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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X]

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

For the quarterly period ended March 31, 2003

OR

[   ]

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

For the transition period from                  to

Commission file number 0-22158

NetManage, Inc.

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

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

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

YES [  ]    NO [X]

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

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

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

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

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

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

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

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

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

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

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

1.      Interim financial data

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

2.      Consolidation

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

3.      Summary of significant accounting policies:

Use of estimates

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

Foreign currency translation, foreign exchange contracts and comprehensive loss

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

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

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

Short-term investments

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

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

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Goodwill and other intangible assets, net

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

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

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

Accrued liabilities and restructuring

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

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

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Concentrations of credit risk

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

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

Stock Compensation Plans

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

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

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

Net loss per share

     Basic net loss per share data has been computed using the weighted-average number of shares of common stock outstanding during the periods. Diluted net loss per share data has been computed using the weighted-average number of shares of common stock and potential dilutive common shares. Potential dilutive common shares include dilutive shares issuable upon the exercise of outstanding common stock options computed using the treasury stock method. For the three month periods ended March 31, 2003 and 2002, the number of shares used in the computation of diluted loss per share was the same as those used for the computation of basic loss per share. For the three month periods ended March 31, 2003 and 2002, potentially dilutive securities of 5,086 and 2,301 shares respectively, were not included in the computation of diluted net loss per share because to do so would have been anti-dilutive.

Income taxes

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

Recent accounting pronouncements

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

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

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4.        Restructuring of operations

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

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

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

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

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

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

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

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

     In the fourth quarter of 1999, following the acquisitions of Wall Data, Inc., or Wall Data, and Simware Inc., or Simware, the Company initiated a plan to restructure its worldwide operations in order to integrate the operations of the two acquired companies. In connection with this plan, the Company recorded a $3.8 million charge to operating expenses in 1999. The restructuring charge included approximately $1.9 million of estimated expenses for facilities-related charges associated with the consolidation of redundant operations, $1.4 million of employee-related expenses for employee terminations and $0.5 million for legal, accounting and other. The Company anticipated that the execution of the restructuring actions would require total cash expenditures of approximately $3.6 million, which the Company expected to be funded from internal operations. In 2002, in connection with a review of its obligations for facilities, the Company recorded a reduction in the estimated expenses of approximately $128,000. In March 2003, as a result of a re-negotiated facilities lease, the Company recorded a reduction in the estimate for facilities of approximately $129,000. The $128,000 and $129,000 reductions in the restructuring reserve were recorded with a corresponding reduction to restructuring expense in 2002 and the first quarter of 2003, respectively. As of March 31, 2003, total cash expenditures incurred with respect to this restructuring reserve were approximately $3.4 million. The remaining reserve is approximately $0.3 million, and is included in accrued liabilities as of March 31, 2003.

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

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

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

5.      Commitments and contingencies

Legal proceedings

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

     On January 31, 2002, on an order of the court granting in part and denying in part following defendant’s successful motion to dismiss the May 2001 amended complaint, Mr. Fisher filed a Second Amended Complaint, or Second Complaint, in the United States District Court of the District of Columbia against NSA and NetSoft among numerous other defendants. On May 13, 2002, on an order of the court following defendants’ successful motion to strike the Second Complaint, Mr. Fisher filed a Third Amended Complaint, or Complaint, in the United States District Court of the District of Columbia against NSA and NetSoft among numerous other defendants. The Complaint alleges that NSA, NetSoft and the other defendants made false claims to the government to obtain government contracts set aside for entities owned and controlled by disadvantaged persons admitted to the Section 8(a) Minority Small Business Development Program. Specifically, the Complaint alleges that from 199387 to 1997, NSA, NetSoft, and the other defendants presented false or fraudulent claims for payment or approval to the government in violation of 31 U.S.C. § 3729 (a)(1), and used false records or statements to get claims paid or approved by the government in violation of 31 U.S.C. § 3729 (a) (2). in connection with NSA’s application and certification as a Section 8 (a) minority owned and controlled company. In addition, the Complaint alleges that NSA, Netsoft and the other defendants conspired to defraud the government by working to fraudulently continue obtaining NSA’s certification as a Section 8 (a) entity for alleged use by NSA’s Federal Systems Division and by getting fraudulent claims allowed and paid by virtue of the alleged fraudulent Section 8(a) status, in violation of 31 U.S.C. § 3729 (a) (3). NetManage did not acquire NSA until July 1997 and had no involvement with the events alleged by Mr. Fisher. According to the earlier amended complaint (although not alleged in the current Complaint), Mr. Fisher’s theory was that the liabilities of NSA and NetSoft, including alleged liability in this suit, liabilities of NSA and Netsoft passed to NetManage. Discovery is presently continuing in this matter. It was previously reported in NetManage’s 10-K filing that, on May 31, 2002, NSA, NetSoft and the other defendants moved to strike Fisher’s Third Amended Complaint. That is incorrect. On May 31, 2002, NSA and NetSoft and the other defendants answered the complaint and filed a motion to strike the complaint. NetManage, and its affiliates, vigorously dispute Mr. Fisher’s allegations. The Company has insufficient information at this time to estimate the possible loss, if any, which might result from this lawsuit.

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

6.      Stockholders’ equity

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

7.      Segment information

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

     The Company’s Host Access product line is designed to provide the technology to make the connection between personal computers and large corporate computers possible. These products are designed to leverage the strengths and popularity of the Internet, as well as corporate private networks, and offer features to improve network manageability. The Host Integration product line is designed to provide the technology to allow customers to leverage the investment they have in existing host-based systems, applications and business processes for new web-based presentations, applications, and solutions. These two product lines have similar economic characteristics and are similar with respect to the nature of the products, the nature of the production processes, the type of customer that the products are sold to and the methods used to distribute the products. Net revenues for the Host Access and Host Integration product lines was as follows for the three months ended March 31, 2003 and 2002 (in thousands):

8.      Restatement of financial statements

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

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

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

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

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

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

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

9.      Related party transactions

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

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

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NETMANAGE, INC.

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

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

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

Overview

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

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

     We develop and market these software solutions to allow our customers to access and leverage applications, business processes and data on International Business Machines Corporation (IBM) corporate mainframe computers, and IBM midrange computers such as iSeries (formerly AS/400) and on UNIX based servers. We provide professional support, maintenance, and technical consultancy services to our customers in association with the products we develop and market. We provide professional applications and management consultancy to our customers in association with the server-based products we deliver that are designed to allow customers to develop and deploy new web-based applications.

     Our principal products are compatible with Microsoft Corporation’s, or Microsoft Windows .NET, Windows XP, Windows 2000, Windows NT, Windows 98, Windows 95, and Windows 3.x operating systems, IBM operating systems, Novell, Inc., or Novell, operating systems and various implementations of the industry standard UNIX operating system such as IBM’s AIX, Hewlett-Packard Company’s HP/UX, Sun Microsystems Inc.’s Solaris, and the open source Linux system.

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

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

Operations

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

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

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

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

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

     We initiated restructuring plans as a result of our acquisitions of Wall Data, Simware, and Aqueduct Software, Inc, or Aqueduct, including the $5.6 million restructuring plan announced on August 3, 2000. As part of the restructuring, we reduced our workforce by approximately 17%, consisting mostly of Engineering and Customer Support personnel who were focused primarily on our older technologies, predominantly acquired through the Wall Data and FTP acquisitions. With the reduction in personnel, knowledge levels with respect to certain products and our ability to enhance and expand products acquired from Wall Data and FTP was reduced, thus impacting future expected revenues from these product families. In connection with the restructuring, we made provisions for reductions in office space, related overhead expenses, and the write-down of certain assets. The total amount of the restructuring charge was $5.6 million. The restructuring charge includes approximately $3.0 million of expenses for facilities-related charges, $1.6 million of employee-related expenses for employee terminations, approximately $200,000 in other equipment and professional service costs, and an $800,000 settlement to Verity for a software license that we no longer plan to use. As of March 31, 2003, our total cash expenditures incurred were approximately $5.1 million.

     We experienced a reduction in incoming orders from the latter half of 2000 through the third quarter of 2001, and incoming orders did not begin to increase until the fourth quarter of 2001. The slowdown in the North American economy, as well as the events associated with the September 11, 2001 disaster, influenced customers’ willingness to place new orders for our products. We experienced significant revenue reduction in each quarter of 2001, compared to the same quarter of the previous year and this trend continued into the third quarter of 2002. In some cases, customers chose to reduce the number of desktop units at the time of annual maintenance renewal to reflect a reduction-in-force at their facilities, or they continued to postpone their buying decisions due to budget constraints. The reduction in revenue in the first quarter of 2003 primarily was attributed to our North American operations. Our first quarter 2003 revenues were approximately 26% less than the amount recorded in the first quarter of 2002 and approximately 15% less than the amount recorded in the fourth quarter of 2002. There can be no assurance that revenues will increase at all in future periods.

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

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

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

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