<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 March 31, 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 March 31, 1997:
43,222,655


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


<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 March 31, 1997 and
                  December 31, 1996                                                             3

                  Condensed Consolidated Statements of Operations for the three
                  months ended March 31, 1997 and March 31, 1996                                4

                  Condensed Consolidated Statements of Cash Flows for the three
                  months ended March 31, 1997 and March 31, 1996                                5

                  Notes to Condensed Consolidated Financial Statements                          6

Item 2.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                                     8


PART II.          OTHER INFORMATION

Item 1.           Legal Proceedings                                                            16

Item 2.           Changes in Securities                                                        16

Item 3.           Defaults upon Senior Securities                                              16

Item 4.           Submission of Matters to a Vote of Security Holders                          16

Item 5.           Other Information                                                            16

Item 6.           Exhibits and Reports on Form 8-K                                             16

                  Signatures                                                                   17
</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>
                                                                                                MARCH 31,         DECEMBER 31,
                                                                                                  1997               1996
                                                                                               (UNAUDITED)         (AUDITED)
                                                                                               -----------        ------------
ASSETS
<S>                                                                                            <C>                 <C>      
CURRENT ASSETS:
   Cash and cash equivalents                                                                   $  21,129           $  19,483
   Short-term investments                                                                         36,899              46,609
   Accounts receivable, net                                                                       10,092              13,915
   Prepaid expenses and other current assets                                                       9,916              13,191
                                                                                               ---------           ---------
        Total current assets                                                                      78,036              93,198
                                                                                               ---------           ---------
PROPERTY AND EQUIPMENT, at cost:
   Computer software and equipment                                                                14,793              14,874
   Furniture and fixtures                                                                          5,596               5,622
   Leasehold improvements                                                                          1,412               1,434
                                                                                               ---------           ---------
                                                                                                  21,801              21,930
   Less - Accumulated depreciation                                                               (11,267)             (9,872)
                                                                                               ---------           ---------
        Net property and equipment                                                                10,534              12,058
                                                                                               ---------           ---------

LONG-TERM INVESTMENTS                                                                             47,343              37,201
GOODWILL AND OTHER INTANGIBLES, net                                                                1,453               1,763
OTHER ASSETS                                                                                       8,013               8,309
                                                                                               ---------           ---------
                                                                                               $ 145,379           $ 152,529
                                                                                               =========           =========




LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                                            $   1,118           $   2,060
   Accrued liabilities                                                                             3,330               4,154
   Accrued payroll and payroll-related expenses                                                    4,860               4,779
   Deferred revenue                                                                                7,575               8,839
   Income taxes payable                                                                            1,529               1,698
                                                                                               ---------           ---------
        Total current liabilities                                                                 18,412              21,530
                                                                                               ---------           ---------

LONG-TERM LIABILITIES                                                                                836               1,708
                                                                                               ---------           ---------

STOCKHOLDERS' EQUITY:
   Common stock                                                                                      432                 431
   Additional paid-in capital                                                                     90,297              90,193
   Retained earnings                                                                              37,012              39,751
   Cumulative translation adjustments                                                             (1,610)             (1,084)
                                                                                               ---------           ---------
        Total stockholders' equity                                                               126,131             129,291
                                                                                               ---------           ---------
                                                                                               $ 145,379           $ 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
                                                                                             ---------------------------
                                                                                             MARCH 31,         MARCH 31,
                                                                                               1997              1996
                                                                                             ---------         ---------
<S>                                                                                          <C>               <C>     
NET REVENUES:
   License fees                                                                              $  12,280         $ 29,369
   Services                                                                                      4,099            3,653
                                                                                             ---------         --------
        Total net revenues                                                                      16,379           33,022

COST OF REVENUES                                                                                 1,125            3,271
                                                                                             ---------         --------

GROSS MARGIN                                                                                    15,254           29,751
                                                                                             ---------         --------

OPERATING EXPENSES:
   Research and development                                                                      6,090            7,174
   Sales and marketing                                                                          10,299           12,818
   General and administrative                                                                    2,390            2,658
   Amortization of goodwill                                                                        260              309
                                                                                             ---------         --------
        Total operating expenses                                                                19,039           22,959
                                                                                             ---------         --------
 
INCOME (LOSS) FROM OPERATIONS                                                                   (3,785)           6,792

INTEREST INCOME AND OTHER, NET                                                                   1,255            1,038
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATE                                                      (209)            (225)
                                                                                             ---------         --------

INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES                                                 (2,739)           7,605
PROVISION FOR INCOME TAXES                                                                           -            2,585
                                                                                             ---------         --------
NET INCOME (LOSS)                                                                            $  (2,739)        $  5,020
                                                                                             =========         ========
NET INCOME (LOSS) PER SHARE                                                                  $   (0.06)        $   0.12
                                                                                             =========         ========
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS                                                  43,182           43,141
                                                                                             =========         ========
</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>
                                                                                                 THREE MONTHS ENDED
                                                                                             ---------------------------
                                                                                              MARCH 31,        MARCH 31,
                                                                                                1997             1996
                                                                                             ---------         --------
<S>                                                                                          <C>               <C>     
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                                                                         $  (2,739)        $  5,020
   Adjustments to reconcile net income to net cash provided by operating activities:
        Depreciation and amortization                                                            2,779            1,832
        Provision for doubtful accounts and returns                                                  -              211
        Equity in losses of unconsolidated affiliate                                               209              225
        Changes in assets and liabilities, net of business combinations:
           Accounts receivable                                                                   3,823              420
           Prepaid expenses and other assets                                                     3,455              239
           Accounts payable                                                                       (942)            (921)
           Accrued liabilities, payroll and payroll-related expenses                              (743)             579
           Deferred revenue                                                                     (2,136)          (1,675)
           Income taxes payable                                                                   (169)           2,206
                                                                                             ---------         --------
                Net cash provided by operating activities                                        3,537            8,136
                                                                                             ---------         --------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of short-term investments                                                          (4,100)         (11,903)
   Proceeds from maturity of short-term investments                                             13,592           19,894
   Purchases of long-term investments                                                          (12,781)         (15,816)
   Proceeds from maturity of long-term investments                                               2,417            4,005
   Purchases of property and equipment                                                             (68)          (1,499)
   Purchases of technology and other intangible assets                                            (530)               -
   Investment in unconsolidated affiliate                                                            -             (407)
                                                                                             ---------         --------
                Net cash used in investing activities                                           (1,470)          (5,726)
                                                                                             ---------         --------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from issuance of common stock, net                                                     105              191
                                                                                             ---------         --------
                Net cash provided by financing activities                                          105              191

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                           (526)             270
                                                                                             ---------         --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                                        1,646            2,871

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

CASH AND CASH EQUIVALENTS, end of period                                                     $  21,129        $  35,464
                                                                                             =========        =========
</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 financial statements for the three month periods ended March
     31, 1997 and 1996 for NetManage(R), Inc. (the "Company") have been prepared
     on the same basis as the year end financial statements and, in the opinion
     of management, include all adjustments (consisting of only normal recurring
     adjustments) necessary to present fairly the financial information set
     forth therein, in accordance with 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 50% investment in an
     unconsolidated affiliate, NetVision, Ltd., is accounted for by the equity
     method.

3.   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 ending December 31,
     1997. Upon adoption, all prior-period earnings per share data presented
     will be restated to conform with SFAS No. 128. SFAS No. 128 must be adopted
     for financial statements issued for periods ending after December 15, 1997,
     including interim periods; earlier application is not permitted.
     The Company has not yet quantified the effect of adopting SFAS No. 128.

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-97-20061 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. 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 


                                       6
<PAGE>   7
     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.





                                       7
<PAGE>   8
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
fluctuations in revenues and percentages of revenues from international
markets, indirect sales channels and services, 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, slower than expected growth in the markets
for the Company's  products or the Company's failure 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 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 also 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 and IBM host access as well as for messaging and
collaboration. The Company's products include the Chameleon(TM) ATX family
(Chameleon HostLink(TM), Chameleon UNIXLink 97), ECCO(R) Pro and the Z-Mail(R)
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.


RESULTS OF OPERATIONS

The Company experienced a significant decline in net revenues for the three
month period ended March 31, 1997 as compared to the same period of 1996. The
decline in net revenues primarily reflects increased competition and pricing
pressures. In addition, the decline reflects the Company's lack of success in
marketing and selling its products in Europe and Japan in particular. During the
fourth quarter of 1996, the Company 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 to focusing on controlling expenses, the Company has been evaluating 
its marketing and selling strategies and recently consolidated its products and
operations into two distinct business units, each with dedicated development,
sales, marketing and support resources. The Core Products Business Unit is
focused on enhancing and marketing the Company's established products, including
the Chameleon networking products. The Emerging Technologies Business Unit is
focused on the Company's new products, including the messaging and collaboration
products. The benefits of this reorganization were not expected to contribute
immediately in terms of increased revenues, and net revenues actually declined
on a sequential quarterly basis between the fourth quarter of 1996 and the first
quarter of 1997. As a result of the Company's focus on controlling expenses,
however, operating expenses declined on a sequential quarterly basis by
approximately $4.0 million, excluding a fourth quarter 1996 charge of $13.4
million for the write-off of in-process research and development. Despite the
decline in operating expenses, a net loss of $2.7 million resulted from the
aforementioned revenue shortfall during the first quarter of 1997. Operating
expense levels are based in part on the Company's expectations as to future
revenues and to a large extent are fixed. Operating expenses are expected to
remain relatively constant for the remainder of 1997, but may increase as a
percentage of net revenues in the event the Company's revenues decline more 


                                       8
<PAGE>   9
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.

FIRST QUARTER 1997 COMPARED TO FIRST QUARTER 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
(Dollars in millions)                                March 31,                                Change
Quarter ended                                1997                 1996                 $                 %
-------------------------------------------------------- --- ----------------------------------------------------
<S>                                         <C>                  <C>               <C>                 <C>    
Net revenues:
       License fees                         $ 12.3               $ 29.4            $ (17.1)            (58.2%)
       Services                                4.1                  3.6                0.4              12.2%
                                            ------               -------
         Total net revenues                 $ 16.4               $ 33.0            $ (16.6)            (50.4%)

As a percentage of net revenues:
       License fees                           75.0%                88.9%
       Services                               25.0%                11.1%
                                            -------              -------
         Total net revenues                  100.0%               100.0%

Gross margin                                $ 15.3               $ 29.8            $ (14.5)            (48.7%)
   As a percentage of net revenues            93.1%                90.1%

Research and development                    $  6.1               $  7.2            $  (1.1)            (15.1%)
   As a percentage of net revenues            37.2%                21.7%

Sales and marketing                         $ 10.3               $ 12.8            $  (2.5)            (19.7%)
   As a percentage of net revenues            62.9%                38.8%

General and administrative                  $  2.4               $  2.7            $  (0.3)            (10.1%)
   As a percentage of net revenues            14.6%                 8.0%

Interest income                             $  1.3               $  1.0            $   0.2              20.9%
   As a percentage of net revenues             7.7%                 3.1%

Equity in losses of
   unconsolidated affiliate                 $ (0.2)              $ (0.2)           $    -                7.1%
   As a percentage of net revenues             1.3%                 0.7%

Provision for income taxes                      -                $  2.6            $  (2.6)           (100.0%)
   Effective tax rate                           -                  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 net revenues during the first quarter of 1997 as compared to the
first quarter of 1996. As previously discussed, the decline in license fees was
primarily attributable to increased competition and heightened pricing
pressures. In addition, the decline reflects the Company's lack of success in
marketing and selling its products in Europe and Japan in particular. 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, as previously discussed, 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 primarily reflects the decline in
the total net 


                                       9
<PAGE>   10
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 21% and 36% for the three month periods ended March
31, 1997 and 1996, respectively. The decline in international revenues as a
percentage of total net revenues is 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 the first quarter of 1996. The Company has recently addressed
and taken steps with respect to staffing and management, distributor
relationships, and product marketing in both Europe and Japan. There can be no
assurance, however, 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. 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 that 10% of net revenues during the quarters
ended March 31, 1997 or March 31, 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 March 31, 1997 has not been material and is not reported
separately.

Gross margin as a percentage of net revenues increased for the first quarter of
1997 as compared to the first quarter of 1996 primarily as a result of decreased
packaging and documentation costs. A charge of approximately $350,000 and
$250,000 is included in cost of revenues for the quarters ended March 31, 1997
and 1996, respectively, for the amortization of purchased technology.

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 decrease in R&D expenses in absolute dollars for three months
ended March 31, 1997 as compared to the three months ended March 31, 1996
primarily reflects cost savings, particularly in salaries and benefits,
associated with employee attrition, as well as the Company's decision to
discontinue several low revenues 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 quarter ended
March 31, 1997 as compared to the same quarter of 1996.



                                       10
<PAGE>   11
The Company expects that R&D spending in absolute dollars will remain relatively
constant on a quarterly basis for the remainder of 1997 and, as a percentage of
net revenues, will fluctuate depending on future revenue levels, acquisitions
and licensing of technology. As previously mentioned, the Company recently
organized into business units, one focused on the Company's core products 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
Chameleon UNIXLink 97 and Chameleon HostLink, the products that currently
represent the majority of the Company's revenues. 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 that
do not qualify for capitalization are charged to R&D expense when incurred. As
previously discussed, approximately $350,000 and $250,000 for the quarters ended
March 31, 1997 and 1996, respectively, is included in cost of revenues for the
amortization of purchased software. 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 first quarter of 1997 as compared to the first quarter
of 1996 primarily reflects cost savings related to employee attrition and the
resulting declines in salaries and benefits, minimal advertising as the Company
re-evaluated its marketing and selling strategies, and a decline in commissions
on lower revenues. The increase in S&M expenses as a percentage of total net
revenues for the quarter ended March 31, 1997 as compared to the same quarter of
1996, reflects the decline in the Company's total net revenues base.

The Company believes that S&M expenses will increase in absolute dollars during
the remaining quarters of 1997 as the Company implements it 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 decreased in absolute dollars for
the quarter ended March 31, 1997 as compared to the quarter ended March 31, 1996
due to employee attrition and the resulting savings in salaries and benefits,
and the Company's overall focus on controlling operating expenses. As a
percentage of total net revenues, the increase in G&A expenses is attributable
to the decreased total net revenues base. The Company believes that G&A expenses
will remain constant in absolute dollars during the remaining quarters of 1997
and as a percentage of total net revenues will fluctuate depending on future
revenue levels.

Interest income 
Interest income increased in absolute dollars primarily as a result of higher
interest rates earned on cash and investment balances for the quarter ended
March 31, 1997 as compared to the quarter ended March 31, 1996. The increase in
interest income as a percentage of net revenues is consistent with the Company's
decreased revenue base.

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 Industries, Ltd. ("Elron"). The 


                                       11
<PAGE>   12
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 for income taxes
The Company's effective tax rate for the first quarter of 1997 was 0% due to the
Company's loss position as compared to an effective tax rate of 34% for the
first quarter of 1996.

<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
------------------------------------------------------------------------------
                                                          As of March 31,
(In millions)                                         1997               1996
------------------------------------------------------------------------------
<S>                                                <C>                <C>
Cash and cash equivalents                           $ 21.1             $ 35.5
Short-term investments                                36.9               17.2
Long-term investments                                 47.3               63.0
Net cash provided by operating activities              3.5                8.1
Net cash used in investing activities                  1.5                5.7
Net cash provided by financing activities              0.1                0.2
------------------------------------------------------------------------------
</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.

The Company's cash and cash equivalents, short-term investments and long-term
investments increased from $103.3 million at December 31, 1996 to $105.4 million
at March 31, 1997. This increase was primarily due to a federal income tax
refund received during the first quarter of 1997 in the amount of approximately
$2.3 million related to the Company's 1995 tax year.

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 proceeds from maturities, the Company invested
$0.9 million in short-term and long-term investments during the first quarter of
1997. Expenditures for purchases of property and equipment were minimal during
the first quarter of 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, 
and it is anticipated that such spending will remain relatively constant during
the remaining quarters of 1997. The Company's principal commitment as of March 
31, 1997 consists of leases on its facilities.

Net cash provided by financing activities during the first quarter of 1997
reflects proceeds from the issuance of common stock under the Company's stock
option plan.

At March 31, 1997, the Company had working capital of $59.6 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.


                                       12
<PAGE>   13
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.

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 


                                       13
<PAGE>   14
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 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
While the Company expects that international sales will 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 and first quarter of 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, 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 areas 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 


                                       14
<PAGE>   15
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.


























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



                                       15
<PAGE>   16
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. 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 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.       No reports on Form 8-K have been filed during the quarter for which 
         this report relates.


                                       16
<PAGE>   17
                                   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: MAY 13, 1997                   BY:   /S/ WALTER D. AMARAL
      -----------------------              --------------------
                                           WALTER D. AMARAL
                                           SENIOR VICE PRESIDENT, FINANCE AND
                                           CHIEF FINANCIAL OFFICER




















                                       17
<PAGE>   18
                           EXHIBIT INDEX

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