NETMANAGE INC, 10-K405, 2000-03-30

NETMANAGE INC
10-K405, 2000-03-30
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

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

FOR THE TRANSITION PERIOD FROM __________ TO __________ .

COMMISSION FILE NO. 0-22158

NETMANAGE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 77-0252226
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

10725 NORTH DE ANZA BOULEVARD,
CUPERTINO, CALIFORNIA 95014
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 973-7171

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant, based upon the closing price of the Common
Stock reported on the Nasdaq Stock Market, was $324,024,872 as of February 29,
2000.(1)

The number of shares of Common Stock outstanding as of February 29, 2000
was 64,120,805.
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DOCUMENTS INCORPORATED BY REFERENCE

Sections of the registrant's definitive Proxy Statement for the
registrant's Annual Meeting of Stockholders, to be held May 31, 2000, which will
be filed with the Securities and Exchange Commission, are incorporated by
reference into Part III of this Report to the extent stated herein.
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(1) Excludes 14,749,348 shares of Common Stock held by directors and officers
and stockholders whose beneficial ownership exceeds five percent of the
shares outstanding at December 31, 1999. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the
power, direct or indirect, to direct or cause the direction of the
management or policies of the registrant, or that such person is controlled
by or under common control with the registrant.

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PART I

ITEM 1 -- BUSINESS.

OVERVIEW

NetManage, Inc. (the "Company") develops and markets software applications
that allow its customers to access and 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's business is focused on taking advantage of the overall move
that major corporations worldwide are making to embrace electronic
trading -- commonly termed Business-to-Business ("B2B") or Business-to-Consumer
("B2C"). In this market, the Company enables businesses to move to the Internet
economy through providing the bridge between their existing access systems and
those required to compete in the B2B and B2C marketplaces.

The Company provides host access solutions that allow internal and external
users to access mission-critical line-of-business host system applications and
resources (Business-to-Employee or "B2E"). The corporate resources behind B2E
are the basis of any eBusiness transformation. Alongside these solutions, the
Company is focused on providing products that allow existing corporate business
processes to be extended to business partners in the supply and demand chains,
and products that allow new business processes to be created in support of
corporate eBusiness B2B and B2C initiatives.

The Company develops and markets these software solutions for UNIX(R), IBM
AS/400 midrange and IBM corporate mainframe computers. The Company also develops
and markets software that increases the productivity of corporate call centers,
and allows real time application sharing on corporate networks and across the
Internet. The Company provides professional support, maintenance and consultancy
services to its customers in association with the products it develops and
markets.

The Company's business is also focused on taking advantage of major
industry trends: expansion of the Internet and its adoption as the eCommerce and
eBusiness infrastructure; continued mobilization of personal computer users and
the adoption of mobile information access and display devices; and broader
access to corporate data and information for people internal and external to an
organization. The Company's principal products are compatible with Microsoft
Corporation's ("Microsoft") Windows 2000, Windows NT, Windows 98, Windows 95 and
Windows 3.1 platforms, International Business Machines Corporation ("IBM")
operating systems, Novell, Inc. ("Novell") operating systems and various
implementations of the industry standard UNIX operating system such as IBM's
AIX, Hewlett Packard's HP/UX, Sun Microsystems' Solaris and Linux. The Company
was incorporated in 1990 as a California corporation and changed its
incorporation to Delaware in 1993 in conjunction with its initial public
offering.

The Company has a range of web integration products, host application
publishing products and host access connectivity products. It also has a range
of support connectivity products that provide real-time visual support in
conjunction with help desk systems aimed at reducing the time and cost of end
user support. The Company's host access products provide the applications and
solutions that allow end user devices, including personal computers, to
communicate with large centralized corporate computer systems. Host access
products include the company's strongest brands: the Rumba family, the ViewNow
family and the Chameleon(TM) family. Other strong brands in the Company's Host
Access portfolio include: the NS/Portfolio(TM) family and the OnNet(R) and
OnWeb(TM) families. Strong Web Integration and Applications Server brands
include the Salvo(TM) family and the OnWeb(TM) family. The Company's real-time
visual support connectivity products add value to its Host Access and Web
Integration offerings and also target new market segments. Current products
include SupportNow(TM) Enterprise and the SupportNow SDK(TM) software tools that
help reduce the length and cost of support phone calls from end-users and help
with end-user education and training.

The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, among others, statements regarding the
Company's expectation that indirect sales will grow as a percentage of both
domestic and total net revenues and the Company's expectation that it will
continue to target and expand its marketing and sales

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efforts in major European and Asian markets. The Company's actual results could
differ significantly from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below and in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
including those discussed under the heading "Factors That May Affect Future
Results and Financial Condition."

INDUSTRY BACKGROUND

Four important industry trends have had strong influence on the Company's
business strategy during the past two years, (i) the rapid adoption of eBusiness
and electronic trading approaches by major corporations worldwide (ii) the
continuing development of the Internet, intranets and extranets for delivery of
mission-critical business applications in large companies, (iii) an increased
desire on the part of corporations to make information stored in mainframes and
midrange computers ("legacy" systems) broadly accessible internally and
externally to their employees and business partners and (iv) the continued
mobilization of users of personal computers and the proliferation of wireless
and handheld devices requiring corporate host access on a global basis.

The Company uses the term "internetworking" to describe the technology of
global connectivity. Internetworking had its origins in the Internet, a
worldwide "network of networks" which allows communication between different
organizations and locations, each with its own individual network of computers.
With the rapid development of the Internet, the breadth of the connectivity
industry has quickly expanded beyond proprietary-based solutions to Web-based
technologies and other open protocol solutions. The application of this same
internetworking technology within a company on its own computer networks is
known as an "intranet" to distinguish it from the larger public Internet. When
companies use internetworking technology for connecting to outside customers and
suppliers, it's known as an "extranet." An extranet is a network upon which all
users are known and authenticated as opposed to the Internet where the
identities of users are anonymous. Importantly, internetworking is comprised of
many different applications which must communicate with one another, each
according to its function, and which must follow certain standards or
conventions to ensure interoperability.

The number and variety of applications and services that utilize the
internetworking infrastructure is growing rapidly -- pushed along by the
Internet and corporate eBusiness initiatives. The Company is focused on several
levels of product that utilize the internetworking infrastructure. These include
traditional host access products for corporate desktops and servers which
provide users with the ability to communicate with corporate host systems;
applications that allow organizations to transform "legacy" applications into
systems that can service external users, partners and customers -- particularly
through the Web; and development platforms that allow organizations to
re-engineer their existing "Legacy" applications and draw one or many existing
applications and information sources together to create net new applications for
new internal and external users.

The personal computer has continued to grow in importance as a tool for
facilitating communications, information sharing and group productivity in large
companies. As professional workers have become more mobile, there is an
accelerated effort to connect personal computers easily and reliably to
corporate networks to improve communications and organizational productivity. As
a result, the personal computer has become an important tool to connect workers
to shared repositories of information and to other people, regardless of
location, network or type of computer. Internetworking also facilitates
activities such as mobile computing by allowing users to use and to access more
effectively all of a company's computer systems from a remote location within
the confines of an organization's security and access control policies. As the
Internet Economy takes off, the number of different communication and
internetworking options required by major corporations to support their
businesses is increasing . The number and type of mobile computing and
communication devices is also increasing and now includes wireless handheld
devices, Personal Digital Assistants (PDAs) and Internet and Web-enabled
cellular phones.

Within organizations, personal computers must connect not only to other
personal computers via LANs (Local Area Networks), but also to workstations,
servers, minicomputers and mainframes, many of which

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may run different operating system software and connect to different physical
networks. In addition, more companies are seeking ways to link their computer
systems directly with those of vendors, customers and other business partners to
enhance the flow of information and reduce expenses. This major move, utilizing
the Internet as the internetwork, is termed eBusiness or eCommerce. eBusiness
covers the full migration of business processes to the web and the sharing of
those business processes with partners. eCommerce covers the elements that allow
electronic selling, trading and transactions on the Web.

For a network to function properly, all connected devices must follow rules
or "protocols" that govern access to the network and communication with other
devices. "TCP/IP" (Transmission Control Protocol/ Internet Protocol) is the name
of the data communications protocol family that has become the de facto
networking standard application because it is an open (non-proprietary) protocol
capable of linking disparate environments. The Company was one of the first
software vendors to deliver the TCP/IP protocol and related applications for the
Microsoft Windows platform. Selling primarily to the business user, NetManage
has promoted standards based on its implementation of TCP/IP that have been
adopted by the industry at large. The most notable example is the Windows
Sockets, or "WinSock," interface, which is used today by a wide range of Windows
internetworking software vendors including Microsoft.

The Company believes that the open and interoperable characteristics of
internetworking technology, the use of intranets and the software that enables
them, will continue to grow within organizations. The software required to
implement an internetworking solution includes applications for the desktop, the
software that transports information over the wires, the servers at the other
end and management support and development tools to create and administer a
network of this type. Additionally, an easy-to-use, intuitive interface can
extend the use of these software components to a non-technical audience and
facilitates adoption by such an audience.

The Company's vision is to provide internetworking connectivity products
and application level solutions that greatly improve and extend the reach of
existing corporate host-centric systems regardless of what the end user devices
are, regardless of where the end user devices are located, and to deliver
products and services that provide an easy to use, standards-based
infrastructure to support businesses in running more efficiently. As the Company
continues to deliver on its vision of enabling its customers to implement B2B
and B2C eBusiness solutions and to compete in the Internet Economy, internal and
external users will be able to access corporate applications, data and
information efficiently and easily and in a manageable, secure and supportable
way.

PRODUCTS AND TECHNOLOGY

The Company's comprehensive suite of products provides organizations with
cost-effective solutions for connecting people, their computers and their
businesses. The Company's products extend the functionality of these
organizations' technology investments by providing essential services that are
not included in desktop and network operating systems. The result is streamlined
communication, reductions in the total cost of ownership and increased
productivity throughout an organization.

The Company has been a long-time proponent of industry standards and it
pursues partnerships and alliances with key industry players. In addition to
promoting technological progress, these alliances help strengthen the Company's
market insight and lead to improved customer solutions with greater value. Some
of the Company's strategic partners include Microsoft, Intel, IBM, Novell, Dell
Computer and AT&T. All NetManage products are developed around the following:

Ease of Use -- The Company's goal is to create host access
applications for non-technical users. The Company's products are designed
to be set up on any personal computer or network server in a few minutes
and to determine with minimum user intervention, the appropriate settings
and installation parameters for each PC's configuration and network. For
many corporate users, the cost of training, installation and support can
exceed software acquisition costs. Ease of use can reduce such costs.
Moreover, ease of use increases product utilization, thereby enhancing
product value to the customer. Thus, by reducing costs and enhancing value,
the benefit of ease of use is significant to the Company's target market.

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Manageability -- NetManage offers an integrated suite of applications,
improving network manageability for system administrators. NetManage is
focused on providing managed products and a key value-add in NetManage
products is built-in common management server support. The common
characteristics of the product suite tend to increase user satisfaction and
product utilization. A well-integrated product lowers the cost of ownership
and increases product value to the customer.

Functionality -- The depth and completeness of the applications in
NetManage products are designed to compete with "best of class"
functionality from specialist vendors in each category. The value
proposition of NetManage's product offerings is enhanced by eliminating
multi-source product purchases with no compromise on advanced software
functionality. The economic proposition for the customer is enhanced by
purchasing software and service from a single vendor.

Supportability -- NetManage recognizes that its customers need to
reduce continually the cost-of-ownership associated with PC connectivity
software. Unlike competitors, who have focused solely on improved
manageability to reduce costs, NetManage has also invested in the
development of unique support tools. Products are designed with
well-integrated support tools that reduce the time required to resolve
software problems and reduce downtime, significantly enhancing the value of
NetManage's product offerings to customers.

Adherence to Standards -- The foundation of the Internet is predicated
upon the notion that any client can talk to any server, and that all APIs
(Application Program Interfaces) and protocols are published as free open
standards. In the corporate computing environment, it is impossible to
guarantee a common set of software on every client and every server.
NetManage's commitment to open standards ensures that the plug-and-play
interoperability that has made the Internet successful extends to corporate
intranets as well.

The Company's best-known products include the Rumba, ViewNow, Chameleon,
NS/Portfolio, OnNet, OnWeb, Salvo and SupportNow product families. The Company
recently acquired Wall Data Incorporated (WALL), a host connectivity company
specializing in the IBM market, and Simware Inc. (SIMW), a Canadian company
specializing in the Host Integration Server market, to expand and enhance its
offerings for Desktop and Web-based host connectivity products and Web
Integration solutions. The Company's products include:

Rumba 2000 Office Complete connectivity software connecting PCs
to IBM mainframe and AS/400 systems, HP, and
UNIX. Rumba Office 2000 provides
state-of-the-art terminal and printer
emulation; file sharing and file transfer
solutions.

Rumba 2000 Web-to-Host A browser based solution for fast deployment of
host access solutions to any browser supporting
ActiveX or Java. RUMBA 2000, Web-to-Host
deploys from virtually any Web server, lowering
Total Cost of Ownership (TCO) by eliminating
the need to configure individual desktops
during initial installation and future updates.

Rumba Management Server (RMS) RUMBA(R) Management Server delivers effective
and efficient centralized management for a
browser-based host access environment. This
high-performance application server gives the
ability to securely deliver host information
over an intranet, extranet or the Internet.

Rumba Security Services RUMBA Security Services provides uncompromising
security for RUMBA Management Server. This
product delivers state-of-the-art encryption
and authentication for browser-based access to
business-critical systems via extranets or the
Internet. It builds on the features of RUMBA
Management Server, which centrally manages
Web-to-Host access.

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ViewNow Windows Edition ViewNow Windows Edition provides Microsoft
Windows users with a complete set of
high-performance connectivity software for easy
access to mainframe, AS/400(R), and UNIX(R)
hosts, providing powerful management facilities
for centralized configuration, deployment, and
control, as well as built-in real-time support
capabilities.

ViewNow for Terminal Services
/ Citrix ViewNow for Terminal Services & Citrix
MetaFrame is an enterprise-scale, multi-host
connectivity solution for clients supported by
Windows Terminal Services and Citrix
MetaFrame -- including workstations running
Microsoft(R) Windows(R), Mac OS, UNIX(R), or
any web browser. ViewNow leverages MetaFrame's
manageability, scalability, and robust
multi-user capabilities to provide easy access
to UNIX, AS/400(R), and mainframe hosts over
any network connection.

ViewNow Browser Edition ViewNow Browser Edition provides a complete set
of high-performance connectivity solutions for
users that require easy access to mainframe,
AS/400(R), and UNIX(R) hosts from their
browser.

Chameleon UNIX Link/HostLink Complete PC-to-UNIX and PC-to-IBM (mainframe
and AS/400) connectivity, including PC NFS
(Network File System) file sharing, the most
comprehensive suite of Telnet terminal
emulation for TCP/IP and asynchronous
connections and the industry's first
Web-enabled X Windows server.

InterDrive(R) and InterDrive
Gateway Client applications which provide network users
with access to printers, directories and file
systems on network servers, a server product
allowing users to share applications,
information and devices as if connected
directly to a desktop, and a gateway product
linking standard Windows desktops to UNIX file
sharing systems.

NS/Portfolio Full-featured, manageable access to IBM
mainframes and AS/400 systems from Windows
platforms.

OnNet OnNet products provide end users with a full
range of applications designed to reach and
share information on corporate intranets and
the Internet and across legacy systems, and
advanced terminal emulation.

OnWeb Host OnWeb Host enables host access through any
Java-enabled Web browser. Deployment, upgrades
and support are handled centrally, permitting
control and audit of user-based host access. It
includes the OnWeb application server, a Java
servlet, that delivers applets and works with a
Web server to manage and audit security and
network activity.

OpSession SDK Comprehensive software developer tool that
enables programmers to add real-time
application and workgroup sharing capability,
using standard Internet technology, to any
Microsoft Windows 95/98/NT application.

SupportNow Enterprise Interactive, real-time, visual support solution
that brings the users' desktop to the support
representative and reduces the length of time
spent on a support incident. It provides
independent software vendors ("ISVs") a way to
offer faster and more effective technical
support to their customers via interactive
sessions.

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SupportNow Server Comprehensive real-time support server offering
SupportNow Call Queue Management, conferencing,
backend help desk integration, and firewall and
proxy services.

Substantially all of the Company's net revenues have been derived from the
sale of products that provide internetworking applications for the Microsoft
Windows environment and are marketed primarily to Windows users. As a result,
sales 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. See "Factors that May Affect Future
Results and Financial Condition -- Product Development and Competition" under
Item 7 below.

The Company's competitors could seek to expand their product offerings by
designing and selling similar or new technology that could render the Company's
products 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 making potential
customers delay their purchases of the Company's products. See "Competition"
below.

NetManage, ViewNow, Rumba, OnWeb, OnNet, Chameleon UNIXLink, Chameleon
HostLink, OpSession, SupportNow, NS/Portfolio, NS/Router, InterDrive, the
NetManage logo and the lizard logo are trademarks or registered trademarks of
NetManage, Inc. or its wholly owned subsidiaries in the United States and other
countries. UNIX is a registered trademark in the U.S. and other countries,
licensed exclusively through X/Open Company Limited. AS/400 is a registered
trademark in the U.S. and other countries of International Business Machines
Corporation. All other trademarks are the property of their respective owners.

SALES AND MARKETING

The Company's products are designed to meet the needs of corporate
end-users, network administrators, system administrators, MIS (Management
Information Systems) managers and Line-of-Business managers. The Company,
through its host access products, targets three key market segments: 1)
connecting users of communication devices to UNIX, midrange (including IBM
AS/400) and mainframe systems and 2) allowing customers with these three types
of host systems to publish and re-engineer their applications for the Internet
Economy and 3) the Web. NetManage's goal is to allow customers to access,
publish and integrate their corporate information from anywhere on their global
business network and make that information available to employees, customers and
partners in a secure and manageable way. Visual connectivity solutions extend
NetManage's core connectivity strengths and are designed to foster better
one-to-one relationships with customers by adding the element of human
interaction to the Internet. The Company's visual connectivity products and
services improve customer support and augment the sales process for the
independent software vendor (ISV) and corporate marketplace.

The Company is organized to solve the critical network and internetworking
software application needs of corporations in a wide range of industries. From
education and government to finance and manufacturing, the Company's products
are being used to streamline communications throughout organizations. The
Company's products have been sold to more than 30,000 organizations worldwide.
The company has sold in excess of 20 million "seats" of software worldwide.

In the United States, the Company combines advertising and promotion with
direct sales through a telephone-based sales force, assisted by designated
personnel specifically assigned to the needs of major accounts. As part of its
continuing strategy to develop multiple distribution channels, the Company
expects to continue its use of indirect channels, such as resellers,
particularly value added resellers and systems integrators, distributors and
original equipment manufacturers, both in the U.S. and internationally. The
acquisition of Wall Data in December 1999, which has historically sold its
products through indirect channels to a greater extent than NetManage, should
result in an increase in sales through indirect sales channels. Indirect sales
may grow as a percentage of revenues of both domestic and total net revenues, as
a result of the

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acquisition of Wall Data or to increase market penetration. Any material
increase in the Company's indirect sales 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 resellers and distributors
who will be able to market the Company's products effectively and will be
qualified to provide timely and cost-effective customer support and service. The
Company ships products to resellers and distributors on a purchase-order basis,
and many of the Company's resellers and distributors carry competing product
lines. Therefore, there can be no assurance that any reseller or distributor
will continue to represent the Company's products, and the inability to recruit
or retain important resellers or distributors could adversely affect the
Company's results of operations. See "Factors That May Affect Future Results and
Financial Condition -- Marketing and Distribution" under Item 7 below.

Internationally, the Company has sales offices in Belgium, France, Germany,
Sweden, Israel, Italy, Japan, the Netherlands, Spain and the United Kingdom. The
Company also utilizes local distributors internationally. The Company supports
the sales activity of these sales offices and distributors in target countries
through localization of products and sales material, local training and
participation in local trade shows.

In 1999, 1998 and 1997, respectively the Company derived approximately 26%,
26% and 23% of net revenues from international sales, including export sales.
The Company believes that the potential international markets for its products
are substantial, based on the extent to which Windows and internetworking
products are used internationally. Accordingly, the Company localizes many of
its products for use in the native language of target countries. Further, the
Company has adapted many of its products to support computing standards that are
unique to these countries, such as the NEC PC in Japan. The Company intends to
continue to target major European and Asian countries for additional sales and
marketing activity and to expand the use of its local sales offices and Israel
subsidiary in the support of its international sales. For a summary of
international operations by geographic area, see Note 8 of the Notes to
Consolidated Financial Statements included herein. 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 international 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, 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 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 results of operations.

CUSTOMER SUPPORT

The Company's domestic support organization consists of an experienced
staff of engineers and other professionals providing support by telephone from
the Company's facilities in Washington State, Massachusetts and Ottawa. Both
telephone support and regular update releases of the Company's products are
provided to customers who purchase an annual maintenance agreement. The sales
and the customer support organizations at NetManage work together closely to
provide customer satisfaction.

International customers are supported by Company personnel located in
various international sales offices as well as local distributors who are
trained by the Company.

RESEARCH AND DEVELOPMENT

The Company believes that its future success will depend on its ability to
enhance its existing products and to develop and introduce new products related
to PC connectivity and host access solutions which address the
Business-to-Business, Business-to-Consumer and Business-to-Employee markets. As
of December 31, 1999, the Company had approximately 345 full time employees
engaged in research and development for

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existing and potential new products. The Company's research and development
expenses for the years ended December 31, 1999, 1998 and 1997 were $18.6
million, $18.9 million and $20.7 million, respectively.

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. To maintain
or improve its position in this industry, the Company must continue to
successfully develop, introduce and market new products and product enhancements
on a timely and cost-effective basis. Several key factors will contribute to the
continued growth of the Company's marketplace, including the proliferation of
Microsoft Windows NT and Windows 2000 client and server technology, the
proliferation of multi-user Microsoft Windows NT systems and Citrix MetaFrame
and the continued implementation of Web-based access to corporate mainframe and
midrange computer systems and information.

Any 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 results of operations. The failure to develop on a timely basis new
products and 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 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.

The Company competes directly with providers of Windows internetworking
applications, such as Hummingbird Communications, Ltd., Attachmate Corporation,
IBM, WRQ, Inc., Microsoft and Novell, as well as other major computer and
communications systems vendors, such as Sun Microsystems, Inc. It also competes
with companies such as IBM, Bluestone, Silverstream and Computer Associates (CA)
in the web integration server markets. In the real-time support market it
competes with companies such as Symantec Corporation. It is imperative that the
Company's development efforts remain competitive in this marketplace,
particularly given that the market is rapidly evolving and subject to rapid
technological change. There is no assurance that the Company will be successful
in its efforts to do so.

Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name
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 current
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. Accordingly, there can be no assurance that the
Company will be able to provide products that compare favorably with the
products of the Company's competitors or that competitive pressures will not
require the Company to reduce its prices. During 1999, the Company has continued
to experience price declines. Any further material reduction in the price of the
Company's products would negatively affect gross margins as a percentage of net
revenues and would require the Company to further increase software unit sales
in order to maintain net revenues at existing levels.

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. However, the basic TCP/IP protocols on which the
Company's products are based are non-proprietary and other companies have
developed their own versions. 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

9
<PAGE> 10

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" or "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 for 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 third parties, seeking
indemnification against such infringement or indicating that the Company may be
interested in obtaining a license or royalty from such third parties. There can
be no assurance that any of such claims would not result in protracted and
costly litigation or that additional claims will not be made in the future or
that the Company will not be required to enter into a costly license agreement.

The Company believes that, due to the rapid pace of innovation within its
industry, factors such as the technological and creative skills of its personnel
are more important to establishing and maintaining a technology leadership
position within the industry than are the various legal means of protecting its
technology.

EMPLOYEES

As of December 31, 1999, the Company had a total of 901 full-time
employees, of whom 390 were engaged in sales, marketing and technical support,
140 in general management, administration and finance, 345 in software
development and engineering and 26 in production. None of the Company's
employees are subject to a collective bargaining agreement, and the Company has
not experienced any work stoppage.

The majority of the Company's employee workforce is located in the
extremely competitive employment markets of the Silicon Valley in California,
North Andover, Massachusetts, Kirkland and Bellingham, Washington, Ottawa,
Canada and Haifa, Israel. During 1999 and 1998, the Company 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 and the effects of the Company's 1999, 1998 and 1997
restructurings and acquisitions. Managing employee attrition, integrating
acquired operations and products and expanding both the geographic area of its
customer base and operations have resulted in substantial demands on the
Company's management resources. The Company's future operating results will be
dependent in part on its ability to attract and retain its employees and to
train and manage its management and employee base. There can be no assurance
that the Company will be able to manage such challenges successfully. See
"Factors That May Affect Future Results and Financial Condition -- Changes in
Personnel" under Item 7 below.

EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company and their ages as of March 15, 2000
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Zvi Alon................. 48 Chairman of the Board, President and Chief Executive
Officer
Michael R. Peckham....... 49 Chief Financial Officer, Senior Vice President, Finance
and Secretary
Kevin B. Vitale.......... 42 Executive Vice President and Chief Operating Officer
D. Patrick Linehan....... 53 Senior Vice President, Worldwide Sales
Peter R. Havart-Simkin... 47 Senior Vice President, Worldwide Strategic Development
and New Business
Juan A. Guillen.......... 40 Vice President, Worldwide Engineering
Judith A. Somerville..... 57 Vice President, Human Resources
Craig E. Shank........... 41 Vice President, Corporate Counsel
</TABLE>

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<PAGE> 11

Zvi Alon is the founder of the Company and has served as its Chairman of
the Board, President and Chief Executive Officer since the Company's formation.
From 1986 to 1989, Mr. Alon was the President of Halley Systems, a manufacturer
of networking equipment including bridges and routers. He also has served as
Manager, Standard Product Line at Sytek, Inc., a networking company, and Manager
of the Strategic Business Group for Architecture, Graphics and Data
Communications at Intel Corporation, a semiconductor manufacturer. Mr. Alon
received a B.S. degree in electrical engineering from the Technion-Israel
Institute of Technology in Haifa, Israel. Mr. Alon is the son-in-law of Mr. Uzia
Galil, a director of the Company.

Kevin B. Vitale has been Executive Vice President and Chief Operating
Officer of the Company since December 1999 when Wall Data was acquired by the
Company. Prior to the acquisition, Mr. Vitale was a Director, President and
Chief Operating Officer of Wall Data Incorporated. He served as a Director and
the Chief Operating Officer of Wall Data from July 1997 to August 1999, as
Executive Vice President of Wall Data from April 1996 to July 1997 and as Vice
President Operations in services of Wall Data from July 1993 to April 1996.

Michael R. Peckham joined the Company in November 1999 as Senior Vice
President, Finance, Chief Financial Officer, and Secretary. From February 1993
until November 1999, Mr. Peckham was Vice President, Finance and Administration
for Simware Inc., an international software development company. Prior to that
he served as Chief Financial Officer for NORR Partnership Limited, architects
and engineers from June 1987 to February 1993. Mr. Peckham holds a Bachelor of
Commerce (Honors Degree) from the University of Ottawa. Mr. Peckham is also a
Chartered Accountant.

D. Patrick Linehan joined the Company in July 1997 as Senior Vice
President, General Manager of PC Connectivity Products. In November 1999 he was
appointed as Senior Vice President, Worldwide Sales. From May 1996 until he
joined the Company, Mr. Linehan served as President and Chief Executive Officer
of NetSoft, a software development company. From January 1995 to May 1996, Mr.
Linehan was President and Chief Executive Officer of MiraLink Corporation, a
hardware manufacturer and software developer. Previously, he was Chief Operating
Officer at Starbase Corporation, a software developer, from October 1993 to
January 1995 and President and Chief Executive Officer of Castelle, Inc., a
networking hardware manufacturer, from July 1991 to October 1993. Mr. Linehan
received a B.A. degree in business administration from the University of
Washington in Seattle.

Peter R. Havart-Simkin joined the Company in August 1998 and became Senior
Vice President of Marketing in January 1999. In November 1999 he was appointed
as Senior Vice President, Worldwide Strategic Development and New Business. Mr.
Havart-Simkin came to the Company from FTP, where he had served as Chief
Technology Officer since July 1996, when FTP acquired Firefox Communications
Inc. ("Firefox"), a networking software company. Prior to joining FTP, Mr.
Havart-Simkin served with Firefox as Vice President and Chief Technical Officer
from January 1994 to July 1996 and as Vice President of Marketing and Product
Strategy from 1989 until January 1994. One of the founders of Firefox, Mr.
Havart-Simkin also served as a director of Firefox from 1989 to February 1995.
Before that time, Mr. Havart-Simkin held sales and marketing positions with a
number of hardware and software companies over a 20-year period.

Juan A. Guillen joined the Company as Vice President, Worldwide Engineering
in November 1999. Mr. Guillen joined the Company from Simware Inc., an
international software development company, where he was Vice President,
Engineering from June 1995 to November 1999. From July 1993 to June 1995, Mr.
Guillen served as Executive Vice President, Wyvern for Sybase Canada, Ltd.,
following the acquisition in July 1993 by Sybase, Inc. of Wyvern Technologies,
Inc., a software development company, of which Mr. Guillen had been a director
and senior officer from February 1991 to July 1993. From September 1985 to
February 1991, Mr. Guillen served as Director of Technology for Kylain
Technologies, a computer consulting company.

Judith A. Somerville joined the Company as Director of Human Resources in
May 1999 and became Vice President, Human Resources in October 1999. Ms.
Somerville was Vice President, Human Resources for Ascent Logic Corporation, a
software company, from March 1998 until March 1999. Prior to that she was Vice
President, Human Resources for Visx, Inc., a manufacturer of laser vision
correction systems, from September 1995 to March 1998 and Director, Human
Resources since March 1995. From 1993 to March

11
<PAGE> 12

1995, she served as Corporate Director, Compensation and Benefits at VLSI
Technology, Inc., a publicly held semiconductor company. From 1990 to 1993, she
was Director, Corporate Compensation and Benefits at Conner Peripherals, Inc.,
an international manufacturer of disk drives. Ms. Somerville received a Bachelor
of Science degree in Human Resource Administration from San Jose State
University.

Craig E. Shank joined the Company as General Counsel in December 1999. Mr.
Shank joined the Company from Wall Data Incorporated, an enterprise software
company, where he was Vice President, General Counsel and Secretary from March
1998 to December 1999. Prior to joining the Wall Data, he was a lawyer with the
Perkins Coie LLP law firm from November 1986 to May 1998, becoming a partner in
January 1993.

ITEM 2 -- PROPERTIES.

Domestically, all of the company's office space is leased, and totals
218,000 square feet. The Company's primary site is its 39,000 square foot
Headquarters building in Cupertino, California. This location supports
executive, finance, human resources, marketing, sales, and administration. East
coast operations, located in a 77,000 square foot facility in North Andover
Massachusetts, supports sales, marketing, technical support, and research and
development. The Vienna, Virginia, sales office serves the Washington DC area in
a 3,800 square foot facility. Recent acquisitions have added a 65,000 square
foot facility in Kirkland, Washington, for sales, research and development,
legal, and technical support and a 38,000 square foot facility in Ottawa,
Canada, supporting the OnWeb product group. Regional sales offices under 1,000
square feet are located in Irvine, California; Newton, Mass; Atlanta, Georgia;
New York, NY and Chicago, Illinois.

Internationally, the Company leases approximately 32,000 square feet in
Haifa, Israel for the purpose of international sales, marketing and technical
support, administration, and product development. The Company also leases sales
office space in Belgium, France, Germany, Italy, Japan, the Netherlands, and the
United Kingdom.

ITEM 3 -- LEGAL PROCEEDINGS.

On May 21, 1999, Verity filed a complaint against the company alleging
claims for breach of contract, contractual and tortious breach of the implied
covenant of good faith and fair dealing, fraud, negligent misrepresentation,
conspiracy, and indemnification. The complaint arises out of the sale by FTP of
certain technology to Verity. Verity claims that FTP's representations and
warranties regarding its ownership of the technology sold were inaccurate,
especially insofar as a third party claimed ownership of the technology. Verity
seeks compensatory and punitive damages in an unspecified amount, and attorneys
fees. The action is pending in the Superior Court for the County of Santa Clara.
The Company has answered the complaint, denying the allegations and raising
several affirmative defenses, among them that it has secured a release from the
third party of any claims it might have otherwise had against Verity regarding
ownership of the technology. The Company believes that it has meritorious
defenses to the claims alleged and intends to defend the action vigorously.

On January 9, 1997, a securities class action complaint, Head, et al. v.
NetManage, Inc., et al., No. 07763295, was filed in the Superior Court of
California, Santa Clara County, against the Company and certain of its directors
and current and former officers. On January 10, 1997, the same plaintiffs filed
a securities class action complaint, Head, et al. v. NetManage, Inc., et al.,
No. C-97-4385-CRB, in the United States District Court for the Northern District
of California, against the same defendants. Both complaints allege that, between
July 25, 1995 and January 11, 1996, the defendants made false or misleading
statements of material fact about the Company's prospects and failed to follow
generally accepted accounting principles. The state court complaint asserts
claims under California state law; the federal court complaint asserts claims
under the federal securities laws. On September 10, 1997, a class action
substantially similar to the Headaction was filed, Beasley v. NetManage, Inc.,
et al., C-98-1794 CRB (N.D. Cal.), seeking an unspecified amount of damages. The
federal court certified the purported class. On December 30, 1998, the federal
court granted without leave to amend the defendants' motion to dismiss the
second amended complaint in the Head federal action; plaintiffs have filed a
notice of appeal to the U.S. Court of Appeals for the Ninth Circuit. On

12
<PAGE> 13

February 2, 1999, the federal court dismissed with prejudice the Beasley action
pursuant to its order in the Head action. The Company believes there is no merit
to these cases and intends to defend them vigorously.

On March 21, 1997, a securities class action complaint, Interactive Data
Systems, Inc., et al. v. NetManage, Inc., et al., No. CV764945, was filed in the
Superior Court of California, Santa Clara County, against the Company and
certain of its directors and officers. On June 19, 1997, one of the plaintiffs
in that action filed a securities class action complaint, Molinari v. NetManage,
Inc., et al., No. C-98-202-CRB, in the United States District Court for the
Northern District of California against the same defendants. Both complaints
allege that, between April 18, 1996 and July 18, 1996, the defendants made false
or misleading statements of material fact about the Company's prospects. The
state court complaint asserts claims under California state law; the federal
complaint asserts claims under the federal securities laws. Both complaints seek
an unspecified amount of damages. The federal court certified the purported
class. On February 26, 1998, the state court entered judgement in favor of the
Company in the state case. Plaintiffs have filed a notice of appeal as to the
Company and have indicated that they will file an amended complaint as to the
individual defendants. On December 30, 1998, the federal court granted without
leave to amend the defendants' motion to dismiss the complaint in the Molinari
case. Plaintiffs have filed a notice of appeal to the U.S. Court of Appeals for
the Ninth Circuit. The Company believes there is no merit to these cases and
intends to defend these cases vigorously.

On October 10, 1997, a shareholder derivative action was filed in the
United States District Court for the Northern District of California against
nine present and former officers and directors of the Company. Sucher v. Alon et
al., No. C-98-203-CRB. The complaint alleged that the defendants violated
various fiduciary duties to the Company; the Company is named as a nominal
defendant. The complaint was predicated on the factual allegations contained in
the Head and Molinari class action complaints, and sought an unspecified amount
of damages. On November 6, 1998, the court dismissed the complaint without leave
to amend on the grounds that plaintiffs had failed to make a pre-litigation
demand on the Company's board of directors. Plaintiff have filed a notice of
appeal to the U.S. Court of Appeals for the Ninth Circuit. Appellate briefing is
complete. A hearing on that appeal has been set for April 2000.

On March 14, 1996, a securities class action complaint, Greebel v. FTP
Software, Inc., et al., No. 96-10544, was filed in the United States District
Court for the District of Massachusetts against FTP and certain of its former
officers and directors. The complaint alleged that between July 14, 1995 and
January 3, 1996, defendants violated the federal securities laws by making false
and misleading statements of material fact about FTP's prospects and financial
statements. NetManage acquired FTP in August 1998. On September 24, 1998, the
district court granted defendants' motion for partial summary judgment and
granted without leave to amend defendants' renewed motion to dismiss the
complaint. Plaintiffs filed a notice of appeal. Oral argument on the appeal was
held on June 9, 1999. By order dated October 8, 1999, the United States Court of
Appeals for the First Circuit affirmed the district court's dismissal. Time to
petition for review by the United States Supreme Court has expired.

In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, 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 motion to dismiss was held by the district court.
The Company believes that there is no merit to the case and intends to defend
the case vigorously.

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<PAGE> 14

The cost of defending each of these cases and their ultimate outcome are
uncertain and cannot be estimated. There can be no assurance either that
NetManage (or its subsidiaries, where applicable) will ultimately prevail in any
of these cases, or that the result in these cases will not have a material
adverse effect on the Company's financial position or results of operations. As
the outcome of these cases cannot be reasonably determined, the Company has not
accrued for any potential loss contingencies.

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

ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

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<PAGE> 15

PART II

ITEM 5 -- MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's common stock is traded on the Nasdaq National Market under
the symbol NETM. As of February 29, 2000, there were 972 stockholders of record
and approximately 31,500 beneficial owners of the Company's common stock.

The high and low closing sales prices of the Company's common stock as
reported on the Nasdaq National Market for each quarter of 1999 and 1998 are as
follows:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
1999
High............................................. $3.25 $2.75 $2.53 $6.56
Low.............................................. $1.88 $2.06 $2.00 $1.97
1998
High............................................. $4.59 $4.16 $3.25 $3.00
Low.............................................. $2.59 $2.66 $0.97 $0.97
</TABLE>

The Company has not paid cash dividends on its common stock and does not
intend to pay any cash dividends in the foreseeable future.

ITEM 6 -- SELECTED CONSOLIDATED FINANCIAL DATA.

<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ 79,200 $ 71,727 $ 61,524 $104,596 $125,446
Income (loss) from operations(1)............ $(31,999) $(21,817) $(42,074) $(13,653) $ 29,596
Net income (loss)........................... $(27,492) $ (9,968) $(33,755) $ (5,705) $ 22,297
Net income (loss) per share, diluted........ $ (0.42) $ (0.19) $ (0.78) $ (0.13) $ 0.52
Weighted average common shares, diluted..... 64,712 53,205 43,385 42,341 42,955

BALANCE SHEET DATA:
Working capital............................. $ 22,760 $ 98,113 $ 55,542 $ 71,668 $ 83,738
Total assets................................ $215,367 $201,753 $119,593 $152,529 $154,471
Total stockholders' equity.................. $120,193 $159,160 $ 96,087 $129,291 $129,397
</TABLE>

- ---------------
(1) Loss from operations includes write-offs of in-process research and
development of $19.1 million, $9.5 million, $20.6 million and $13.4 million
for the years ended December 31, 1999, 1998, 1997 and 1996, respectively.

ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

This Annual Report on Form 10-K 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 indirect sales
will increase as a percentage of domestic and total revenues, and the Company's
expectation that research and development and sales and marketing expenses will
increase as a result of the Company's acquisition of FTP in 1998 and the
Company's recent acquisitions of Wall Data and Simware. 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 Chameleon UNIX
Link97, Chameleon HostLink97, OnNet Host, OnWeb Host, SupportNow, OpSession,
NS/Portfolio and NS/Router, could grow more slowly than the Company or market

15
<PAGE> 16

analysts believe or that 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 retain and hire sufficient qualified personnel
following the recent acquisitions of Wall Data and Simware, that the Company
will be able to realize new business opportunities that may exist as a result of
the acquisition of Wall Data or Simware, that the Company will be able to
continue to execute on its business plan in a manner that will allow it to
improve its financial position or that economic difficulties in Asia,
particularly Japan, will not adversely affect sales of the Company's products in
that region. The timely completion of the fourth quarter 1999 restructuring of
operations described below is dependent upon a number of factors, including
risks associated with the integration of the operations of Wall Data and
Simware, the Company's ability to complete the integration of the operations and
technologies of Wall Data and Simware in a timely, efficient and cost-effective
manner, the rate and amount at which the Company is able to terminate leases or
sublease excess office space and the accuracy of management's estimates of lease
termination or sublease and other restructuring charges. 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 consolidated financial statements and notes
thereto.

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(R),
IBM AS/400 midrange and IBM corporate mainframe computers. The Company also
develops and markets software that increases the productivity of corporate call
centers, and allows real time application sharing on corporate networks and
across the Internet. The company provides professional support, maintenance and
consultancy services to its customers in association with the products it
develops and markets.

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. 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 using the purchase method of accounting.

16
<PAGE> 17

related charges associated with the closure of NetManage facilities and $1.4
million of employee-related expenses for the termination of NetManage employees.
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 December 31, 1999, the Company had
made cash payments totaling approximately $0.2 million related to the
restructuring.

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. The
restructuring has been substantially completed with the exception of certain
lease obligations. See Note 4 of Notes to Consolidated Financial Statements.

With the acquisitions of Wall Data, Simware, FTP, and prior acquisitions,
the Company has enhanced its market position and product offerings by becoming a
supplier with a broader range of software solutions spanning major market
segments. The Company's full line of products includes the recently acquired
RUMBA product family with the acquisition of Wall Data, the Chameleon product
family, the NS/Portfolio product family, the OnNet Host and OnWeb Host product
families and the InterDrive family of NFS products. In addition, with the
acquisition of Simware, the Company established itself in the web-based
eCommerce solutions and web integration servers with the Salvo Commerce Servers
and Salvo application re-engineering and integration servers. The Company's
products are sold and serviced worldwide by the Company's direct sales force,
international subsidiaries and authorized channel partners.

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 current
integration of Simware and Wall Data, or the integration of any future
acquisition(s), will be accomplished successfully, and the failure to accomplish
effectively any of these integrations could have a material adverse effect on
the Company's results of operations and financial condition.

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.

In November 1997, the Company acquired all of the outstanding shares of
Relay Technology, Inc. ("Relay"), a privately-held company, for $4.2 million in
cash. Relay was primarily engaged in the development, marketing and support of
network connectivity, file transfer and terminal emulation software. The
acquisition was accounted for as a purchase. In connection with the acquisition,
net intangibles of approximately $5.8 million were acquired, of which $4.6
million was reflected as a charge to operations in the fourth quarter of 1997
for the write-off of acquired in-process research and development that had not
yet achieved technological feasibility and, in management's opinion, had no
probable alternative future use.

In July 1997, the Company acquired all of the outstanding shares of Network
Software Associates, Inc., a California corporation ("NSA"), for $26.0 million
in cash. NSA is a holding company for NetSoft, a privately-held company
specializing in the development, marketing and support of PC-to-host
connectivity software solutions. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of NetSoft from the
acquisition date forward have been recorded in the Company's consolidated
financial statements. In connection with the acquisition, net intangibles of
approximately $18.6 million were acquired, of which $16.0 million was reflected
as a charge to operations in the third quarter of 1997 for the write-off of
acquired in-process research and development that had not yet achieved
technological feasibility and, in management's opinion, had no probable
alternative future use.

In the third quarter of 1997, the Company initiated a plan to restructure
its operations worldwide due to business conditions. The purpose of the plan was
intended to realign the Company to focus solely on its core competencies: UNIX,
AS/400, midrange and mainframe connectivity. In connection with the plan, the
Company recorded a $5.2 million charge to operating expenses in the third
quarter of 1997. As of

17
<PAGE> 18

December 31, 1998, the Company had completed these restructuring activities and
had incurred costs totaling approximately $5.2 million related to the
restructuring.

The Company's Board of Directors authorized the repurchase from time to
time of up to 9 million shares of the Company's common stock through open market
purchases. During 1999, the Company repurchased 4,325,600 shares of its common
stock on the open market at an average purchase price of $2.62 per share for a
total cost of approximately $11.3 million. Cumulatively, the Company has
repurchased 6,354,300 shares of its common stock at an average price of $2.45
per share for a total cost of approximately $15.6 million.

RESULTS OF OPERATIONS

During the past year, the Company has taken several initiatives intended to
control costs and reduce operating expenses, including the discontinuance of
several low revenue generating products and the results of a restructuring plan
in the third quarter of 1998. More recently, the Company has initiated another
restructuring plan as a result of the acquisitions of Wall Data and Simware in
the fourth quarter of 1999. The Company is currently focusing on integrating the
technologies acquired as a result of these recent acquisitions and continues to
integrate the technologies of FTP, NetSoft and Relay acquired in August 1998,
July 1997 and November 1997, respectively. For most of 1999, the Company focused
on the core competencies of its two business groups, the Core Technology
Business Unit ("Core") and the Emerging Technology Business Unit ("Emerging"),
each with dedicated development, sales, marketing and support resources. Core
products provided the technology to make the connection between personal
computers and large corporate computers possible. These products leverage the
strengths and popularity of the Internet and offer features to improve network
manageability. PC connectivity products include the Company's strongest brands:
the Chameleon family (Chameleon HostLink 97, Chameleon UNIX Link 97, Chameleon
3270LT), and the NS/Portfolio family (NS/Portfolio Enterprise, NS/Portfolio for
Mainframe, NS/Portfolio for AS/400, NS/Router, OnNet Host and OnWeb Host).
Visual connectivity products add value to the PC connectivity product offerings
and also targeted new market segments. Products included DemoNow, SupportNow and
OpSession, real-time software tools that help reduce the length of support phone
calls from end-users.

For the year ended December 31, 1999 as compared to the prior year, the
Company experienced an increase in net revenues and an increase in net loss. The
increase in net revenues is primarily attributable to the Company's expanded
product offerings as a result of the inclusion of revenues from the recent
acquisitions of Wall Data and Simware and the inclusion of a full year of FTP's
revenues in 1999. The Company continues to experience pricing pressures on
certain of its products. There can be no assurance that revenues will increase
at the same rate, or 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, excluding the write-off of in-process
research and development, amortization of goodwill and restructuring charges,
have increased in absolute dollars but remained relatively flat as a percentage
of revenues for the year ended December 31, 1999 compared to 1998 primarily as a
result of the inclusion of Simware and Wall Data. Operating expenses are
expected to increase as a result of the acquisitions of Simware and Wall Data
but may fluctuate as a percentage of net revenues as the Company completes its
integration of Simware and Wall Data into its operations and 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 income will stabilize or
improve in the future.

18
<PAGE> 19

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- ----------------
1999 1998 $ %
---------- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues:
License fees....................................... $ 56.5 $ 55.1 $ 1.4 2.5%
Services........................................... 22.7 16.6 6.1 36.7%
------ ------ ------
Total net revenues......................... $ 79.2 $ 71.7 $ 7.5 10.5%
As a percentage of net revenues:
License fees....................................... 71.3% 76.8%
Services........................................... 28.7% 23.2%
------ ------
Total net revenues......................... 100.0% 100.0%
Gross margin......................................... $ 74.6 $ 68.3 $ 6.3 9.2%
As a percentage of net revenues.................... 94.2% 95.2%
Research and development............................. $ 18.5 $ 18.9 $ (0.4) (2.1)%
As a percentage of net revenues.................... 23.4% 26.4%
Sales and marketing.................................. $ 45.3 $ 39.5 $ 5.8 14.7%
As a percentage of net revenues.................... 57.2% 55.1%
General and administrative........................... $ 14.1 $ 12.4 $ 1.7 13.7%
As a percentage of net revenues.................... 17.8% 17.3%
Write-off of in-process research and development..... $ 19.1 $ 9.5 $ 9.6 101.1%
As a percentage of net revenues.................... 24.1% 13.2%
Amortization of goodwill............................. $ 5.7 $ 2.8 $ 2.9 103.6%
As a percentage of net revenues.................... 7.2% 3.9%
Restructuring charge................................. $ 3.8 $ 7.0 $ (3.2) (45.7)%
As a percentage of net revenues.................... 4.8% 9.7%
Interest income...................................... $ 4.9 $ 3.5 $ 1.4 40.0%
As a percentage of net revenues.................... 6.2% 4.9%
Equity in income (loss) of unconsolidated
affiliate.......................................... $ -- $ 1.0 $ (1.0) (100.0)%
As a percentage of net revenues.................... NA 1.4%
Gain on sale of investment in unconsolidated
affiliate.......................................... $ -- $ 11.7 $(11.7) 100%
As a percentage of net revenues.................... NA 16.3%
Provision for income taxes........................... $ .4 $ 4.4 $ (4.0) (90.9)%
Effective tax rate................................. NA NA
Net loss............................................. $(27.5) $(10.0) $(17.5) 175.0%
</TABLE>

Net Revenues

Historically, a majority of the Company's net revenues have been derived
from software license fees. Service revenues have been primarily attributable to
maintenance agreements associated with product licenses.

License fees increased in absolute dollars but decreased as a percentage of
total net revenues during the year ended December 31, 1999 as compared to the
year ended December 31, 1998. The increase in license fees was primarily
attributable to the inclusion of FTP's revenues for the full fiscal year 1999
and inclusion of two months of Simware's revenues and one month of Wall Data's
revenues in the fourth quarter of 1999. The increase in service revenues in
absolute dollars and as a percentage of total net revenues for the year ended
December 31, 1999 as compared to 1998 primarily reflects the growth in the
customer base.

The Company has operations worldwide with sales offices located in the
United States, Europe, Canada, Israel and Japan. International revenues as a
percentage of total net revenues were approximately 26% and 26% for the years
ended December 31, 1999 and 1998, respectively. International revenues as a
percentage of total net revenues were relatively unchanged due to the
integration of FTP products, particularly in Europe, with the Company's product
lines in the international marketplace and, to a lesser extent, the inclusion of

19
<PAGE> 20

results from the recent acquisitions of Simware and Wall Data offset by declines
in sales of the Company's other international product offerings. The Company is
currently in the process of integrating the sales and distribution efforts of
these recent acquisitions. There can be no assurance that such integration will
be completed expeditiously or successfully.

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

The Company provides ongoing maintenance and support to its customers,
generally under annual service agreements. Maintenance and support is comprised
of software updates for existing products and telephone support. Service
revenues are recognized on a pro-rata basis over the terms of such agreements.
Periodically, the Company has provided training and consulting services to
selected customers. Revenue from such services is recognized as the related
services are performed and has not been material to date. The Company expects
that revenues generated from such training and consulting services should
increase in the future.

No customer accounted for more than 10% of net revenues during the years
ended December 31, 1999 and 1998.

Gross margin

Cost of revenues primarily includes royalties paid to third parties for
licensed software incorporated into the Company's products, costs associated
with product packaging, documentation and software duplication and the
amortization and write-down of purchased software. Gross margin, in absolute
dollars, increased between the years ended December 31, 1999 and 1998 and gross
margin, as a percentage of net revenues, decreased between the years ended
December 31, 1999 and 1998 primarily as a result of the change in the mix of
products sold and lower average margins as the Company's FTP products tend to be
sold through indirect channels of distribution offset by cost savings obtained
from the outsourcing of manufacturing activities beginning in the third quarter
of 1998. Cost of service revenues through December 31, 1999 has not been
material and is not reported separately.

Gross margin as a percentage of net revenues may fluctuate in the future
due to increased price competition, the mix of distribution channels used by the
Company, the mix of license fee revenues versus service revenues, the mix of
products sold and the mix of international versus domestic revenues. The Company
typically recognizes higher gross margins on direct sales than on sales through
indirect channels of distribution, which carry lower margins. In 1999, FTP's
products, which are sold through lower margin indirect channels, were included
in the Company's results for the entire year.

Research and development

Research and development ("R&D") expenses consist primarily of salaries and
benefits, occupancy and travel expenses, and fees paid to outside consultants.
R&D expenses in absolute dollars have remained relatively constant for 1999 as
compared to 1998 and, as a percentage of total net revenues, decreased slightly
for 1999 as compared to 1998 primarily as a result of cost savings, particularly
in R&D salaries and benefits, associated with the reduction in headcount from a
restructuring plan announced in the third quarter of 1998, offset by the
inclusion of R&D expenses from the acquisitions of Simware and Wall Data. The
Company expects that R&D spending in absolute dollars will increase in 2000 but,
as a percentage of revenues, will fluctuate depending on future revenue levels,
acquisitions and licensing of technology.

Software development costs are accounted for in accordance with Statement
of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," under which the Company is
required to capitalize software development costs after technological
feasibility is established, which the Company defines as a working model and
further defines as a beta version

20
<PAGE> 21

of the software. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenue, estimated economic life
and changes in technology. Costs that do not qualify for capitalization are
charged to R&D expense when incurred. To date, internal software development
costs that were eligible for capitalization have not been significant and the
Company has charged all internal software developments costs to R&D expense as
incurred.

Sales and marketing

Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotional
expenses and customer service and support costs. S&M expenses increased in
absolute dollars and as a percentage of net revenues during 1999 as compared to
1998, as the Company launched new products, which were based on the integration
of the technologies of FTP with those of the Company. These efforts required
additional advertising and promotion activities. In addition, the inclusion of
Simware's and Wall Data's results in the fourth quarter also contributed to the
increase of S&M expenses. The Company expects that S&M expenses during 2000 as a
percentage of total net revenues will fluctuate depending on future revenue
levels.

General and administrative

General and administrative ("G&A") expenses increased slightly in absolute
dollars and as a percentage of sales for 1999 as compared to 1998, as a result
of including Simware's and Wall Data's G&A expenses from the date of acquisition
forward and the inclusion of a $1.8 million dollar cash settlement of a lawsuit
in the third quarter of 1999, offset by the reductions in G&A expenses as a
result of a restructuring plan announced in August 1998. The Company has also
recorded a restructuring charge in the fourth quarter of 1999. No assurance can
be given that the restructuring will prove to be successful, that future
operating results will improve, or that the actions undertaken in the
restructuring will not disrupt the Company's remaining operations. Further,
there can be no assurance that additional reorganization of the Company's
operations will not be required in the future.

Write-off of in-process research and development

In connection with the acquisitions of Simware and Wall Data in the fourth
quarter of 1999 and the acquisition of FTP during the third quarter of 1998, the
Company acquired total intangible assets and purchased technology of $73.1
million in 1999 and $28.1 million in 1998. Of this amount, $19.1 million in 1999
and $9.5 million in 1998 were reflected as a charge to operations for the
write-off of in-process research and development that had not reached
technological feasibility and, in management's opinion, had no probable
alternative future use. These charges were reflected in the Company's
Consolidated Statements of Operations for the years ended December 31, 1999 and
1998, respectively.

The Company allocates values to in-process research and development based
on an assessment of research and development projects. The values assigned to
those assets are limited to significant research projects for which
technological feasibility had not been established. This allocation represents
the estimated fair value based on the risk adjusted cash flow of incomplete
projects The value was determined by estimating the costs to develop the
purchased in-process technology into commercially viable products, estimating
the cash flows from the projects and discounting the net cash flows to their
present value.

The nature of the efforts to develop the acquired in-process technology
into commercially viable products principally relate to the completion of all
planning, designing, coding, and testing activities that are necessary to
establish that the products can be produced to meet the Company's design
requirements, including functions, features, and technical and economic
performance requirements. For a further discussion of write-off of in-process
research and development as it relates to the Company's acquisitions, see Note 3
of the accompanying Notes to the Company's Consolidated Financial Statements.

21
<PAGE> 22

Amortization of goodwill and intangibles

Goodwill is an intangible asset that represents the excess of the purchase
price of an acquired company over the estimated fair value of its net
identifiable assets. Goodwill and other intangibles are amortized over estimated
useful lives of five to seven years. Amortization of goodwill increased
primarily in 1999 compared to 1998, as this was the first full year of
amortization of the goodwill arising from the acquisition of FTP that occurred
in August 1998. The Company expects amortization of goodwill to increase next
year as a result of the acquisitions of Wall Data and Simware.

Restructuring charge

In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge included approximately $1.9 million of
estimated expenses for facilities-related charges associated with the closure of
NetManage facilities and $1.4 million of employee-related expenses for
terminations of NetManage employees. The employees were notified of their
terminations prior to December 31, 1999. 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 December 31, 1999, the Company had made cash payments totaling
approximately $0.2 million related to the restructuring.

In late August 1998, following the acquisition of 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. The 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. 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. The two restructuring plans included a reduction in the
Company's worldwide workforce, reduction of office space, and the closure of
four domestic locations, all of FTP's international facilities and additional
NetManage international locations. The reduction in force involved approximately
150 employees. Asset related write-offs primarily relate to leasehold
improvements, computers, and communications equipment which would no longer be
used when facilities were closed or downsized and headcount was reduced. The
Company completed the majority of the restructuring actions by the end of 1998.

Interest income

The increase in interest income for 1999 as compared to 1998 is primarily
the result of an increase in cash balances and investments as a result of the
acquisition of FTP offset slightly by reductions of cash in the fourth quarter
as a result of the cash tender offers for Simware and Wall Data.

Equity in income (loss) of unconsolidated affiliate and gain on investment in
unconsolidated affiliate

In December 1998, the Company sold its equity interest in NetVision for
$17.0 million. The Company's ownership interest prior to the sale was
approximately 32%. In connection with this transaction, the Company recorded a
gain on the sale of its NetVision stock of $11.7 million, which is included in
the accompanying Consolidated Statement of Operations for the year ended
December 31, 1998.

Provision for income taxes

The Company recorded a provision for income taxes for the year ended
December 31, 1999 of approximately $0.4 million, which consisted primarily of
foreign income taxes.

22
<PAGE> 23

At December 31, 1999, the Company had a net deferred tax asset of
approximately $3.2 million. Realization of the net deferred tax asset is
dependent on the Company generating sufficient future taxable income. Although
realization is not assured, management believes that it is more likely than not
that the net deferred tax asset will be realized. The amount of the net deferred
tax asset, however, could be reduced in the near term if actual future taxable
income differs from estimated amounts.

The Company recorded a provision for income taxes for the year ended
December 31, 1998 of approximately $4.4 million, which consisted primarily of
foreign taxes for the gain realized on the sale of its interest in NetVision and
an increase to the valuation allowance against the Company's deferred tax asset.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
-------------------- ----------------
1998 1997 $ %
---------- ------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Net revenues:
License fees....................................... $ 55.1 $ 45.8 $ 9.3 20.3%
Services........................................... 16.6 15.7 0.9 5.7%
------ ------ ------
Total net revenues......................... $ 71.7 $ 61.5 $ 10.2 16.6%
As a percentage of net revenues:
License fees....................................... 76.8% 74.4%
Services........................................... 23.2% 25.6%
------ ------
Total net revenues......................... 100.0% 100.0%
Gross margin......................................... $ 68.3 $ 57.4 $ 10.9 19.0%
As a percentage of net revenues.................... 95.2% 93.3%
Research and development............................. $ 18.9 $ 20.7 $ (1.8) (8.7)%
As a percentage of net revenues.................... 26.4% 33.6%
Sales and marketing.................................. $ 39.5 $ 41.5 $ (2.0) (4.8)%
As a percentage of net revenues.................... 55.1% 67.5%
General and administrative........................... $ 12.4 $ 10.4 $ 2.0 19.2%
As a percentage of net revenues.................... 17.3% 16.9%
Write-off of in-process research and development..... $ 9.5 $ 20.6 $(11.1) (53.9)%
As a percentage of net revenues.................... 13.2% 33.6%
Amortization of goodwill............................. $ 2.8 $ 1.1 $ 1.7 154.5%
As a percentage of net revenues.................... 3.9% 1.8%
Restructuring charge................................. $ 7.0 $ 5.2 $ 1.8 34.6%
As a percentage of net revenues.................... 9.7% 8.4%
Interest income...................................... $ 3.5 $ 4.6 $ (1.1) (23.9)%
As a percentage of net revenues.................... 4.9% 7.4%
Equity in income (loss) of unconsolidated
affiliate.......................................... $ 1.0 $ 1.1 $ (0.1) (9.1)%
As a percentage of net revenues.................... 1.4% 1.8%
Unrealized gain on investment in unconsolidated
affiliate.......................................... $ $ 2.2 $ (2.2) (100.0)%
As a percentage of net revenues.................... NA 3.5%
Gain on sale of investment in unconsolidated
affiliate.......................................... $ 11.7 -- 11.7 NA
As a percentage of net revenues.................... 16.3% NA
Provision (benefit) for income taxes................. $ 4.4 $ (0.4) $ 4.8 (1,200)%
Effective tax rate................................. NA NA
Net loss............................................. $(10.0) $(33.8) $ 23.8 70.4%
</TABLE>

Net Revenues

License fees increased both in absolute dollars and as a percentage of
total net revenues during the year ended December 31, 1998 as compared to the
year ended December 31, 1997. The increase in license fees was primarily
attributable to the inclusion of FTP's revenues from the date of acquisition
forward, integration of

23
<PAGE> 24

new products from the Company's 1997 acquisitions of NetSoft and Relay, the
release of UNIXLink/ HostLink 8.0 late in the second quarter of 1998 and growth
in product sales for SupportNow; this increase was partially offset by a decline
in sales of the Company's Chameleon products. The increase in service revenues
in absolute dollars for the year ended December 31, 1998 as compared to 1997
primarily reflects the growth in the customer base as a result of the
aforementioned increase in licenseS.

International revenues as a percentage of total net revenues were
approximately 26% and 23% for the years ended December 31, 1998 and 1997,
respectively. The increase in international revenues as a percentage of total
net revenues was due to the integration of FTP products, particularly in Europe,
with the Company's product lines in the international marketplace.

No customer accounted for more than 10% of net revenues during the years
ended December 31, 1998 and 1997.

Gross margin

Gross margin, in absolute dollars and as a percentage of net revenues,
increased between the years ended December 31, 1997 and 1998 primarily as a
result of the change in the mix of products sold and significant cost savings
obtained from the outsourcing of manufacturing activities beginning in the third
quarter of 1998. Cost of service revenues through December 31, 1998 has not been
material and is not reported separately.

Research and development

The decrease in R&D expenses in absolute dollars and as a percentage of
total net revenues for 1998 as compared to 1997 primarily reflects cost savings,
particularly in R&D salaries and benefits, associated with the reduction in
headcount resulting from the restructuring plans announced in the third quarters
of 1998 and 1997 as well as the Company's continued efforts to control operating
expenses.

Sales and marketing

The decrease in S&M expenses in absolute dollars and as a percentage of net
revenues for the year ended December 31, 1998 as compared to the prior year
primarily reflects declines in S&M salaries and benefits related to employee
attrition and the 1998 and 1997 restructurings discussed above and reduced
advertising expenses, partially offset by increased commissions expense due to
the sales growth in 1998.

General and administrative

General and administrative ("G&A") expenses increased in absolute dollars
and as a percentage of sales for the year ended December 31, 1998 as compared to
the prior year due to an increase in G&A salary expense as a result of the
NetSoft and FTP acquisitions as well as increased legal expenses associated with
defending the lawsuits discussed in Note 5 of the accompanying Notes to
Consolidated Financial Statements.

Write-off of in-process research and development

In connection with the acquisitions of all of the outstanding shares of
FTP, NSA and Relay during the third quarter of 1998 and the third and fourth
quarters of 1997, respectively, the Company acquired a total of $28.1 million in
1998 and $24.4 million in 1997 of intangible assets and purchased technology. Of
this amount, $9.5 million in 1998 and $20.6 million in 1997 were reflected as a
charge to operations for the write-off of in-process research and development
that had not reached technological feasibility and, in management's opinion, had
no probable alternative future use. These charges were reflected in the
Company's Consolidated Statements of Operations for the years ended December 31,
1998 and 1997, respectively. For a further discussion of write-off of in-process
research and development as it relates to the Company's acquisitions, see Note 3
of the accompanying Notes to the Company's Consolidated Financial Statements.

24
<PAGE> 25

Amortization of goodwill

Amortization of goodwill increased in 1998 compared to 1997 primarily as a
result of the acquisition of FTP in August 1998.

Restructuring charge

In August 1998, the Company announced and 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 and also assumed a
$9.7 million restructuring liability in connection with the acquisition of FTP
in the third quarter of 1998. The two restructuring plans included a reduction
in the Company's worldwide workforce, reduction of office space and closure of
domestic and international locations. The Company completed the majority of the
restructuring actions by the end of 1998.

In the third quarter of 1997, the Company initiated a plan to restructure
its worldwide operations due to business conditions and a need to focus solely
on its core competencies. In connection with this plan, the Company recorded a
$5.2 million charge to operating expenses in the third quarter of 1997. This
plan included a reduction in workforce, closure of international locations and
elimination of certain unprofitable product lines. As of December 31, 1997, the
Company had incurred costs totaling approximately $4.3 million related to the
restructuring. The remaining restructuring actions were completed in the year
ended December 31, 1998 and required cash expenditures of approximately $0.9
million.

Interest income

The decline in interest income for the year ended December 31, 1998 as
compared to the prior year is the result of a decrease in cash balances in 1998
prior to the acquisition of FTP. This was due to the cash used to fund
operations, cash requirements for restructuring activities and an adjustment to
interest income to convert FTP's investments from available for sale to held to
maturity. The reductions were partially offset by increases in the Company's
cash and investments following the acquisition of FTP and the sale of the
Company's 32% interest in NetVision.

Equity in income (loss) in unconsolidated affiliate and unrealized gain (loss)
on sale of investment in unconsolidated affiliate

Provision for income taxes

At December 31, 1998, the Company had a net deferred tax asset of
approximately $5.8 million. Realization of the net deferred tax asset is
dependent on the Company generating sufficient future taxable income. Although
realization is not assured, management believes that it is more likely than not
that the net deferred tax asset will be realized. The amount of the net deferred
tax asset, however, could be reduced in the near term if actual future taxable
income differs from estimated amounts.

The Company recorded a benefit of income taxes of $0.5 million for the year
ended December 31, 1997.

25
<PAGE> 26

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.

The table below presents the carrying value, market value and related
weighted average interest rates for the Company's investment portfolio as of
December 31, 1999. All investments mature, by policy, in four years or less.

<TABLE>
<CAPTION>
CARRYING MARKET AVERAGE
VALUE VALUE INTEREST RATE
-------- ------ -------------
(IN MILLIONS, EXCEPT FOR
AVERAGE INTEREST RATES)
<S> <C> <C> <C>
Investment Securities:
Cash equivalents -- fixed rate...................... $63.1 $63.1 5.6%
Short-term investments -- fixed rate................ 0.1 0.1 5.6%
----- ----- ---
Total interest bearing instruments.......... $63.2 $63.2 5.6%
===== ===== ===
</TABLE>

Foreign currency risk

The Company transacts business in various foreign currencies, primarily in
Europe and Israel. The Company has established a foreign currency hedging
program, utilizing foreign currency forward exchange contracts ("forward
contracts") to hedge certain foreign currency exposures. Under this program,
increases or decreases in the Company's foreign currency transactions are
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 are marked-to-market with unrealized gains and losses included
in interest income and, thus, are recognized in income in advance of the actual
foreign currency cash flows. As these forward contracts mature, the realized
gains and losses are recorded and are included in net income (loss) as a
component of interest income. The Company's ultimate realized gain or loss with
respect to currency fluctuations will depend upon the currency exchange rates
and other factors in effect as the contracts mature.

At December 31, 1999, the Company had outstanding foreign currency option
contracts expiring in March 2000, of $2.0 million (in Canadian dollars) to
purchase U.S. dollars. At December 31, 1998, the Company had outstanding forward
foreign exchange contracts to purchase $2.9 million of various foreign
currencies expiring at various dates through 1999. The realized gain (loss) on
forward contracts in 1999 was not material to the consolidated operations of the
Company.

26
<PAGE> 27

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1999 1998
------- -------
(IN MILLIONS)
<S> <C> <C>
Cash and cash equivalents.................................. $ 63.1 $ 43.1
Short-term investments..................................... $ 0.1 $ 62.5
Long-term investments...................................... $ -- $ 33.6
Net cash provided by (used in) operating activities........ $ 5.0 $ (8.6)
Net cash provided by investing activities.................. $ 25.2 $ 41.9
Net cash used in financing activities...................... $(10.0) $ (2.6)
</TABLE>

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

During the year ended December 31, 1999, the Company's aggregate cash and
cash equivalents, short-term investments and long-term investments decreased
from $139.2 million to $63.2 million. This decrease was due primarily to the
acquisitions of Simware and Wall Data in the fourth quarter of 1999 and the
Company's purchases of its common stock.

Net cash provided by operating activities in 1999 reflects the Company's
increase in interest income. The Company had larger average cash and investment
balances throughout 1999 as a result of the FTP acquisition.

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

Net cash used in financing activities in 1999 reflects the repurchase of
shares of the Company's common stock for $11.3 million in the open market under
the repurchase program described below, partially offset by proceeds from the
sale of common stock under the Company's employee stock purchase plan and stock
option plans.

At December 31, 1999, the Company had working capital of $22.8 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 for the foreseeable future.

YEAR 2000 COMPLIANCE

To date, the Company has not experienced disruption in its business related
to the Year 2000 Issue. However, we cannot provide any assurance that no Year
2000 issues will impact our systems, products or other aspects of our business
in the future. To the Company's knowledge, its key suppliers have not
experienced disruptions in their businesses related to the Year 2000 issue.
However, we cannot provide any assurance that no Year 2000 issue will effect our
suppliers in the future.

The total cost of our Year 2000 readiness program is estimated to be less
than $500,000. All costs were charged to expense as incurred, and did not
include potential costs related to any customers or other claims or the cost of
internal software or hardware replaced in the normal course of business.

27
<PAGE> 28

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, 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, foreign currency
exchange rates and general economic conditions. 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 and
Simware.

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

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

Restructuring; Integration of Operations of both Simware and Wall Data

In early December 1999, following its acquisition of Simware and Wall Data
the Company initiated a plan to restructure its worldwide operations in
connection with the need to integrate the operations of Simware and Wall Data.
The restructuring plan involves both a reduction in the Company's worldwide
workforce and the consolidation of certain of the Company's sales and research
and development facilities. The majority of the restructuring actions will be
completed by the end of the second quarter of 2000. No assurance can be given
that the restructuring will prove to be successful, that future-operating
results will improve, or that the completion of the restructuring will not
disrupt the Company's operations. Further, there can be no assurance that
additional reorganization of the Company's operations will not be required in
the future.

As indicated below, the successful combination of companies requires
coordination of sales and marketing and research and development efforts and may
be difficult to accomplish. The integration of both Wall Data and Simware has
involved the integration of geographically separated organizations (in suburban
Kirkland, Washington, Boston, Massachusetts, Cupertino and Irvine, California,
Ottawa, Canada and Haifa, Israel) and personnel with diverse business
backgrounds and corporate cultures. The Company believes that such factors as
the attention and dedication of management and other resources required to
effect the integration and the disruption in the business of both Wall Data and
Simware resulting from the announcement and consummation of the acquisition may
have contributed to an interruption and loss of momentum in the business
activities of both Wall Data and Simware, and that the Company's ability to
maintain or increase revenues from the sale of products from Wall Data and
Simware 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 recent
acquisition of Wall Data and Simware, have been motivated by various factors,
including the desire to obtain new technologies, expand and

28
<PAGE> 29

enhance the Company's product offerings, attract key personnel and strengthen
the Company's presence in the international and OEM marketplace. 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.

The Company regularly evaluates product and technology acquisition
opportunities and anticipates that it may make additional acquisitions in the
future if it determines that an acquisition would further its corporate
strategy. No assurance can be given that any acquisition by the Company will or
will not occur, that if an acquisition does occur that it will not materially
and adversely affect the Company or that any such acquisition will be successful
in enhancing the Company's business. If the operations of an acquired company or
business do not meet the Company's expectations, the Company may be required to
restructure the acquired business or write off the value of some or all of the
assets of the acquired business.

Changes in Personnel

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

Product Development and Competition

The market for the Company's products is intensely competitive and
characterized by rapidly changing technology, evolving industry standards,
changes in customers' needs and frequent new product introductions. From time to
time over the past three years, many customers have delayed purchase decisions
due to the confusion in the marketplace relating to rapidly changing technology
and product introductions. To maintain or improve its position in this industry,
the Company must continue to 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

29
<PAGE> 30

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.

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

Software products as complex as those offered by the Company may contain
undetected errors or failures when first introduced or as new versions are
released. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in new products or
product enhancements after commencement of commercial shipments, which could
result in loss of or delay in market acceptance. Such loss or delay could have a
material adverse effect on the Company's business, financial condition and
results of operations.

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

30
<PAGE> 31

which could have a material adverse effect on the Company's business, financial
condition or 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 in many cases 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 2000 and beyond, as a result of acquisitions or to increase 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 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

31
<PAGE> 32

commence, such litigation could be extremely expensive and time consuming and
could materially adversely affect the Company's business, financial condition
and results of operations regardless of the outcome of the litigation.

Global Market Risks

The Company derived approximately 26% of net revenues from international
sales during the year ended December 31, 1999. 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. In addition, the recent financial
difficulties of some international economies could result in reduced revenue
from sales to customer locations in such areas.

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.

Litigation

The Company and certain of its subsidiaries are currently parties to class
action lawsuits filed by holders or former holders of each company's common
stock. See Note 5 of the accompanying Notes to the Consolidated Financial
Statements. There can be no assurance that the Company or its subsidiaries will
be able to prevail in the lawsuits or that adverse outcomes in one or more of
these proceedings will not have a material adverse effect on the Company's
business, results of operations or financial condition.

32
<PAGE> 33

QUARTERLY FINANCIAL INFORMATION

The following table sets forth unaudited quarterly financial information
for the Company's last eight quarters. This unaudited information has been
prepared on the same basis as the audited consolidated financial statements and,
in the opinion of management, includes all adjustments (consisting only of
normal recurring adjustments) necessary for the fair presentation of the
information for the periods presented.

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, those described above within "Factors That May
Affect Future Results and Financial Condition." The Company's future revenues
and results of operations could be subject to significant volatility and may
also be unpredictable due to shipment patterns typical of the software industry.
A significant percentage of the Company's revenues are generally recognized in
the third month of each quarter and tend to occur in the latter half of that
month. 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.

<TABLE>
<CAPTION>
1998 1999
-------------------------------------- ---------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $17,313 $14,540 $ 17,088 $22,785 $17,354 $18,353 $17,646 $ 25,847
Gross margin................................ 16,322 13,836 16,541 21,611 16,382 17,397 16,797 23,984
Income (loss) from operations(1)............ (541) (3,686) (18,170) 572 (2,159) (2,718) (1,012) (26,110)
Net income (loss)........................... 531 (2,704) (16,388) 8,568 (1,036) (1,234) 819 (26,041)
Net income (loss) per share, diluted........ $ 0.01 $ (0.06) $ (0.29) $ 0.12 $ (0.02) $ (0.02) $ 0.01 $ (0.41)
Weighted average common shares, diluted..... 43,903 44,158 56,591 69,000 66,784 64,785 65,190 63,633
Price range per common share(2)............. $2.59 - $2.66 - $ 0.97 - $0.97 - $1.88 - $2.06 - $2.00 - $ 1.97 -
$4.59 $4.16 $3.25 $3.00 $3.25 $2.75 $2.53 $6.56
</TABLE>

- ---------------
(1) Loss from operations includes write-offs of in-process research and
development of $9.5 million and $19.1 million for the quarters ended
September 30, 1998 and December 31, 1999, respectively.

(2) The Company's common stock is traded on the Nasdaq National Market under the
symbol NETM. Price range per share is based on the quarterly high and low
closing prices for the Company's common stock as reported by Nasdaq. As of
February 29, 2000, there were 972 stockholders of record of the Company's
common stock.

ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required by Item 7A is incorporated by reference from the
section entitled "Disclosures about Market Risk" found above, under Item 7,
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations."

33
<PAGE> 34

ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Financial Statements:
Report of Independent Public Accountants.................. 35
Consolidated Balance Sheets at December 31, 1999 and
1998................................................... 36
Consolidated Statements of Operations -- Years ended
December 31, 1999, 1998 and 1997....................... 37
Consolidated Statements of Other Comprehensive
Loss -- Years ended December 31, 1999, 1998 and 1997... 38
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1999, 1998 and 1997................. 39
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999, 1998 and 1997....................... 40
Notes to Consolidated Financial Statements................ 41
Financial Statement Schedules:
II Valuation and Qualifying Accounts...................... 66
</TABLE>

All other schedules are omitted because they are not required or the
required information is shown in the accompanying consolidated financial
statements or notes thereto.

34
<PAGE> 35

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To NetManage, Inc.:

We have audited the accompanying consolidated balance sheets of NetManage,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, other comprehensive loss,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NetManage, Inc. and its
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles in
the United States.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed under Item 14(a) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

San Jose, California
January 24, 2000

35
<PAGE> 36

NETMANAGE, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 63,079 $ 43,104
Short-term investments.................................... 148 62,539
Accounts receivable, less allowances of $3,923 and $3,859,
respectively........................................... 30,544 19,234
Prepaid expenses and other current assets................. 20,497 15,695
-------- --------
Total current assets.............................. 114,268 140,572
-------- --------
Property and Equipment, at cost:
Computer software and equipment........................... 10,315 10,117
Furniture and fixtures.................................... 6,310 4,877
Leasehold improvements.................................... 3,433 2,408
-------- --------
20,058 17,402
Less -- Accumulated depreciation.......................... (8,473) (10,268)
-------- --------
Net property and equipment............................. 11,585 7,134
-------- --------
Long-Term Investments....................................... -- 33,606
Goodwill and Other Intangibles, net......................... 86,040 18,971
Other Assets................................................ 3,474 1,470
-------- --------
$215,367 $201,753
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 7,104 $ 4,444
Accrued liabilities....................................... 39,760 12,372
Accrued payroll and payroll-related expenses.............. 4,669 4,938
Deferred revenue.......................................... 27,710 14,025
Income taxes payable...................................... 12,265 6,680
-------- --------
Total current liabilities......................... 91,508 42,459
-------- --------
Long-Term Liabilities....................................... 3,666 134
-------- --------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Common stock, $0.01 par value --
Authorized -- 125,000,000 shares
Issued -- 70,162,149 and 69,377,177 shares,
respectively
Outstanding -- 63,807,849 and 67,348,477 shares,
respectively.......................................... 701 693
Treasury stock, at cost -- 6,354,300 and 2,028,700 shares,
respectively........................................... (15,559) (4,246)
Additional paid-in capital................................ 169,606 168,301
Accumulated deficit....................................... (31,464) (3,972)
Accumulated other comprehensive loss...................... (3,091) (1,616)
-------- --------
Total stockholders' equity........................ 120,193 159,160
-------- --------
$215,367 $201,753
======== ========
</TABLE>

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

36
<PAGE> 37

NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net Revenues:
License fees............................................. $ 56,527 $ 55,114 $ 45,795
Services................................................. 22,673 16,613 15,729
-------- -------- --------
Total net revenues............................... 79,200 71,727 61,524
Cost of Revenues........................................... 4,640 3,416 4,093
-------- -------- --------
Gross Margin............................................... 74,560 68,311 57,431
-------- -------- --------
Operating Expenses:
Research and development................................. 18,539 18,882 20,670
Sales and marketing...................................... 45,337 39,453 41,455
General and administrative............................... 14,107 12,445 10,428
Write-off of in-process research and development......... 19,100 9,500 20,643
Amortization of goodwill................................. 5,685 2,817 1,137
Restructuring charge..................................... 3,791 7,031 5,172
-------- -------- --------
Total operating expenses......................... 106,559 90,128 99,505
-------- -------- --------
Loss from Operations....................................... (31,999) (21,817) (42,074)
Interest Income............................................ 4,887 3,474 4,562
Equity in Income of Unconsolidated Affiliate............... -- 1,027 1,145
Unrealized Gain on Investment in Unconsolidated
Affiliate................................................ -- -- 2,152
Gain on Sale of Investment in Unconsolidated Affiliate..... -- 11,748 --
-------- -------- --------
Loss Before Income Taxes................................... (27,112) (5,568) (34,215)
Provision (Benefit) for Income Taxes....................... 380 4,400 (460)
-------- -------- --------
Net Loss................................................... $(27,492) $ (9,968) $(33,755)
======== ======== ========
Net Loss Per Share:
Basic.................................................... $ (0.42) $ (0.19) $ (0.78)
Diluted.................................................. $ (0.42) $ (0.19) $ (0.78)
Weighted Average Common Shares and Equivalents:
Basic.................................................... 64,712 53,205 43,385
Diluted.................................................. 64,712 53,205 43,385
</TABLE>

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

37
<PAGE> 38

NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Net loss.................................................... $(27,492) $(9,968) $(33,755)
Other comprehensive income (loss):
Unrealized loss on investments............................ (13) -- --
Foreign currency translation adjustments.................. (1,462) 295 (827)
-------- ------- --------
Other comprehensive loss.................................... $(28,967) $(9,673) $(34,582)
======== ======= ========
</TABLE>

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

38
<PAGE> 39

NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
------------------- TREASURY PAID-IN (ACCUMULATED COMPREHENSIVE
SHARES AMOUNT STOCK CAPITAL DEFICIT) LOSS TOTAL
---------- ------ -------- ---------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996......... 43,148,350 $431 $ -- $ 90,193 $ 39,751 $(1,084) $129,291
Sale of common stock under employee
stock purchase plan.............. 343,142 4 -- 785 -- -- 789
Exercise of stock options.......... 272,035 3 -- 437 -- -- 440
Income tax benefit from stock
option transactions.............. -- -- -- 149 -- -- 149
Repurchase of common stock from
employees for cash............... (10,597) -- -- -- -- -- --
Translation adjustment............. -- -- -- -- -- (827) (827)
Net loss........................... -- -- -- -- (33,755) -- (33,755)
---------- ---- -------- -------- -------- ------- --------
BALANCE, DECEMBER 31, 1997......... 43,752,930 438 -- 91,564 5,996 (1,911) 96,087
Sale of common stock under employee
stock purchase plan.............. 519,698 5 -- 964 -- -- 969
Exercise of stock options.......... 337,909 3 -- 618 -- -- 621
Common stock issued in connection
with FTP acquisition............. 24,766,640 247 -- 74,042 -- -- 74,289
Issuance of NetManage options in
exchange for FTP options......... -- -- -- 1,113 -- -- 1,113
Repurchase of common stock for
cash............................. (2,028,700) -- (4,246) -- -- -- (4,246)
Translation adjustment............. -- -- -- -- -- 295 295
Net loss........................... -- -- -- -- (9,968) -- (9,968)
---------- ---- -------- -------- -------- ------- --------
BALANCE, DECEMBER 31, 1998......... 67,348,477 693 (4,246) 168,301 (3,972) (1,616) 159,160
Sale of common stock under employee
stock purchase plan.............. 609,185 6 -- 1,003 -- -- 1,009
Exercise of stock options.......... 175,787 2 -- 302 -- -- 304
Repurchase of common stock for
cash............................. (4,325,600) -- (11,313) -- -- -- (11,313)
Unrealized loss on investments..... -- -- -- -- -- (13) (13)
Translation adjustment............. -- -- -- -- -- (1,462) (1,462)
Net loss........................... -- -- -- -- (27,492) -- (27,492)
---------- ---- -------- -------- -------- ------- --------
BALANCE, DECEMBER 31, 1999......... 63,807,849 $701 $(15,559) $169,606 $(31,464) $(3,091) $120,193
========== ==== ======== ======== ======== ======= ========
</TABLE>

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

39
<PAGE> 40

NETMANAGE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(27,492) $ (9,968) $(33,755)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization......................... 11,681 10,060 8,204
Provision for doubtful accounts and returns........... 790 378 268
Equity in income of unconsolidated affiliate.......... -- (1,027) (1,145)
Gain on sale of interest in unconsolidated
affiliate........................................... -- (11,748) --
Write-off of in-process research and development...... 19,100 9,500 20,643
Write-down of assets related to restructure........... -- 1,511 1,831
Unrealized gain on investment in unconsolidated
affiliate........................................... -- -- (2,152)
Changes in assets and liabilities, net of business
combinations:
Accounts receivable................................. 4,133 (2,603) 6,688
Prepaid expenses and other current assets........... (2,825) 6,763 (1,012)
Other assets........................................ 1,658 (5,252)
Accounts payable.................................... (2,483) (1,228) (1,447)
Accrued liabilities, payroll and payroll-related
expenses......................................... (512) (5,935) (2,838)
Deferred revenue.................................... (3,115) 70 (4,034)
Income taxes payable................................ 4,063 833 2,918
-------- -------- --------
Net cash provided by (used in) operating
activities..................................... 4,998 (8,646) (5,831)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments...................... (56,861) (96,628) (27,395)
Proceeds from sales and maturities of short-term
investments........................................... 121,954 95,586 36,320
Purchases of long-term investments....................... (23,973) (37,915) (23,925)
Proceeds from sales and maturities of long-term
investments........................................... 53,274 35,935 40,675
Proceeds from sale of investment in unconsolidated
affiliate............................................. -- 17,000 --
Purchases of property and equipment...................... (622) (1,115) (326)
Acquisition of businesses, net of cash acquired.......... (68,445) 29,157 (26,651)
Purchases of technology and other intangible assets...... (150) -- (530)
Investment in unconsolidated affiliate................... -- (33) (58)
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 25,177 41,987 (1,890)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance
costs................................................. 1,313 1,590 1,229
Repurchase of common stock............................... (11,313) (4,246) --
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (10,000) (2,656) 1,229
-------- -------- --------
Effect of exchange rate changes on cash.................... (200) (287) (285)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... 19,975 30,398 (6,777)
Cash and cash equivalents, beginning of year............... 43,104 12,706 19,483
-------- -------- --------
Cash and cash equivalents, end of year..................... $ 63,079 $ 43,104 $ 12,706
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for:
Income taxes.......................................... $ 172 $ 71 $ 358
</TABLE>

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

40
<PAGE> 41

NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND ORGANIZATION:

NetManage, Inc. (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, AS/400 midrange and corporate mainframe computers.
The Company also develops and markets software that increases the productivity
of corporate call centers, and allows real time application sharing on corporate
networks and across the Internet. The Company provides professional support,
maintenance and consultancy services to its customers in association with the
products it develops and markets. The Company was incorporated in 1990 as a
California corporation and changed its incorporation to Delaware in 1993 in
conjunction with its initial public offering.

The Company provides, and will continue to provide, host access solutions
that allow internal and external users to access mission-critical
line-of-business host system applications and resources ("Business-to-Employee"
or "B2E"). Alongside these solutions, the Company is focused on providing
products that allow existing corporate business processes to be extended to
business partners in the supply and demand chains, and products that allow new
business processes to be created in support of corporate eBusiness Business-to-
Business and Business-to-Consumer initiatives.

The Company has a range of host access and connectivity products, host
application publishing products and web integration products. It also has a
range of support connectivity products that provide real-time visual support in
conjunction with help desk systems aimed at reducing the time and cost of end
user support. The Company's host access products provide the applications and
solutions that allow end user devices, including personal computers, to
communicate with large centralized corporate computer systems. The Company's
real-time visual support connectivity products add value to its Host Access and
Web Integration offerings and also target new market segments.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All intercompany accounts and transactions
have been eliminated. The Company's investment in NetVision, Ltd. ("NetVision")
was accounted for using the equity method prior to its sale in December 1998
(see Note 3).

Use of Estimates

The preparation of 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 and
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 and Foreign Exchange Contracts

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 does not enter into financial instruments for trading or
speculative purposes. Financial instruments are used to reduce the impact of
changes in foreign currency exchange rates. The principal

41
<PAGE> 42
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

instruments used are forward foreign exchange contracts. The counterparties are
major financial institutions. The Company historically and periodically will
enter into forward exchange contracts to reduce the impact of foreign currency
fluctuations on those balance sheet accounts denominated in foreign currency,
other than the entities' local currency, that give rise to transaction gains or
losses. The periods of the forward foreign exchange contracts correspond to the
periods of the hedged transactions.

The estimated fair value of the foreign currency contracts represents the
amount required to enter into offsetting contracts with similar remaining
maturities based on quoted market prices. At December 31, 1999 and 1998, the
difference between the contract amounts and fair values was immaterial.

Revenue Recognition

License fees are earned under software license agreements to end-users and
resellers and are generally recognized as revenue upon shipment of the software
if collection of the resulting receivable is probable, the fee is fixed and
determinable and vendor-specific objective evidence exists to allocate the total
fee to all delivered and undelivered elements of the arrangement. The Company
offers its customers a 30-day right of return on sales and records an estimate
of such returns at the time of product delivery based on historical experience.
To date, such returns have been insignificant. Certain of the Company's sales
are made to domestic distributors under agreements allowing rights of return and
price protection on unsold merchandise. Accordingly, the Company defers
recognition of such sales until the merchandise is sold by the distributor. The
Company's international distributors generally do not have return rights and, as
such, the Company generally recognizes sales to international distributors upon
shipment, if all other revenue recognition criteria has been met.

Service revenues consist of fees for providing system updates for existing
software products, user documentation and technical support, generally under
annual service agreements, and are recognized ratably over the terms of such
agreements. If such services are included in the initial licensing fee, the
value of the services is unbundled and recognized ratably over the related
service period. The cost of service revenues is not material and is included in
cost of revenues in the accompanying Consolidated Statements of Operations.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

Short-term and Long-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 and held-to-maturity.
Available-for-sale securities are reported at fair value, with unrealized gains
and losses, net of tax, reported as a separate component of stockholders'
equity. Held-to-maturity securities are valued using the amortized cost method.
At December 31, 1999 and 1998, the fair value of the held-to-maturity
investments approximated amortized cost and, as such, gross unrealized holding
gains and losses were not material. The fair value of the held-to-maturity
investments was determined based on quoted market prices at the reporting dates
for those instruments. During 1999, the Company liquidated substantially all of
its held-to-maturity securities before maturity, to fund its acquisition of Wall
Data and Simware. The Company realized a net loss of approximately

42
<PAGE> 43
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$0.2 million as a result of liquidation. Investments with a maturity of greater
than one year from the balance sheet date are classified as long-term
investments. The carrying value of the Company's investments by major security
type consisted of the following as of December 31, 1999 and 1998 (in thousands):

<TABLE>
<CAPTION>
DESCRIPTION 1999 1998
----------- ------- -------
<S> <C> <C>
Municipal bonds.......................................... $ -- $23,938
Auction rate securities.................................. -- 26,684
Commercial paper/Corporate bonds......................... 38,785 20,687
Government securities.................................... -- 24,836
------- -------
Total.......................................... $38,785 $96,145
======= =======
</TABLE>

At December 31, 1999, approximately $38.6 million of the Company's
investments were classified as cash and cash equivalents.

Property and Equipment

Property and equipment are recorded at cost. Betterments, renewals and
extraordinary repairs that extend the life of the asset are capitalized, other
repairs and maintenance are expensed. Depreciation is computed using the
straight-line method over the following estimated useful lives:

<TABLE>
<CAPTION>
CLASSIFICATION LIFE
-------------- ----
<S> <C>
Computer software and equipment...... 2 to 3 years
Furniture and fixtures............... 5 years
Leasehold improvements............... Shorter of the lease term or the
estimated useful life
</TABLE>

Goodwill

Goodwill arising from the Company's acquisitions (see Note 3) is amortized
on a straight-line basis over two to seven years. Accumulated amortization was
approximately $11.6 million and $5.9 million at December 31, 1999 and 1998,
respectively.

Accrued Liabilities

The Company's accrued liabilities at December 31, 1999 and 1998 consisted
of the following (in thousands):

<TABLE>
<CAPTION>
DESCRIPTION 1999 1998
----------- ------- -------
<S> <C> <C>
Acquisition costs related to Wall Data and Simware....... $15,871 $ --
Restructuring............................................ 7,798 5,224
Other accruals........................................... 16,091 7,148
------- -------
Total............................................... $39,760 $12,372
======= =======
</TABLE>

Software Development Costs

Software development costs are accounted for in accordance with SFAS No.
86, "Accounting for Computer Software to be Sold, Leased or Otherwise Marketed,"
under which capitalization of software development costs begins upon the
establishment of technological feasibility of the product, which the Company
defines as the development of a working model and further defines as the
development of a beta version of the software. The establishment of
technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and

43
<PAGE> 44
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

changes in technology. To date, internal software development costs that were
eligible for capitalization have not been significant and the Company has
charged all software development costs to research and development as incurred.
Purchased software is reported at the lower of unamortized cost or net
realizable value. Amortization of purchased software is generally computed on a
straight-line basis over one to five years or, if less, the estimated remaining
economic life of the underlying products.

For the years ended December 31, 1999, 1998 and 1997, approximately $0.1
million, $0.1 million and $0.4 million, respectively, is included in the
accompanying Consolidated Statements of Operations in cost of revenues for the
amortization of purchased software.

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 cash investment policies that limit the amount of
credit exposure to any one issuer and restrict 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.

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 dilutive potential common shares. Potential common
shares include dilutive shares issuable upon the exercise of outstanding common
stock options computed using the treasury stock method. For the years ended
December 31, 1999, 1998 and 1997, the number of shares used in the computation
of diluted earnings per share were the same as those used for the computation of
basic earnings per share. Potentially dilutive securities of 9,424,191,
5,444,330, and 3,613,521 were not included in the computation of diluted
earnings per common share because to do so would have been antidilutive for the
years ended December 31, 1999, 1998 and 1997, respectively.

New Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value and requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133, to be
effective for all fiscal years beginning after June 15, 2000. The Company plans
to adopt SFAS No. 133 in the first quarter of 2001 and does not believe that its
adoption will have a material effect on the Company's financial statements.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements"
("SAB 101") which provides guidance related to revenue recognition based on
interpretations and practices followed by the SEC. SAB 101 allows companies to
recognize any changes in revenue recognition related to adopting its provisions
as an accounting change at the time of implementation in accordance with APB
Opinion No. 20, "Accounting Changes." The Company does not believe that the
adoption of SAB 101 will have a material effect on the its financial statements.

44
<PAGE> 45
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. ACQUISITIONS AND OTHER INVESTMENTS:

On December 29, 1999, the Company completed its acquisition of Wall Data
Incorporated ("Wall Data"), a leader in the PC-to-IBM 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 the cash tender offer. The Company
acquired the remaining outstanding shares of Wall Data by means of a merger
completed in accordance with Washington law on December 29, 1999. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of Wall Data from the date of acquisition forward have
been recorded in the Company's consolidated financial statements. As of December
31, 1999, the Company had approximately $15.5 million of acquisition-related
costs, including certain cash payments for stock options pursuant to a tender
offer for Wall Data, which are included in accrued liabilities in the Company's
consolidated balance sheet.

The aggregate purchase price for the acquisition of Wall Data was computed
as follows (in thousands):

<TABLE>
<S> <C>
Cash payments pursuant to tender offer.................... $ 94,048
Acquisition costs......................................... 9,456
--------
$103,504
========
</TABLE>

The purchase price is allocated as follows (in thousands):

<TABLE>
<S> <C>
Cash and investments...................................... $ 48,597
Other current and non-current assets...................... 15,374
Equipment................................................. 6,763
Intangible assets......................................... 54,971
In-process research and development....................... 12,400
Liabilities assumed....................................... (34,601)
--------
Net assets acquired..................................... $103,504
========
</TABLE>

In connection with the acquisition of Wall Data, the Company allocated
$12.4 million of the purchase price to in-process research and development
projects. This allocation represents the estimated fair value based on
risk-adjusted cash flows related to the incomplete projects. At the date of
acquisition, the development of these projects had not yet reached technological
feasibility and the research and development in progress had no alternative
future uses. Accordingly, these costs were expensed as of the acquisition date.
The remaining intangibles of $54.9 million, consisting of goodwill, developed
technology, installed customer base, tradename, and assembled work force, are
included in goodwill and other intangibles in the accompanying balance sheets
and are being amortized over their estimated useful lives of five years.

As of the acquisition date, Wall Data's significant on-going research and
development projects included next-generation versions of current technologies
and development of new web-to-host and PC-to-host product technologies. At the
time of the acquisition, these projects had estimated completion percentages of
approximately 15% to 90%; estimated technology lives of five to seven years; and
projected product introduction dates of early to mid-2000.

45
<PAGE> 46
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

dates ranged from 3 to 6 months, at which time the Company expects to begin
selling the developed products. Development costs to complete the research and
development were estimated at approximately $2.4 million.

The Company allocated value to the in-process research and development
based on an assessment of the research and development projects. The value
assigned to these assets was limited to significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of Wall
Data's next-generation technologies and products. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The Company
used discount rates of 20% to 30% for the calculation of present value of cash
flows. The discount rates used for the in-process technologies was higher than
the Company's weighted average cost of capital due to the risk of realizing cash
flows from projects that had yet to reach technological feasibility.

The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Future revenue estimates were
aggregated into three product categories: Web-to-host, PC-to-host, and Rumba
tools/other. Web-to-host product revenues were estimated to increase at a
compound annual rate of approximately 68% for fiscal years 1999 through 2002,
stabilizing at a 10% growth after 2002. All other product revenues were assumed
to decline steadily as customers migrate to next-generation technologies.

Operating expenses used in the valuation analysis of Wall Data included:
(i) cost of sales, (ii) selling, general and administrative expenses, and (iii)
research and development expenses. Operating expenses were estimated based on
data provided by management. Due to purchasing power increases and general
economies of scale, estimated operating expense as a percentage of revenues were
expected to decrease after the acquisition.

With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Wall Data prior to
the close of the acquisition. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.

If these projects are not successfully developed, the sales and
profitability of the combined company may be adversely affected in future
periods. Additionally, the value of other acquired intangible assets may become
impaired.

The following unaudited pro forma financial information shows the results
of operations for the years ended December 31, 1999 and 1998 as if the
acquisition of Wall Data had occurred at the beginning of the periods presented
and at the same aggregate purchase price. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma financial data for the year
ended December 31, 1999 combines the Company's results for the year ended
December 31, 1999 with the results of Wall Data for the period from February 1,
1999 through the date of acquisition. The pro forma financial data for 1998
combines the Company's results of operations for the year ended December 31,
1998, with Wall Data's results of operations for the twelve months ended January
31, 1999. The following unaudited pro forma

46
<PAGE> 47
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

financial data includes the straight-line amortization of intangibles over a
period of five to seven years and excludes the charge for in-process research
and development (in thousands, except per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue................................................ $138,706 $224,539
Net loss............................................... $(70,073) $(14,925)
Net loss per share, diluted............................ $ (1.08) $ (0.28)
Weighted average common shares, diluted................ 64,712 53,205
</TABLE>

The aggregate purchase price for the acquisition of Simware was computed as
follows (in thousands):

<S> <C>
Cash payments pursuant to tender offer..................... $29,191
Acquisition costs.......................................... 953
-------
$30,144
=======
</TABLE>

The purchase price is allocated as follows (in thousands):

<TABLE>
<S> <C>
Cash and investments....................................... $ 2,188
Other current and non-current assets....................... 6,512
Equipment.................................................. 1,170
Intangible assets.......................................... 18,166
In-process research and development........................ 6,700
Liabilities assumed........................................ (4,592)
-------
Net assets acquired...................................... $30,144
=======
</TABLE>

In connection with the acquisition of Simware, the Company allocated $6.7
million of the purchase price to in-process research and development projects.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete projects. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the research and development in progress had no alternative future uses.
Accordingly, these costs were expensed as of the acquisition date. The remaining
intangibles of $18.2 million, consisting of goodwill, developed technology, and
assembled work force are included in goodwill and other intangibles in the
accompanying balance sheets and are being amortized over their estimated useful
lives of five years.

As of the acquisition date, Simware's significant ongoing research and
development projects included next-generation versions of current technologies
and development of new web-based product technologies. At the time of the
acquisition, these projects had an estimated aggregate completion percentage of
approximately

47
<PAGE> 48
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

50%; estimated technology lives of five to seven years; and projected product
introduction dates of mid to late 2000.

The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing, coding, and testing activities that are
necessary to establish that the developmental products can be produced to meet
their design requirements, including functions, features, and technical and
economic performance requirements. Anticipated completion dates ranged from 6 to
12 months, at which time the Company expects to begin selling the developed
products. Development costs to complete the R&D were estimated at approximately
$1.9 million.

The Company allocated value to the in-process research and development
based on an assessment of the research and development projects. The value
assigned to these assets was limited to significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of Simware's
next-generation technologies and products. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects, and discounting the net cash flows to their present value. The Company
used a discount rate of 20% for the calculation of present value of cash flows.
The discount rate used for the in-process technology was higher than the
Company's weighted average cost of capital due to the risk of realizing cash
flows from projects that had yet to reach technological feasibility.

The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Future revenue estimates were
aggregated into four product categories: Salvo, A2B/Sim, Rexware, and other.
Salvo-based product revenues were estimated to increase at a compound annual
rate of approximately 77% for fiscal years 1999 through 2002, stabilizing at 20%
growth after 2002. All other product revenues were assumed to decline steadily
as customers are converted to Simware's next-generation technologies.

Operating expenses used in the valuation analysis of Simware included: (i)
cost of sales, (ii) selling, general and administrative expenses, and (iii)
research and development expenses. Operating expenses were estimated based on
data provided by management. Due to purchasing power increases and general
economies of scale, estimated operating expense as a percentage of revenues were
expected to decrease after the acquisition.

With respect to the acquired in-process technology, the calculations of
value were adjusted to reflect the value creation efforts of Simware prior to
the close of the acquisition. In doing so, consideration was given to each major
project's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete the projects.

The following unaudited pro forma financial information shows the results
of operations for the years ended December 31, 1999 and 1998 as if the
acquisition of Simware had occurred at the beginning of the periods presented
and at the same aggregate purchase price. The results are not necessarily
indicative of what would have occurred had the acquisition actually been made at
the beginning of each of the respective periods presented or of future
operations of the combined companies. The pro forma financial data for the year
ended December 31, 1999 combines the Company's results for the year ended
December 31, 1999 with the results of Simware for the period from February 1,
1999 through the date of acquisition. The pro forma financial data for 1998
combines the Company's results of operations for the year ended December 31,
1998, with Simware's

48
<PAGE> 49
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

results of operations for the twelve months ended January 31, 1999. The
following unaudited pro forma financial data includes the straight-line
amortization of intangibles over a period of five to seven years and excludes
the charge for in-process research and development (in thousands, except per
share amounts):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue................................................ $ 88,463 $ 85,522
Net loss............................................... $(13,558) $(11,979)
Net loss per share, diluted............................ $ (0.21) $ (0.23)
Weighted average common shares, diluted................ 64,712 53,205
</TABLE>

On August 27, 1998, the Company acquired all of the outstanding shares of
common stock of FTP Software, Inc. ("FTP"). Each outstanding share of the common
stock of FTP, and each associated junior preferred stock purchase right, was
converted into 0.72767 of a share of the Company's common stock. Outstanding FTP
options were converted into options to purchase shares of the Company's common
stock at the same conversion rate, with appropriate corresponding changes to the
exercise price. As a result, 34,035,463 shares of FTP common stock outstanding
immediately prior to the merger were converted into approximately 24,766,640
shares of the Company's common stock and options to acquire approximately
5,587,528 shares of FTP common stock were assumed by the Company and converted
into options to purchase approximately 4,065,351 shares of the Company's common
stock. The total purchase price for the acquisition was approximately $78.3
million. The acquisition was accounted for using the purchase method of
accounting and, accordingly, the results of FTP from the date of acquisition
forward have been recorded in the Company's consolidated financial statements.
In August 1999, the Company recorded an increase to goodwill of approximately
$2.7 million as a result of an increase to the Company's FTP related
restructuring accrual (see Note 4). The following tables reflect this
adjustment.

The aggregate purchase price for the acquisition of FTP is computed as
follows (in thousands):

<TABLE>
<S> <C>
Value of NetManage common stock issued...................... $74,042
Value of options assumed.................................... 1,113
Acquisition costs........................................... 3,157
-------
$78,312
=======
</TABLE>

The purchase price is allocated as follows (in thousands):

<TABLE>
<S> <C>
Cash and investments........................................ $ 61,249
Other current assets........................................ 10,138
Equipment................................................... 5,838
Intangible assets, as adjusted.............................. 21,306
In-process research and development......................... 9,500
Current liabilities assumed, including FTP related
restructuring accrual,
as adjusted............................................... (29,719)
--------
Net assets acquired....................................... $ 78,312
========
</TABLE>

In connection with the acquisition of FTP, the Company allocated $9.5
million of the purchase price to in-process research and development projects.
The Company used an independent third-party appraiser to assess and allocate a
value to the in-process research and development. This allocation represents the
estimated fair value based on risk-adjusted cash flows related to the incomplete
projects. At the date of acquisition, the development of these projects had not
yet reached technological feasibility and the research and development in
progress had no alternative future uses. Accordingly, these costs were expensed
as of the acquisition date. The remaining intangibles of $18.6 million,
consisting of goodwill and developed technology,

49
<PAGE> 50
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

are included in goodwill and other intangibles in the accompanying balance
sheets and are being amortized over their estimated useful lives of five to
seven years.

As of the acquisition date, FTP's significant ongoing research and
development projects included next-generation versions and development of new
product technologies. At the time of the acquisition, these projects had
estimated completion percentages ranging from 58% to 74%, estimated technology
lives of five to seven years, and projected product introduction dates between
the end of 1998 and the first six months of 1999. The nature of the efforts
required to develop the acquired in-process technology into commercially viable
products principally relate to the completion of all planning, designing,
coding, and testing activities that are necessary to establish that the products
can be produced to meet their design requirements, including functions,
features, and technical and economic performance requirements.

The Company allocated value to the in-process research and development
based on an assessment of the research and development projects. The value
assigned to these assets was limited to significant research projects for which
technological feasibility had not been established, including development,
engineering and testing activities associated with the introduction of FTP's
next-generation technologies and products. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The Company
used a discount rate of 20% for the calculation of present value of cash flows.
The discount rate used for the in-process technology was higher than the
Company's weighted average cost of capital due to the risk of realizing cash
flows from projects that had yet to reach technological feasibility.

The revenue projection used to value the in-process research and
development was based on estimates of relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by the Company and its competitors. Future revenue estimates were
aggregated into four product categories: 16-bit, 32-bit, Web-based, and other.
Web-based product revenues were estimated to increase at a compound annual rate
of approximately 50% for fiscal years 1999 through 2002, stabilizing at 10%
growth after 2002.

Operating expenses used in the valuation analysis of FTP included: (i) cost
of sales, (ii) selling, general and administrative expenses, and (iii) research
and development expenses. Operating expenses were estimated based on data
provided by management. Due to purchasing power increases and general economies
of scale, estimated operating expense as a percentage of revenues were expected
to decrease after the acquisition.

The following unaudited pro forma financial information shows the results
of operations for the years ended December 31, 1998 and 1997 as if the
acquisition of FTP had occurred at the beginning of the periods presented and at
the same aggregate purchase price. The results are not necessarily indicative of
what would have occurred had the acquisition actually been made at the beginning
of each of the respective periods presented or of future operations of the
combined companies. The pro forma financial data for the year ended December 31,
1998 combines the Company's results for the year ended December 31, 1998 with
the results of FTP for the period from January 1, 1998 through the date of
acquisition (August 26, 1998.) The pro forma financial data for 1997 combines
the Company's results of operations with FTP's results of operations for the
year ended December 31, 1997. The following unaudited pro forma financial data
includes the straight-line amortization of intangibles over a period of five to
seven years and excludes the charge for in-process research and development (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenue................................................ $ 96,545 $129,258
Net loss............................................... $(11,319) $(90,354)
Net loss per share, diluted............................ $ (0.18) $ (1.33)
Weighted average common shares, diluted................ 61,940 68,010
</TABLE>

50
<PAGE> 51
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In December 1998, the Company sold its equity interest in NetVision for
$17.0 million. The Company's ownership interest prior to the sale was
approximately 32%. In connection with this transaction, the Company recorded a
gain on the sale of stock by NetVision of $11.7 million, which is included in
the accompanying Consolidated Statement of Operations for the year ended
December 31, 1998.

In December 1997, NetVision issued an additional 800,000 preferred shares
which were sold to Tevel Israel International Communications, Ltd., an unrelated
party, for $10.0 million cash in exchange for a one-third interest in NetVision.
As a result of the issuance and sale of these shares by NetVision, the Company's
ownership interest in NetVision decreased from 50% to approximately 32%. In
connection with this transaction, the Company recorded an unrealized gain on
NetVision's sale of stock of $2,152,000, which is included in the accompanying
Consolidated Statement of Operations for the year ended December 31, 1997. The
investment in NetVision of approximately $5.0 million was included in other
assets in the accompanying Consolidated Balance Sheets at December 31, 1997.

In November 1997, the Company acquired all of the outstanding shares of
Relay Technology, Inc. ("Relay"), a privately-held company primarily engaged in
the development, marketing and support of network connectivity, file transfer
and terminal emulation software for $4.2 million in cash. The acquisition was
accounted for as a purchase, and accordingly, the results of Relay from the date
of acquisition forward have been recorded in the Company's consolidated
financial statements. In connection with the purchase, net intangibles of
approximately $5.8 million were acquired, of which $4.6 million is reflected as
a charge to operations for the write-off of in-process research and development
that had not yet reached technological feasibility and, in management's opinion,
had no probable alternative future use. The remaining intangible of $1.2
million, consisting of goodwill, is included in goodwill and other intangibles
in the accompanying balance sheets and is being amortized over its estimated
useful life of two years. Comparative pro forma financial information has not
been presented as the results of Relay are not material to the Company's
consolidated financial statements.

In July 1997, the Company acquired all of the outstanding shares of Network
Software Associates, Inc. ("NSA") for $26.0 million in cash. NSA is a holding
company for NetSoft ("NetSoft"), a privately-held company specializing in the
development, marketing and support of PC-to-Host connectivity software
solutions. The acquired company hereinafter will be referred to as NetSoft. The
acquisition was accounted for using the purchase method of accounting and,
accordingly, the results of NetSoft from the date of acquisition forward have
been recorded in the Company's consolidated financial statements. In connection
with the acquisition, net intangibles of $18.6 million were acquired, of which
$16.0 million was reflected as a charge to operations for the write-off of
in-process research and development that had not reached technological
feasibility and, in management's opinion, had no probable alternative future
use. The remaining intangible of $2.6 million, consisting of goodwill, is
included in goodwill and other intangibles in the accompanying balance sheets
and was amortized over its estimated useful life of two years.

In connection with the NetSoft acquisition, net assets acquired were as
follows (in thousands):

<TABLE>
<S> <C>
Cash and cash equivalents................................... $ 2,719
Trade accounts receivable and other current assets.......... 8,802
Intangibles, including in-process research and
development............................................... 18,589
Property, equipment and other long-term assets.............. 2,733
Current liabilities assumed................................. (6,224)
Long-term liabilities....................................... (619)
-------
Net assets acquired....................................... $26,000
=======
</TABLE>

The following unaudited pro forma financial information shows the results
of operations for the year ended December 31, 1997 as if the NetSoft acquisition
had occurred at the beginning of the year presented

51
<PAGE> 52
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and at the purchase price established in July 1997. The pro forma financial data
includes the straight-line amortization of intangibles over a two-year period
and excludes the charge for in-process research and development. The results are
not necessarily indicative of what would have occurred had the acquisition
actually been made at the beginning of each of the respective years presented or
of the future operations of the combined companies.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
--------------
(IN THOUSANDS)
<S> <C>
Revenue..................................................... $ 81,103
Net loss.................................................... $(35,137)
Net loss per share, diluted................................. $ (0.80)
Weighted average common shares, diluted..................... 43,385
</TABLE>

4. RESTRUCTURING OF OPERATIONS

In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of 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 includes approximately $1.9
million of estimated expenses for facilities-related charges associated with the
closure of NetManage facilities and $1.4 million of employee-related expenses
for the termination of NetManage employees. The employees were notified of their
terminations prior to December 31, 1999. 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 December 31, 1999, the Company had incurred costs totaling
approximately $0.2 million related to the restructuring, which required $0.2
million in cash expenditures.

The following table lists the components of the restructuring charge for
the year ended December 31, 1999 (in thousands):

<TABLE>
<CAPTION>
EMPLOYEE EXCESS
COSTS FACILITIES OTHER TOTAL
-------- ---------- ----- ------
<S> <C> <C> <C> <C>
Reserve provided............................... $1,448 $1,868 $475 $3,791
Reserve utilized in 1999....................... (151) -- -- (151)
------ ------ ---- ------
Balance at December 31, 1999................... $1,297 $1,868 $475 $3,640
====== ====== ==== ======
</TABLE>

52
<PAGE> 53
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

actions would require total cash expenditures of approximately $13.7 million,
which was expected to be funded from internal operations. As of December 31,
1999, the Company had incurred costs totaling approximately $16.9 million
related to the restructuring, which required $13.3 million in cash expenditures.
During the third quarter of 1999, the Company increased the FTP restructuring
reserve for $2.7 million which, after an evaluation of the restructuring charges
and actions taken since the initial restructuring charge was taken, was
determined to be the increase necessary for anticipated continued restructuring
activities. The increase relates to lease commitments for FTP facilities which
the Company has been unable to extricate itself from the lease or find suitable
sublease tenants. As the additional reserve relates to FTP facilities and the
closure of those facilities was initiated prior to the acquisition of FTP, the
increase to the restructuring reserve was recorded as part of an adjustment to
the FTP purchase price allocation resulting in additional goodwill (see Note 3).
At December 31, 1999, the remaining FTP reserve related to this restructuring
plan was approximately $2.5 million.

The following table lists the components of the 1998 restructuring charges
for the years ended December 1998 and 1999 (in thousands):

<TABLE>
<CAPTION>
EMPLOYEE EXCESS EXCESS
COSTS ASSETS FACILITIES TOTAL
-------- ------- ---------- --------
<S> <C> <C> <C> <C>
Reserve provided in 1998
Reserve provided........................... $ 7,284 $ 2,674 $ 6,794 $ 16,752
Reserve utilized in 1998................... (6,693) (1,585) (3,250) (11,528)
------- ------- ------- --------
Balance at December 31, 1998
Reserve provided........................... $ 591 $ 1,089 $ 3,544 $ 5,224
Reserve utilized in 1999................... (591) (1,089) (3,744) (5,424)
Addition to reserve recorded as adjustment
to FTP purchase price allocation......... -- -- 2,722 2,722
------- ------- ------- --------
Balance at December 31, 1999............... $ -- $ -- $ 2,522 $ 2,522
======= ======= ======= ========
</TABLE>

In the third quarter of 1997, the Company initiated a plan to restructure
its operations worldwide due to business conditions. The plan was intended to
realign the Company to focus solely on its core competencies -- UNIX, AS/400
midrange and IBM mainframe connectivity. In connection with this plan, the
Company recorded a $5.2 million charge to operating expenses. The restructuring
charge included approximately $1.8 million of estimated employee-related
expenses for employee terminations, approximately $2.4 million for the write-off
of excess equipment and facilities-related expenses associated with the
consolidation of operations and approximately $1.0 million for the write-off of
intangible assets related to certain unprofitable products. The restructuring
plan included the termination of employees worldwide and reduction in worldwide
office space, which primarily consisted of the consolidation of sales offices in
Europe resulting from the acquisition of NetSoft in the third quarter of 1997 as
well as the consolidation of certain domestic technical support and engineering
locations. As of December 31, 1997, the Company had incurred costs totaling
approximately $4.3 million related to the restructuring. The remaining
restructuring actions were completed in the year ended December 31, 1998 and
required cash expenditures of approximately $0.9 million.

5. COMMITMENTS AND CONTINGENCIES:

Legal Proceedings

53
<PAGE> 54
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Verity seeks compensatory and punitive damages in an unspecified amount, and
attorneys fees. The action is pending in the Superior Court for the County of
Santa Clara. The Company has answered the complaint, denying the allegations and
raising several affirmative defenses, among them that it has secured a release
from the third party of any claims it might have otherwise had against Verity
regarding ownership of the technology. The Company believes that it has
meritorious defenses to the claims alleged and intends to defend the action
vigorously.

54
<PAGE> 55
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

certain of its former officers and directors. The complaint alleged that between
July 14, 1995 and January 3, 1996, defendants violated the federal securities
laws by making false and misleading statements of material fact about FTP's
prospects and financial statements. NetManage acquired FTP in August 1998. On
September 24, 1998, the district court granted defendants' motion for partial
summary judgment and granted without leave to amend defendants' renewed motion
to dismiss the complaint. Plaintiffs filed a notice of appeal. Oral argument on
the appeal was held on June 9, 1999. By order dated October 8, 1999, the United
States Court of Appeals for the First Circuit affirmed the district court's
dismissal. Time to petition for review by the United States Supreme Court has
expired

In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, 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 heald by the
district court. The Company believes that there is no merit to the case and
intends to defend the case vigorously.

55
<PAGE> 56
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Leases

Facilities and equipment are leased under non-cancelable operating and
capital leases expiring on various dates through the year 2007. As of December
31, 1999, future minimum rental and lease payments under operating and capital
leases are as follows (in thousands):

<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
---- --------- -------
<S> <C> <C>
2000........................................................ $ 8,752 $ 185
2001........................................................ 8,542 185
2002........................................................ 7,106 185
2003........................................................ 6,188 12
2004........................................................ 4,370 --
Thereafter.................................................. 1,230 --
------- -----
Total minimum obligations......................... $36,188 572
=======
Amount representing interest................................ (98)
-----
Present value of minimum lease obligations.................. 474
Current portion............................................. (134)
-----
Long-term lease obligations at December 31, 1999.......... $ 340
=====
</TABLE>

Rent expense was approximately $3.4 million, $2.4 million and $3.9 million
for the years ended December 31, 1999, 1998 and 1997, respectively.

6. CAPITAL STOCK:

COMMON STOCK

As of December 31, 1999, the Company has reserved the following shares of
authorized but unissued common stock:

<TABLE>
<S> <C>
Employee stock option plans.............................. 11,801,986
Directors' stock option plan............................. 739,835
Employee stock purchase plan............................. 558,712
----------
13,100,533
==========
</TABLE>

Stock Repurchase Plan

As of December 31, 1999, the Company's Board of Directors authorized the
repurchase of up to 9 million shares of the Company's common stock for general
corporate purposes. During 1999 and 1998, the Company repurchased 4,325,600 and
2,028,700 shares of its common stock, respectively, on the open market at an
average purchase price of $2.62 and $2.09 per share for a total cost of $11.3
million and $4.2 million, respectively.

Employee Stock Option Plans

In October 1999, the Board of Directors adopted the 1999 Non-Statutory
Stock Option Plan (the "1999 Plan"). The Board of Directors authorized and
reserved for the issuance of 4,000,000 shares of the Company's common stock. The
1999 Plan provides for the grant of non-qualified stock options for employees.
Options may not be granted to officers and directors , except as an essential
inducement to an officer entering into an employment agreement regarding his or
her initial service with the Company. The exercise price of stock options issued
under the 1999 Plan is established by the 1999 Plan Administrator, which is a
committee of the Board of Directors. Options granted under the 1999 Plan become
exercisable at a rate of 25% of the shares

56
<PAGE> 57
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

subject to the option at the end of the first year and 1/48 of the shares
subject to the option at the end of each calendar month thereafter. The maximum
term of a stock option under the 1999 Plan is 10 years.

During 1992, the Company established the 1992 Employee Stock Option Plan
(the "1992 Plan"). The Company currently has authorized a total of 9,800,000
shares for issuance under the 1992 Plan. The 1992 Plan provides for the grant by
the Company of incentive stock options to employees and officers and
non-statutory stock options to employees, officers, directors and consultants.
The exercise price of incentive stock options may not be less than 100% of the
fair market value of the common stock on the date of grant (110% of such fair
market value in the case of a grant to a holder of more than 10% of the voting
power of the Company's outstanding capital stock (a "10% stockholder")); the
exercise price of non-statutory options may not be less than 85% of such fair
market value. Up until mid-1997, options granted under the 1992 Plan generally
were scheduled to become exercisable at a rate of one-fourth of the shares
subject to the option at the end of the first year and 1/48 of the shares
subject to the option at the end of each calendar month thereafter. From mid-
1997 until September 1998, options granted under the 1992 Plan for new hires
generally were scheduled to become exercisable at a rate of one-fifth of the
shares subject to the option at the end of the first year and 1/60 of the shares
subject to the option at the end of each calendar month thereafter. Beginning in
September 1998, options granted under the 1992 Plan become exercisable at a rate
of one-fourth of the shares subject to the option at the end of the first year
and 1/48 of the shares subject to the option at the end of each calendar month
thereafter. The maximum term of a stock option under the 1992 Plan is 10 years
(five years in the case of an incentive option granted to a 10% stockholder).

In connection with the acquisition of FTP, the Company assumed options to
purchase shares of FTP's common stock held by employees of FTP and its
subsidiaries (the "Assumed FTP Options"). Pursuant to the FTP merger, these
options were converted into options to purchase shares of NetManage common stock
at the FTP merger exchange rate, with appropriate adjustments to the exercise
price. The assumed FTP Options were granted under, and continue to be governed
by the plans under which they were originally granted. The options generally
vest over three to four years and have a maximum term of ten years. No
additional options will be granted pursuant to any of the FTP stock option
plans.

The Company also assumed certain options granted to former employees of
acquired companies (the "Acquired Options"). The Acquired Options were assumed
by the Company outside of the Plan, but all are administered as if assumed under
the Plan. All of the Acquired Options have been adjusted to effectuate the
conversion under the Agreements and Plans of Reorganization between the Company
and the companies acquired. Certain of the Acquired Options became immediately
exercisable under the original terms of the option agreements. The remaining
Acquired Options continue to vest under the original vesting schedule over a
four-year period. No additional options will be granted under any of the
acquired companies' plans.

In October 1998, the Company's Board of Directors approved an option
exchange program pursuant to which all directors and employees of the Company
were given the opportunity to exchange any or all of their existing options for
new options covering a number of shares of the Company's common stock determined
under a formula that took into account the original number of shares, term and
vesting schedule of the existing options, at an exercise price of $1.00 per
share (being the fair market value of the Company's common stock on the grant
date of the new options). The new options become exercisable at a rate of
one-fourth of the shares subject to the option at the end of the first year and
1/36 of the remaining shares subject to the option at the end of each calendar
month thereafter, and have a term of 10 years from the date of grant. Pursuant
to this exchange offer, options covering an aggregate of 3,020,421 shares of the
Company's common stock, with exercise prices ranging from $1.00 to $43.64 per
share, were exchanged for options covering an aggregate of 2,196,612 shares of
the Company's common stock.

In September 1997 and January 1997, upon approval by the Company's Board of
Directors, the Company repriced 1,703,624 and 3,451,079 options, respectively,
originally issued at prices ranging from $3.25 to $6.00

57
<PAGE> 58
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

and $6.63 to $21.25, respectively. The options were repriced at the then current
market value of the Company's common stock of $3.06 for the September 1997
repricing and $6.00 for the January 1997 repricing.

Non-Employee Directors' Stock Option Plan

In July 1993, the Company adopted the 1993 Directors' Stock Option Plan
(the "Directors' Plan") and reserved 800,000 shares of common stock for issuance
thereunder. Under the Directors' Plan, options may be granted only to
non-employee directors of the Company at an exercise price of 100% of the fair
market value of the stock on the date of grant. Options granted under the
Directors' Plan become exercisable at a rate of one-fourth of the shares subject
to the option at the end of the first year and 1/48 of the shares subject to the
option at the end of each calendar month thereafter. The maximum term of a stock
option under the Directors' Plan is 10 years.

Employee Stock Purchase Plan

In July 1993, the Company adopted the Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 2,400,000 shares of common stock for future
issuance under the Purchase Plan. Under the Purchase Plan, the Company's
employees, subject to certain restrictions, may purchase shares of common stock
at a price per share that is equal to 85% of the lower of the fair market value
of the common stock on the commencement date of each offering period or the
relevant purchase date. For the years ended December 31, 1999, 1998 and 1997,
609,185, 519,698 and 343,142 shares were issued under the Purchase Plan,
respectively, at prices ranging from $1.24 to $1.83, $1.28 to $2.87 and $2.28 to
$2.34 per share, respectively.

Stock-Based Compensation Plans

The Company accounts for the above plans under Accounting Principles Board
Opinion ("APB") No. 25, under which no compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's net loss per share
would have been adjusted to the following pro forma amounts (in thousands,
except per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported...................................... $(27,492) $ (9,968) $(33,755)
Pro forma........................................ (29,947) (12,922) (42,453)
Net loss per share:
As reported...................................... $ (0.42) $ (0.19) $ (0.78)
Pro forma -- Basic and diluted................... (0.46) (0.24) (0.98)
</TABLE>

Because the method of accounting prescribed by SFAS No. 123 has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
effect of compensation cost may not be representative of that to be expected in
future years.

58
<PAGE> 59
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Option activity, including the Acquired Options, under the Company's stock
option plans was as follows:

<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
---------- ---------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996.................. 4,237,147 4,270,780 $9.99
Granted..................................... (7,856,064) 7,856,064 4.28
Exercised................................... -- (272,035) 1.62
Terminated.................................. 8,241,288 (8,241,288) 7.50
---------- ----------
Balance at December 31, 1997.................. 4,622,371 3,613,521 3.00
Authorized.................................. 1,470,875 --
Granted..................................... (9,623,317) 9,623,317 3.89
Exercised................................... -- (337,909) 1.81
Terminated.................................. 7,454,599 (7,454,599) 4.96
---------- ----------
Balance at December 31, 1998.................. 3,924,528 5,444,330 1.96
Authorized.................................. 4,000,000 --
Granted..................................... (6,532,393) 6,532,393 3.21
Exercised................................... -- (175,787) 2.23
Terminated.................................. 1,725,495 (1,725,495) 1.96
Terminated FTP.............................. -- (651,250) 3.86
---------- ----------
Balance at December 31, 1999.................. 3,117,630 9,424,191 2.66
========== ==========
Exercisable at December 31, 1997.............. 1,031,752 3.07
Exercisable at December 31, 1998.............. 640,862 4.61
Exercisable at December 31, 1999.............. 941,949 1.92
</TABLE>

The following table summarizes the Company's outstanding options as of
December 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF NUMBER REMAINING LIFE WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 - $ 1.97 3,110,266 8.88 $ 1.42 738,753 $ 1.35
$ 2.06 - $10.31 6,311,747 9.59 $ 3.27 201,468 $ 3.82
$12.37 - $17.81 1,452 6.88 $15.98 1,092 $15.98
$37.45 - $43.64 726 8.65 $40.55 636 $40.11
--------- -------
$ 1.00 - $43.64 9,424,191 9.36 $ 2.66 941,949 $ 1.92
========= =======
</TABLE>

The weighted average fair values of options granted during 1999, 1998 and
1997 were $2.59, $1.19 and $3.55 per share, respectively. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
pricing method with the following weighted average assumptions used for grants
in 1999, 1998 and 1997:

<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Volatility..................... 192.45% 207.25% 183.16%
Risk-free interest rate........ 4.64% - 5.95% 4.07% - 5.87% 4.93% - 5.79%
Dividend yield................. 0.00% 0.00% 0.00%
Expected term.................. 3 - 4 months 3 - 4 month 3 - 7 months
beyond vest date beyond vest date beyond vest date
</TABLE>

59
<PAGE> 60
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. INCOME TAXES:

The provision (benefit) for income taxes is based upon loss before income
taxes as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Domestic........................................... $(13,172) $(12,128) $(25,573)
Foreign............................................ (13,940) 6,560 (8,642)
-------- -------- --------
$(27,112) $ (5,568) $(34,215)
======== ======== ========
</TABLE>

The components of the provision (benefit) for income taxes are as follows
(in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1999 1998 1997
----- ------ -------
<S> <C> <C> <C>
Current --
Federal................................................ $ 8 $ -- $(3,134)
State.................................................. 50 2 1
Foreign................................................ 372 2,400 235
----- ------ -------
Total current.................................. 430 2,402 (2,898)
----- ------ -------
Deferred --
Federal................................................ 54 1,978 2,231
State.................................................. 26 20 207
Foreign................................................ (130) -- --
----- ------ -------
Total deferred................................. (50) 1,998 2,438
----- ------ -------
Provision (benefit) for income taxes..................... $ 380 $4,400 $ (460)
===== ====== =======
</TABLE>

The provision (benefit) for income taxes differs from the amounts which
would result by applying the applicable statutory Federal income tax rate to
income before taxes, as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Provision (benefit) at Federal statutory rate........ $(9,489) $(1,949) $(11,975)
State income taxes, net of Federal tax benefit....... (1,627) (320) (2,068)
Nontaxable interest income........................... (82) (469) (982)
Foreign losses benefited at a lower tax rate......... 2,310 -- 2,140
Nondeductible write-off of in-process research and
development........................................ 7,831 3,895 8,464
Change in valuation allowance........................ (458) 1,123 3,292
Nondeductible goodwill amortization.................. 1,378 -- --
Nondeductible expenses............................... 137 58 94
Foreign taxes........................................ 372 2,400 235
Other................................................ 8 (338) 340
------- ------- --------
Provision (benefit) for income taxes............... $ 380 $ 4,400 $ (460)
======= ======= ========
</TABLE>

60
<PAGE> 61
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The components of the net deferred income tax asset are as follows (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred revenue recognized currently for tax purposes...... $ 880 $ 463
Reserves and accruals not currently deductible for tax
purposes.................................................. 4,137 2,772
Net operating loss carryforwards -- NetManage............... 5,142 2,008
Net operating loss carryforwards -- FTP..................... 9,500 3,451
Net operating loss carryforwards -- Wall Data............... 13,240 --
Net operating loss carryforwards -- Simware................. 1,684 --
Tax credit carryforwards -- NetManage....................... 335 507
Tax credit carryforwards -- FTP............................. 787 2,130
Tax credit carryforwards -- Wall Data....................... 1,292 --
Tax credit carryforwards -- Simware......................... 1,236 --
Write-off of in-process research and development, not
currently deductible for tax purposes..................... 4,886 5,375
Depreciation and amortization............................... 1,683 388
Capitalized R&D -- FTP...................................... 7,588 8,728
Amortizable intangibles not deductible for tax purposes..... (2,804) --
Capital loss carryforward................................... 526 --
Other temporary differences................................. (259) 79
-------- --------
Total deferred tax asset.......................... 49,853 25,901
Less: Valuation allowance................................... (46,648) (20,107)
-------- --------
Net deferred tax asset............................ $ 3,205 $ 5,794
======== ========
</TABLE>

In connection with the acquisition of Wall Data, Inc., the Company assumed
Wall Data's deferred tax asset of $16.8 million. Realization of Wall Data's
deferred tax asset is dependent upon generating sufficient future taxable income
in specific tax jurisdictions. Due to the uncertainty as to whether the deferred
tax asset may be realized, Wall Data recorded a valuation allowance for the
entire balance of the Wall Data deferred tax asset prior to their acquisition by
the Company.

Realization of the net deferred tax asset of $3.2 million is dependent on
generating sufficient future taxable income. Although realization is not
assured, management believes it is more likely than not that the net deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced if actual future taxable income differs
from estimated amounts.

At December 31, 1999, the Company had gross net operating loss
carryforwards for federal income tax purposes of approximately $69 million
expiring at various dates through 2018 and federal tax credit carryforwards of
approximately $3.6 million which expire in various years through 2012. At
December 31, 1999, the Company had state net operating loss carryforwards of
approximately $10 million available to offset future taxable income in several
state jurisdictions expiring at various dates through 2018. In accordance with
certain provisions of the Internal Revenue Code, as amended, a change in
ownership of greater than 50% of a company within a three year period results in
an annual limitation on the Company's ability to utilize its net operating loss
carryforward from tax periods prior to the ownership change. Such a change in
ownership occurred with respect to the Company's acquisition of certain
companies, including Wall Data. Accordingly, the net operating losses and
credits of the Company are subject to these limitations.

The Company's subsidiary in Haifa, Israel has a ten-year tax holiday, which
commenced January 1, 1995. During the first two years of the tax holiday, the
subsidiary was exempt from taxation on income generated

61
<PAGE> 62
NETMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

during that period. During the remaining eight years, income generated by the
subsidiary will be taxed at a reduced income tax rate of 10%.

8. SEGMENT REPORTING:

The Company operates in two operating segments: PC connectivity and visual
connectivity. An operating segment is defined as a component of an enterprise
for which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. The Company's chief operating decision
maker is its chief executive officer. The PC connectivity segment develops,
markets and supports software products that provide the technology to make the
connection between personal computers and large corporate computers possible.
The visual connectivity segment develops, markets and supports software products
that add value to the PC connectivity product offerings. The Company has
aggregated these two segments for reporting purposes as they have similar
economic characteristics and are similar with respect to the nature of their
products, the nature of their production processes, the type of customer that
their products are sold to and the method used to distribute their products.

The following table presents a summary of operations by geographic area (in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Revenues:
Domestic operations............................. $ 58,154 $ 53,144 $ 48,155
European operations............................. 19,252 16,845 10,574
Asian operations................................ 1,794 1,738 2,795
--------- -------- --------
Consolidated................................. $ 79,200 $ 71,727 $ 61,524
========= ======== ========
Income (loss) from operations:
Domestic operations............................. $ (22,595) $(14,500) $(29,877)
European operations............................. (9,404) (7,202) (12,330)
Asian operations................................ -- (115) 133
--------- -------- --------
Consolidated................................. $ (31,999) $(21,817) $(42,074)
========= ======== ========
Identifiable assets:
Domestic operations............................. $ 268,227 $203,214 $121,582
European operations............................. 45,883 77,928 27,690
Asian operations................................ 3,738 1,952 1,433
Eliminations.................................... (102,481) (81,341) (31,112)
--------- -------- --------
Consolidated................................. $ 215,367 $201,753 $119,593
========= ======== ========
</TABLE>

Domestic revenues include export revenues of approximately $1.0 million,
$0.4 million and $0.8 million to Asia for the years ended December 31, 1999,
1998 and 1997, respectively, and $2.8 million, $1.6 million and $2.4 million to
the rest of the world for the years ended December 31, 1999, 1998 and 1997,
respectively.

There were no customers that accounted for more than 10% of net revenues
for the years ended December 31, 1999, 1998 or 1997.

62
<PAGE> 63

ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The Company's definitive Proxy Statement will be filed with the Securities
and Exchange Commission in connection with the solicitation of proxies for the
Company's Annual Meeting of Stockholders, to be held on May 31, 2000 (the "Proxy
Statement"). Certain information required by this item is incorporated by
reference from the information contained in the Proxy Statement under the
captions "Election of Directors" and "Security Ownership of Certain Beneficial
Owners and Management -- Compliance with the Reporting Requirements of Section
16(a)." For information regarding executive officers of the Company, see Part I
of this Form 10-K under the caption "Business -- Executive Officers of the
Registrant."

ITEM 11 -- EXECUTIVE COMPENSATION.

The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement under the caption
"Executive Compensation", except for the information appearing under the
captions "-- Ten Year Option Repricing," "-- Report of the Board of Directors on
Repricing of Options," "-- Report of the Compensation Committee of the Board of
Directors on Executive Compensation" and "-- Performance Measurement
Comparison."

ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement under the caption
"Security Ownership of Certain Beneficial Owners and Management."

ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this item is incorporated by reference from the
information contained in the Company's Proxy Statement under the caption
"Certain Transactions."

PART IV

ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The following documents are filed as part of this Report on Form 10-K:

FINANCIAL STATEMENTS:

See Index to Consolidated Financial Statements at Item 8 on page 34 of this
Report.

FINANCIAL STATEMENT SCHEDULE:

See Index to Consolidated Financial Statements at Item 8 on page 34 of this
Report

63
<PAGE> 64

EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
3.1 Certificate of Incorporation of the Registrant.(1)
3.2 Form of Certificate of Amendment of Certificate of
Incorporation of the Registrant.(2)
3.3 Bylaws of the Registrant.(1)
4.1 Amended Stock Rights Agreement, among the Registrant and the
parties named therein, dated as of March 12, 1993.(1)
4.2 Form of Common Stock certificate.(1)
10.1 Form of Indemnity Agreement entered into among the
Registrant and its directors and officers.(1)
10.2* Registrant's 1992 Stock Option Plan, as amended, including
forms of option agreements.(1)
10.3* Registrant's 1993 Non-Employee Directors Stock Option Plan,
including form of option agreements.(1)
10.4* Registrant's 1993 Employee Stock Purchase Plan, including
form of offering document.(1)
10.5 Lease between the Registrant and Stevens Creek Office Center
Associates, dated as of November 30, 1992.(1)
10.6 Lease between the Registrant and Beim & James Properties
III, dated January 3, 1994.(3)
10.7 Lease between the Registrant and Cupertino Industrial
Associates, dated September 30, 1994.(4)
10.8 Lease between the Registrant and the Flatley Company, dated
January 30, 1995.(5)
10.9 Lease between the Registrant and Cupertino Brown Investment,
dated April 28, 1995.(6)
10.10 Agreement between NetManage, Ltd., Elron Electronic
Industries, Ltd., and NetVision, Ltd., dated July 1,
1995.(6)
10.11 Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation, Syzygy Communications,
Inc. and the Designated Shareholders, dated October 16,
1995.(6)
10.12 Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation and AGE Logic, Inc., dated
November 17, 1995.(6)
10.13 Stock Purchase Agreement by and among the Registrant,
Network Software Associates, Inc. a California corporation,
NetSoft, a California corporation, holders of securities of
NSA and holders of securities of NetSoft, dated as of July
8, 1997.(7)
10.14 Agreement and Plan of Reorganization by and among the
Registrant, Amanda Acquisition Corp. and FTP Software, Inc.,
dated as of June 15, 1998, as amended as of June 30, 1998
and July 14, 1998.(8)
10.15 Acquisition Agreement by and among Registrant, NetManage Bid
Co., Preston Delaware Acquisition Corporation and Simware
Inc., dated as of September 26, 1999.(9)
10.16 Agreement and Plan of Merger by and among Registrant,
NetManage Acquisition Corporation and Wall Data
Incorporated, dated October 20, 1999.(10)
10.17 Lease between Totem Skyline Associates III as Landlord and
Wall Data Incorporated as Tenant dated as of December 2,
1993 and Sublease between Wall Data Incorporated as Landlord
and Totem Skyline Associates III as Tenant dated as of
December 2, 1993.(11)
10.18* Registrant's 1999 Non-Statutory Stock Option Plan, including
form of option agreements.(12)
</TABLE>

64
<PAGE> 65

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
24.1 Power of Attorney. Reference is made to the signature page
to this Form 10-K.
27.1 Financial Data Schedule.
</TABLE>

- ---------------
(1) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-66460) dated July 24, 1993, as
amended, which became effective September 20, 1993.

(2) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-4 (No. 333-59101) dated July 17, 1998 (the
"Form S-4").

(3) Incorporated by reference to the Exhibits filed with the Registrant's
Registration Statement on Form S-1 (No. 33-74364) dated January 24, 1994,
as amended, which became effective February 10, 1994.

(4) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-Q for the quarter ended September 30, 1994.

(5) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-Q for the quarter ended March 31, 1995.

(6) Incorporated by reference to the Exhibits filed with the Registrant's Form
10-K for the year ended December 31, 1995.

(7) Incorporated by reference to the Exhibits filed with the Registrant's Form
8-K dated July 29, 1997.

(8) Incorporated by reference to Annex A to the Joint Proxy
Statement/Prospectus included in the Form S-4.

(9) Incorporated by reference to the Exhibits filed with the Registrant's Form
8-K dated December 23, 1999.

(10) Incorporated by reference to the Exhibits filed with the Registrant's Form
8-K dated January 12, 2000.

(11) Incorporated by reference to the Exhibits filed with Wall Data Incorporated
Form 10-K dated March 30, 1995.

(12) Registrant's 1999 Non-Statutory Stock Option Plan, including form of option
agreements.

* Employee Benefit Plan

(b) Reports on Form 8-K

A Current Report on Form 8-K/A was filed by the Company on January 13, 2000
amending its Report on Form 8-K dated December 23, 1999, to amend the
description of the acquisition of Simware, Inc. and to include certain financial
statements of Simware, Inc. and pro forma combined financial statements for the
Company and Simware, Inc.

A Current Report on Form 8-K/A was filed by the Company on February 14,
2000 amending its Report on Form 8-K dated January 12, 1999, to amend the
description of the acquisition of Wall Data Incorporated and to include certain
financial statements of Wall Data Incorporated and pro forma combined financial
statements for the Company and Wall Data Incorporated.

The exhibits required by this Item are listed under Item 14(a).

(d) Financial Statement Schedules

The financial statement schedule required by this Item is listed under Item
14(a).

65
<PAGE> 66

SCHEDULE II
NETMANAGE, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO ADDITIONS/DEDUCTIONS BALANCE AT
BEGINNING OF REVENUES, AND END OF
PERIOD COSTS OR EXPENSES WRITE-OFFS PERIOD
------------ ----------------- -------------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Allowance for doubtful accounts and
sales returns...................... $2,012 $268 $ (905) $1,375

Year ended December 31, 1998:
Allowance for doubtful accounts and
sales returns...................... $1,375 $378 $2,106(1) $3,859

Year ended December 31, 1999:
Allowance for doubtful accounts and
sales returns...................... $3,859 $790 $ (726)(2) $3,923
</TABLE>

- ---------------
(1) The allowance for doubtful accounts and sales returns includes a reserve for
doubtful accounts of $2,746,000 which was assumed as part of the acquisition
of FTP.

(2) The allowance for doubtful accounts and sales returns includes reserves for
doubtful accounts, in aggregate, of $1,908,000 which were assumed as part of
the acquisitions of Wall Data and Simware.

66
<PAGE> 67

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K Annual
Report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 30th day of March 2000.

NETMANAGE, INC.

By /s/ ZVI ALON

------------------------------------
Zvi Alon
Chairman of the Board,
President and Chief Executive
Officer

POWER OF ATTORNEY

Each person whose signature appears below constitutes and appoints ZVI ALON
and MICHAEL PECKHAM his or her true and lawful attorneys-in-fact and agents,
each acting alone, with the power of substitution and resubstitution, for him or
her and in his or her name, place and stead, in any and all capacities, to sign
any amendments to this Form 10-K Annual Report, and to file the same, with
exhibits thereto and other documents in connections therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ ZVI ALON Chairman of the Board, March 30, 2000
- ----------------------------------------------------- President and Chief
Zvi Alon Executive Officer
(Principal Executive
Officer)

/s/ MICHAEL PECKHAM Chief Financial Officer and March 30, 2000
- ----------------------------------------------------- Senior Vice President,
Michael Peckham Finance and Secretary
(Principal Financial and
Accounting Officer)

/s/ JOHN BOSCH Director March 30, 2000
- -----------------------------------------------------
John Bosch

/s/ UZIA GALIL Director March 30, 2000
- -----------------------------------------------------
Uzia Galil

/s/ SHELLEY HARRISON, PHD Director March 30, 2000
- -----------------------------------------------------
Shelley Harrison, PhD

/s/ DARRELL MILLER Director March 30, 2000
- -----------------------------------------------------
Darrell Miller

/s/ ABRAHAM OSTROVSKY Director March 30, 2000
- -----------------------------------------------------
Abraham Ostrovsky
</TABLE>

67
<PAGE> 68

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
3.1 Certificate of Incorporation of the Registrant.(1)
Form of Certificate of Amendment of Certificate of
3.2 Incorporation of the Registrant.(2)
3.3 Bylaws of the Registrant.(1)
Amended Stock Rights Agreement, among the Registrant and the
4.1 parties named therein, dated as of March 12, 1993.(1)
4.2 Form of Common Stock certificate.(1)
Form of Indemnity Agreement entered into among the
10.1 Registrant and its directors and officers.(1)
Registrant's 1992 Stock Option Plan, as amended, including
10.2* forms of option agreements.(1)
Registrant's 1993 Non-Employee Directors Stock Option Plan,
10.3* including form of option agreements.(1)
Registrant's 1993 Employee Stock Purchase Plan, including
10.4* form of offering document.(1)
Lease between the Registrant and Stevens Creek Office Center
10.5 Associates, dated as of November 30, 1992.(1)
Lease between the Registrant and Beim & James Properties
10.6 III, dated January 3, 1994.(3)
Lease between the Registrant and Cupertino Industrial
10.7 Associates, dated September 30, 1994.(4)
Lease between the Registrant and the Flatley Company, dated
10.8 January 30, 1995.(5)
Lease between the Registrant and Cupertino Brown Investment,
10.9 dated April 28, 1995.(6)
Agreement between NetManage, Ltd., Elron Electronic
Industries, Ltd., and NetVision, Ltd., dated July 1,
10.10 1995.(6)
Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation, Syzygy Communications,
Inc. and the Designated Shareholders, dated October 16,
10.11 1995.(6)
Agreement and Plan of Reorganization among the Registrant,
NetManage Acquisition Corporation and AGE Logic, Inc., dated
10.12 November 17, 1995.(6)
Stock Purchase Agreement by and among the Registrant,
Network Software Associates, Inc. a California corporation,
NetSoft, a California corporation, holders of securities of
NSA and holders of securities of NetSoft, dated as of July
10.13 8, 1997.(7)
Agreement and Plan of Reorganization by and among the
Registrant, Amanda Acquisition Corp. and FTP Software, Inc.,
dated as of June 15, 1998, as amended as of June 30, 1998
10.14 and July 14, 1998.(8)
Acquisition Agreement by and among Registrant, NetManage Bid
Co., Preston Delaware Acquisition Corporation and Simware
10.15 Inc., dated as of September 26, 1999.(9)
Agreement and Plan of Merger by and among Registrant,
NetManage Acquisition Corporation and Wall Data
10.16 Incorporated, dated October 20, 1999.(10)
Lease between Totem Skyline Associates III as Landlord and
Wall Data Incorporated as Tenant dated as of December 2,
1993 and Sublease between Wall Data Incorporated as Landlord
and Totem Skyline Associates III as Tenant dated as of
10.17 December 2, 1993.(11)
Registrant's 1999 Non-Statutory Stock Option Plan, including
10.18 * form of option agreements.(12)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Independent Public Accountants.
</TABLE>

68
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<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
Power of Attorney. Reference is made to the signature page
24.1 to this Form 10-K.
27.1 Financial Data Schedule.
</TABLE>