<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, 2001

                                       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 April 30, 2001:
65,223,230

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


<PAGE>   2
                                 NETMANAGE, INC.
                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                        PAGE
<S>                                                                     <C>
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Condensed Consolidated Balance Sheets at March 31, 2001 and
         December 31, 2000                                               3

         Condensed Consolidated Statements of Operations for the three
         months ended March 31, 2001 and March 31, 2000                  4

         Condensed Consolidated Statements of Cash Flows for the three
         months ended March 31, 2001 and March 31, 2000                  6

         Notes to Condensed Consolidated Financial Statements            7

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                      10

Item 3.  Quantitative and Qualitative Disclosures About Market Risk     23


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                              24

Item 2.  Changes in Securities                                          24

Item 3.  Defaults upon Senior Securities                                24

Item 4.  Submission of Matters to a Vote of Security Holders            24

Item 5.  Other Information                                              24

Item 6.  Exhibits and Reports on Form 8-K                               24

         Signatures                                                     25
</TABLE>


                                       2


<PAGE>   3
                                 NETMANAGE, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                                      MARCH 31,      DECEMBER 31,
ASSETS                                                                  2001             2000
                                                                     ----------      ------------
                                                                     (UNAUDITED)
<S>                                                                  <C>             <C>
CURRENT ASSETS:
     Cash and cash equivalents                                       $   36,359       $   35,017
     Short-term investments                                                 981            3,033
     Accounts receivable, net                                            19,986           26,081
     Prepaid expenses and other current assets                            7,400           11,591
                                                                     ----------       ----------
                      Total current assets                               64,726           75,722
                                                                     ----------       ----------

PROPERTY AND EQUIPMENT, at cost:
     Computer software and equipment                                     10,051           10,005
     Furniture and fixtures                                               6,268            6,268
     Leasehold improvements                                               3,302            3,302
                                                                     ----------       ----------
                                                                         19,621           19,575
     Less - Accumulated depreciation                                    (13,890)         (12,581)
                                                                     ----------       ----------
                      Net property and equipment                          5,731            6,994
                                                                     ----------       ----------

GOODWILL AND OTHER INTANGIBLES, net                                      22,175           23,689
OTHER ASSETS                                                              3,130            3,576
                                                                     ----------       ----------
                                                                     $   95,762       $  109,981
                                                                     ==========       ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable                                                  $    5,214       $    5,050
   Accrued liabilities                                                   12,967           17,426
   Accrued payroll and payroll-related expenses                           4,435            4,500
   Deferred revenue                                                      22,719           24,453
   Income taxes payable                                                   4,005            4,000
                                                                     ----------       ----------
       Total current liabilities                                         49,340           55,429
                                                                     ----------       ----------

LONG-TERM LIABILITIES                                                       149            1,523
                                                                     ----------       ----------

STOCKHOLDERS' EQUITY:
     Common stock, $0.01 par value --
     Authorized -- 125,000,000 shares
     Issued -- 72,625,935 and 72,625,520 shares,
     respectively
     Outstanding -- 65,223,230 and 65,266,455 shares,                       726              726
     respectively
     Treasury stock, at cost -- 7,402,705 and 7,359,065 shares,
     respectively                                                       (16,458)         (16,414)
    Additional paid-in capital                                          176,083          176,081
    Accumulated deficit                                                (108,608)        (103,374)
    Unrealized loss on marketable securities                             (1,656)               -
    Accumulated foreign currency translation loss                        (3,814)          (3,990)
                                                                     ----------       ----------
        Total stock holders' equity                                      46,273           53,029
                                                                     ----------       ----------
                                                                     $   95,762       $  109,981
                                                                     ==========       ==========
</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,
                                                     -----------------------
                                                       2001           2000
                                                     --------       --------
<S>                                                  <C>            <C>
NET REVENUES:
         License fees                                $ 11,409       $ 14,942
         Services                                      10,322         12,488
                                                     --------       --------
                   Total net revenues                  21,731         27,430

COST OF REVENUES                                          805          1,127

                                                     --------       --------
GROSS MARGIN                                           20,926         26,303
                                                     --------       --------

OPERATING EXPENSES:
         Research and development                       5,709          6,582
         Sales and marketing                           15,864         19,506
         General and administrative                     3,681          5,960
         Insurance recovery                                 -         (2,516)
         Amortization of goodwill                       1,502          4,492
                                                     --------       --------
                   Total operating expenses            26,756         34,024
                                                     --------       --------

LOSS FROM OPERATIONS                                   (5,830)        (7,721)

INTEREST INCOME AND OTHER, NET                            731            453

                                                     --------       --------
LOSS BEFORE PROVISION FOR INCOME TAXES                 (5,099)        (7,268)
PROVISION FOR INCOME  TAXES                               135            134
                                                     --------       --------
NET LOSS                                             $ (5,234)      $ (7,402)
                                                     ========       ========

NET LOSS PER SHARE:
       Basic                                         $  (0.08)      $  (0.12)
       diluted                                       $  (0.08)      $  (0.12)

WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
       Basic                                           65,223         64,138
       Diluted                                         65,223         64,138
</TABLE>


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


                                       4


<PAGE>   5
                                 NETMANAGE, INC.
          CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE LOSS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                     Three months ended
                                                         March 31,
                                                   ---------------------
                                                     2001          2000
                                                   -------       -------
<S>                                                <C>           <C>
Net Loss                                           $(5,234)      $(7,402)
Other comprehensive loss:
     Unrealized loss on investments                 (1,656)         (212)
     Foreign currency translation adjustments          176          (308)
                                                   -------       -------
Other comprehensive loss                           $(6,714)      $(7,922)
                                                   =======       =======
</TABLE>


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


                                       5


<PAGE>   6
                                 NETMANAGE, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                   (UNAUDITED)


<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                               MARCH 31,
                                                                        -----------------------
                                                                          2001           2000
                                                                        --------       --------
<S>                                                                     <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                             $ (5,234)      $ (7,402)
   Adjustments to reconcile net loss to net cash provided by
     operating activities:
       Depreciation and amortization                                       2,811          6,142
       Provision for doubtful accounts and returns                             -             41
       Changes in assets and liabilities, net of business
         combinations:
         Accounts receivable                                               6,095          6,198
         Prepaid expenses and other assets                                 4,471          3,428
         Accounts payable                                                    164         (1,322)
         Accrued liabilities, payroll and payroll-related expenses        (4,524)       (11,969)
         Deferred revenue                                                 (1,734)            86
         Income taxes payable                                                  5         (3,424)
         Long-term liabilities                                            (1,374)        (1,269)
                                                                        --------       --------
             Net cash provided by (used in) operating activities             680         (9,491)
                                                                        --------       --------



 CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from sales and maturities of short-term investments           70,562        (17,638)
   Purchases of short-term investments                                   (69,877)        16,959
   Purchases of property and equipment                                       (46)          (273)
                                                                        --------       --------
             Net cash provided by (used in) investing activities             639           (952)
                                                                        --------       --------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from sale of common stock, net of issuance costs                   2            875
     Purchase of common stock                                                (44)             -
                                                                        --------       --------
             Net cash provided by (used in) financing activities             (42)           875
                                                                        --------       --------

EFFECT OF EXCHANGE RATE CHANGES ON CASH                                       65           (106)
                                                                        --------       --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       1,342         (9,674)

CASH AND CASH EQUIVALENTS, beginning of period                            35,017         63,079
                                                                        --------       --------
CASH AND CASH EQUIVALENTS, end of period                                $ 36,359       $ 53,405
                                                                        ========       ========
</TABLE>


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


                                       6


<PAGE>   7
                                 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,
2001 and 2000 for NetManage, 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.

3.      NET LOSS PER SHARE

Basic net loss per share data has been computed using the weighted-average
number of shares of common stock outstanding during the periods. Diluted net
loss per share data has been computed using the weighted-average number of
shares of common stock and dilutive potential common shares. Potential common
shares include dilutive shares issuable upon the exercise of outstanding common
stock options computed using the treasury stock method. For the three month
periods ended March 31, 2001 and March 31, 2000 the number of shares used in the
computation of diluted loss per share were the same as those used for the
computation of basic loss per share. Potentially dilutive securities of 508,726
and 8,287,354 were not included in the computation of diluted net loss per
common share because to do so would have been anti-dilutive for the three month
periods ended March 31, 2001 and 2000, respectively.

4.      RESTRUCTURING OF OPERATIONS

On August 3, 2000, the Company announced a restructuring of its operations
designed to re-focus the Company on core business functions and reduce operating
expenses. In connection with the restructuring, the Company reduced its
workforce by approximately 17% and made provisions for reductions in office
space, related overhead expenses and the writedown of certain assets. The total
amount of the restructuring charge was $5.6 million. The restructuring charge
included approximately $3.0 million of estimated expenses for facilities-related
charges, $1.6 million of employee-related expenses for employee terminations and
an $800,000 settlement to Verity for a software license that the Company does
not plan to use and, accordingly, has written-off. As of March 31, 2001, the
Company had incurred costs totaling approximately $3.8 million related to the
restructuring, which required $3.8 million in cash expenditures. The remaining
reserve related to this restructuring was approximately $1.8 million which is
included in accrued liabilities.

The following table lists the change in the August 2000 NetManage restructuring
charge for the three months ended March 31, 2001 (in thousands):


<TABLE>
<CAPTION>
                                           Employee         Excess
                                            Costs          Facilities         Other           Total
                                          ----------       ----------       ----------      ----------
<S>                                       <C>              <C>              <C>             <C>
Balance at December 31, 2000              $      100       $    1,884       $      100      $    2,084
    Reserve utilized in three months
       ended March 31, 2001                     (100)            (153)              --            (253)
                                          ----------       ----------       ----------      ----------
Balanced at March 31, 2001                    $   --       $    1,731       $      100      $    1,831
                                          ==========       ==========       ==========      ==========
</TABLE>


                                       7


<PAGE>   8
                                 NETMANAGE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

In the fourth quarter of 1999, following the acquisitions of Wall Data, Inc.
("Wall Data") and Simware, Inc. ("Simware"), the Company initiated a plan to
restructure its worldwide operations in connection with the integration of
operations of the two acquired companies. In connection with this plan, the
Company recorded a $3.8 million charge to operating expenses in 1999. The
restructuring charge included approximately $1.9 million of estimated expenses
for facilities-related charges associated with the consolidation of redundant
operations and $1.4 million of employee-related expenses for employee
terminations. The Company anticipates that the execution of the restructuring
actions will require total cash expenditures of approximately $3.8 million,
which is expected to be funded from internal operations. As of March 31, 2001,
the Company had incurred costs totaling approximately $2.6 million related to
the restructuring, which required $2.6 million in cash expenditures. The
remaining reserve related to this restructuring was approximately $1.2 million.

The following table lists the change in the NetManage restructuring charge from
1999 for the three months ended March 31, 2001 (in thousands):


<TABLE>
<CAPTION>
                                        Excess
                                      Facilities         Other            Total
                                      ----------       ----------       ----------
<S>                                   <C>              <C>              <C>
Balance at December 31, 2000          $    1,139       $      300       $    1,439
Reserve utilized in three months
  ended March 31, 2001                       (28)            (163)            (191)
                                      ----------       ----------       ----------
Balance at March 31, 2001             $    1,111       $      137       $    1,248
                                      ==========       ==========       ==========
</TABLE>


In August 1998, following the acquisition of FTP Software, Inc. ("FTP"), the
Company initiated a plan to restructure its worldwide operations as a result of
business conditions and in connection with the integration of the operations of
FTP. In connection with this plan, the Company recorded a $7.0 million charge to
operating expenses in 1998. The restructuring charge included approximately $5.5
million of estimated expenses for the write-off of excess equipment and
leasehold improvements as NetManage facilities are downsized or closed,
facilities- related expenses associated with the consolidation of redundant
operations and $1.5 million of employee-related expenses for employee
terminations. The Company completed the majority of the restructuring actions
by the end of 1998. The Company anticipated that the execution of the
restructuring actions would require total cash expenditures of approximately
$13.7 million, which was expected to be funded from internal operations.


                                       8


<PAGE>   9
                                 NETMANAGE, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Uaudited)

At March 31 2001, the remaining FTP reserve related to this restructuring plan
was approximately $1.1 million.

The following table lists the change in the NetManage restructuring charge from
1998 relating to FTP for the three months ended March 31, 2001:


<TABLE>
<CAPTION>
                                        Excess
                                      Facilities          Total
                                      ----------       ----------
<S>                                   <C>              <C>
Balance at December 31, 2000          $    1,108       $    1,108
Reserve utilized in three months
 ended March 31, 2001                        (36)             (36)
                                      ----------       ----------
Balance at March 31, 2001             $    1,072       $    1,072
                                      ==========       ==========
</TABLE>


5.      COMMITMENTS AND CONTINGENCIES

        Legal Proceedings

In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, was filed in the United States
District Court for the Northern District of California against Firefox
Communications Inc. ("Firefox") and certain of its former officers and
directors. FTP acquired Firefox in July 1996. The complaint alleged that,
between July 20, 1995 and January 2, 1996, the defendants violated the federal
securities laws by making false or misleading statements about Firefox's
operations and financial results. On May 8, 1997, the district court granted
defendants' motion to dismiss without leave to amend. Plaintiffs filed a notice
of appeal. Oral argument on the appeal was held on September 14, 1998. On
November 1, 1999, the Court of Appeals for the Ninth Circuit issued an order
vacating the judgment of the district court and remanded the case back to the
district court for reconsideration in light of its recently issued landmark
decision in the securities litigation case of Janas v. McCraken (In re Silicon
Graphics Inc.). After remand, the Company renewed its motion to dismiss. On
March 22, 2000, a hearing on the Company's motion to dismiss was held by the
district court and on March 20, 2001, the Court of Appeals for the Ninth Circuit
affirmed the dismissal.

NetManage is not involved in any other legal proceedings.

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

6.      TREASURY STOCK

In the first quarter of 2001, the Company purchased 43,640 shares of its
outstanding common shares for approximately $44,000. In May 2001, the Company
purchased 152,500 shares of its outstanding common shares for approximately
$126,000.

7.      SUBSEQUENT EVENT

In May 2001, the Company received a federal tax refund of approximately $3.6
million related to a net operating loss carry-back for FTP.


                                       9


<PAGE>   10
                                 NETMANAGE, INC.

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

This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. Forward-looking statements include assumptions
regarding expected revenues from products recently introduced or acquired as a
result of recent acquisitions of other companies, expected changes in operating
expenses and capital spending, the Company's expectation that sales may increase
modestly through the remainder of 2001, the Company's expectation that research
and development and sales and marketing expenses remain flat or decline as a
percentage of revenues in line with the implementation of cost reduction
measures. The Company's actual results could differ materially from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, among other things, a realization in the
future that the markets for the Company's products, including but not limited to
Rumba, ViewNow, OnWeb and SupportNow could grow more slowly than the Company or
market analysts believe, or the Company will not be able to compete effectively
in those markets. In addition, there is no assurance that the Company's products
for real-time customer support over the Internet will receive customer
acceptance, that the Company will not suffer increased competitive pressures,
that buying decisions by the Company's customers will not be adversely
influenced by the actions of the Company's competitors or other market factors,
that the Company will be able to realize new business opportunities that may
exist as a result of the acquisition of Wall Data, Simware, or Aqueduct, that
the Company will be able to execute on its revised business plan in a manner
that will allow it to improve its financial position, or that economic
difficulties in the United States and Asia will not adversely affect sales of
the Company's products in those regions. The timely completion of the Company's
restructuring of operations described below is dependent upon a number of
factors, including risks associated with the integration of the remaining
operations of Wall Data, Simware, and Aqueduct, the Company's ability to
complete the integration of the operations and technologies of Wall Data,
Simware and Aqueduct in a timely, efficient and cost-effective manner.
Additional factors that could affect the Company's business, financial condition
and results of operations include those discussed below under "Factors That May
Affect Future Results and Financial Condition." The following discussion should
be read in conjunction with the accompanying condensed consolidated financial
statements and notes to condensed consolidated financial statements.

OVERVIEW

The Company develops and markets software applications that allow its customers
to implement host computer access from a range of internal or external desktop
or web-based client computers, to publish information from existing host-centric
applications to Internet and web-based client computer users, and to create new
applications that leverage existing host applications and data sources. The
Company develops and markets these software solutions for UNIX(R), IBM AS/400
midrange and IBM corporate mainframe computers. The Company also develops and
markets software that increases the productivity of corporate call centers, and
allows real-time application sharing on corporate networks and across the
Internet. The Company provides professional support, maintenance and consultancy
services to its customers in association with the products it develops and
markets.

In the first six months of 2000, revenues, primarily from Wall Data and FTP
products, fell short of the level of revenues anticipated prior to the
acquisitions. In management's judgment, this short-fall in the level of revenue
was not a temporary condition. As a result, the Company revisited its strategy
to refocus itself on core competencies, revised its business plan, and its
projected future revenues for each family of products. Management believed it
was necessary to restructure the Company and reduce operating expenses in line
with the revised anticipated level of revenues, which were expected to be less
than or comparable to revenues generated during the first half of fiscal 2000.


                                       10


<PAGE>   11
                                 NETMANAGE, INC.

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

As a result, the Company announced a restructuring on August 3, 2000. As part of
the restructuring, the Company reduced its workforce by approximately 17%,
consisting mostly of Engineering and Customer Support personnel who were
focussed primarily on the Company's older technologies, acquired through the
Wall Data and FTP acquisitions. With the reduction in personnel, knowledge
levels with respect to certain products and the Company's ability to enhance and
expand products acquired from Wall Data and FTP was reduced, thus impacting
future expected revenues from these product families. In connection with the
restructuring, the Company also made provisions for reductions in office space,
related overhead expenses, and the write-down of certain assets. The total
amount of the restructuring charge was $5.6 million. The restructuring charge
includes approximately $3.0 million of estimated expenses for facilities-related
charges and $1.6 million of employee-related expenses for employee terminations.
As of March 31, 2001 the Company had incurred costs totaling approximately $3.8
million related to the restructuring which required $3.8 million in cash
expenditures.

Based on management's analysis of revised product directions, revenue forecasts
and undiscounted future cash flows, taking into account the estimated impact on
product development and customer support resulting from the reductions in
personnel, the Company determined that there was a permanent impairment of the
long-lived assets related to the acquisitions of Wall Data and FTP Software. In
accordance with Statement of Financial Standards (SFAS) No. 121, the Company
re-evaluated the fair value of these long-lived assets and intangibles using
primarily the estimated discounted cash flows method. Management used the same
methodology to evaluate the fair value of its long-lived assets and intangibles
to allocate purchase price at the time of acquisition. As a result, the Company
wrote off $42.2 million of goodwill and other intangibles through a charge to
operations in the third quarter of fiscal 2000.

On June 5, 2000, the Company completed its acquisition of Aqueduct Software,
Inc. ("Aqueduct"), an early stage web-based application intelligence company.
The Company issued 1,121,495 shares of NetManage common stock and issued
warrants and options to purchase an additional 727,237 shares for all the
outstanding stock of Aqueduct including the retirement of $2.2 million of notes
payable and accrued interest. The Company also hired the three employees of
Aqueduct who subsequently have left the company. The acquisition was accounted
for as a purchase.

In the fourth quarter of 2000, the Company determined that it had overestimated
the liabilities assumed in the FTP and Wall Data acquisitions by approximately
$9.4 million. The Company reversed these liabilities against the remaining
goodwill and other intangibles acquired.

In the fourth quarter of 1999, following the acquisitions of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the integration of operations of the acquisitions. In connection
with this plan, the Company recorded a $3.8 million charge to operating expenses
in 1999. The restructuring charge included approximately $1.9 million of
estimated expenses for facilities-related charges associated with the
consolidation of redundant operations, $1.4 million of employee-related expenses
for employee termination costs, and $500,000 in accounting and legal fees
related to the acquisitions. The Company anticipates that the execution of the
restructuring actions will require total cash expenditures of approximately $3.8
million, which is expected to be funded from internal operations. As of March
31, 2001, the Company had made cash payments totaling approximately $2.6 million
related to the restructuring.

On December 29, 1999, the Company completed its acquisition of Wall Data
Incorporated ("Wall Data"), a leader in the PC-to-IBM host connectivity market.
The Company acquired a total of 10,203,344 outstanding shares of Wall Data
common stock and paid cash to qualifying Wall Data option holders and employee
stock purchase plan participants pursuant to a cash tender offer of $9.00 per
common share. Total aggregate payments pursuant to the cash tender offer
amounted to approximately $94.0 million. The Company completed the transaction
in two stages. On November 26, 1999, the Company acquired approximately 89% of
the outstanding shares of Wall Data pursuant to the cash tender offer. The
Company acquired the remaining outstanding shares of Wall Data by means of a


                                       11


<PAGE>   12
                                 NETMANAGE, INC.

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

merger completed in accordance with Washington law on December 29, 1999. The
acquisition was accounted for as a purchase.

On December 10, 1999, the Company completed its acquisition of Simware Inc.
("Simware"), a leading provider of e-commerce solutions and web integration
servers. The Company acquired a total of 7,503,372 shares of Simware common
stock and paid cash to qualifying Simware option holders and employee stock
purchase plan participants pursuant to a cash tender offer of $3.75 per common
share. Total aggregate payments pursuant to the cash tender offer amounted to
approximately $29.2 million. The Company completed the transaction in two
stages. On November 2, 1999, the Company acquired approximately 91% of the
outstanding shares of Simware pursuant to the cash tender offer. The Company
acquired the remaining outstanding shares of Simware by means of a compulsory
acquisition completed in accordance with Canadian law on December 10, 1999. The
acquisition was accounted for as a purchase.

In December 1998, the Company sold its equity interest in NetVision Ltd.
("NetVision"), an Internet service provider in Israel, for $17 million, and
recognized a gain of $11.7 million.

On August 27, 1998, the Company acquired all of the outstanding common stock of
FTP in exchange for NetManage stock for an aggregate purchase price of $78.3
million. The acquisition was accounted for as a purchase. In late August 1998,
following the acquisition of FTP, the Company initiated a plan to restructure
its worldwide operations as a result of current business conditions and in
connection with the integration of the operations of FTP. In connection with
this plan, the Company recorded a $7.0 million charge to operating expenses in
1998. The restructuring charge included approximately $5.5 million of estimated
expenses for the write-off of excess equipment and leasehold improvements as
NetManage facilities are downsized or closed, facilities-related expenses
associated with the consolidation of redundant operations, and $1.5 million of
employee-related expenses for employee terminations. Additionally, prior to the
acquisition of FTP by the Company, FTP recorded a restructuring charge. The
remaining restructuring liability of $9.7 million as of the date of acquisition
was assumed by the Company in connection with the acquisition. As of December
31, 2000, the restructuring had been substantially completed with the exception
of certain lease obligations. See Note 4 of Notes to Condensed Consolidated
Financial Statements.

As described in detail below, under the heading "Factors That May Affect Future
Results and Financial Condition," acquisitions involve a number of risks,
including risks relating to the integration of the acquired company's
operations, personnel, and products. There can be no assurance that the
integration of previously acquired companies, or the integration of any future
acquisition(s), will be accomplished successfully, and the failure to accomplish
effectively any of these integration's could have a material adverse effect on
NetManage's results of operations and financial condition. As discussed above,
the Company already incurred significant restructuring charges and asset
impairment in connection with the acquisition of Wall Data and FTP.

The Company's Board of Directors authorized the repurchase from time to time of
up to 9 million shares of the Company's common stock through open market
purchases. On January 2, 2001, the Company purchased 43,640 shares of its common
stock on the open market at an average purchase price of $0.996 per share for a
total cost of approximately $44,000. During 2000, the Company purchased
1,004,765 shares of its common stock on the open market at an average purchase
price of $0.85 per share for a total cost of approximately $0.9 million.
Cumulatively, as of March 31, 2001, the Company has purchased 7,402,705 shares
of its common stock at an average price of $2.22 per share for a total cost of
approximately $16.5 million.


                                       12


<PAGE>   13
                                 NETMANAGE, INC.

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

OPERATIONS


During the past several years, the Company has taken a number of initiatives
intended to control costs and reduce operating expenses, including the
discontinuance of several low revenue generating products, and implementing
worldwide restructuring of its operations as a result of acquisitions and
prevailing market conditions.

Recently the Company has initiated other restructuring plans as a result of the
acquisitions of Wall Data, Simware, and Aqueduct including the restructuring
plan of $5.6 million announced on August 3, 2000 (see above). For most of 2000,
the Company focused on the core competencies of its key business lines -- the PC
Connectivity product line, the Web Publishing, Integration and Development
product line, and the Realtime Interactive Support product line -- each with
dedicated development, sales, marketing, and support resources. The PC
Connectivity product line provides the technology to make the connection between
personal computers and large corporate computers possible. These products
leverage the strengths and popularity of the Internet, as well as corporate
private networks, and offer features to improve network manageability. The Web
Publishing, Integration and Development product line provides the technology to
allow customers to leverage the investment they have in existing host based
systems, applications and business processes for new web-based presentations,
applications and solutions. The Publishing, Integration and Development product
line includes the company's latest product branded OnWeb. The Realtime
Interactive Support products add value to the PC Connectivity and Web
Publishing, Integration and Development product offerings, and are also targeted
at new market segments. Products included SupportNow Enterprise and SupportNow
SDK -- real-time software tools that help reduce the length of support phone
calls from end-users and augment application help and training.

In the first quarter of 2001, the Company experienced a decline in revenues
compared to the same period in the prior year. The Company believes that its
revenues were adversely impacted by the general slowdown in technology purchases
due to current economic conditions in North America. The Company continues to
experience pricing pressures on its products. There can be no assurance that
revenues will increase at all, in future periods. See "Factors That May Affect
Future Results and Financial Condition -- Marketing and Distribution" below.

Because the Company generally ships software products within a short period
after receipt of an order, the Company does not have a material backlog of
unfilled orders, and revenues in any one quarter are substantially dependent on
orders booked in that quarter. The Company's operating expense levels are based
in part on the Company's expectations as to future revenues and to a large
extent are fixed. Operating expenses are expected to decrease from those levels
incurred in the first quarter and may fluctuate as a percentage of net revenues
as the Company develops and introduces new products, which may contribute more
significantly to revenue. While the Company continues to adjust its operations
to address these issues, there can be no assurance that net revenues or net
income will stabilize or improve in the future.


                                       13


<PAGE>   14
                                 NETMANAGE, INC.

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

RESULTS OF OPERATIONS


THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH 31, 2000 (DOLLARS IN
MILLIONS):


<TABLE>
<CAPTION>
                                           Three months ended March 31,
                                    -----------------------------------------
                                      2001            2000           Change %
Net revenues:                       --------        --------         --------
<S>                                 <C>             <C>              <C>
     License fees                   $   11.4        $   14.9          (23.6)%
     Services                           10.3            12.5          (17.3)%
                                    --------        --------
        Total net revenues          $   21.7        $   27.4          (20.8)%
                                    --------        --------
As a percentage of
revenues:
     License fees                       52.5%           54.4%
     Services                           47.5%           45.6%
                                    --------        --------
        Total net revenues             100.0%          100.0%
                                    --------        --------

Gross margin                        $   20.9        $   26.3          (20.4)%
     As a percentage of
     revenues:                          96.3%           95.9%
Research and development            $    5.7        $    6.6          (13.3)%
     As a percentage of
     revenues:                          26.3%           24.0%
Sales and marketing                 $   15.9        $   19.5          (18.7)%
     As a percentage of
     revenues:                          73.0%           71.7%
General and administrative          $    3.7        $    6.0          (38.2)%
     As a percentage of
     revenues:                          16.9%           21.7%
Interest income and other, net      $    0.7        $    0.5           40.0%
     As a percentage of
     revenues:                           3.4%            1.7%
Provision for income taxes          $    0.1        $    0.1              -
     Effective tax rate        (less than) 1%  (less than) 1%
</TABLE>


NET REVENUES

Historically, a substantial portion 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 revenues and service revenues decreased for the three months ended March
31, 2001 as compared to the same period in 2000 which the Company believes is
due to customer decisions to delay or postpone purchases of its products because
of the slowing North American economy. The Company is unable to predict how long
the current economic slowdown will last or whether it will continue to adversely
affect Company revenues.

The Company has operations worldwide with sales offices located in the United
States, Europe, Canada, Latin America, Israel and Japan. Revenues outside of the
United States as a percentage of total net revenues were approximately 30% and
33% for the three months ended March 31, 2001 and 2000, respectively.


                                       14
<PAGE>   15
                                 NETMANAGE, INC.


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

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

The Company provides ongoing maintenance and support to its customers, generally
under annual service agreements. Maintenance and support is comprised of
software updates for existing products and telephone support. Service revenues
are recognized on a pro-rata basis over the terms of such agreements. The
Company also provides training and consulting services to selected customers.
Revenue from such services is recognized as the related services are performed.
The Company expects that revenues generated from such training and consulting
services should increase in the future. No customer accounted for 10% or more of
net revenues in the three months ended March 31, 2001 or 2000.

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 order processing, product packaging, documentation and software
duplication.

Gross margin decreased in absolute dollars and increased slightly as a
percentage of net revenues for the three month period ended March 31, 2001 as
compared to the same period in 2000, primarily as a result of the decrease in
revenue and the impact of the Company's cost reduction efforts related to
software procurement and distribution.

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.

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. R&D expense decreased in absolute dollars primarily as a result of
the reduction in headcount due to the Company's restructuring in August 2000.
R&D increased as a percentage of net revenues for the three month period ended
March 31, 2001 as compared to the same period in 2000 due to the decline in net
revenues. The Company expects R&D spending in absolute dollars will decrease
from the level incurred in the first quarter of 2001 over the remainder of 2001
due to the implementation of cost reduction measures, and as a percentage of net
revenues. The Company expects that R&D expenses during 2001 as a percentage of
total net revenues will fluctuate depending on future revenue levels.

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


                                       15


<PAGE>   16
                                 NETMANAGE, INC.

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

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. S&M expense decreased in
absolute dollars primarily as a result of the reduction in sales staff
headcount, and to a lesser extent, the Company's restructuring in August 2000.
S&M increased as a percentage of net revenues for the three month period ended
March 31, 2001 as compared to the same period in 2000 due to the decline in net
revenues.

The Company believes S&M expenses will decrease in absolute dollars from the
levels recorded in the first quarter of 2001 during the remainder of 2001, as
the Company realigns its sales and customer support organizations, and
implements other cost reduction measures. The Company expects that S&M expenses
during 2001 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
primarily as a result of certain "Change of Control" payments to former Wall
Data executives and higher legal fees in the first quarter of 2000 as compared
to the first quarter of 2001,and to a lesser extent, the timing of attrition and
replacement of the Company's G&A staff, and the allocation of some G&A costs to
other functional areas. G&A increased as a percentage of net revenues for the
three month period ended March 31, 2001 as compared to the same period in 2000
due to the decline in net revenues.

The Company believes G&A expenses will decrease in absolute dollars as the
Company implements cost reduction measures. The Company expects that G&A
expenses during 2001 as a percentage of total net revenues will fluctuate
depending on future revenue levels.

INTEREST INCOME AND OTHER, NET

Interest income increased in absolute dollars due to the Company receiving a
$5.1 million income tax refund in the first quarter of 2001 which included
$863,000 of unaccrued interest income associated with the refund. Offsetting
interest income are translation losses in international subsidiaries and sundry
miscellaneous charges.

PROVISION FOR INCOME TAXES

The Company's effective tax rate for 2001 is less than 1% due to the Company's
current consolidated net loss position. Income taxes primarily include
international withholding taxes and state taxes.

DISCLOSURES ABOUT MARKET RISK

Interest rate risk

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit quality issuers and, by policy, limits the amount
of credit exposure to any one issuer. As stated in its policy, the Company is
averse to principal loss and seeks to preserve its invested funds by limiting
default risk, liquidity risk, and territory risk.

        The Company mitigates default and liquidity risks by investing in only
safe and high credit quality securities, and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer or guarantor. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. The Company mitigates territory risk by only allowing up to 25% of
the portfolio to be placed outside of the United States.


                                       16


<PAGE>   17
                                 NETMANAGE, INC.

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

Foreign currency risk

The Company transacts business in various foreign currencies, primarily in
Europe and Israel. Prior to 2000, the Company had established a foreign currency
hedging program, utilizing foreign currency forward exchange contracts ("forward
contracts") to hedge certain foreign currency exposures in certain European
countries. Under the program, increases or decreases in the Company's foreign
currency transactions were partially offset by gains and losses on the forward
contracts, so as to mitigate the possibility of short-term earnings volatility.

The Company does not use forward contracts for trading purposes. All outstanding
forward contracts at the end of a period were marked-to-market with unrealized
gains and losses included in interest income and, thus, were recognized in
income in advance of the actual foreign currency cash flows. As these forward
contracts matured, the realized gains and losses were recorded and were included
in net income (loss) as a component of interest income. The Company's ultimate
realized gain or loss with respect to currency fluctuations depended upon the
currency exchange rates and other factors in effect as the contracts mature. The
Company did not use foreign currency forward contracts during the three month
period ended March 31, 2001.




<TABLE>
<CAPTION>
--------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------
                               March 31,    December 31,
(In millions)                    2001          2000
--------------------------------------------------------
<S>                            <C>          <C>
Cash and cash equivalents      $   36.4      $   35.0
Short-term investments              1.0           3.0
                               --------      --------
Total                          $   37.4      $   38.0
                               --------      --------
</TABLE>


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

During the three months ended March 31, 2001, the Company's aggregate cash, cash
equivalents and short-term investments decreased from $38.0 million to $37.4
million. This decrease was due primarily to net cash used to reduce accrued
liabilities relating to restructuring expenditures offset by the receipt of an
income tax refund in the amount of $5.1 million and to an unrealized loss of
$1.7 million in marketable securities recorded to comprehensive income in the
first quarter of 2001.

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

Net cash used in financing activities in 2001 reflects of the purchase of the
Company's common stock from time to time through open market purchases.

At March 31, 2001, the Company had working capital of $15.4 million. The Company
believes that its current cash balances and future operating cash flows will be
sufficient to meet the Company's working capital and capital expenditure
requirements for the foreseeable future.


                                       17


<PAGE>   18
                                 NETMANAGE, INC.

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

FACTORS THAT MAY AFFECT FUTURE RESULTS AND FINANCIAL CONDITION

SIGNIFICANT FLUCTUATIONS IN OPERATING RESULTS

        The Company has experienced, and expects to experience in future
periods, significant fluctuations in operating results that may be caused by
many factors including, among others, general economic conditions, in particular
the recent slowdown of purchases of information technology due to current
economic conditions in North America, demand for the Company's products,
introduction or enhancements of products by the Company or its competitors,
technological changes in computer networking, competitive pricing pressures,
market acceptance of new products, customer order deferrals in anticipation of
new products and product enhancements, the size and timing of individual product
orders, mix of international and domestic revenues, mix of distribution channels
through which the Company's products are sold, impact of, or failure to enter
into, strategic alliances to promote the Company's products, quality control of
products, changes in the Company's operating expenses, personnel changes and
foreign currency exchange rates. In addition, the Company's acquisition of
complementary businesses, products or technologies may cause fluctuations in
operating results due to in-process research and development charges, the
amortization of acquired intangible assets, and integration costs such as those
recorded in connection with the acquisitions of FTP, Wall Data, Simware, and
Aqueduct.

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

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

RESTRUCTURING; INTEGRATION OF OPERATIONS OF WALL DATA, SIMWARE AND AQUEDUCT

        In early December 1999, following its acquisition of Wall Data and
Simware, the Company initiated a plan to restructure its worldwide operations in
connection with the need to integrate the operations of Wall Data and Simware.
The Company undertook a further restructuring of its operations, primarily in
North America in August 2000. The restructuring related primarily to former Wall
Data operations. Both restructuring plans involved reductions in the Company's
worldwide workforce and the consolidation of certain of the Company's sales,
customer support, and research and development facilities. No assurance can be
given that these restructurings will prove to be successful, that future
operating results will improve, or that the completion of the restructurings
will not disrupt the Company's operations and have a material adverse effect on
its business, financial condition and results of operations. Further, we cannot
assure you that additional reorganizations of the Company's operations will not
be required in the future.

        The successful combination of companies requires coordination of sales
and marketing with research and development efforts, and may be difficult to
accomplish. The integration of both Wall Data and Simware has involved
geographically separated organizations (in suburban Kirkland, Washington;
Boston, Massachusetts; Cupertino and Irvine, California; Ottawa, Ontario,
Canada; and Haifa, Israel), and personnel with diverse business backgrounds and
corporate cultures. The Company believes that factors such as the ongoing
attention and dedication of management, resources required to effect the
complete integration of both Wall Data and Simware, resulting from the
announcement and consummation of the acquisition, and the consequent disruption
in the


                                       18


<PAGE>   19
                                 NETMANAGE, INC.

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

business of these companies, have contributed to interruptions and loss of
momentum in their business activities. The Company's ability to maintain or
increase revenues from the sale of products from Wall Data and Simware on an
ongoing basis will depend in part on its ability to effectively respond to these
factors.

RISKS OF ACQUISITIONS

        The Company's merger and acquisition transactions, including the
acquisitions of Wall Data and Simware in the fourth quarter of 1999, and the
acquisition of Aqueduct in the second quarter of 2000, have been motivated by
various factors, including the desire to obtain new technologies, expand and
enhance the Company's product offerings, expand the Company's customer base,
attract key personnel, and strengthen the Company's presence in the
international and OEM marketplaces. Product and technology acquisitions entail
numerous risks, including the diversion of management's attention away from
day-to-day operations, difficulties in the assimilation of acquired operations
and personnel (such as sales, engineering, and customer support), the
integration of acquired products with existing product lines, the failure to
realize anticipated benefits in terms of cost savings and synergies, undisclosed
liabilities, adverse short-term effects on reported operating results, the
amortization of acquired intangible assets, the potential loss of key employees
from acquired companies, and the difficulty of presenting a unified corporate
image.

        The Company regularly evaluates product and technology acquisition
opportunities and anticipates that it may make additional acquisitions in the
future if it determines that an acquisition would further its corporate
strategy. No assurance can be given that any acquisition by the Company will or
will not occur, that if an acquisition does occur, that it will not materially
and adversely affect the Company, or that any such acquisition will be
successful in enhancing the Company's business. If the operations of an acquired
company or business do not meet the Company's expectations, the Company may be
required to restructure the acquired business, or write-off the value of some or
all of the assets of the acquired business as the Company did in the third
quarter of 2000.


CHANGES IN PERSONNEL

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

PRODUCT DEVELOPMENT AND COMPETITION

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


                                       19


<PAGE>   20
                                 NETMANAGE, INC.

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

enhancements on a timely and cost-effective basis. The Company has experienced
difficulty from time to time in developing and introducing new products and
enhancing existing products, in a manner which satisfies customer requirements
and changing market demands. Any further failure by the Company to anticipate or
respond adequately to changes in technology and customer preferences, or any
significant delays in product development or introduction, could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The failure to develop on a timely basis products or product
enhancements incorporating new functionality could cause customers to delay
purchase of the Company's current products or cause customers to purchase
products from the Company's competitors; either situation would adversely affect
the Company's business, financial condition, and results of operations. There
can be no assurance that the Company will be successful in developing new
products or enhancing its existing products on a timely basis, or that such new
products or product enhancements will achieve market acceptance.

        Because certain of the Company's products incorporate software and other
technologies developed and maintained by third parties, the Company is, to a
certain extent, dependent upon such third parties' ability to enhance their
current products, to develop new products that will meet changing customer needs
on a timely and cost-effective basis, and to respond to emerging industry
standards and other technological changes. There can be no assurance that the
Company would be able to replace the functionality provided by the third party
technologies currently offered in conjunction with its products if those
technologies become unavailable to it or obsolete or incompatible with future
versions of the Company's products or market standards. For example,
substantially all of NetManage's net revenues have been derived from the sales
of products that provide internetworking applications for the Microsoft Windows
environment and are marketed primarily to Windows users. As a result, sales of
certain of the Company's products might be negatively impacted by developments
adverse to Microsoft's Windows products. In addition, the Company's strategy of
developing products based on the Windows operating environment is substantially
dependent on its ability to gain pre-release access to, and to develop expertise
in, current and future Windows developments by Microsoft. No assurance can be
given as to the ability of the Company to provide, on a timely basis, products
compatible with future Windows releases.

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

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

        The Company's connectivity software products compete with major computer
and communication systems vendors, including Microsoft, IBM, Novell and Sun
Microsystems, Inc., as well as smaller networking software companies such as
Hummingbird Communications Ltd.. The Company also faces competition from makers
of terminal emulation software such as Attachmate Corporation, and WRQ, Inc..
Many of the Company's competitors have substantially greater financial,
technical, sales, marketing and other resources, as well as greater name or
product recognition and a larger customer base, than the Company. The market for
the Company's products is characterized by significant price competition and the
Company anticipates that it will face increasing pricing


                                       20


<PAGE>   21
                                 NETMANAGE, INC.

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

pressures from its current and new competitors in the future. Moreover, given
that there are low barriers to entry into the software market and that the
market is rapidly evolving and subject to rapid technological change, the
Company believes that competition will persist and intensify in the future.
There can be no assurance that the Company will be able to provide new products
that compare favorably with the new products of the Company's competitors or
that competitive pressures will not require the Company to reduce its prices.
The Company has experienced price declines for its products since 1997. Any
further material reduction in the prices of the Company's products would require
the Company to increase unit sales in order to maintain revenues at existing
levels. There can be no assurance that the Company will be successful in doing
so.

        The Company's competitors could seek to expand their product offerings
by designing and selling products using technology that could render obsolete or
adversely affect sales of the Company's products. These developments may
adversely affect the Company's sales of its own products either by directly
affecting customer purchasing decisions or by causing potential customers to
delay their purchases of the Company's products. Several of the Company's
competitors have developed proprietary networking applications and certain of
such vendors, including Novell, provide a TCP/IP protocol suite in theirproducts
at little or no additional cost. In particular, Microsoft has embedded a TCP/IP
protocol suite in its Windows 95, Windows 98, Windows 2000, Windows ME, and
Windows NT operating systems. The Company has products which are similar to
connectivity products marketed by Microsoft. Microsoft is expected to increase
development of such products, which could have a material adverse effect on the
Company's business, financial condition or results of operations.

MARKETING AND DISTRIBUTION

        Historically, the Company has relied significantly on its independent
distributors, systems integrators and value-added resellers for certain elements
of the marketing and distribution of its products. The agreements in place with
these organizations are generally non-exclusive. These organizations are not
within the control of the Company, may represent other product lines in addition
to those of the Company and are not obligated to purchase products from the
Company. There can be no assurance that such organizations will give a high
priority to the marketing of the Company's products, and such organizations may
give a higher priority to other products, which may include those of the
Company's competitors. Actions of this nature by such organizations could result
in a lower sales effort being applied to the Company's products and a consequent
reduction in the Company's operating results. The Company's results of
operations can also be materially adversely affected by changes in the inventory
strategies of its resellers, which can occur rapidly and may not be related to
end-user demand. As part of its continued strategy of selling through multiple
distribution channels, the Company expects to continue its use of indirect
distribution channels, particularly value-added resellers and system
integrators, in addition to distributors and original equipment manufacturers.
Indirect sales may grow as a percentage of both domestic and total net revenues
during 2001 and beyond, as a result of acquisitions or to increased market
penetration. Any material increase in the Company's indirect sales as a
percentage of revenues may adversely affect the Company's average selling prices
and gross margins due to the lower unit costs that are typically charged when
selling through indirect channels. There can be no assurance that the Company
will be able to attract or retain resellers and distributors who will be able to
market the Company's products effectively, will be qualified to provide timely
and cost-effective customer support and service, or will continue to represent
the Company's products, and any inability on the part of the Company to recruit
or retain important resellers or distributors could adversely affect the
Company's business, financial condition or results of operations.

PROPRIETARY RIGHTS

        The Company relies primarily on a combination of copyright and trademark
laws, trade secrets, confidentiality procedures, and contractual provisions to
protect its proprietary rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection, and, to a lesser extent, patent laws.
Despite the Company's efforts to protect its proprietary rights,


                                       21


<PAGE>   22
                                 NETMANAGE, INC.

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

unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. Policing
unauthorized use of the Company's products is difficult and, while the Company
is unable to determine the extent to which piracy of its software products
exists, software piracy can be expected to be a persistent problem. In selling
its products, the Company relies primarily on "shrink-wrap" and "click-wrap"
licenses that are not signed by licensees and, therefore, may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to as great an extent
as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology. In
addition, the number of patents applied and granted for software inventions is
increasing. Consequently, there is a growing risk of third parties asserting
patent claims against the Company. The Company has received, and may receive in
the future, communications from third parties asserting that the Company's
products infringe, or may infringe, the proprietary rights of third parties,
seeking indemnification against such infringement or indicating that the Company
may be interested in obtaining a license from such third parties. There can be
no assurance that any of such claims would not result in protracted and costly
litigation.

        If any claims or actions were to be asserted against the Company, and it
were required to seek a license of a third party's intellectual property, there
can no assurance that it would be able to acquire such a license on reasonable
terms or at all, and no prediction can be made about the effect that such a
license might have on its business, financial condition or results of
operations. Should litigation with respect to any such claim commence, such
litigation could be extremely expensive and time consuming, and could materially
adversely affect the Company's business, financial condition and results of
operations regardless of the outcome of the litigation.

GLOBAL MARKET RISKS

        The Company derived approximately 30% of net revenues from international
sales during the quarter ended March 31, 2001. While the Company expects that
international sales will continue to account for a significant portion of its
net revenues, there can be no assurance that the Company will be able to
maintain or increase international market demand for the Company's products or
that the Company's distributors will be able to effectively meet that demand.
Risks inherent in the Company's international business activities generally
include unexpected changes in regulatory requirements, the limitations imposed
by U.S. export laws (see "Government Regulation and Legal Uncertainties" below),
changes in markets caused by a variety of political, social and economic
factors, tariffs and other trade barriers, costs and risks of localizing
products for foreign countries, longer accounts receivable payment
cycles,difficulties in managing international operations, currency exchange rate
fluctuations, potentially adverse tax consequences, repatriation of earnings,
and the burdens of complying with a wide variety of foreign laws. There can be
no assurance that such factors will not have an adverse effect on the Company's
future international sales and,consequently, on the Company's business,
financial condition or results of operations. Additionally, the recent slowdown
in North America of purchases of information technology due to current economic
conditions will affect the Company's ability to generate revenues and profit,
and could adversely affect the Company's financial condition and results of
operations.

GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES

        The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that various laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products, increase the Company's cost of
doing business or otherwise have an adverse effect on its business, financial
condition or


                                       22


<PAGE>   23
                                 NETMANAGE, INC.

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

results of operations. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, libel and personal privacy is
uncertain. Further, due to the encryption technology contained in certain of the
Company's products, such products are subject to U.S. export controls. There can
be no assurance that such export controls, either in their current form or as
may be subsequently enacted, will not limit the Company's ability to distribute
products outside of the United States or electronically. While the Company takes
precautions against unlawful exportation, there can be no assurance that
inadvertent violations will not occur, and the global nature of the Internet
makes it virtually impossible to effectively control the distribution of the
Company's products. In addition, future federal or state legislation or
regulation may further limit levels of encryption or authentication technology.
Any such export restriction, new legislation or regulation or unlawful
exportation could have a material adverse effect on the Company's business,
financial condition, or results of operations.


ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required by Item 3. is incorporated by reference from the
section entitled "Factors that May Affect Future Results and Financial
Condition" found above, under Item 2, "Management's Discussion and Analysis of
Financial Conditions and Results of Operations."


                                       23


<PAGE>   24
                                 NETMANAGE, INC.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In February 1996, a securities class action complaint, Zeid, et al. v.
Kimberley, et al., Case No. C-96-20136SW, was filed in the United States
District Court for the Northern District of California against Firefox
Communications Inc. ("Firefox") and certain of its former officers and
directors. FTP acquired Firefox in July 1996. The complaint alleged that,
between July 20, 1995 and January 2, 1996, the defendants violated the federal
securities laws by making false or misleading statements about Firefox's
operations and financial results. On May 8, 1997, the district court granted
defendants' motion to dismiss without leave to amend. Plaintiffs filed a notice
of appeal. Oral argument on the appeal was held on September 14, 1998. On
November 1, 1999, the Court of Appeals for the Ninth Circuit issued an order
vacating the judgment of the district court and remanded the case back to the
district court for reconsideration in light of its recently issued landmark
decision in the securities litigation case of Janas v. McCraken (In re Silicon
Graphics Inc.). After remand, the Company renewed its motion to dismiss. On
March 22, 2000, a hearing on the Company's motion to dismiss was held by the
district court and on March 20, 2001, the Court of Appeals for the Ninth Circuit
affirmed the dismissal.

NetManage is not involved in any other legal proceedings.

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

ITEM 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

None.

b.      The Company filed no reports on Form 8-K during the three months ended
        March 31, 2001.


                                       24


<PAGE>   25
        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 15, 2001        By: /s/ Michael Peckham
                              Michael Peckham
                              Chief Financial Officer and Senior Vice President
                              (Principal Financial and Accounting Officer)