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                                 UNITED STATES.
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[ ]   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)

DELAWARE                                                              77-0252226
(State or other jurisdiction                   (IRS Employer Identification No.)
of incorporation or organization)


10725 NORTH DE ANZA BOULEVARD, CUPERTINO, CALIFORNIA                       95014
(Address of principal executive offices)                              (Zip code)

       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, $.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. [ ]

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 Nasdaq National Market was $129,220,152 as of February 28,
1997 (1).

The number of shares of Common Stock outstanding as of February 28, 1997 was
43,193,840.

                                -----------------
                       DOCUMENTS INCORPORATED BY REFERENCE

Sections of the Registrant's definitive Proxy Statement for the Registrant's
Annual Meeting of Stockholders, to be held May 30, 1997, 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 9,846,704 shares of Common Stock held by directors and officers and
   stockholders whose beneficial ownership exceeds five percent of the shares
   outstanding at December 31, 1996. 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.

         NetManage(R), Inc. (the "Company") develops, markets and supports an
integrated set of application, server and development tool software for the
Microsoft Windows, Windows 95, and Windows NT platforms. The Company's
standards-based products provide TCP/IP (Transmission Control Protocol/Internet
Protocol) and SNA host access, UNIX access including NFS and X, and
ActiveX-based development. The Company's products include the Chameleon(TM) ATX
family (Chameleon HostLink(TM), Chameleon NFS/X), ECCO(R) Pro and the Z-Mail(TM)
messaging family. The Company was incorporated in 1990 as a California
corporation and changed its state of incorporation to Delaware in 1993 in
conjunction with its initial public offering.

         During 1996, the Company acquired Maximum Information, Inc.
("MaxInfo"). MaxInfo was a developer and supplier of application development
tools and web management systems. During 1996, the Company also purchased
technology from various parties, including collaborative computing software
technology from Applicom Software Industries (1990) Ltd., Z-Mail, an electronic
mail and messaging system, from Network Computing Devices, Inc. and gateway and
mail server technology from U.S. Computer Software, Inc.

         During 1995, the Company acquired all of the outstanding stock of AGE
Logic, Inc. ("AGE") and Syzygy Communications, Inc. ("Syzygy"). AGE was a
supplier of Desktop-to-UNIX connectivity software and provided high-performance
X server, file sharing and terminal emulation products for PC and Macintosh
desktops. Syzygy was an inter-networking communications software company and
developer of interconnection and network management software for hardware and
software vendors and also provided custom communications software for commercial
customers.

         During 1994, the Company acquired the outstanding stock of Ariana S.A.
("Ariana") of Paris, France. Ariana had been a distributor for the Company since
1993. Also during 1994, the Company acquired the outstanding stock of Arabesque
Software, Inc. ("Arabesque") of Bellevue, Washington. Arabesque was primarily
engaged in the development and marketing of personal information management
software products.

         This Annual Report on Form 10-K contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
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
in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, and include, among others, those discussed under the
heading "Factors That May Affect Future Results and Financial Condition."

INDUSTRY BACKGROUND

         The personal computer has evolved from a stand-alone desktop computing
device to become an important tool for facilitating communications, information
sharing and group productivity. This evolution has been enabled by the addition
of network connectivity to personal computers and is driven by basic business
needs for better communications and organizational productivity. As a result,
the PC has become a tool to connect people's desktops to shared repositories of
information and to other people, regardless of location, network or type of
computer.

         The term used to describe the technology for global connectivity is
"inter-networking". Inter-networking had its origins in the public Internet, a
world-wide "network of networks" which allows communication between different
organizations and locations, each with its own individual network of computers.
The application of this same inter-networking technology within a company on its
own computer networks is known as an "Intranet", to distinguish it from the
larger public Internet.


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         The key benefit of inter-networking technology is the more timely and
complete communication of electronic information within and between
organizations. The specific tasks facilitated by inter-networking are numerous
and include basic functions such as universal electronic mail, file transfer and
file sharing capabilities, remote data access, login to remote computers and
information publishing.

         Widespread popular interest in the public Internet has been enhanced by
the emergence of the World-Wide Web, which has given an attractive graphical
front end to information that can be published using inter-networking
technology. Inter-networking is actually much more than just the Web, however.
It is comprised of many different applications which must communicate with one
another, each according to its function, and following certain standards or
conventions which insure interoperability.

         In order 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 is the name of the protocol family used by all
inter-networking devices and applications because it is an open
(non-proprietary) protocol capable of linking disparate environments. NetManage
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 inter-networking software vendors including Microsoft
Corporation ("Microsoft").

         The Company believes that because of the open and interoperable
characteristics of inter-networking technology, the use of TCP/IP based
Intranets and the software that enables them will continue to grow significantly
within organizations, and may emerge as the dominant corporate networking
technology -- replacing other proprietary "LAN" (Local Area Network) technology
from vendors such as Novell, Inc. ("Novell"), International Business Machines
("IBM"), and Digital Equipment Corporation ("Digital").

         A corporate Intranet may be applied to a wide range of business
problems. Within organizations, PCs must be connected not only to other PCs via
LANs, but also to workstations, servers, minicomputers and mainframes, many of
which 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.
Inter-networking also facilitates activities such as mobile computing by
allowing users to use and access more effectively all of a company's computer
systems from a remote location.

         The required software to implement an Intranet includes applications
for the desktop, the software which transports information over the wires
(TCP/IP), the servers at the other end, and management and development tools to
create and administer a network of this type. An easy-to-use, intuitive
interface extends the use of these software components to a large, non-technical
audience and facilitates adoption of this new technology.

         The Company has targeted its products to serve three business market
segments within what is now called the Intranet. These three segments are the
UNIX connectivity business, the IBM host connectivity business, and the
messaging and collaboration business. The Company believes that the markets for
these PC connectivity solutions are large and fast growing segments where the
Company has established products, reputation and expertise.

PRODUCTS AND TECHNOLOGY

         NetManage develops and markets a suite of applications designed to
allow PC users to communicate across diverse networking environments. Targeting
initially the Microsoft Windows platform, the Company now sells products which
run on Microsoft Windows 3.1, Windows 95, and Windows NT. The NetManage product
line includes client applications, TCP/IP network transport software, server
applications and tools for developers and network managers. These software
products are designed to meet the needs of the entire spectrum of corporate
customers including, end-users, software developers and system administrators.
With this breadth and depth of product offerings, the Company believes it is
well positioned to serve the needs of business users with a complete integrated
solution for Intranet software sales, service and support.



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The capabilities of the Company's products include:

       Ease of use - The Company's goal is to create applications for
       non-technical users. Accordingly, the native look and feel of NetManage
       products is designed to be intuitive to the user and compatible with the
       operation of other familiar desktop programs, thereby masking the
       complexities arising from communicating with a variety of systems and
       facilitating use of the product without requiring special training. The
       products are designed to be setup on any desktop in five minutes and to
       determine with minimum user intervention all the appropriate settings and
       installation parameters for each desktop's configuration and network. For
       corporate users, the cost of training, installation, and support can
       exceed software acquisition costs. The benefit of ease of use is
       significant to NetManage's target market.

       Integration - NetManage offers a fully integrated suite of applications.
       Customers do not have to buy terminal emulation from one vendor, file
       transfer from another, electronic mail from yet a third vendor, and a web
       browser downloaded from the Internet -- each with its own setup, user
       interface and feature set. The common characteristics of the product
       suite tend to increase user satisfaction and product utilization.
       Further, the client applications are built in such a way as to be
       manageable by a system administrator, and compatible with custom Intranet
       applications built using NetManage developer toolkits. 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 is designed to compete with `best of class'
       functionality from specialist vendors in each category. The value
       proposition of the NetManage offering 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.

       Adherence to Standards - The very 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 insures that
       the plug and play interoperability that has made the Internet successful
       extends to the corporate Intranet as well.

       The Company's principal product line is marketed under the name
Chameleon. The Chameleon family of products encompasses a suite of over 50
integrated connectivity applications. These applications deliver standards based
solutions for Host Access, Messaging, Group Collaboration and Desktop
Management. Other key products include software for terminal emulation and host
access, networked information management and network application development.
The Company's products include:

       ChameleonNFS/X      A complete PC-to-UNIX connectivity solution for
                           Windows, Windows NT, and Windows 95. Includes an NFS
                           client and server and an X-Server.

       Chameleon HostLink  Terminal emulation and host connectivity to
                           legacy mainframe, and mid-range systems using SNA or
                           async protocols and featuring a migration path to
                           TCP/IP.

       Chameleon 3270LT    A low-cost, small-footprint solution for PC-to-IBM
                           mainframe connectivity.

       ECCO Pro            An award winning networked personal information
                           manager, featuring group calendaring and scheduling
                           capabilities.

       Z-Mail Messaging    An open-standards, cross-platform e-mail solution
         Family            that includes clients and a server.


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         Substantially all of the Company's net revenues have been derived from
the sales of products that provide inter-networking applications for the
Microsoft Windows environment and are marketed primarily to Windows users. As a
result, sales of the Company's products would be materially adversely affected
by market developments adverse to Windows. 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 competitors could seek to expand their product offerings
by designing and selling products using TCP/IP or other technology that could
render the Company's products obsolete or adversely affect sales of the
Company's products. For example, Microsoft, a company with significantly greater
financial, development and marketing resources, has recently introduced a
personal information manager and has included this product in a suite of
software. This development 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.

SALES AND MARKETING

         The Company's marketing strategy is to be identified as the preferred
supplier of an integrated set of TCP/IP applications, servers and development
tools for Microsoft Windows operating systems. The Company's products are
marketed and sold in the United States and internationally by the Company's
direct sales force and authorized channel partners.

         In the United States, the Company combines an aggressive program of
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 increasingly utilize resellers,
particularly value added resellers and systems integrators, in addition to
distributors and original equipment manufacturers. The Company expects that
indirect sales will grow as a percentage of both domestic and total revenues and
that any material increase in the Company's indirect sales as a percentage of
revenues will 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.

         Internationally, the Company has sales offices in London; Munich;
Paris; Tokyo; and Haifa, Israel. 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 1996, the Company derived approximately 33% 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 TCP/IP are used internationally. Accordingly, the
Company localizes its products for use in the native language of target
countries. Kanji, French, Korean, Spanish and German versions of Chameleon have
been developed and are being sold. Further, the Company has adopted its software
to support computing standards that are unique to these countries, such as the
NEC PC in Japan. The Company will 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. 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.


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         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 providing support by telephone from the Company's facilities
in Cupertino and San Diego, California; Nashua, New Hampshire; and Bellevue,
Washington. Both telephone support and regular update releases of the software
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. Telephone support hours are from 5 a.m. to 6
p.m. Pacific Time, complemented by electronic mail, fax and Compuserve access
service.

         International customers are supported by local distributors who are
trained by the Company and also are supported by Company personnel located in
Haifa, Israel and the European and Japanese sales offices.

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 enhance
its current products and develop new products on a timely and cost-effective
basis. 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, would have a material adverse effect on the
Company's results of operations. The failure to develop on a timely basis these
or other enhancements incorporating new functionality could cause customers to
delay purchase of the Company's current products and thereby 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
inter-networking applications for the TCP/IP protocol such as FTP Software, IBM,
Microsoft, Novell, and Sun Microsystems, Inc. as well as several other
companies. The Company also competes with providers of host access software such
as Attachmate Corporation, Wall Data, Inc., Hummingbird Communications, Ltd. and
WRQ, Inc.

         The inter-networking marketplace has also been identified as a key
market by several other companies, including Netscape Communications
Corporation, Oracle Corporation and others. 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. The Company has recently experienced
price declines for its products, contributing to lower revenues in 1996 as
compared to prior periods. 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 increase software unit sales

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in order to maintain net revenues at existing levels. There can be no assurance
that the Company will be successful in doing so.

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 patent, trade secret
and copyright laws, which afford only limited protection. 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" 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 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.

         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. The Company believes that its products and technology
do not infringe any existing proprietary rights of others, although there can be
no assurance that third parties will not assert infringement claims in the
future.

EMPLOYEES

         As of December 31, 1996, the Company had a total of 632 full-time
employees, of whom 305 were engaged in sales, marketing and technical support,
88 in general management, administration and finance, 231 in software
development and engineering and 8 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 Company believes that its employee relations
are good.

         The majority of the Company's employee workforce is located in the
extremely competitive employment markets of the Silicon Valley in California and
in Haifa, Israel. During the latter half of 1996, 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. The Company has and will continue to address the issue of
attrition, and in fact in January 1997, repriced the majority of its outstanding
stock options in an effort to retain its employees and become competitive in the
extremely competitive employment market. 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 employee
workforce, train and manage its management and employee base, and continue to
implement and improve its operating and financial controls. There can be no
assurance that the Company will be able to manage such challenges successfully.


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EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers of the Company and their ages as of December 31,
1996 are as follows:

              NAME                       AGE           POSITION
              ----                       ---           --------

              Zvi Alon                    45    Chairman of the Board,
                                                President and
                                                Chief Executive Officer

              Walter D. Amaral            45    Chief Financial Officer,
                                                Senior Vice President,
                                                Finance and Secretary

              Carl W. Peede               49    Senior Vice President,
                                                Worldwide Marketing

              Patricia M. Roboostoff      43    Senior Vice President,
                                                Human Resources

         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 ("Intel"), 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.

         Walter D. Amaral has served as Senior Vice President, Finance and Chief
Financial Officer since April 1995 when he joined the Company. Prior to joining
the Company, Mr. Amaral served as Chief Financial Officer of Maxtor Corporation
("Maxtor"), a disk drive manufacturer, since April 1992. From 1977 to 1992, Mr.
Amaral was at Intel, in numerous positions, most recently as Corporate
Controller. Mr. Amaral received a B.S. degree in Administration from San Jose
State University.

         Carl W. Peede has served as Senior Vice President, Worldwide Marketing
since joining the Company in June 1996. Prior to joining the Company, Mr. Peede
served as Vice President of Marketing for Attachmate Corporation, a software
developer, since September 1994 and as Manager of Worldwide Marketing for Wall
Data, Inc., a software developer, from January 1993 to September 1994. Prior to
1993, Mr. Peede was Executive Vice President of TelAviso, a consulting company
which he founded. Mr. Peede received a B.S. degree in electrical engineering
from Georgia Institute of Technology, a M.B.A. from Georgia State University and
holds a Professional Engineering License from the state of Alabama. Mr. Peede
resigned from the Company effective April 7, 1997.

         Patricia M. Roboostoff joined the Company in December 1994 as Vice
President, Human Resources and since March of 1996 has held the position of
Senior Vice President, Human Resources. Prior to joining NetManage, she was Vice
President Administration/Human Resources at Maxtor, since October 1991. From
1978 to 1991 Ms. Roboostoff was at Intel, in several positions, most recently as
Human Resources Manager of the Microprocessor/Technology/Manufacturing
organization.

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ITEM 2 - PROPERTIES.

         In the United States, the Company's principal sales, marketing,
technical support, administration, product development and support functions
occupy an aggregate of approximately 134,000 square feet of facilities comprised
of three buildings located in Cupertino, California, one building in San Diego,
California and one building in Scotts Valley, California. The Company also
leases approximately 18,000 square feet in Bellevue, Washington, which is used
primarily for sales and product development, and approximately 12,000 square
feet in Nashua, New Hampshire, which is used for sales and technical support.

         Internationally, the Company leases approximately 35,000 square feet in
Haifa, Israel for the purpose of international sales, marketing and technical
support, administration, and product development and owns a facility in


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Jerusalem, Israel, which is used primarily for product development. The Company
also leases sales office space in Paris, France; Munich, Germany; Tokyo, Japan;
and London, England.

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ITEM 3 - LEGAL PROCEEDINGS.

         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-97-0109 CW, 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. Both complaints seek an unspecified amount of
damages. The Company believes there is no merit to either case and intends to
defend the cases vigorously. There can be no assurance that the Company will be
able to prevail in the lawsuits, or that the pendency of the lawsuits will not
adversely affect the Company's operations. As the outcome of this matter cannot
be reasonably determined, the Company has not accrued for any potential loss
contingencies.

         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. The complaint alleges that, between April
18, 1996 and July 18, 1996, the defendants violated California state law by
making false or misleading statements of material fact about the Company's
prospects and finances. The complaint seeks an unspecified amount of damages.
The Company believes there is no merit to the case and intends to defend it
vigorously. There can be no assurance that the Company will be able to prevail
in the lawsuit, or that the pendency of the lawsuit will not adversely affect
the Company's operations. As the outcome of this matter 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 all other 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.

--------------------------------------------------------------------------------


                                       9
<PAGE>   10
                                     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
System under the symbol NETM. As of February 28, 1997 there were 687
stockholders of record.

         The high and low closing prices of the Company's common stock for each
quarter of 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                              First      Second     Third     Fourth
         -----------------------------------------------------------
         <S>        <C>      <C>         <C>       <C>        <C>
         1996
                    High     $22.69      $18.00    $12.75     $ 8.56
                    Low      $ 9.88      $ 9.75    $ 7.88     $ 5.63

         1995
                    High     $21.63      $21.25    $26.25     $29.88
                    Low      $16.94      $15.00    $16.13     $19.00
</TABLE>

         Price range per share is based on the quarterly high and low closing
prices for the Company's common stock as reported by Nasdaq, adjusted for the
two-for-one stock dividend effected in April 1995.

         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


For the five years ended December 31,
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                        1996            1995           1994          1993           1992
                                    --------------------------------------------------------------------
<S>                                 <C>             <C>            <C>            <C>           <C>
STATEMENT OF OPERATIONS DATA:

Net revenues                        $104,596        $125,446       $ 71,466       $29,106       $ 5,004

Income (loss) from operations        (13,653)         29,596         26,619         9,183         1,393

Net income (loss)                     (5,705)         22,297         17,815         5,676           861

Net income (loss) per share         $  (0.13)       $   0.52       $   0.43       $  0.19       $  0.03

Weighted average common
    shares and equivalents            42,341          42,955         41,103        29,262        26,252

BALANCE SHEET DATA:

Working capital                     $ 71,668        $ 83,738       $ 64,091       $39,686       $ 1,379

Total assets                         152,529         154,471        116,358        47,762         2,263

Total stockholders' equity           129,291         129,397         99,306        41,475         1,698
</TABLE>


--------------------------------------------------------------------------------


                                       10
<PAGE>   11
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

         This "Annual Report" contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, among others, statements regarding expected
fluctuations in revenues and percentages of revenues from international markets,
indirect sales channels and services, and statements regarding expected declines
in operating expenses and capital spending. 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,
among others stated herein, that the markets for the Company's products could
grow more slowly than the Company believes, or that the Company will not be able
to take advantage of growth in those markets. In addition, there is no assurance
that the Company's organizational changes and plans for 1997 will prove
successful, that the Company's existing products will continue to meet with
customer acceptance, that the Company will not suffer increased competitive
pressures, that corporate buying decisions will not be influenced by the actions
of the Company's competitors or other market factors, or that the Company will
return to profitability and growth. Additional factors are identified under the
heading "Factors That May Affect Future Results and Financial Condition". The
following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto.

OVERVIEW

         NetManage, Inc. (the "Company") develops, markets and supports an
integrated set of application, server, and development tool software for the
Microsoft Windows, Windows 95, and Windows NT platforms. The Company's
standards-based products provide TCP/IP and SNA host access, UNIX access
including NFS and X, and ActiveX-based development. The Company's products
include the Chameleon ATX family (Chameleon HostLink, Chameleon NFS/X), ECCO
Pro, and the Z-Mail messaging family. Its products are sold and serviced
worldwide by the Company's direct sales force, international subsidiaries, and
authorized channel partners. Since the Company's inception, revenues from the
Chameleon family of products have represented substantially all of the Company's
revenues, and the Company expects that revenues from these products will
continue to account for a substantial portion of the Company's revenues for the
foreseeable future.

         In July 1996, the Company acquired all of the outstanding stock of
Maximum Information, Inc. ("MaxInfo"), in exchange for shares of the Company's
common stock. This transaction was accounted for as a pooling of interests
during the third quarter of 1996. The operations of MaxInfo, however, were not
material to the Company's consolidated results of operations and financial
position and, therefore, the historical financial statements have not been
restated to reflect the acquisition retroactively. Accordingly, the operations
of MaxInfo from the date of acquisition forward have been recorded in the
Company's consolidated financial statements.

         In November 1996, the Company acquired all of the outstanding stock of
AGE Logic, Inc. ("AGE") in exchange for shares of the Company's common stock.
The transaction was accounted for as a pooling of interests and accordingly, the
Company's consolidated financial statements for the years ended December 31,
1995, 1994 and 1993 have been restated to combine the results of AGE and the
Company. The Company's financial statements for the year ended December 31, 1992
have not been restated, however, as the results of operations for AGE were not
materially significant to the Company's consolidated financial statements. The
Company also acquired all of the outstanding stock of Syzygy Communications,
Inc. ("Syzygy"), in exchange for shares of the Company's common stock, in
October 1995. This transaction was also accounted for as a pooling of interests.
The operations of Syzygy, however, were not material to the Company's
consolidated results of operations and financial position and, therefore, the
historical financial statements have not been restated to reflect the
acquisition retroactively. Accordingly, the operations of Syzygy from the date
of acquisition forward have been recorded in the Company's consolidated
financial statements.

         In 1994, the Company acquired all of the outstanding stock of Arabesque
Software, Inc. ("Arabesque") and Ariana, S.A. ("Ariana"). These transactions
were accounted for as purchases and the operations of Arabesque and


                                       11
<PAGE>   12
Ariana from the dates of acquisition forward have been recorded in the Company's
consolidated financial statements.

RESULTS OF OPERATIONS

         The Company experienced a significant decline in net revenues and net
income during the year ended December 31, 1996 as compared to the prior year.
The decline in net revenues primarily reflects increased competition, pricing
pressures and general confusion in the marketplace resulting from rapidly
changing technology and product introductions. In addition, the decline reflects
the Company's lack of success in marketing and selling its products in the
United States and Japan in particular, and also reflects the inability to
realize any significant revenues from the Company's recent acquisitions of
products and technology. Operating expenses for 1996 included increased costs
related to the Company's acquisition activity, particularly headcount-related
costs, and increased costs related to the Company's investment in expanding its
direct corporate sales and support functions in the United States, neither of
which has yet produced the expected results in terms of increased net revenues.
In addition, operating expenses for 1996 included a fourth quarter charge of
$13.4 million for the write off of in-process research and development in
connection with the purchases of technology from Applicom Software Industries
(1990) Ltd. and U.S. Computer Software, Inc. (see Note 3 of Notes to
Consolidated Financial Statements). Operating expense levels are based in part
on the Company's expectations as to future revenues and to a large extent are
fixed. Operating expense growth, coupled with the significant decline in net
revenues, resulted in a net loss of $5.7 million for the year ended December 31,
1996. Operating expenses are expected to decline in terms of absolute dollars in
the future. Such operating expenses may increase, however, in the future as a
percentage of net revenues in the event the Company's revenues decline more than
its operating expenses. 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.


                                       12
<PAGE>   13
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
(Dollars in millions)                           December 31,                   Change
Year ended                                  1996           1995            $            %
------------------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>          <C>
Net revenues:
    License fees                           $ 89.3         $112.1        $(22.7)       (20.3%)
    Services                                 15.3           13.4           1.9         14.2%
                                           ------         ------        ------
      Total net revenues                   $104.6         $125.5        $(20.8)       (16.6%)

  As a percentage of net revenues:
    License fees                             85.4%          89.3%
    Services                                 14.6%          10.7%
                                           ------         ------
      Total net revenues                    100.0%         100.0%

Gross margin                               $ 92.8         $112.4        $(19.6)       (17.4%)
    As a percentage of net revenues          88.7%          89.6%

Research and development                   $ 27.9         $ 23.9        $  4.1         17.1%
    As a percentage of net revenues          26.7%          19.0%

Sales and marketing                        $ 52.2         $ 46.1        $  6.1         13.1%
    As a percentage of net revenues          49.9%          36.8%

General and administrative                 $ 11.2         $  9.8        $  1.4         14.2%
    As a percentage of net revenues          10.7%           7.8%

Write-off of in-process
      research and development             $ 13.4         $   --        $ 13.4        100.0%
    As a percentage of net revenues          12.8%            --

Amortization of goodwill                   $  1.5         $  1.3        $  0.2         17.6%
    As a percentage of net revenues           1.5%           1.0%

Acquisition costs                          $  0.2         $  1.7        $ (1.5)       (88.3%)
    As a percentage of net revenues           0.2%           1.4%

Interest income                            $  5.6         $  4.5        $  1.1         25.2%
    As a percentage of net revenues           5.4%           3.6%

Equity in losses of
      unconsolidated affiliate             $  1.0         $  0.3        $  0.7        228.4%
    As a percentage of net revenues           1.0%           0.2%

Provision (benefit) for income taxes       $ (3.3)        $ 11.5        $(14.8)      (129.0%)
    Effective tax rate                        n/a           34.0%

Net income (loss)                          $ (5.7)        $ 22.3        $(28.0)      (125.6%)
    As a percentage of net revenues           n/a           17.8%
-------------------------------------------------------------------------------------------
</TABLE>


                                       13
<PAGE>   14
Net revenues

         Historically substantially all of the Company's net revenues have been
derived from software license fees. Service revenues have been primarily
attributable to maintenance agreements associated with licenses. During the year
ended December 31, 1996, however, license fees declined significantly and
service revenues increased in absolute dollars year over year by approximately
14%.

         License fees decreased both in absolute dollars and as a percentage of
net revenues during the year ended December 31, 1996 as compared to the same
period of 1995. The decline in license fees was primarily attributable to
increased competition, heightened pricing pressures and the general confusion
within the marketplace resulting from rapidly changing technology and product
introductions, the delayed release of Windows NT 4.0, and the slow adoption of
Windows 95 in corporate accounts, all of which contributed to delayed buying
decisions, particularly by corporate users. In addition, the decline reflects
the Company's lack of success in marketing and selling its products in the
United States and Japan in particular, and also reflects the inability of the
Company to realize any significant revenues from its recent acquisitions of
products and technology. These factors may lead to lower unit volumes as well as
lower average prices for the foreseeable future. While the Company has been
adjusting its operations to address these issues, there can be no assurance that
revenues will stabilize or increase in the future. Service revenues increased in
absolute dollars year over year by approximately 14% and as a percentage of net
revenues increased to nearly 15% of total net revenues. These increases
primarily reflect the Company's focus on marketing its customer support services
domestically in 1996.

         During mid-1995, the Company expanded its worldwide operations with new
sales offices internationally in Europe and Japan. International revenues as a
percentage of total net revenues were 33% and 30% for the years ended December
31, 1996 and 1995, respectively. During the fourth quarter of 1996, in
particular, the Company was unsuccessful in marketing and selling its products
in Japan, which in 1995 and the first half of 1996 accounted for the majority of
the Company's international revenues. The Company has recently addressed and
taken steps with respect to staffing and management, distributor relationships,
and product marketing in Japan, however there can be no assurance that the
Company will be successful in its attempts to more successfully market and sell
its products in Japan in the future.

         Software license fees are generally recognized as revenue upon shipment
if there are no, or insignificant, post-delivery obligations, and allowances for
returns and doubtful accounts are provided based on historical rates of returns
and write-offs, which have not been material to date. 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 term of such agreements.
The Company expects that service revenues will continue to increase as a
percentage of total net revenues.

         Periodically the Company has provided training and consulting services
to selected customers. Such revenue is recognized as the related services are
performed and has not been material to date. The Company does not expect that
revenues generated from such services will become materially significant in the
future.

         No customer accounted for more than 10% of net revenues during the
years ended December 31, 1996 and 1995.

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 writedown of purchased software. A charge of approximately $2.7
million is included in cost of revenues for the year ended December 31, 1996 for
the amortization and write-off of software purchased in early 1996. The
write-off of purchased software primarily resulted from the Company's decision
during the fourth quarter of 1996 to discontinue its ChameleonNFS for Mac OS and
Xoftware(R) for Mac OS product lines. Gross


                                       14
<PAGE>   15
margin, as a percentage of net revenues, declined slightly between the years
ended December 31, 1996 and 1995, primarily as a result of the decline in the
revenue base and the write-off discussed above. Cost of service revenues through
December 31, 1996 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 and higher gross margins on license fee revenues than
on service revenues.

Research and development

         Research and development ("R&D") expenses consist primarily of salaries
and benefits, occupancy and travel expenses, as well as fees paid to outside
consultants. The increase in R&D for the year ended December 31, 1996 as
compared to the prior year primarily reflects the hiring of product development
engineers in the United States and Israel during 1996, in part reflecting the
high employee attrition experienced in both locations.

         The Company expects that R&D expenses will decrease in absolute dollars
in the future and expects that R&D expenses as a percentage of net revenues will
fluctuate depending on future revenue levels, acquisitions and licensing of
technology. The Company expects to reduce operating costs by discontinuing
certain products and development efforts, particularly those with low future
revenue potential. The Company has recently organized into business units, one
focused on the core business and the other on emerging technologies. In the Core
Products Business unit, the Company will continue to focus on improving the
performance and usability of ChameleonNFS/X and Chameleon HostLink, the products
which currently represent the majority of the Company's revenue. Revenues from
the Core Products Business unit will be used to seed the Emerging Technologies
Business unit, where new products are researched, tested and sold.

         Software development costs are accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed," under
which the Company is required to capitalize software development costs after
technological feasibility is established, which the Company defines as a working
model and further defines as a beta version of the software. The establishment
of technological feasibility and the ongoing assessment of the recoverability of
these costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future gross
product revenue, estimated economic life and changes in technology. Costs which
do not qualify for capitalization are charged to R&D expense when incurred. As
previously discussed, approximately $2.7 million is included in cost of revenues
at December 31, 1996 for the amortization and write-off of software purchased in
early 1996. 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 research and development 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 promotion
expenses, and customer service and support costs. The increase in S&M expenses
for the year ended December 31, 1996 compared to the prior year, both in
absolute dollars and as a percentage of net revenues, reflects increased costs
related to the Company's investment in expanding its direct corporate sales and
support functions in the United States and increased marketing activities,
including advertising, trade show participation and promotions.

         The Company believes that S&M expenses will decrease in absolute
dollars in the future as the Company focuses on controlling operating expenses
relative to revenues and returning the Company to profitability and growth. The
Company expects that S&M expenses as a percentage of net revenues will fluctuate
depending on future revenue levels.


                                       15
<PAGE>   16
General and administrative

         General and administrative ("G&A") expenses increased in absolute
dollars and as a percentage of net revenues for the year ended December 31,
1996, compared to the prior year primarily as a result of increased staffing and
associated expenses necessary to support and improve the Company's
infrastructure. The increase as a percentage of net revenues was also
attributable to the decreased revenue base.

         The Company believes that G&A expenses will decrease in absolute
dollars in the future as the Company focuses on controlling operating expenses
relative to revenues and returning the Company to profitability and growth. The
Company expects that G&A expenses as a percentage of net revenues will fluctuate
depending on future revenue levels.

Write-off of in-process research and development

         During the year ended December 31, 1996, the Company purchased
technology from several parties. The majority of the $13.4 million fourth
quarter charge is attributable to the Company's purchases of technology from
Applicom Software Industries (1990) Ltd. ("Applicom") and U.S. Computer
Software, Inc. ("U.S. Computer"). In management's opinion, both purchases of
technology had not reached technological feasibility and had no probable future
alternative use. Accordingly, such amounts were deemed to be in-process research
and development and were charged to operations for the year ended December 31,
1996.

Amortization of goodwill

         During 1996, the Company purchased certain assets related to the Z-Mail
business, an electronic mail and messaging system, of Network Computing Devices,
Inc. ("NCD"). The assets purchased include goodwill which is being amortized on
a straight-line basis over a two year period beginning July 1996. In 1994, the
Company recorded approximately $2.6 million of goodwill, primarily in connection
with the acquisitions of Arabesque and Ariana. Goodwill from these two
acquisitions was being amortized on a straight-line basis and was fully
amortized at December 31, 1996.

Acquisition costs

         The Company incurred acquisition costs during the year ended December
31, 1996 related to the aforementioned acquisition of MaxInfo, which was
accounted for as a pooling of interests. Acquisition costs for the year ended
December 31, 1995 primarily related to the aforementioned acquisitions of Syzygy
and AGE, which were also accounted for as poolings of interests. Acquisition
costs consisted primarily of investment banking, legal, accounting and other
related expenses.

Interest income

         Interest income increased in absolute dollars and as a percentage of
net revenues primarily as a result of higher average cash and investment
balances during the year ended December 31, 1996 compared to the prior year.

Equity in losses of unconsolidated affiliate

         In July 1995, NetManage, Ltd., one of the Company's wholly-owned
subsidiaries, agreed to an investment in one of its wholly-owned subsidiaries,
NetVision, Ltd. ("NetVision") by Elron Electronics, Ltd. ("Elron"). The Company
retains an ownership in NetVision of 50%. Prior to the investment by Elron, the
accounts of NetVision were included in the Company's consolidated financial
statements. Subsequent to the investment, the Company did not have a majority
voting interest in NetVision. Accordingly, NetVision's accounts are no longer
consolidated and the Company's remaining investment in NetVision is accounted
for by the equity method.

Provision (benefit) for income taxes

         The Company recorded a benefit for income taxes of approximately $3.3
million on a net loss of approximately $5.7 million for the year ended December
31, 1996 compared to a provision for income taxes of approximately $11.5 million
on net income of approximately $22.3 million for the year ended December 31,
1995.


                                       16
<PAGE>   17
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
(Dollars in millions)                          December 31,                   Change
Year ended                                 1995          1994            $             %
------------------------------------------------------------------------------------------
<S>                                       <C>           <C>           <C>            <C>
Net revenues:
    License fees                          $112.1        $ 64.7        $ 47.4          73.3%
    Services                                13.4           6.8           6.6          97.0%
                                          ------        ------        ------
      Total net revenues                  $125.5        $ 71.5        $ 54.0          75.5%

As a percentage of net revenues:
    License fees                            89.3%         90.5%
    Services                                10.7%          9.5%
                                          ------        ------
      Total net revenues                   100.0%        100.0%

Gross margin                              $112.4        $ 64.2        $ 48.2          75.1%
    As a percentage of net revenues         89.6%         89.8%

Research and development                  $ 23.9        $ 11.3        $ 12.6         110.9%
    As a percentage of net revenues         19.0%         15.8%

Sales and marketing                       $ 46.1        $ 18.7        $ 27.4         146.5%
    As a percentage of net revenues         36.8%         26.2%

General and administrative                $  9.8        $  5.2        $  4.6          87.6%
    As a percentage of net revenues          7.8%          7.3%

Write-off of in-process
      research and development            $   --        $  2.0        $ (2.0)       (100.0%)
    As a percentage of net revenues           --           2.8%

Amortization of goodwill                  $  1.3        $  0.3        $  1.0         314.7%
    As a percentage of net revenues          1.0%          0.4%

Acquisition costs                         $  1.7        $   --        $  1.7         100.0%
    As a percentage of net revenues          1.4%           --

Interest income                           $  4.5        $  2.6        $  1.9          73.8%
    As a percentage of net revenues          3.6%          3.6%

Provision for income taxes                $ 11.5        $ 11.4        $  0.1           0.9%
    Effective tax rate                      34.0%         39.0%
------------------------------------------------------------------------------------------
</TABLE>

Net revenues

         The increase in license fees was primarily attributable to increased
market acceptance of the Company's Chameleon family of products as well as the
contribution of increased sales of the Company's ECCO Pro product, which
resulted from the acquisition of Arabesque in 1994. Also, the Company focused
domestic marketing efforts on indirect sales channels which contributed to the
increase in revenues in 1995.

         During 1995, the Company continued expanding its worldwide operations
with new sales offices both internationally, in Europe and Japan, and
domestically. As a result, international revenues, including export sales,


                                       17
<PAGE>   18
accounted for approximately 30% and 19% of net revenues in 1995 and 1994,
respectively. The increase in international revenues was attributable primarily
to the establishment of sales offices in London, Munich, Tokyo and Paris; the
latter was established as a result of the Company's acquisition of its French
distributor, Ariana, in December 1994. A shift in international marketing
efforts towards indirect channels, including increasing the number of
international distributors and resellers, also contributed to the increase.
Finally, the introduction of an increased number of localized versions of the
Company's products also contributed to the increased acceptance of the Company's
products in the international marketplace.

         No customer accounted for more than 10% of net revenues during the
years ended December 31, 1995 and 1994.

Gross margin

         Cost of revenues primarily included royalties paid to third parties for
licensed software incorporated into the Company's products as well as costs
associated with product packaging, documentation and software duplication. Cost
of service revenues through December 31, 1995 was not material and was not
reported separately.

Research and development

         R&D expenses consisted primarily of salaries and benefits, occupancy
and travel expenses, as well as fees paid to outside consultants. The increase,
both in absolute dollars and as a percentage of net revenues, primarily
reflected the hiring of additional product development engineers in the United
States and Israel during 1995.

Sales and marketing

         S&M expenses consisted primarily of salaries and commissions of sales
and marketing personnel, advertising and promotion expenses, and customer
service and support costs. The increase in S&M expenses, both in absolute
dollars and as a percentage of net revenues, reflected increased salaries and
commissions due to increased staffing and to sales commissions on significantly
higher revenues during the year ended December 31, 1995, the growth of internal
telesales and customer service and support functions, the opening of foreign
sales offices in Europe and Japan in 1995, as well as domestic sales offices,
and increased marketing activities, including trade show participation,
advertising and promotions.

General and administrative

         G&A expenses increased in absolute dollars and as a percentage of net
revenues primarily as a result of increased staffing and associated expenses
which were necessary to manage and support the Company's growth.

Write-off of in-process research and development

         For the year ended December 31, 1994, the Company allocated $2.0
million of the purchase price related to the Arabesque acquisition to research
and development projects that, in management's opinion, had not reached
technological feasibility and had no probable alternative future use. No such
expenses were incurred for the year ended December 31, 1995.

Amortization of goodwill

         In 1994, the Company recorded approximately $2.6 million of goodwill,
primarily in connection with the acquisitions of Arabesque and Ariana. Goodwill
was amortized on a straight-line basis over two years.

Acquisition costs

         The Company incurred acquisition costs in 1995 related to the
aforementioned acquisitions of Syzygy and AGE. These costs consisted primarily
of investment banking, legal, accounting and other related expenses.

Interest income

         The increase in interest income was reflective of the increase in cash
generated by operating activities and the increase in the interest rates
received on higher levels of cash throughout 1995.


                                       18
<PAGE>   19
Provision for income taxes

         The Company's effective tax rate in 1995 decreased to 34% from 39% in
1994, reflecting the increased benefit of tax-free interest income and benefits
derived from increased international operations which are subject to a lower tax
rate.

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
-----------------------------------------------------------------
                                                As of December 31,
(In millions)                                    1996        1995
-----------------------------------------------------------------
<S>                                             <C>         <C>
Cash and cash equivalents                       $19.5       $32.6
Short-term investments                           46.6        47.5
Long-term investments                            37.2        29.2
Net cash provided by operating activities        13.7        28.1
Net cash used in investing activities            30.8        43.4
Net cash provided by financing activities         4.7         4.8
-----------------------------------------------------------------
</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, and have aggregated net proceeds to the
Company of approximately $72.5 million. The Company does not have a bank line of
credit or an equipment lease facility.

         During the year ended December 31, 1996, the Company's aggregate cash
and cash equivalents, short-term investments and long-term investments decreased
from $109.3 million to $103.3 million. This decrease was due primarily to
operating losses.

         The Company's principal investing activities to date have been the
purchase of short-term and long-term investments, purchases of technology, and
purchases of property and equipment. Net of proceeds from maturities, the
Company invested $8.8 million in short-term and long-term investments during
1996. Cash expenditures for purchased technology and the acquisition of a
business amounted to $12.7 million in 1996. In addition, expenditures for
purchases of property and equipment were $4.7 million in 1996 and were primarily
purchases of computers and, to a lesser extent, office equipment. The Company
does not have any specific commitments with regard to future capital
expenditures and it is anticipated that such spending will decline. The
Company's principal commitment as of December 31, 1996 consists of leases on its
facilities.

         Net cash provided by financing activities in 1996 reflects proceeds
from the issuance of common stock under the Company's stock purchase plan and
stock option plans.

         The Company and Elron have guaranteed a bank line of credit for
NetVision in the amount of $2.0 million. As of December 31, 1996, there was no
outstanding balance on this line of credit.

         At December 31, 1996, the Company had working capital of $71.7 million.
The Company believes that its current cash balances and operating cash flows
will be sufficient to meet the Company's working capital and capital expenditure
requirements for the foreseeable future.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

         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; market acceptance of new products; customer
order deferrals in anticipation of new products; the size



                                       19
<PAGE>   20
and timing of individual orders; mix of international and domestic revenues; mix
of distribution channels through which the Company's products are sold;
seasonality of revenues; quality control of products; changes in the Company's
operating expenses; personnel changes; foreign currency exchange rates and
general economic conditions. As a result, 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.

         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 quarter are substantially
dependent on orders booked in 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 revenues 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. Fluctuations in operating results may also result in volatility
in the price of the Company's common stock.

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. Particularly
over the past year, 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 enhance its current products and to develop, introduce
successfully and market new products on a timely and cost-effective basis. 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, would have a material adverse effect on the
Company's results of operations. The failure to develop on a timely basis these
or other 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.

         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 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. 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. The Company has
recently experienced price declines for its products, contributing to lower
revenues. 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 TCP/IP or other technology that could
render obsolete or adversely affect sales of the Company's products. For
example, Microsoft Corporation ("Microsoft"), a company with significantly
greater financial, development and marketing resources, has recently introduced
a personal information manager and has included this product in a suite of
software. This development 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.

         Substantially all of the Company's net revenues have been derived from
the sales of products that provide inter-networking applications for the
Microsoft Windows environment and are marketed primarily to Windows users. As a
result, sales of the Company's products would be materially adversely affected
by market developments



                                       20
<PAGE>   21
adverse to Windows. 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 Window releases.

Marketing and Distribution

         As part of its strategy to develop multiple distribution channels, the
Company expects to increase its use of resellers, particularly value added
resellers and system integrators, in addition to distributors and original
equipment manufacturers. The Company expects that indirect sales will grow as a
percentage of both domestic and total revenues and that any material increase in
the Company's indirect sales as a percentage of revenues will 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.

Global Market Risks

         The Company derived approximately 33% of net revenues from
international sales during the year ended December 31, 1996. 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, 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.

Employee Retention

         The majority of the Company's employee workforce is located in the
extremely competitive employment markets of the Silicon Valley in California and
in Haifa, Israel. During the latter half of 1996, 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. The Company has and will continue to address the issue of
attrition, and in fact in January 1997, repriced the majority of its outstanding
stock options in an effort to retain its employees and become competitive in the
extremely competitive employment market. 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 employee
workforce, train and manage its management and employee base, and continue to
implement and improve its operating and financial controls. There can be no
assurance that the Company will be able to manage such challenges successfully.

Other

         The Company regularly evaluates product and technology acquisition
opportunities and anticipates that it may make additional acquisitions in the
future. Product and technology acquisitions entail numerous risks, including
difficulties in the assimilation of acquired operations and products, diversion
of management's attention away from day-to-day matters and potential loss of key
employees from acquired companies. To date, the Company's acquisitions have not
contributed significantly to revenues, and there can be no assurance that the
Company will be able to integrate successfully the operations and personnel
acquired to date, and if applicable, in the future. The failure of the Company
to do so could have a material adverse effect on the Company's results of
operations.

                                       21
<PAGE>   22
QUARTERLY FINANCIAL INFORMATION

         The following table sets forth unaudited quarterly financial
information for the Company's last eight quarters. The Company's consolidated
financial results were restated for the year ended December 31, 1995 to include
the combined operating results of AGE and the Company, as previously described.
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 expected to be
recognized in the third month of each quarter and may 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>
                                                           1995
                                     -------------------------------------------------
(In thousands, except per            Mar. 31       June 30       Sept. 30      Dec. 31
  share data)                        -------------------------------------------------
<S>                                  <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:

Net revenues                         $26,936       $32,034       $35,250       $31,226

Gross margin                          24,213        28,471        31,761        27,936

Income (loss) from operations          7,110         8,073        10,228         4,185

Net income (loss)                      5,345         6,121         7,561         3,270

Net income (loss) per share          $  0.12       $  0.14       $  0.18       $  0.08


Weighted average common shares
  and equivalents                     42,803        42,702        43,043        43,330

Price range per common               $ 16.94-      $ 15.00-      $ 16.13-      $ 19.00-
  share (1)                          $ 21.63       $ 21.25       $ 26.25       $ 29.88
</TABLE>


<TABLE>
<CAPTION>
                                                            1996
                                     ------------------------------------------------
(In thousands, except per            Mar. 31       June 30      Sept. 30     Dec. 31
  share data)                        ------------------------------------------------
<S>                                  <C>           <C>          <C>         <C>
STATEMENT OF OPERATIONS DATA:

Net revenues                         $33,022       $26,775      $25,426     $ 19,373

Gross margin                          29,751        24,238       23,043       15,727

Income (loss) from operations          6,792           640         (443)     (20,642)

Net income (loss)                      5,020         1,635          241      (12,601)

Net income (loss) per share          $  0.12       $  0.04      $  0.01     $  (0.29)


Weighted average common shares
  and equivalents                     43,141        43,521       43,049       42,931

Price range per common               $  9.88-      $  9.75-     $  7.88-    $   5.63-
  share (1)                          $ 22.69       $ 18.00      $ 12.75     $   8.56
</TABLE>



(1) The Company's common stock is traded on the Nasdaq National Market System
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,
adjusted for the two-for-one stock dividends effected in May 1994 and April
1995. As of February 28, 1997 there were 687 stockholders of record.

--------------------------------------------------------------------------------


                                       22
<PAGE>   23
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
         Index to Consolidated Financial Statements                             Page
<S>                                                                            <C>
         Financial Statements:

                  Report of Independent Public Accountants                        24
                  Consolidated Balance Sheets at December 31, 1996 and 1995       25
                  Consolidated Statements of Operations --
                    Years ended December 31, 1996, 1995 and 1994                  26
                  Consolidated Statements of Stockholders' Equity --
                    Years ended December 31, 1996, 1995 and 1994                  27
                  Consolidated Statements of Cash Flows --
                    Years ended December 31, 1996, 1995 and 1994                  28
                  Notes to Consolidated Financial Statements                   29-39

         Financial Statement Schedules

                  II.  Valuation and Qualifying Accounts                          43

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


                                       23
<PAGE>   24
                    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,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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. 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
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.

        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 22, 1997 (except with respect
to the second paragraph of Note 4, as
to which the date is March 21, 1997)


                                       24
<PAGE>   25
                                 NETMANAGE, INC.
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)


<TABLE>
<CAPTION>
                                                                                       DECEMBER 31,
                                                                                 ------------------------
                                                                                   1996            1995
                                                                                 --------        --------
<S>                                                                              <C>             <C>
ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                                     $ 19,483        $ 32,593
   Short-term investments                                                          46,609          47,496
   Accounts receivable, less allowances of $2,012 and $2,516, respectively         13,915          20,397
   Prepaid expenses and other current assets                                       13,191           6,990
                                                                                 --------        --------
        Total current assets                                                       93,198         107,476
                                                                                 --------        --------
PROPERTY AND EQUIPMENT, at cost:
   Computer software and equipment                                                 14,874          10,656
   Furniture and fixtures                                                           5,622           5,034
   Leasehold improvements                                                           1,434           1,355
                                                                                 --------        --------
                                                                                   21,930          17,045
   Less - Accumulated depreciation                                                 (9,872)         (4,900)
                                                                                 --------        --------
          Net property and equipment                                               12,058          12,145
                                                                                 --------        --------

LONG-TERM INVESTMENTS                                                              37,201          29,205
GOODWILL AND OTHER INTANGIBLES, net                                                 1,763           1,439
OTHER ASSETS                                                                        8,309           4,206
                                                                                 --------        --------
                                                                                 $152,529        $154,471
                                                                                 ========        ========
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                              $  2,060        $  4,749
   Accrued liabilities                                                              4,154           3,680
   Accrued payroll and payroll-related expenses                                     4,779           4,003
   Deferred revenue                                                                 8,839          10,877
   Income taxes payable                                                             1,698             429
                                                                                 --------        --------
        Total current liabilities                                                  21,530          23,738
                                                                                 --------        --------

LONG-TERM LIABILITIES                                                               1,708           1,336
                                                                                 --------        --------
COMMITMENTS AND CONTINGENCIES (Note 4)

STOCKHOLDERS' EQUITY:
   Common stock, $0.01 par value -
      Authorized - 75,000,000 shares
      Outstanding - 43,148,350 shares and 41,660,332 shares, respectively             431             417
   Additional paid-in capital                                                      90,193          83,520
   Retained earnings                                                               39,751          45,850
   Cumulative translation adjustment                                               (1,084)           (390)
                                                                                 --------        --------
        Total stockholders' equity                                                129,291         129,397
                                                                                 --------        --------
                                                                                 $152,529        $154,471
                                                                                 ========        ========
</TABLE>

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


                                       25
<PAGE>   26
                                 NETMANAGE, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                             ----------------------------------------
                                                               1996            1995            1994
                                                             --------        --------        --------
<S>                                                          <C>             <C>             <C>
NET REVENUES:
   License fees                                              $ 89,334        $112,079        $ 64,679
   Services                                                    15,262          13,367           6,787
                                                             --------        --------        --------
        Total net revenues                                    104,596         125,446          71,466

COST OF REVENUES                                               11,837          13,065           7,282
                                                             --------        --------        --------

GROSS MARGIN                                                   92,759         112,381          64,184
                                                             --------        --------        --------
OPERATING EXPENSES:
   Research and development                                    27,938          23,861          11,316
   Sales and marketing                                         52,167          46,117          18,709
   General and administrative                                  11,198           9,808           5,227
   Write-off of in-process research and development            13,384              --           2,000
   Amortization of goodwill                                     1,526           1,298             313
   Acquisition costs                                              199           1,701              --
                                                             --------        --------        --------

        Total operating expenses                              106,412          82,785          37,565
                                                             --------        --------        --------
INCOME (LOSS) FROM OPERATIONS                                 (13,653)         29,596          26,619

INTEREST INCOME                                                 5,625           4,494           2,586
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATE                   (1,005)           (306)             --
                                                             --------        --------        --------

INCOME (LOSS) BEFORE INCOME TAXES                              (9,033)         33,784          29,205
PROVISION (BENEFIT) FOR INCOME TAXES                           (3,328)         11,487          11,390
                                                             --------        --------        --------
NET INCOME (LOSS)                                            $ (5,705)       $ 22,297        $ 17,815
                                                             ========        ========        ========

NET INCOME (LOSS) PER SHARE                                  $  (0.13)       $   0.52        $   0.43
                                                             ========        ========        ========

WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS                 42,341          42,955          41,103
                                                             ========        ========        ========
</TABLE>



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


                                       26
<PAGE>   27
                                 NETMANAGE, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                      Common Stock           Additional                     Cumulative
                                                -----------------------       Paid-in        Retained       Translation
                                                  Shares         Amount       Capital        Earnings       Adjustment       Total
                                                ----------       ------       -------        --------       ----------     --------
<S>                                             <C>              <C>         <C>             <C>            <C>            <C>
BALANCE, DECEMBER 31, 1993                      34,327,992        $ 88        $34,851        $ 6,536        $    --        $ 41,475
  Issuance of common stock for cash in
    secondary public offering                    4,940,000          12         37,930             --             --          37,942
  Issuance of common stock to
    officer in exchange for bank guarantee          19,238          --             36             --             --              36
  Two-for-one stock dividend                            --          97            (97)            --             --              --
  Sale of common stock under
    employee stock purchase plan                   211,498           1            957             --             --             958
  Exercise of stock options                        821,559           5            322             --             --             327
  Compensation costs related to
    stock option grants                                 --          --            138             --             --             138
  Income tax benefit from stock option
    transactions                                        --          --            615             --             --             615
  Net income                                            --          --             --         17,815             --          17,815
                                                ----------        ----        -------        -------        -------        --------
BALANCE, DECEMBER 31, 1994                      40,320,287         203         74,752         24,351             --          99,306
  Two-for-one stock dividend                            --         199           (199)            --             --              --
  Sale of common stock under
    employee stock purchase plan                   145,145           2          2,020             --             --           2,022
  Exercise of stock options                        740,550           8          2,734             --             --           2,742
  Compensation costs related to stock
    option grants                                       --          --            109             --             --             109
  Income tax benefit from stock option
    transactions                                        --          --          2,080             --             --           2,080
  Pooling of interests with Syzygy
    Communications, Inc.                           394,000           4          1,251           (798)            --             457
  Common stock issued in connection
    with the acquisition of Pacer
    Software, Inc.                                  64,600           1            773             --             --             774
  Repurchase of common stock from
    employees for cash                              (4,250)         --             --             --             --              --
  Translation adjustment                                --          --             --             --           (390)           (390)
  Net income                                            --          --             --         22,297             --          22,297
                                                ----------        ----        -------        -------        -------        --------
BALANCE, DECEMBER 31, 1995                      41,660,332         417         83,520         45,850           (390)        129,397
  Sale of common stock under
    employee stock purchase plan                   226,124           2          1,868             --             --           1,870
  Exercise of stock options                        666,399           7          2,831             --             --           2,838
  Income tax benefit from stock option
    transactions                                        --          --            642             --             --             642
  Pooling of interests with Maximum
    Information, Inc.                              590,448           6            334           (394)            --             (54)
  Issuance of common stock for
    purchase of technology                         121,997           1            999             --             --           1,000
  Repurchase of common stock from
    employees for cash                            (116,950)         (2)            (1)            --             --              (3)
  Translation adjustment                                --          --             --             --           (694)           (694)
  Net loss                                              --          --             --         (5,705)            --          (5,705)
                                                ----------        ----        -------        -------        -------        --------
BALANCE, DECEMBER 31, 1996                      43,148,350        $431        $90,193        $39,751        $(1,084)       $129,291
                                                ==========        ====        =======        =======        =======        ========
</TABLE>



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


                                       27
<PAGE>   28
                                 NETMANAGE, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                           YEARS ENDED DECEMBER 31,
                                                                                   ----------------------------------------
                                                                                     1996            1995            1994
                                                                                   --------        --------        --------
<S>                                                                                <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income (loss)                                                            $ (5,705)       $ 22,297        $ 17,815
      Adjustments to reconcile net income (loss) to net cash provided
       by operating activities:
       Depreciation and amortization                                                  9,846           6,545           1,787
       Compensation costs related to stock issuances and stock option grants             --             109             174
       Provision for doubtful accounts and returns                                      886           1,842           3,534
       Equity in losses of unconsolidated affiliate                                   1,005             306              --
       Write-off of in-process research and development                              13,384              --           2,000
       Write-down of purchased technology to net realizable value                     1,248              --              --
       Changes in assets and liabilities, net of business combinations:
         Accounts receivable                                                          5,611          (7,885)        (10,519)
         Prepaid expenses and other current assets                                   (6,201)         (4,407)         (4,979)
         Accounts payable                                                            (2,689)          3,073              38
         Accrued liabilities, payroll and payroll-related expenses                     (330)            424           2,692
         Deferred revenue                                                            (2,094)          3,625           5,729
         Income taxes payable                                                        (1,268)          2,183             501
                                                                                   --------        --------        --------
            Net cash provided by operating activities                                13,693          28,112          18,772
                                                                                   --------        --------        --------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Purchases of short-term investments                                           (44,201)        (75,550)        (31,306)
      Proceeds from maturities of short-term investments                             45,045          47,220          18,000
      Purchases of long-term investments                                            (32,841)        (15,133)        (27,279)
      Proceeds from maturities of long-term investments                              23,205          11,111           1,000
      Purchases of property and equipment                                            (4,716)        (10,103)         (3,846)
      Acquisition of businesses, net of cash acquired                                (1,325)            540          (3,818)
      Acquisition of in-process research and development                            (11,384)             --              --
      Purchases of technology and other intangible assets                            (2,668)             --              --
      Investment in unconsolidated affiliate                                         (1,929)         (1,529)             --
                                                                                   --------        --------        --------
            Net cash used in investing activities                                   (30,814)        (43,444)        (47,249)
                                                                                   --------        --------        --------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from sale of common stock, net of issuance costs                       4,708           4,764          39,227
      Repurchase of common stock                                                         (3)             --              --
                                                                                   --------        --------        --------
            Net cash provided by financing activities                                 4,705           4,764          39,227
                                                                                   --------        --------        --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                (694)           (390)             --
                                                                                   --------        --------        --------
NET (DECREASE) INCREASE IN CASH AND CASH  EQUIVALENTS                               (13,110)        (10,958)         10,750
CASH AND CASH EQUIVALENTS, beginning of year                                         32,593          43,551          32,801
                                                                                   --------        --------        --------
CASH AND CASH EQUIVALENTS, end of year                                             $ 19,483        $ 32,593        $ 43,551
                                                                                   ========        ========        ========

SUPPLEMENTAL CASH FLOW INFORMATION:
      Cash paid during the year for:
       Interest                                                                    $     --        $     46        $     15
       Income taxes                                                                   2,852          11,240          13,938
</TABLE>



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


                                       28
<PAGE>   29
                                 NETMANAGE, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. NATURE OF OPERATIONS AND ORGANIZATION:

         NetManage, Inc. (the "Company") develops, markets and supports an
integrated set of application, server and development tool software for the
Microsoft Windows, Windows 95 and Windows NT platforms. The Company's
standards-based products provide TCP/IP and SNA host access, UNIX access
including NFS and X, and ActiveX-based development. The Company's products are
sold and serviced worldwide by the Company's direct sales force, international
subsidiaries and authorized distribution partners. The Company's products
include the Chameleon ATX family (Chameleon HostLink, ChameleonNFS/X), ECCO Pro
and the Z-Mail messaging family.


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 50% investment in NetVision,
Ltd. ("NetVision") is accounted for using the equity method.

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
subsidiaries' financial statements are reported as a separate component of
stockholders' equity. The Company enters 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 notional amount of
the forward contracts was approximately $2.9 million and $11.2 million at
December 31, 1996 and 1995, respectively. The 1996 contracts expired on January
29, 1997. Gains and losses on foreign exchange contracts were immaterial for the
years ended December 31, 1996 and 1995. The Company had not entered into any
such contracts in 1994.

Revenue Recognition

         License fees are earned under software license agreements to end-users
and resellers, and are generally recognized when a customer purchase order has
been received, the software has been shipped, the Company has a right to invoice
the customer, collection of the receivable is probable and there are no
significant obligations remaining. 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
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 is recognized ratably over the


                                       29
<PAGE>   30
term 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 classified as held-to-maturity and are valued using
the amortized cost method. The Company's investments mature at various dates
through October 1999. Investments with a maturity of greater than one year from
the balance sheet date are classified as long-term investments. At December 31,
1996 and 1995, the fair value of the investments approximated amortized cost
and, as such, gross unrealized holding gains and losses were not material. The
fair value of the investments was determined based on quoted market prices at
the reporting dates for those instruments. The carrying value of the Company's
investments by major security type consisted of the following as of December 31,
1996 and 1995 (in thousands):

<TABLE>
<CAPTION>
                  DESCRIPTION                          1996         1995
                  ----------------------------       -------       -------
                  <S>                                <C>           <C>
                  Municipal bonds                    $69,441       $59,890
                  Auction rate securities             11,200        12,302
                  CDs/Bankers acceptance notes         1,669         3,007
                  Government securities                1,500         1,502
                                                     -------       -------
                                                     $83,810       $76,701
                                                     =======       =======
</TABLE>

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 years. Accumulated amortization was
$3,137,000 and $1,611,000 at December 31, 1996 and 1995, respectively.

Software Development Costs

         Software development costs are accounted for in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," under which 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 changes in technology. Such costs
are 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


                                       30
<PAGE>   31
of the underlying products. 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.

         For the year ended December 31, 1996, approximately $2.7 million is
included in the accompanying Consolidated Statements of Operations in cost of
revenues for the amortization and writedown to net realizable value of software
purchased and capitalized during 1996. Prior to 1996, purchased software costs
eligible for capitalization had not been significant and the Company charged all
such costs to research and development as incurred.

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 Income (Loss) Per Share

         Net loss per share data has been computed using the weighted average
number of shares of common stock. Net income per share data has been computed
using the weighted average number of shares of common stock and common
equivalent shares from stock options outstanding (when dilutive using the
treasury stock method).

Reclassifications

         Certain prior year financial statement amounts have been reclassified
to conform to the current year presentation.

3. ACQUISITIONS AND OTHER INVESTMENTS:

         In November 1996, the Company purchased collaborative computing
software technology from Applicom Software Industries (1990) Ltd. ("Applicom")
for cash consideration of approximately $10.0 million. The Company's intention
is to integrate this technology into its Chameleon ATX family in 1997. In the
opinion of management, the purchased technology had not reached technological
feasibility and had no probable alternative future use. Accordingly, the entire
purchase price was deemed to be in-process research and development and was
charged to operations in 1996.

         In October 1996, the Company purchased gateway and mail server software
technology from U.S. Computer Software, Inc. ("U.S. Computer"). Consideration
included cash of approximately $2.2 million and the issuance of approximately
122,000 shares of the Company's common stock valued at $1.0 million. In the
opinion of management, the purchased technology had not reached technological
feasibility and had no probable alternative future use. Accordingly, the entire
purchase price was deemed to be in-process research and development and was
charged to operations in 1996.

         In July 1996, the Company acquired all of the outstanding stock of
Maximum Information, Inc. ("MaxInfo") in exchange for approximately 590,000
shares of the Company's common stock. The Company also assumed MaxInfo's
outstanding employee stock options, which were converted into options to
purchase approximately 129,000 shares of the Company's common stock. This
transaction was accounted for as a pooling of interests during the third quarter
of 1996. The operations of MaxInfo are not material to the Company's
consolidated results of operations and financial position and, therefore, the
historical financial statements have not been restated to reflect the
acquisition retroactively. Accordingly, the operations of MaxInfo from the
acquisition date forward have been recorded in the Company's consolidated
financial statements.


                                       31
<PAGE>   32
         In June 1996, the Company purchased certain assets related to the
Z-Mail business, an electronic mail and messaging system, from Network Computing
Devices, Inc. The assets purchased include customer lists and records, customer
contracts and service agreements, intellectual property rights and the Z-Mail
proprietary software. The purchase price included cash consideration of
approximately $1.3 million and the assumption of certain Z-Mail business-related
liabilities of approximately $0.8 million. The acquisition was accounted for as
a purchase. The entire purchase price was allocated to goodwill and other
intangibles and is being amortized on a straight-line basis over the estimated
lives of the assets purchased of two years. Comparative pro forma financial
information has not been presented as the results of operations of the Z-Mail
business were not material to the Company's consolidated financial statements.

         In November 1995, the Company acquired all of the outstanding common
and preferred stock of AGE Logic, Inc. ("AGE") in exchange for approximately
833,000 shares of the Company's common stock. AGE was a supplier of
Desktop-to-UNIX connectivity software and provided a full family of high
performance X server, file sharing and terminal emulation products for PC and
Macintosh desktops. The Company also assumed AGE's outstanding employee stock
options and warrants, which were converted to options and warrants to purchase
approximately 167,000 shares of the Company's common stock. The merger was
accounted for as a pooling of interests and, accordingly, the Company's
financial statements for the years ended December 31, 1995 and 1994 were
restated to include the results of AGE. Prior to the merger, AGE's fiscal year
end was June 30. AGE's financial statements were restated to a calendar year
basis consistent with the Company's year end on December 31.

         Reconciliation of the 1995 and 1994 financial statements with
previously reported separate consolidated Company information is presented below
(in thousands):

<TABLE>
<CAPTION>
                                                  YEARS ENDED DECEMBER 31,
                                                  ------------------------
                                                    1995             1994
                                                  --------         -------
                  <S>                             <C>              <C>
                  Revenue:
                    NetManage                     $116,628         $61,606
                    AGE                              8,818           9,860
                                                  --------         -------
                      Combined                    $125,446         $71,466
                                                  ========         =======
                  Net income (loss):
                    NetManage                     $ 23,432         $16,394
                    AGE                             (1,135)          1,421
                                                  --------         -------
                     Combined                     $ 22,297         $17,815
                                                  ========         =======
</TABLE>

         Prior to the merger with the Company, in March 1995, AGE acquired all
of the outstanding stock, stock options and warrants of Pacer Software, Inc.
("Pacer") in exchange for approximately 64,600 shares of the Company's common
stock. Pacer was involved in the development and marketing of computer software
products. The acquisition was accounted for as a purchase. Accordingly, the
results of Pacer from the date of the acquisition forward have been recorded in
the Company's consolidated financial statements. The value of the Company's
common stock issued in connection with the acquisition was equal to the net
assets acquired from Pacer which approximated $774,000. Accordingly, no goodwill
was recorded for this transaction. Comparative pro forma financial information
has not been presented as the results of operations for Pacer were not material
to the Company's consolidated financial statements.

         In October 1995, the Company acquired all of the outstanding stock of
Syzygy Communications, Inc. ("Syzygy") in exchange for approximately 394,000
shares of the Company's common stock. Syzygy was an inter-networking
communications software company and developer of interconnection and network
management software for hardware and software vendors and also provided custom
communications software for commercial customers. The Company also assumed
Syzygy's outstanding employee stock options and warrants, which were converted
to options and warrants to purchase approximately 48,000 shares of the Company's
common stock. The transaction was accounted for as a pooling of interests. The
operations of Syzygy were not material to the Company's consolidated operations
and financial position and, therefore, prior period financial statements were
not

                                       32
<PAGE>   33
restated. The results of Syzygy from the date of acquisition forward have been
recorded in the Company's consolidated financial statements.

         In July 1995, one of the Company's wholly-owned subsidiaries,
NetManage, Ltd., agreed to an investment by Elron Electronics, Ltd. ("Elron") in
NetVision, a wholly-owned subsidiary of NetManage, Ltd. Elron's investment in
NetVision, comprised of various assets, was equal to the net equity of NetVision
as of June 30, 1995. NetManage, Ltd. retains an ownership in NetVision of 50%.
Prior to the investment by Elron, the accounts of NetVision were included in the
Company's consolidated financial statements. Subsequent to the investment, the
Company did not have a majority voting interest in NetVision. Accordingly,
NetVision's accounts are no longer consolidated and the Company's remaining
investment in NetVision is accounted for by the equity method. During 1996, the
Company and Elron each invested approximately an additional $1,500,000 in
NetVision. The Company's ownership percentage did not change as a result of this
investment. The investment in NetVision of approximately $1,859,000 and
$1,223,000 is included in other assets in the accompanying Consolidated Balance
Sheets at December 31, 1996 and 1995, respectively. A director of the Company
also serves as the Chairman of the Board of Directors, President and Chief
Executive Officer of Elron. Elron holds an investment in the common stock of the
Company representing approximately 2% of the Company's outstanding shares as of
December 31, 1996. In November 1996, the Company and Elron guaranteed a bank
line of credit for NetVision in the amount of $2.0 million. As of December 31,
1996 there was no outstanding balance on this line of credit.

         In December 1994, the Company acquired all of the outstanding common
stock of Ariana S.A. ("Ariana") of Paris, France. Ariana had been a distributor
for the Company since 1993. The total cost of the acquisition, accounted for as
a purchase, was $400,000, which exceeded the fair value of the net assets of
Ariana, resulting in goodwill of $512,000. The goodwill was amortized on a
straight-line basis and was fully amortized at December 31, 1996. Comparative
pro forma financial information has not been presented as the results of
operations for Ariana were not material to the Company's consolidated financial
statements.

         In September 1994, the Company acquired all of the outstanding common
stock of Arabesque Software, Inc. ("Arabesque") of Bellevue, Washington for
approximately $3.0 million. Arabesque was primarily engaged in the development
and marketing of personal information management software products. The
acquisition was accounted for as a purchase and the results of operations of
Arabesque since the date of acquisition are included in the accompanying
consolidated financial statements. In connection with the acquisition, net
intangibles of approximately $3.9 million were acquired, of which $2.0 million
is reflected as a one-time 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 $1.9 million represents goodwill which was amortized on a
straight-line basis over two years and was fully amortized at December 31, 1996.
Under the terms of the purchase agreement, the Company was contingently liable
for future payments of $2.0 million for the achievement of certain technology
milestones. The payment for achievement of such milestones totaling $2.0 million
was expensed during 1995 ($800,000) and 1994 ($1,200,000). Comparative pro forma
financial information has not been presented as the results of operations for
Arabesque were not material to the Company's consolidated financial statements.


4. COMMITMENTS AND CONTINGENCIES:

         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-97-0109 CW, 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. Both complaints seek an unspecified amount of
damages. The Company believes there is no merit to either case and intends to
defend the cases vigorously. There can be no assurance that the Company will be
able to prevail in the


                                       33
<PAGE>   34
lawsuits, or that the pendency of the lawsuits will not adversely affect the
Company's operations. As the outcome of this matter cannot reasonably be
determined, the Company has not accrued for any potential loss contingencies.

         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. The complaint alleges that, between April
18, 1996 and July 18, 1996, the defendants violated California state law by
making false or misleading statements of material fact about the Company's
prospects and finances. The complaint seeks an unspecified amount of damages.
The Company believes there is no merit to the case and intends to defend it
vigorously. There can be no assurance that the Company will be able to prevail
in the lawsuit, or that the pendency of the lawsuit will not adversely affect
the Company's operations. As the outcome of this matter 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 all other such matters presently known to
management will not have a material adverse effect on the Company's business,
financial position or results of operations.

         Facilities and equipment are leased under noncancelable operating
leases expiring on various dates through the year 2005. As of December 31, 1996,
future minimum rental payments under operating leases are as follows (in
thousands):

<TABLE>
<CAPTION>
                            YEAR
                            ----------------------
                            <S>           <C>
                            1997           $ 3,410
                            1998             2,650
                            1999             1,810
                            2000             1,332
                            2001               605
                            Thereafter       1,790
                                           -------
                                           $11,597
                                           =======
</TABLE>

         Rent expense was approximately $3,448,000, $2,885,000 and $1,175,000
for the years ended December 31, 1996, 1995 and 1994, respectively.


5. CAPITAL STOCK:

Common Stock

         In both April 1995 and May 1994, the Company effected two-for-one stock
splits (each in the form of a stock dividend) of the Company's common stock. All
share and per share amounts in the accompanying consolidated financial
statements and notes have been adjusted retroactively to reflect both stock
dividends.

         As of December 31, 1996, the Company has reserved the following shares
of authorized but unissued common stock:

<TABLE>
                 <S>                                       <C>
                 Employee stock option plan                 7,768,092
                 Directors' stock option plan                 739,835
                 Employee stock purchase plan               1,817,233
                                                           ----------
                                                           10,325,160
                                                           ==========
</TABLE>

Employee Stock Option Plan

         During 1992, the Company established the 1992 Employee Stock Option
Plan (the "Plan"). The Company currently has authorized a total of 9,800,000
shares for issuance under this Plan. The Company may grant incentive


                                       34
<PAGE>   35
stock options or non-statutory stock options to employees, officers, directors
and consultants at an exercise price of not less than 100% of the fair market
value of the common stock on the date of grant, except that non-statutory
options may be granted at 85% of such fair value. Options granted under the Plan
generally 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 Plan is ten years, but if the optionee at the time of grant has
voting power over more than 10% of the Company's outstanding capital stock, the
maximum term is five years.

         The Company has assumed certain options granted to former employees of
the companies acquired during 1995 and 1996 (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. The Acquired
Options related to two of the companies acquired became immediately exercisable
under the original terms of the option agreements. The Acquired Options related
to the other company acquired 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 February 1996 and January 1997, upon approval by the Company's Board
of Directors, the Company repriced 2,302,338 and 3,451,079 options,
respectively, originally issued at prices ranging from $11.63 to $24.62 and
$6.63 to $21.25, respectively. The options were repriced at the then current
market value of the Company's common stock of $11.13 for the February 1996
repricing and $6.00 for the January 1997 repricing. The Company's Board of
Directors extended the vesting period for all options repriced in February 1996
by an additional six months.

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 ten 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, 1996, 1995 and 1994
shares issued under the Purchase Plan were 226,124, 145,145 and 211,498,
respectively, at prices ranging from $5.79 to $12.54 per share, $12.22 to $15.51
per share and $3.40 to $7.12 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
income (loss) and net income (loss) per share would have been adjusted to the
following pro forma amounts (in thousands, except per share amounts):


                                       35
<PAGE>   36
<TABLE>
<CAPTION>
                                                                                   YEARS ENDED DECEMBER 31,
                                                                                   ------------------------
                                                                                     1996             1995
                                                                                   --------         -------
                  <S>                                <C>                           <C>              <C>
                  Net income (loss):                 As reported                   $ (5,705)        $22,297
                                                     Pro forma                      (11,135)         16,548

                  Net income (loss) per share:       As reported                   $  (0.13)        $  0.52
                                                     Pro forma - Primary              (0.26)           0.39
                                                     Pro forma - Fully diluted        (0.26)           0.41
</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.

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


<TABLE>
<CAPTION>
                                                                                     OUTSTANDING OPTIONS
                                                                     ----------------------------------------------------
                                                                                                             WEIGHTED
                                                       OPTIONS                                                AVERAGE
                                                      AVAILABLE         SHARES       PRICE PER SHARE       EXERCISE PRICE
                                                     -----------     -----------     ------------------------------------
<S>                                                  <C>             <C>             <C>                   <C>
Balance at December 31, 1993                           5,357,600       2,242,400     $0.08  -  $ 7.63         $ 1.12
    Granted                                           (2,381,200)      2,381,200      1.87  -   13.00           9.93
    Exercised                                                 --        (771,370)     0.08  -    6.63           0.41
    Terminated                                           110,533        (110,533)     0.78  -    9.00           5.46
                                                     -----------     -----------
Balance at December 31, 1994                           3,086,933       3,741,697      0.08  -   13.00           6.74
    Authorized                                         1,000,000              --
    Granted                                           (2,288,420)      2,288,420      0.76  -   21.25          10.52
    Exercised                                                 --        (689,561)     0.08  -   13.00           3.87
    Terminated                                           749,495        (749,495)     0.08  -   20.63           8.11
                                                     -----------     -----------
Balance at December 31, 1995                           2,548,008       4,591,061      0.08  -   21.25           8.83
    Authorized                                         2,000,000              --
    Granted                                           (1,852,317)      1,852,317      2.03  -   16.63           9.71
    Exercised                                                 --        (631,142)     0.08  -   13.00           4.42
    Terminated                                         1,541,456      (1,541,456)     0.08  -   21.25          10.32
                                                     -----------     -----------
Balance at December 31, 1996                           4,237,147       4,270,780      0.08  -   21.25           9.99
                                                     ===========     ===========
</TABLE>

         As of December 31, 1996, there were 1,150,634 shares exercisable under
the Company's stock option plans at a weighted average exercise price of $6.84.
Of the 4,270,780 options outstanding, 2,080,865 have exercise prices between
$0.08 and $10.38, with a weighted average exercise price of $7.05 and a weighted
average remaining contractual life of 8.2 years. The remaining 2,189,916 options
have exercise prices between $11.13 and $21.25, with a weighted average exercise
price of $11.50 and a weighted average remaining contractual life of 8.6 years.

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model utilizing expected volatility
calculations based on historical data (77.89%) and risk-free interest rates
based on U.S. government bonds on the date of grant with maturities equal to the
expected option term (4.94% to 6.45%). The expected lives range from three to
seven months after vest date and no dividends are assumed.


                                       36
<PAGE>   37
6. INCOME TAXES:

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

<TABLE>
<CAPTION>
                           YEARS ENDED DECEMBER 31,
                       -------------------------------
                         1996       1995         1994
                       -------     -------     -------
<S>                    <C>         <C>         <C>
        Domestic       $(5,502)    $22,803     $29,559
        Foreign         (3,531)     10,981        (354)
                       -------     -------     -------
                       $(9,033)    $33,784     $29,205
                       =======     =======     =======
</TABLE>



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

<TABLE>
<CAPTION>
                                               YEARS ENDED DECEMBER 31,
                                        ---------------------------------------
                                         1996             1995            1994
                                        -------         -------         -------
<S>                                     <C>             <C>             <C>
      Current payable -
         Federal                        $ 2,008         $ 8,575         $11,228
         State                              536           2,398           2,938
         Foreign                            830             367             149
                                        -------         -------         -------
            Total current                 3,374          11,340          14,315
                                        -------         -------         -------
      Deferred -
         Federal                         (4,816)            423          (2,407)
         State                           (1,886)           (276)           (518)
                                        -------         -------         -------
            Total deferred               (6,702)            147          (2,925)
                                        -------         -------         -------
      Total provision (benefit)
         for income taxes               $(3,328)        $11,487         $11,390
                                        =======         =======         =======
</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,
                                               -------------------------------------
                                                 1996          1995           1994
                                               -------        -------        -------
<S>                                            <C>            <C>            <C>
Provision (benefit) at Federal statutory
   rate                                        $(3,162)       $11,824        $10,196
State income taxes, net of Federal tax
   benefit                                        (546)         2,042          1,930
Nontaxable interest income                      (1,016)        (1,219)          (571)
Acquisition costs                                  161            701             --
Tax credits                                       (889)          (868)          (367)
Tax savings from foreign operations             (1,429)        (2,095)          (280)
Nondeductible expenses                           2,043            150            152
Foreign taxes                                      830             --             --
Other                                              680            952            330
                                               -------        -------        -------
Total provision (benefit) for income taxes     $(3,328)       $11,487        $11,390
                                               =======        =======        =======
</TABLE>
         The components of the net deferred income tax asset are as follows (in
thousands):


                                       37
<PAGE>   38



<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                                               ----------------------
                                                                                 1996           1995
                                                                               -------        -------
         <S>                                                                   <C>            <C>
         Deferred revenue recognized currently for tax purposes                $   817        $    --
         Reserves and accruals not currently deductible for tax purposes         2,565          2,043
         State taxes, not currently deductible for federal tax purposes            112            383
         Write-off of in-process research and development,
           not currently deductible for tax purposes                             6,056          1,738
         Depreciation and amortization                                             651            993
         Deemed dividend due to excess foreign passive assets                     (171)        (1,733)
         Other temporary differences                                               200            104
                                                                               -------        -------
                   Total deferred tax asset                                    $10,230        $ 3,528
                                                                               =======        =======
</TABLE>

         Realization of the net deferred tax asset of $10,230,000 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.

         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 is exempt from taxation on income generated during that period.
During the remaining eight years, income generated by the subsidiary will be
taxed at a reduced income tax rate of 10%. The Haifa tax holiday decreased
consolidated loss by approximately $1,429,000 ($0.03 per share) and increased
consolidated income by approximately $593,000 ($0.01 per share) for the years
ended December 31, 1996 and 1995, respectively.


7.  OPERATIONS BY GEOGRAPHIC AREA AND SIGNIFICANT CUSTOMERS:

         Operating primarily in one industry segment, the Company's products are
marketed and sold in the United States and internationally by the Company's
direct sales force and authorized channel partners.

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


<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31,
                                              ----------------------------------------
                                                1996            1995            1994
                                              --------        --------        --------
         <S>                                  <C>             <C>             <C>
         Revenues:
            Domestic operations               $ 74,996        $ 99,262        $ 69,903
            European operations                 16,377          14,395           1,563
            Asian operations                    13,223          11,789              --
                                              --------        --------        --------
               Consolidated                   $104,596        $125,446        $ 71,466
                                              ========        ========        ========

         Income (loss) from operations:
            Domestic operations               $(10,780)       $ 26,128        $ 26,972
            European operations                 (3,396)         (6,339)           (353)
            Asian operations                       523           9,807              --
                                              --------        --------        --------
               Consolidated                   $(13,653)       $ 29,596        $ 26,619
                                              ========        ========        ========

         Identifiable assets:
            Domestic operations               $147,581        $145,526        $115,935
            European operations                 23,299          31,503           4,448
            Asian operations                     2,204          14,138              --
            Eliminations                       (20,555)        (36,696)         (4,025)
                                              --------        --------        --------
               Consolidated                   $152,529        $154,471        $116,358
                                              ========        ========        ========
</TABLE>


                                       38
<PAGE>   39
         Domestic revenues include export revenues of approximately $3,207,000,
$5,994,000 and $7,205,000 to Asia for the years ended December 31, 1996, 1995
and 1994, respectively, and $2,090,000, $4,585,000 and $5,404,000 to the rest of
the world for the years ended December 31, 1996, 1995 and 1994, respectively.

         There were no customers that accounted for more than 10% of net
revenues for the years ended December 31, 1996, 1995 or 1994.



                                       39
<PAGE>   40
--------------------------------------------------------------------------------

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 30,
1997 (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 "-- 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."

--------------------------------------------------------------------------------


                                       40
<PAGE>   41
                                     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:

             1.  Financial Statements

                 See Index to Consolidated Financial Statements at Item 8 on
                 page 23 of this Report.

             2.  Financial Statement Schedule

                 See Index to Consolidated Financial Statements at Item 8 on
                 page 23 of this Report.

             3.  Exhibits

<TABLE>
<CAPTION>
             EXHIBIT
             NUMBER                          EXHIBIT TITLE
             -------        ----------------------------------------------------------------
             <S>            <C>
             3.1            Certificate of Incorporation of the Registrant.(1)

             3.1a           Amended Certificate of Incorporation of the Registrant

             3.2            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.(2)

             10.7           Lease between the Registrant and Cupertino Industrial Associates,
                            dated September 30, 1994.(3)

             10.8           Lease between the Registrant and the Flatley Company, dated
                            January 30, 1995.(4)

             10.9           Lease between the Registrant and Cupertino Brown Investment,
                            dated April 28, 1995.(5)

             10.10          Agreement between NetManage, Ltd., Elron Electronic Industries,
                            Ltd., and NetVision, Ltd., dated July 1, 1995.(5)

             10.11          Agreement and Plan of Reorganization among the Registrant,
                            NetManage Acquisition Corporation, Syzygy Communications, Inc.
                            and the Designated Shareholders, dated October 16, 1995.(5)

             10.12          Agreement and Plan of Reorganization among the Registrant,
                            NetManage Acquisition Corporation and AGE Logic, Inc., dated
                            November 17, 1995.(5)

             11.1           Statement of Computation of Common Shares and Equivalents and
                            Net Income (Loss) Per Share.

             21.1           Subsidiaries of Registrant.
</TABLE>


                                       41
<PAGE>   42
<TABLE>
             <S>            <C>
             23.1           Consent of Independent Public Accountants

             24.1           Power of Attorney. Reference is made to the signature page to
                            this Form 10-K.

              (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-1 (No. 33-74364)
                            dated January 24, 1994, as amended, which became effective
                            February 10, 1994.

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

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

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

              *             Employee Benefit Plan

(b)           Reports on Form 8-K

              None.

(c)           Exhibits

              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).
</TABLE>


         NetManage, the NetManage logo, Xoftware and ECCO are registered
trademarks and Chameleon, Chameleon HostLink and Z-Mail are trademarks of
NetManage, Inc. All other registered trademarks or trademarks are the property
of their respective owners.


                                       42
<PAGE>   43
                                                                     SCHEDULE II

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



<TABLE>
<CAPTION>
                                             BALANCE AT        CHARGED TO          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, 1994:
   Allowance for doubtful accounts and
      sales returns                           $  464             $3,534             $(1,717)       $2,281

Year ended December 31, 1995:
   Allowance for doubtful accounts and
      sales returns                            2,281              1,842              (1,607)        2,516

Year ended December 31, 1996:
   Allowance for doubtful accounts and
      sales returns                            2,516                886              (1,390)        2,012
</TABLE>



                                       43
<PAGE>   44
                                   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 28th day of March 1997.

                            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 WALTER D. AMARAL 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, President and Chief             March 28, 1997
---------------------------------    Executive Officer (Principal Executive
    Zvi Alon                         Officer)


/s/ Walter D. Amaral                 Chief Financial Officer and Vice President,            March 28, 1997
---------------------------------    Finance and Secretary
    Walter D. Amaral                 (Principal Financial and Accounting Officer)


/s/ John Bosch                       Director                                               March 28, 1997
---------------------------------
    John Bosch

/s/ Uzia Galil                       Director                                               March 28, 1997
---------------------------------
    Uzia Galil

/s/ Shelley Harrison, PhD.           Director                                               March 28, 1997
---------------------------------
    Shelley Harrison, PhD.

/s/ Darrell Miller                   Director                                               March 28, 1997
---------------------------------
    Darrell Miller
</TABLE>


                                       44
<PAGE>   45
                                 EXHIBIT INDEX
<TABLE>
<CAPTION>
             EXHIBIT
             NUMBER                          EXHIBIT TITLE
             -------        ----------------------------------------------------------------
             <S>            <C>
             3.1            Certificate of Incorporation of the Registrant.(1)

             3.1a           Amended Certificate of Incorporation of the Registrant

             3.2            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.(2)

             10.7           Lease between the Registrant and Cupertino Industrial Associates,
                            dated September 30, 1994.(3)

             10.8           Lease between the Registrant and the Flatley Company, dated
                            January 30, 1995.(4)

             10.9           Lease between the Registrant and Cupertino Brown Investment,
                            dated April 28, 1995.(5)

             10.10          Agreement between NetManage, Ltd., Elron Electronic Industries,
                            Ltd., and NetVision, Ltd., dated July 1, 1995.(5)

             10.11          Agreement and Plan of Reorganization among the Registrant,
                            NetManage Acquisition Corporation, Syzygy Communications, Inc.
                            and the Designated Shareholders, dated October 16, 1995.(5)

             10.12          Agreement and Plan of Reorganization among the Registrant,
                            NetManage Acquisition Corporation and AGE Logic, Inc., dated
                            November 17, 1995.(5)

             11.1           Statement of Computation of Common Shares and Equivalents and
                            Net Income (Loss) Per Share.

             21.1           Subsidiaries of 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
              ---------------
              (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-1 (No. 33-74364)
                            dated January 24, 1994, as amended, which became effective
                            February 10, 1994.

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

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

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

              *             Employee Benefit Plan

</TABLE>