<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

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

                                    FORM 10-Q

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

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

                For the quarterly period ended September 30, 1997

                                       OR

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

              For the transition period from _________ to _________

                         Commission file number 0-22158

                                 NETMANAGE, INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

YES [X]    NO [ ]

Number of shares of registrant's common stock outstanding as of
November 1, 1997: 43,654,177

================================================================================

<PAGE>   2

                                 NETMANAGE, INC.
                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
PART I.        FINANCIAL INFORMATION                                                   PAGE
<S>            <C>                                                                     <C>
Item 1.        Financial Statements

               Condensed Consolidated Balance Sheets at September 30, 1997 and
               December 31, 1996                                                        3

               Condensed Consolidated Statements of Operations for the three
               and nine months ended September 30, 1997 and September 30, 1996          4

               Condensed Consolidated Statements of Cash Flows for the nine
               months ended September 30, 1997 and September 30, 1996                   5

               Notes to Condensed Consolidated Financial Statements                     6

Item 2.        Management's Discussion and Analysis of Financial Condition
               and Results of Operations                                                9

PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings                                                       18

Item 2.        Changes in Securities                                                   19

Item 3.        Defaults upon Senior Securities                                         19

Item 4.        Submission of Matters to a Vote of Security Holders                     19

Item 5.        Other Information                                                       19

Item 6.        Exhibits and Reports on Form 8-K                                        19

               Signatures                                                              20
</TABLE>

It is suggested that these condensed consolidated financial statements be read
in conjunction with the consolidated financial statements and the notes thereto
included in the Company's Report on Form 10-K for the year ended December 31,
1996, filed on March 31, 1997.


                                       2
<PAGE>   3

                                 NETMANAGE, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                            SEPTEMBER 30,      DECEMBER 31,
                                                                1997              1996
                                                            -------------      ------------
                                                             (UNAUDITED)        (AUDITED)
<S>                                                          <C>                <C>       
ASSETS

CURRENT ASSETS:
   Cash and cash equivalents                                 $   11,921         $   19,483
   Short-term investments                                        43,122             46,609
   Accounts receivable, net                                      11,053             13,915
   Prepaid expenses and other current assets                     11,363             13,191
                                                             ----------         ----------
       Total current assets                                      77,459             93,198
                                                             ----------         ----------

PROPERTY AND EQUIPMENT, at cost:
   Computer software and equipment                               14,341             14,874
   Furniture and fixtures                                         5,592              5,622
   Leasehold improvements                                         1,409              1,434
                                                             ----------         ----------
                                                                 21,342             21,930
   Less - Accumulated depreciation                              (11,655)            (9,872)
                                                             ----------         ----------
       Net property and equipment                                 9,687             12,058
                                                             ----------         ----------

LONG-TERM INVESTMENTS                                            20,796             37,201
GOODWILL AND OTHER INTANGIBLES, net                               2,553              1,763
OTHER ASSETS                                                      9,123              8,309
                                                             ----------         ----------
                                                             $  119,618         $  152,529
                                                             ==========         ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                          $    1,349         $    2,060
   Accrued liabilities                                            5,992              4,154
   Accrued payroll and payroll-related expenses                   5,759              4,779
   Deferred revenue                                               8,899              8,839
   Income taxes payable                                           1,376              1,698
                                                             ----------         ----------
       Total current liabilities                                 23,375             21,530
                                                             ----------         ----------

LONG-TERM LIABILITIES                                             1,053              1,708
                                                             ----------         ----------

STOCKHOLDERS' EQUITY:
   Common stock                                                     435                431
   Additional paid-in capital                                    90,916             90,193
   Retained earnings                                              5,562             39,751
   Cumulative translation adjustments                            (1,723)            (1,084)
                                                             ----------         ----------
       Total stockholders' equity                                95,190            129,291
                                                             ----------         ----------
                                                             $  119,618         $  152,529
                                                             ==========         ==========
</TABLE>

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


                                       3
<PAGE>   4

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

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED                     NINE MONTHS ENDED
                                                 -------------------------------       -------------------------------
                                                 SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,      SEPTEMBER 30,
                                                 ------------       ------------       ------------       ------------
                                                     1997               1996               1997               1996
                                                 ------------       ------------       ------------       ------------
<S>                                              <C>                <C>                <C>                <C>         
NET REVENUES:
   License fees                                  $      9,774       $     21,316       $     31,017       $     73,773
   Services                                             3,782              4,110             11,619             11,450
                                                 ------------       ------------       ------------       ------------
       Total net revenues                              13,556             25,426             42,636             85,223

COST OF REVENUES                                          889              2,383              2,913              8,191
                                                 ------------       ------------       ------------       ------------

GROSS MARGIN                                           12,667             23,043             39,723             77,032
                                                 ------------       ------------       ------------       ------------

OPERATING EXPENSES:
   Research and development                             5,585              6,734             16,453             20,984
   Sales and marketing                                 10,927             13,390             31,744             39,422
   General and administrative                           3,186              2,586              8,020              8,245
   Write-off of in-process research and  
     development                                       16,001                 --             16,001                 --
   Restructuring charge                                 5,172                 --              5,172                 --
   Amortization of goodwill                               228                577                748              1,193
   Acquisition costs                                       --                199                 --                199
                                                 ------------       ------------       ------------       ------------
       Total operating expenses                        41,099             23,486             78,138             70,043
                                                 ------------       ------------       ------------       ------------

INCOME (LOSS) FROM OPERATIONS                         (28,432)              (443)           (38,415)             6,989

INTEREST INCOME AND OTHER, NET                          1,112              1,034              3,729              4,028
EQUITY IN INCOME (LOSSES) OF
   UNCONSOLIDATED AFFILIATE                               418               (225)               497               (568)
                                                 ------------       ------------       ------------       ------------

INCOME (LOSS) BEFORE PROVISION FOR  
   INCOME TAXES                                       (26,902)               366            (34,189)            10,449
PROVISION FOR INCOME TAXES                                 --                125                 --              3,553
                                                 ------------       ------------       ------------       ------------
NET INCOME (LOSS)                                $    (26,902)      $        241       $    (34,189)      $      6,896
                                                 ============       ============       ============       ============

NET INCOME (LOSS) PER SHARE                      $      (0.62)      $       0.01       $      (0.79)      $       0.16
                                                 ============       ============       ============       ============

WEIGHTED AVERAGE COMMON SHARES
   AND EQUIVALENTS                                     43,454             43,049             43,322             43,244
                                                 ============       ============       ============       ============
</TABLE>


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


                                       4
<PAGE>   5

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


<TABLE>
<CAPTION>
                                                                                     NINE MONTHS ENDED
                                                                             ---------------------------------
                                                                             SEPTEMBER 30,       SEPTEMBER 30,
                                                                                 1997                 1996
                                                                             -------------       -------------
<S>                                                                          <C>                 <C>          
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                         $     (34,189)      $       6,896
   Adjustments to reconcile net income (loss) to net cash provided
     by (used in) operating activities:
       Depreciation and amortization                                                 6,726               7,319
       Provision for doubtful accounts and returns                                     268                 205
       Equity in (income) losses of unconsolidated affiliate                          (497)                568
       Write-off of in-process research and development                             16,001                  --
       Write down of assets related to restructure                                   1,766                  --
       Changes in assets and liabilities, net of business combinations:
         Accounts receivable                                                         8,902               4,103
         Prepaid expenses and other assets                                           3,576                (601)
         Accounts payable                                                           (1,438)             (1,911)
         Accrued liabilities, payroll and payroll-related expenses                     416                (659)
         Deferred revenue                                                           (3,311)             (2,864)
         Income taxes payable                                                         (322)                614
                                                                             -------------       -------------
             Net cash provided by (used in) operating activities                    (2,102)             13,670
                                                                             -------------       -------------

 CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of short-term investments                                             (27,395)            (30,495)
   Proceeds from maturity of short-term investments                                 30,252              39,546
   Purchases of long-term investments                                              (17,613)            (35,420)
   Proceeds from maturity of long-term investments                                  33,342              18,605
   Purchases of property and equipment                                                (552)             (4,174)
   Purchases of technology and other intangible assets                                (530)             (4,100)
   Acquisition of NetSoft, Inc., net of cash acquired                              (23,281)                 --
   Acquisition of a business                                                            --              (1,325)
   Investment in unconsolidated affiliate                                             (163)             (1,782)
                                                                             -------------       -------------
             Net cash used in investing activities                                  (5,940)            (19,145)
                                                                             -------------       -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock, net                                         727               3,719
                                                                             -------------       -------------
             Net cash provided by financing activities                                 727               3,719

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                               (247)               (423)
                                                                             -------------       -------------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                           (7,562)             (2,179)

CASH AND CASH EQUIVALENTS, beginning of period                                      19,483              32,593
                                                                             -------------       -------------

CASH AND CASH EQUIVALENTS, end of period                                     $      11,921       $      30,414
                                                                             =============       =============
</TABLE>


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


                                       5
<PAGE>   6

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

1.  INTERIM FINANCIAL DATA

    The interim condensed consolidated financial statements for the three- and
    nine-month periods ended September 30, 1997 and 1996 for NetManage(R), Inc.
    (the "Company") have been prepared on the same basis as the year end
    consolidated financial statements and, in the opinion of management, include
    all adjustments (consisting of only normal recurring adjustments) necessary
    to present fairly the financial information set forth therein in accordance
    with generally accepted accounting principles. The Company believes the
    results of operations for the interim periods are subject to fluctuation and
    may not be an indicator of future financial performance.

2.  CONSOLIDATION

    The consolidated financial statements include the accounts of the Company
    and its wholly-owned subsidiaries. All intercompany accounts and
    transactions have been eliminated. The Company's interest of approximately
    50% in an unconsolidated affiliate, NetVision, Ltd., is accounted for by the
    equity method.

3.  ACQUISITIONS

    On July 29, 1997, the Company acquired all of the outstanding shares of
    Network Software Associates, Inc. ("NSA"), for $26.0 million in cash,
    pursuant to the Stock Purchase Agreement dated July 8, 1997. NSA is a
    holding company for NetSoft ("NetSoft"), a privately-held company
    specializing in the development, marketing and support of PC-to-Host
    connectivity software solutions. As of the date of the acquisition, NSA and
    NetSoft have continued as wholly-owned subsidiaries of NetManage. The
    acquired company hereinafter will be referred to as NetSoft. The acquisition
    was accounted for using the purchase method of accounting, and, accordingly,
    the results of NetSoft from the date of acquisition forward have been
    recorded in the Company's consolidated financial statements. In connection
    with the acquisition, net intangibles of $18.6 million were acquired, of
    which $16.0 million was reflected as a 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 $2.6 million, consisting
    of goodwill, is included in goodwill and other intangibles in the
    accompanying balance sheet and is being amortized over its estimated useful
    life of two years.

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

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

    The following unaudited pro forma information shows the results of
    operations for each of the three- and nine-month periods ended September 30,
    1997 and 1996 as if the NetSoft acquisition had occurred at the beginning of
    each period presented and at the purchase price established in July 1997.
    The results are not necessarily 


                                       6
<PAGE>   7

    indicative of what would have occurred had the acquisition actually been
    made at the beginning of each of the respective periods presented or of
    future operations of the combined companies. The pro forma results for the
    three-month period ended September 30, 1997 combine the Company's results
    for the three-months ended September 30, 1997 with the results of NetSoft
    for the period from July 1,1997 through the date of acquisition and include
    the $16.0 million write-off of in-process research and development discussed
    above. Similarly, the pro forma results for the nine-month period ended
    September 30, 1997 combine the Company's results for the nine-months ended
    September 30, 1997 with the results of NetSoft for the period from January
    1, 1997 through the date of acquisition and include the $16.0 million
    write-off of in-process research and development discussed above. The pro
    forma results for 1996 combine the Company's results with NetSoft's results
    for both the three- and nine-months ended September 30, 1996 and include the
    $16.0 million write-off of in-process research and development as previously
    discussed. The following unaudited pro forma results include the
    straight-line amortization of intangibles over a period of two years.

    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                Three months ended                   Nine months ended
                                          -------------------------------     -------------------------------
                                          September 30,     September 30,     September 30,     September 30,
                                              1997              1996              1997              1996
                                          -------------     -------------     -------------     -------------
    <S>                                   <C>               <C>               <C>               <C>          
    Revenue                               $      15,904     $      33,224     $      62,215     $     108,363
    Net loss                              $     (27,295)    $     (15,581)    $     (35,571)    $      (8,773)
    Net loss per share                    $       (0.63)    $       (0.36)    $       (0.82)    $       (0.20)
    Weighted average common and common
       equivalent shares outstanding             43,454            43,049            43,322            43,244
</TABLE>

4.  RESTRUCTURING OF OPERATIONS

    In the third quarter of 1997, the Company initiated a plan to restructure
    its operations worldwide due to business conditions. The plan is intended to
    realign the Company to focus solely on its core competencies - UNIX, AS/400
    midrange and IBM mainframe connectivity. In connection with this plan, the
    Company recorded a $5.2 million charge to operating expenses. The
    restructuring charge includes approximately $1.8 million of estimated
    employee-related expenses for employee terminations, approximately $2.4
    million for the write-off of excess equipment and facilities-related
    expenses associated with the consolidation of operations, and approximately
    $1.0 million for the write-off of intangible assets related to certain
    unprofitable products. The restructuring plan includes the termination of
    employees worldwide and the reduction in worldwide office space, which
    primarily consists of the consolidation of sales offices in Europe resulting
    from the acquisition of NetSoft in the third quarter of 1997 as well as the
    consolidation of certain domestic technical support and engineering
    locations. As of September 30, 1997, the Company had incurred costs totaling
    approximately $2.9 million related to the restructuring. The remaining
    actions are expected to be completed within one year from the date the
    restructuring plan was initiated. The Company anticipates that these
    remaining restructuring actions will require the expenditures of
    approximately $2.3 million of cash over the next year, which the Company
    expects will be funded by internally generated cash. Other current
    liabilities at September 30, 1997 included a reserve related to this
    restructuring plan of approximately $2.3 million.

5.  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). Fully diluted net income per share is substantially the same
    as primary net income per share.

    In February 1997, the Financial Accounting Standards Board issued Statement
    of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share".
    SFAS No. 128 is effective for the Company's fiscal year 


                                       7
<PAGE>   8

    ending December 31, 1997. Upon adoption, all prior-period earnings per share
    data presented will be restated to conform with SFAS No. 128. The Company
    has not yet quantified the effect of adopting SFAS No. 128.

6.  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-97-20061-JW, 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. In addition, on September 10, 1997, the Company and several of its
    officers and directors were named in a securities class action complaint
    filed in the Northern District of California, Beasley v. NetManage, Inc., et
    al., C-97-3329 FMS, (N.D. Cal.). This complaint is substantially similar to
    the previously-filed case of Head et al. v. NetManage, Inc. et al.,
    discussed above, and contains similar allegations, names the same
    defendants, and purports to represent purchasers of NetManage stock during
    the same class period as in the previously-filed complaint. The complaints
    seek an unspecified amount of damages. The Company believes there is no
    merit to these cases and intends to defend both 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. On June 19, 1997, one of the
    plaintiffs in that action filed a securities class action complaint,
    Molinari v. NetManage, Inc., et al., No. C-97-20544-JW-PVT, in the United
    States District Court for the Northern District of California against the
    same defendants. Both complaints allege that, between April 18, 1996 and
    July 18, 1996, the defendants made false or misleading statements of
    material fact about the Company's prospects. The state court complaint
    asserts claims under California state law; the federal complaint asserts
    claims under the federal securities laws. Both complaints seek an
    unspecified amount of damages. The Company believes there is no merit to
    either case and intends to defend both 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 October 10, 1997, a verified derivative complaint was filed in the United
    States District Court for the Northern District of California against nine
    present and former officers and directors of the Company alleging that these
    persons violated various duties to the Company. Sucher v. Alon et al., No.
    C-97-20897 JW (EAI) (N.D. Cal.). The derivative complaint also names the
    Company as a nominal defendant. The derivative complaint is predicated on
    the factual allegations contained in the class action complaints discussed
    above. No demand was previously made to the Company's Board of Directors
    concerning the allegations of the derivative complaint, which seeks an
    unspecified amount of damages.

    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.


                                       8
<PAGE>   9

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS.

This discussion contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. Such forward-looking statements
include, among others, statements regarding expected revenues from newly
introduced products, the amount of restructuring charges and the funding of
these charges from operations and statements regarding expected fluctuations 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, that the markets for the Company's products, including
Chameleon(TM) UNIXLink 97 and Chameleon HostLink 97, could grow more slowly than
the Company or market analysts believe, or the Company will not be able to take
advantage of growth in those markets. In addition, there is no assurance that
the Company's acquisition of NetSoft or the Company's other organizational
changes and plans for 1997 will prove successful, that the Company's existing
products or those of the combined companies will continue to meet with customer
acceptance, that the Company will not suffer increased competitive pressures,
that the Company's 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".
Factors that could cause or contribute to such differences include those
discussed below as well as those discussed in the Company's Report on Form 10-K
for the year ended December 31, 1996. The following discussion should be read in
conjunction with the consolidated financial statements and notes thereto.

OVERVIEW

NetManage, Inc. (the "Company") develops, markets and supports PC connectivity
software for the Microsoft Windows 3.1, Windows 95 and Windows NT platforms,
offering applications for UNIX, AS/400 and IBM mainframe host systems. The
Company also provides remote access, application sharing and help desk
technology. 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.

On July 29, 1997, the Company acquired all of the outstanding shares of Network
Software Associates, Inc. ("NSA"), for $26.0 million in cash, pursuant to the
Stock Purchase Agreement dated July 8, 1997. NSA is a holding company for
NetSoft ("NetSoft"), a privately-held company specializing in the development,
marketing and support of PC-to-Host connectivity software solutions. As of the
date of the acquisition, NSA and NetSoft have continued as wholly-owned
subsidiaries of NetManage. The acquisition was accounted for using the purchase
method of accounting, and, accordingly, the results of NetSoft from the date of
acquisition forward have been recorded in the Company's consolidated financial
statements. In connection with the acquisition, net intangibles of approximately
$18.6 million were acquired, of which $16.0 million was 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 $2.6 million,
consisting of goodwill, is included in goodwill and other intangibles in the
accompanying balance sheet and is being amortized over its estimated useful life
of two years. As described in detail under the heading "Factors That May Affect
Future Results and Financial Condition", acquisitions involve a number of risks,
including the integration of the acquired company's operations, personnel and
products. There can be no assurance that the NetSoft integration will be
accomplished successfully, and the failure to effectively accomplish the
integration could have a material adverse effect on NetManage's results of
operations and financial condition.

In the third quarter of 1997, the Company initiated a plan to restructure its
operations worldwide due to business conditions. The plan is intended to realign
the Company to focus solely on its core competencies - UNIX, AS/400 midrange and
IBM mainframe connectivity. In connection with this plan, the Company recorded a
$5.2 million charge to operating expenses. The restructuring charge includes
approximately $1.8 million of estimated employee-related expenses for employee
terminations, approximately $2.4 million for the write-off of excess equipment
and facilities-related expenses associated with the consolidation of operations,
and approximately $1.0 million for the write-off of intangible assets related to
certain unprofitable products. The restructuring plan includes the 


                                       9
<PAGE>   10

termination of employees worldwide and the reduction in worldwide office space,
which primarily consists of the consolidation of sales offices in Europe
resulting from the acquisition of NetSoft in the third quarter of 1997 as well
as the consolidation of certain domestic technical support and engineering
locations. As of September 30, 1997, the Company had incurred costs totaling
approximately $2.9 million related to the restructuring. The remaining actions
are expected to be completed within one year from the date the restructuring
plan was initiated. The Company anticipates that these remaining restructuring
actions will require the expenditures of approximately $2.3 million of cash over
the next year, which the Company expects will be funded by internally generated
cash. Other current liabilities at September 30, 1997 included a reserve related
to this restructuring plan of approximately $2.3 million.

RESULTS OF OPERATIONS

During the past twelve-month period, the Company has discontinued several low
revenue generating products and focused efforts on controlling expenses in order
to reduce operating expenses and attempt to return the Company to profitability.
In addition, during the fourth quarter of 1996, the Company consolidated its
products and operations into two distinct business units, each with dedicated
development, sales, marketing and support resources. The benefits of this
reorganization have yet to contribute in terms of increased revenues or
profitability.

During both the three- and nine-month periods ended September 30, 1997, the
Company experienced a significant decline in net revenues as compared to the
same periods of 1996. The decline in net revenues primarily reflects the
Company's lack of success in marketing and selling its products, particularly in
Europe and Japan, as well as increased competition and pricing pressures. While
additional revenues resulted from the acquisition of NetSoft, consolidated net
revenues also declined as a direct result of the acquisition as the Company was
incorporating acquired products into existing product lines, integrating the
operations of the Company and NetSoft, and restructuring the combined company's
focus on becoming the premier single source provider of PC-to-host connectivity.
As a result, certain product offerings did not contribute as significantly as in
the prior comparative periods. Finally, Chameleon HostLink 97 began shipping
towards the end of the third quarter of 1997, and therefore did not contribute
significantly to third quarter revenues.

Operating expense levels are based in part on the Company's expectations as to
future revenues and to a large extent are fixed. Operating expenses, excluding
the write-off of in-process research and development and restructuring charges,
had declined in absolute dollars on a sequential quarterly basis during the past
twelve-month period through the second quarter of 1997 and only increased in the
third quarter of 1997 by $1.9 million, or 10%, over the second quarter primarily
as a result of the acquisition of NetSoft.

Despite the continued focus on controlling operating expenses, the
aforementioned decline in revenues resulted in a net loss of $5.7 million and
$13.0 million for the three- and nine-month periods ended September 30, 1997,
respectively, excluding the third quarter 1997 charges of $16.0 million for the
write-off of in-process research and development related to the acquisition of
NetSoft and $5.2 million for restructuring. Operating expenses are expected to
decrease in absolute dollars during the fourth quarter of 1997 as a result of
the Company's restructuring actions, and will fluctuate as a percentage of net
revenues as the Company integrates NetSoft into its operations and the Company's
newly introduced products begin contributing to revenues. While the Company will
continue 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.


                                       10
<PAGE>   11

SEPTEMBER 30, 1997 COMPARED TO SEPTEMBER 30, 1996
(Dollars in millions)

<TABLE>
<CAPTION>
                                              Three Months Ended                        Nine Months Ended
                                     -----------------------------------      -----------------------------------
                                       1997         1996         Change         1997         1996         Change
                                     --------     --------      --------      --------     --------      --------
<S>                                  <C>          <C>              <C>        <C>          <C>           <C>    
Net revenues:
      License fees                   $    9.8     $   21.3         (54.1%)    $   31.0     $   73.8         (58.0%)
      Services                            3.8          4.1           8.0%         11.6         11.4           1.5%
                                     --------     --------                    --------     --------                
        Total net revenues           $   13.6     $   25.4         (46.7%)    $   42.6     $   85.2         (50.0%)

As a percentage of net revenues:
      License fees                       72.1%        83.8%                       72.7%        86.6%              
      Services                           27.9%        16.2%                       27.3%        13.4%             
                                     --------     --------                    --------     --------              
        Total net revenues              100.0%       100.0%                      100.0%       100.0%                

Gross margin                         $   12.7     $   23.0         (45.0%)    $   39.7     $   77.0         (48.4%)
  As a percentage of net revenues        93.4%        90.6%                       93.2%        90.4%               

Research and development             $    5.6     $    6.7         (17.1%)    $   16.5     $   21.0         (21.6%)
  As a percentage of net revenues        41.2%        26.5%                       38.6%        24.6%               

Sales and marketing                  $   10.9     $   13.4         (18.4%)    $   31.7     $   39.4         (19.5%)
  As a percentage of net revenues        80.6%        52.7%                       74.5%        46.3%              

General and administrative           $    3.2     $    2.6          23.2%     $    8.0     $    8.2          (2.7%)
  As a percentage of net revenues        23.5%        10.2%                       18.8%         9.7%              

Write-off of in-process
  research and development           $   16.0     $     --         100.0%     $   16.0     $     --         100.0%
  As a percentage of net revenues       118.0%          --                        37.5%          --              

Restructuring charge                 $    5.2     $     --         100.0%     $    5.2     $     --         100.0%
  As a percentage of net revenues        38.2%          --                        12.1%          --              


Interest income and other, net       $    1.1     $    1.0           7.5%     $    3.7     $    4.0          (7.4%)
  As a percentage of net revenues         8.2%         4.1%                        8.7%         4.7%             

Equity in income (losses)
    of  unconsolidated affiliate     $    0.4     ($   0.2)        285.8%     $    0.5     ($   0.6)        187.5%
  As a percentage of net revenues         3.1%         n/a                         1.2%         n/a              

Provision for income taxes                 --     $    0.1        (100.0%)          --     $    3.6        (100.0%)
  Effective tax rate                       --         34.0%                         --         34.0%             

</TABLE>

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.

License fees decreased substantially both in absolute dollars and as a
percentage of total net revenues during the three- and nine-month periods ended
September 30, 1997 as compared to the same periods of 1996. As previously
discussed, the decline in license fees was primarily attributable to increased
competition and heightened pricing pressures and the Company's lack of success
in marketing and selling its products, particularly in the international
marketplace. Further, as discussed above, the timing of the release of the
Company's Chameleon HostLink 97 


                                       11
<PAGE>   12

product prevented this product from contributing significantly to revenues
during the three- or nine-month periods ended September 30, 1997. While the
Company hopes that the introduction of Chameleon HostLink 97 and other recently
introduced products, including Chameleon UNIXLink 97 in particular, will
contribute to increased revenues in future quarters, there can be no assurance
that revenues will stabilize or increase in the future. The increase in service
revenues as a percentage of total net revenues for both the three- and
nine-month periods ended September 30, 1997 as compared to the same periods of
1996 primarily reflected the decline in the total net revenues base as a result
of the aforementioned decline in license fee revenues.

The Company has operations worldwide with sales offices located in the United
States, Europe and Japan. International revenues as a percentage of total net
revenues were approximately 32% and 40% for the three-month periods ended
September 30, 1997 and 1996, respectively, and 23% and 35% for the nine-month
periods ended September 30, 1997 and 1996, respectively. The decline in
international revenues as a percentage of total net revenues was due largely to
the Company's lack of success in marketing and selling its products,
particularly in Europe and Japan, the latter of which accounted for the majority
of the Company's international revenues during both the three- and nine-month
periods ended September 30, 1996. NetSoft has historically been successful in
marketing and selling its products internationally, and the Company is in the
process of integrating and streamlining overlapping functions, particularly in
Europe, to benefit from NetSoft's success historically in the international
marketplace. The Company is addressing and taking steps with respect to staffing
and management, distributor relationships, and product marketing in Europe as
well as in Japan. There can be no assurance that such integration will be
accomplished expeditiously or successfully, or that the Company will succeed in
its attempts to improve its international marketing and sales efforts.

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 returns 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.
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 training and consulting services will become
materially significant in the future.

No customer accounted for more than 10% of net revenues during the three- or
nine-month periods ended September 30, 1997 or the nine-month period ended
September 30, 1996. The Company had one customer which accounted for
approximately 10% of net revenues during the three-month period ended September
30, 1996.

Gross margin

Cost of revenues primarily includes royalties paid to third parties for licensed
software incorporated into the Company's products as well as costs associated
with product packaging, documentation and software duplication. Cost of service
revenues through September 30, 1997 has not been material and is not reported
separately.

Gross margin as a percentage of net revenues increased for both the three- and
nine-month periods ended September 30, 1997 as compared to September 30, 1996
primarily as a result of decreased packaging and documentation costs. Further,
cost of revenues for the three- and nine-month periods ended September 30, 1996
included approximately $0.5 million and $1.0 million, respectively, for the
amortization of purchased technology; no such charges were recorded for the same
three- or nine-month periods of 1997.

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.


                                       12
<PAGE>   13
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 decrease in R&D expenses in absolute dollars for the three- and
nine-month periods ended September 30, 1997 as compared to the same periods of
the prior year primarily reflected cost savings, particularly in salaries and
benefits, associated with employee attrition. The decrease between the
comparable nine-month periods also reflected the Company's decision to
discontinue several low revenue generating products during the fourth quarter of
1996. The decline in the total net revenues base, however, resulted in the
increase in R&D expenses as a percentage of net revenues for the three- and
nine-month periods ended September 30, 1997 as compared to the same periods of
1996.

The Company expects that R&D spending in absolute dollars will decrease in the
fourth quarter of 1997 primarily as a result of the Company's restructuring
actions. As a percentage of net revenues, the Company expects that R&D will
fluctuate depending on future revenue levels, acquisitions and licensing of
technology.

Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards ("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 that
do not qualify for capitalization are charged to R&D expense when incurred. To
date, internal software development costs that were eligible for capitalization
have not been significant and the Company has charged all internal software
developments costs to R&D expense as incurred.

Sales and marketing

Sales and marketing ("S&M") expenses consist primarily of salaries and
commissions of sales and marketing personnel, advertising and promotion
expenses, and customer service and support costs. The decrease in S&M expenses
in absolute dollars for the three- and nine-month periods ended September 30,
1997 as compared to the same periods in 1996 primarily reflected cost savings
related to employee attrition and the resulting declines in salaries and
benefits, and a decline in advertising as the Company re-evaluated its marketing
and selling strategies. As a percentage of total net revenues for both the
three-and nine-month periods, the increase in S&M expenses was attributable to
the decreased total net revenues base.

The Company believes that S&M expenses will remain relatively constant in
absolute dollars for the fourth quarter of 1997 as the Company continues to
implement its worldwide marketing and selling strategies, particularly related
to advertising and promotion expenses. The Company expects that S&M expenses as
a percentage of total net revenues will fluctuate depending on future revenue
levels.

General and administrative

General and administrative ("G&A") expenses increased in absolute dollars for
the three-month periods ended June 30, 1997 as compared to the same quarter of
1996 due to increased bad debt expense and increased outside professional and
consulting fees. G&A expenses were relatively constant in absolute dollars for
the nine-month periods ended September 30, 1997 and 1996 as the costs savings
related to employee attrition were offset by the increased bad debt and outside
professional and consulting fees. As a percentage of total net revenues for both
the three- and nine-month periods, the increase in G&A expenses was attributable
to the decreased total net revenues base. The Company believes that G&A expenses
will decrease in absolute dollars in the fourth quarter of 1997 as a result of
the Company's restructuring actions, and, as a percentage of total net revenues,
will fluctuate depending on future revenue levels.

Write-off of in-process research and development

As previously discussed , in connection with the acquisition of all of the
outstanding shares of NSA, the Company acquired $18.6 million of intangible
assets, of which $16.0 million was 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 


                                       13
<PAGE>   14

management's opinion, had no probable alternative future use. This one-time
charge was reflected in the Company's statement of operations for the three- and
nine-month periods ended September 30, 1997 as a write-off of in-process
research and development within operating expenses. No such charges were
incurred for the three- and nine-month periods ended September 30, 1996.

Restructuring charge

As discussed above, in the third quarter of 1997, the Company initiated a plan
to restructure its operations worldwide. In connection with this plan, a
restructuring charge of $5.2 million was recorded in the Company's statement of
operations for the three- and nine-month periods ended September 30, 1997. No
such charges were incurred for the three- and nine-month periods ended September
30, 1996.

Interest income and other, net

Interest income and other, net includes interest income earned on the Company's
cash and investments as well as foreign exchange gains and losses. This income
increased slightly for the three-month period ended September 30, 1997 as
compared to the same period in 1996 due largely to a decline in the strength of
the U.S. dollar relative to the Israeli Shekel during the quarter ended
September 30, 1997, as opposed to an increase in the strength of the U.S. dollar
relative to the Israeli Shekel during the quarter ended September 30, 1996. The
decline in interest income and other, net for the nine-month period ended
September 30, 1997 as compared to the same period in 1996 is primarily the
result of a decrease in the aggregate amount of cash and investments from $113.6
million at September 30, 1996 to $75.8 million at September 30, 1997. The
increase in interest income for both the three- and nine-month periods as a
percentage of net revenues is consistent with the Company's decreased revenue
base.

Equity in income (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 Industries, Ltd. ("Elron"). The Company
currently retains an ownership in NetVision of approximately 50%. The Company's
investment in NetVision is accounted for by the equity method.

Provision for income taxes

The Company's effective tax rate for the three- and nine-month periods ended
September 30, 1997 was 0% due to the Company's loss position as compared to an
effective tax rate of 34% for the three- and nine-month periods ended September
30, 1996.

LIQUIDITY AND CAPITAL RESOURCES

<TABLE>
<CAPTION>
                                                               As of September 30,
                                                           -------------------------
(In millions)                                                1997             1996
                                                           --------         --------
<S>                                                        <C>              <C>     
Cash and cash equivalents                                  $   11.9         $   30.4
Short-term investments                                         43.1             16.1
Long-term investments                                          20.8             67.1
Net cash provided by (used in) operating activities            (2.1)            13.1
Net cash used in investing activities                           5.9             18.6
Net cash provided by financing activities                       0.7              3.7

</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, other than those acquired in connection
with the NetSoft acquisition which are not material to the Company.


                                       14
<PAGE>   15

The Company's cash and cash equivalents, short-term investments and long-term
investments declined from $103.3 million at December 31, 1996 to $75.8 million
at September 30, 1997, a decrease of $27.5 million. As described earlier, the
Company acquired all of the outstanding shares of NetSoft in July 1997 for $26.0
million in cash, which accounts for the majority of the decrease.

The Company's principal investing activities to date have been the purchase of
short and long-term investments, purchases of property and equipment, and cash
payments for acquisitions. Net of amounts invested, the Company received
proceeds of $18.6 million from maturities of short-term and long-term
investments during the nine-month period ended September 30, 1997. Expenditures
for purchases of property and equipment were minimal at $0.6 million for the
nine-month period ended September 30, 1997 due to the Company's efforts to
control operating expenses and attempt to return the Company to profitability.
The Company does not have any specific commitments with regard to future capital
expenditures. It is expected, however, that such spending will not increase
during the fourth quarter of 1997 as a result of the Company's restructuring
plan. The Company's principal commitment as of September 30, 1997 consists of
leases on its facilities.

Net cash provided by financing activities during the nine months ended September
30, 1997 reflects proceeds from the issuance of common stock under the Company's
stock option plan.

At September 30, 1997, the Company had working capital of $54.1 million. The
Company believes that its current cash balances and cash flows from current
operations 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 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 revenue shortfall. Accordingly, any
significant shortfall of demand in relation to the Company's expectations or any
material delay of customer orders would have an almost immediate adverse impact
on the Company's operating results and on the Company's ability to achieve
profitability. Fluctuations in operating results may also result in volatility
in the price of the Company's common stock.

The Company recently initiated a plan to restructure its operations and focus on
its core competencies of UNIX, AS/400 midrange and IBM mainframe connectivity.
The Company undertook the restructuring in response to business conditions in
order to improve the Company's future financial performance, however, no
assurance can be given that the restructuring will be successful, that future
operating results will improve, or that the actions undertaken in the
restructuring will not disrupt the Company's remaining operations. Further,
there can be no assurance that additional reorganization of the Company's
operations will not be required in the future.

Acquisitions

The Company's merger and acquisition transactions, including the recent
acquisition of NetSoft, have been motivated by various factors, including the
desire to obtain new technologies, expand and enhance the Company's product
offerings, attract key personnel and strengthen the Company's presence in the
international marketplace. 


                                       15
<PAGE>   16

Product and technology acquisitions entail numerous risks, including the
diversion of management's attention away from day-to-day operations,
difficulties in the assimilation of acquired operations and personnel (such as
sales, engineering and customer support), the incorporation of acquired products
into existing product lines, the failure to realize anticipated benefits in
terms of cost savings and synergies, undisclosed liabilities, adverse short-term
effects on reported operating results, the amortization of acquired intangible
assets, the potential loss of key employees from acquired companies and the
difficulty of presenting a unified corporate image.

The Company and NetSoft each have different systems and policies and procedures
in many operational areas that also must be integrated. To achieve profitability
the Company will need to integrate successfully and streamline overlapping or
duplicative functions. The integration is currently in process and management's
focus centers on ensuring the integration efforts progress as planned. However,
there can be no assurance that the integration will be accomplished smoothly,
expeditiously or successfully. To date, the Company's previous acquisitions have
not contributed significantly to revenues. Uncertainty in the marketplace or
customer hesitation related to the NetSoft acquisition could negatively affect
the Company's future revenues and results of operations. Failure to integrate
effectively the operations of the Company and NetSoft could have a material
adverse effect on the Company's results of operations and financial condition.

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

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. The
Company has experienced difficulty in developing and introducing new products
and enhancing existing products in a manner which satisfies customer
requirements and changing market demands. Any further failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
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.


                                       16
<PAGE>   17

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 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. The Company
and NetSoft are in the process of integrating their distribution channels.
Changes in distribution channels may adversely affect sales of the Company's
products and consequently, may adversely affect the Company's business,
financial condition and results of operations, at least in the near term. There
can be no assurance that the Company will be able to attract or retain resellers
and distributors who will be able to market the combined companies' 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 combined companies'
products, and the inability to recruit or retain important resellers or
distributors could adversely affect the Company's results of operations.

Global Market Risks

During 1997, the Company has addressed and taken steps with respect to staffing
and management, distributor relationships and product marketing in both Europe
and Japan. While NetSoft has been successful historically in marketing and
selling its products internationally, the Company will need to successfully
integrate and streamline overlapping functions, particularly in Europe. There
can be no assurance that such integration will be accomplished expeditiously or
successfully, or that the Company will succeed in its attempts to improve its
international marketing and sales efforts. In addition, 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 meet effectively 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 and Orange County in
California and in Haifa, Israel. During the latter half of 1996 and through
1997, 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. Managing
employee attrition, integrating acquired operations and products and expanding
both the geographic areas of its customer base and operations have resulted in
substantial demands on the Company's management resources. A critical aspect of
the NetSoft integration process has been to focus on an expeditious integration
of the former NetSoft employee base into the Company's operations to mitigate
the loss of key employees from both the Company and the former NetSoft. Despite
such efforts, attrition has continued generally for the same reasons as cited
above as characteristic of the past twelve-month period. The Company's future
operating results will be dependent in part on its ability to retain and attract
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.


                                       17
<PAGE>   18

PART II OTHER INFORMATION

ITEM 1. 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-97-20061-JW, 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. In addition, on September 10, 1997, the
Company and several of its officers and directors were named in a securities
class action complaint filed in the Northern District of California, Beasley v.
NetManage, Inc., et al., C-97-3329 FMS, (N.D. Cal.). This complaint is
substantially similar to the previously-filed case of Head et al. v. NetManage,
Inc., et al., discussed above, and contains similar allegations, names the same
defendants, and purports to represent purchasers of NetManage stock during the
same class period as in the previously-filed complaint. The complaints seek an
unspecified amount of damages. The Company believes there is no merit to these
cases and intends to defend both 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. On June 19, 1997, one of the plaintiffs
in that action filed a securities class action complaint, Molinari v. NetManage,
Inc., et al., No. C-97-20544-JW-PVT, in the United States District Court for the
Northern District of California against the same defendants. Both complaints
allege that, between April 18, 1996 and July 18, 1996, the defendants made false
or misleading statements of material fact about the Company's prospects. The
state court complaint asserts claims under California state law; the federal
complaint asserts claims under the federal securities laws. Both complaints seek
an unspecified amount of damages. The Company believes there is no merit to
either case and intends to defend both 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 October 10, 1997, a verified derivative complaint was filed in the United
States District Court for the Northern District of California against nine
present and former officers and directors of the Company alleging that these
persons violated various duties to the Company. Sucher v. Alon et al., No.
C-97-20897 JW (EAI) (N.D. Cal.). The derivative complaint also names the Company
as a nominal defendant. The derivative complaint is predicated on the factual
allegations contained in the class action complaints discussed above. No demand
was previously made to the Company's Board of Directors concerning the
allegations of the derivative complaint, which seeks an unspecified amount of
damages.

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.


                                       18
<PAGE>   19

ITEM 2. CHANGES IN SECURITIES

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

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

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a.      Exhibits

        27.1 Financial Data Schedule.

b.      Reports on Form 8-K

        A Current Report on Form 8-K dated July 29, 1997 was filed by the
        Registrant on August 8, 1997 to report under Item 5 thereof, the
        Registrant's acquisition of all of the outstanding shares of Network
        Software Associates, Inc.

        A Current Report on Form 8-K/A was filed by the Registrant on October
        14, 1997, to amend its report on Form 8-K dated July 29, 1997, to
        include the financial statements of Network Software Associates, Inc.
        and pro forma combined financial statements for the Company and Network
        Software Associates, Inc.


NetManage, the `lizard-in-the-box' logo, NetSoft, NS/Router, Chameleon, and
Chameleon HostLink are trademarks or registered trademarks of NetManage, Inc. in
the United States and other Countries. All other trademarks are the property of
their respective owners.


                                       19
<PAGE>   20

                                   SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED THEREUNTO DULY AUTHORIZED.

                                    NETMANAGE, INC.
                                    (REGISTRANT)


DATE:    NOVEMBER 14, 1997          BY:  /S/ ZVI ALON
         --------------------            ---------------------------------------
                                         ZVI ALON
                                         CHAIRMAN OF THE BOARD, PRESIDENT AND
                                         CHIEF EXECUTIVE OFFICER


                                       20
<PAGE>   21

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Exhibit No.          Description
-----------          -----------
<S>                  <C> 
   27.1              Financial Data Schedule
</TABLE>