdaq Stock Market, Inc. that the minimum bid price requirement for listing on
the Nasdaq National Market will be suspended until January 2, 2002. The Form
8-K also announced that the Company was further advised that the 30 day and 90
day periods provided by Marketplace Rule 4310 (c)(8)(b) will start anew on
January 2, 2002.

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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.

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|NETMANAGE, INC.
(Registrant)
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|DATE:                        |  | November 8, 2001 |  | By: |  | /s/ Michael Peckham
Michael Peckham
Chief Financial Officer
and Senior Vice President (Principal Financial and
Accounting Officer)

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