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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 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 June 30, 1997

                                       OR

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


                         Commission file number 0-26776

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


              Delaware                                      77-0259235
  (State or other jurisdiction of                        (I.R.S. Employer
   incorporation or organization)                     Identification Number)


                                2125 O'Nel Drive
                           San Jose, California 95131
                    (Address of principal executive offices)

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

                                 (408) 573-3000
              (Registrant's telephone number, including area code)

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

                             http://www.clarify.com
                    (Registrant's home page on the Internet)

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


         Indicate  by check x whether the  registrant  (1) has filed all reports
required to be filed by Sections 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____

         As of August 1, 1997 there were 21,070,934  shares of the  Registrant's
$0.0001 par value Common Stock outstanding.

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<PAGE>

                                  CLARIFY INC.
                                    FORM 10-Q
<TABLE>

                                TABLE OF CONTENTS

<CAPTION>

PART I.        FINANCIAL INFORMATION                                                                             PAGE
                                                                                                                 ----

<S>            <C>                                                                                               <C>
Item 1.        Financial Statements

               Condensed Consolidated Balance Sheets
               As of June 30, 1997 and December 31, 1996..................................................        2

               Condensed Consolidated Statements of Operations
               For the three and six months ended June 30, 1997 and 1996..................................        3

               Condensed Consolidated Statements of Cash Flows
               For the three and six months ended June 30, 1997 and 1996..................................        4

               Notes to Condensed Consolidated Financial Statements.......................................        5

Item 2.        Management's Discussion and Analysis of Financial Condition and Results of Operations......        6



PART II.       OTHER INFORMATION

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

Item 6.        Exhibits and Reports on Form 8-K...........................................................       17



SIGNATURE      ...........................................................................................       18

</TABLE>

<PAGE>


PART I.        FINANCIAL INFORMATION.

Item 1.        Financial Statements.

                                  CLARIFY INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                            (in thousands; unaudited)

                                                           June 30, December 31,
                                                             1997        1996
                                                           --------    --------

                                     ASSETS

Current assets:
    Cash and cash equivalents ..........................   $ 29,671    $ 34,477
    Short-term investments .............................      5,066       1,486
    Accounts receivable, net ...........................     19,234      17,977
    Prepaid expenses and other current assets ..........      1,215       1,601
    Deferred income tax assets .........................      3,784       3,784
                                                           --------    --------
       Total current assets ............................     58,970      59,325
Property and equipment, net ............................      8,732       8,470
Long-term investments ..................................      3,074       1,989
Other assets ...........................................      1,139         900
                                                           --------    --------
          Total assets .................................   $ 71,915    $ 70,684
                                                           ========    ========


                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable ...................................   $  2,026    $  3,920
    Accrued payroll and related accruals ...............      3,790       4,771
    Other accrued liabilities ..........................      4,128       2,284
    Unearned revenue ...................................     10,256      12,764
                                                           --------    --------
       Total current liabilities .......................     20,200      23,739
                                                           --------    --------

Stockholders' equity:
    Common stock .......................................          2           2
    Additional paid-in-capital .........................     47,349      45,556
    Cumulative translation adjustment ..................        (84)        (66)
    Deferred compensation ..............................        (88)       (112)
    Retained earnings ..................................      4,536       1,565
                                                           --------    --------
       Total stockholders' equity ......................     51,715      46,945
                                                           --------    --------
          Total liabilities and stockholders' equity ...   $ 71,915    $ 70,684
                                                           ========    ========


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

                                       2
<PAGE>

<TABLE>

                                  CLARIFY INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except per share data; unaudited)

<CAPTION>

                                                           Three Months Ended     Six Months Ended
                                                                 June 30,             June 30,
                                                          --------------------   -------------------
                                                            1997        1996       1997      1996
                                                          --------   ---------   ---------  --------
<S>                                                       <C>        <C>         <C>        <C>     
    Revenues:
      License fees ....................................   $ 12,446   $  7,708    $ 25,454   $ 13,524
      Services ........................................      6,983      3,429      13,335      6,567
                                                          --------   --------    --------   --------
         Total revenues ...............................     19,429     11,137      38,789     20,091
                                                          --------   --------    --------   --------

    Cost of revenues:
      License fees ....................................        491        306       1,011        489
      Services ........................................      4,154      2,142       8,131      4,129
                                                          --------   --------    --------   --------
         Total cost of revenues .......................      4,645      2,448       9,142      4,618
                                                          --------   --------    --------   --------
         Gross margin .................................     14,784      8,689      29,647     15,473
                                                          --------   --------    --------   --------

    Operating expenses:
      Product development and engineering .............      3,780      2,151       7,373      4,029
      Sales and marketing .............................      8,149      4,233      15,166      7,680
      General and administrative ......................      1,568      1,004       3,083      1,872
      Merger costs .....................................      --        1,061        --        1,061
                                                          --------   --------    --------   --------
         Total operating expenses .....................     13,497      8,449      25,622     14,642
                                                          --------   --------    --------   --------
         Operating income .............................      1,287        240       4,025        831

    Interest income, net ...............................       330        337         692        721
                                                          --------   --------    --------   --------
             Income before provision
                for income taxes ......................      1,617        577       4,717      1,552
    Provision for (benefit from) income taxes .........        599       (685)      1,746       (578)
                                                          --------   --------    --------   --------
               Net income .............................   $  1,018   $  1,262    $  2,971   $  2,130
                                                          ========   ========    ========   ========

    Net income per share ..............................   $   0.05   $   0.06    $   0.14   $   0.10
                                                          ========   ========    ========   ========

    Shares used in per share computations .............     21,744     21,581      21,939     21,192
                                                          ========   ========    ========   ========

<FN>
         The accompanying notes are an integral part of these condensed
                       consolidated financial statements.
</FN>
</TABLE>
                                       3

<PAGE>


                                  CLARIFY INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands; unaudited)


                                                             Six Months Ended
                                                                  June 30,
                                                           --------------------
                                                             1997        1996
                                                           --------    --------
Cash flows from operating activities:
   Net income ..........................................   $  2,971    $  2,130
   Adjustments  to  reconcile  net  income
   to net cash  provided  by  operating activities:
    Depreciation and amortization ......................      1,770         673
    Deferred income taxes ..............................       --          (800)
    Noncash charges, net ...............................          4         169
    Changes in assets and liabilities:
      Accounts receivable ..............................     (1,323)       (312)
      Prepaid expenses and other current assets ........        464        (368)
      Accounts payable .................................     (1,871)      1,862
      Accrued payroll and related accruals .............       (968)        337
      Other accrued liabilities ........................      1,800       1,489
      Unearned revenue .................................     (2,504)     (1,931)
                                                           --------    --------
Net cash provided by operating activities ..............        343       3,249
                                                           --------    --------

Cash flows from investing activities:
    Purchase of property and equipment .................     (2,062)     (2,017)
    Proceeds from disposal of property and equipment ...         39        --
    Purchase of investments ............................    (12,136)       --
    Proceeds from sale and maturity of investments .....      7,493        --
    Increase in other assets ...........................       (269)       (225)
                                                           --------    --------
Net cash used in investing activities ..................     (6,935)     (2,242)
                                                           --------    --------

Cash flows from financing activities:
    Payments of capital lease obligations ..............       --           (54)
    Proceeds from issuance of common stock .............      1,793         715
    Borrowings under notes payable .....................       --           135
                                                           --------    --------
Net cash provided by financing activities ..............      1,793         796
                                                           --------    --------

Net increase (decrease) in cash and cash equivalents ...     (4,799)      1,803
Effect of foreign exchange rate changes on cash ........         (7)       --
Cash and cash equivalents, beginning of period .........     34,477      31,813
                                                           --------    --------

Cash and cash equivalents, end of period ...............   $ 29,671    $ 33,616
                                                           ========    ========

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest ............   $      1    $      9
                                                           ========    ========
   Cash paid during the period for income taxes ........   $     66    $    189
                                                           ========    ========

Supplemental schedule of noncash investing and
  financing activities:
   Forgiveness of notes payable to stockholders ........   $   --      $  1,047
                                                           ========    ========

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

                                       4
<PAGE>


                                  CLARIFY INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

Note 1.        Basis of Presentation

The  unaudited  condensed  consolidated  financial  statements  included  herein
reflect all adjustments,  consisting only of normal recurring adjustments (which
in the opinion of  management  are  necessary to fairly  state the  consolidated
financial position),  results of operations,  and cash flows of Clarify Inc. and
its subsidiaries  ("Clarify" or the "Company") for the periods presented.  These
financial  statements  should be read in conjunction with the Company's  audited
consolidated  financial  statements in the Company's  1996 annual report on Form
10-K as filed with the Securities and Exchange Commission on March 31, 1997. The
consolidated  results of operations  for the interim  periods  presented are not
necessarily  indicative  of the  results  that may be  expected  for any  future
interim periods or for the full fiscal year. The December 31, 1996 balance sheet
was  derived  from  audited  financial  statements,  but  does not  include  all
disclosures required by generally accepted accounting principles.

Note 2.        Computation of Net Income Per Share

Net income per share is computed on the basis of the weighted  average number of
shares outstanding plus the common stock equivalents,  consisting of outstanding
dilutive  stock options  (using the treasury  stock  method).  Fully diluted per
share amounts are not  presented,  as the effect is not  material.  In September
1996,  the Company  announced a  two-for-one  stock split in the form of a stock
dividend. All shares, common stock equivalents, and per-share amounts applicable
to prior periods have been restated to reflect the stock split.

Note 3.        Business Combination

In April 1996, the Company acquired Metropolis Software,  Inc.  (Metropolis),  a
sales force  automation  software  provider.  The Company  issued  approximately
663,000  shares of its common  stock in exchange  for  substantially  all of the
shares of Metropolis. The Company also assumed stock options that converted into
options to purchase  approximately  77,000 shares of the Company's common stock.
The business  combination  was  accounted  for as a pooling of interests and the
consolidated  financial  statements have been restated as if Metropolis had been
combined for all periods presented.

Note 4.        Stock Option Repricing Program

On May 9, 1997 the Compensation  Committee of the Board of Directors  authorized
employees  the right to convert  certain  outstanding  stock  options for option
grants with an exercise  price of $13.50 per share (the fair market value on May
9, 1997),  provided  that such  employees  made the  election to convert by that
date. The converted  option grants vest on a date that is seven months after the
date such  installment  would have vested had the option not been amended by the
employee exercising this conversion right. Approximately 1,008,000 stock options
were repriced pursuant to this program.

                                       5
<PAGE>

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

This  report  contains  forward  looking   statements  that  involve  risks  and
uncertainties.  The  statements  contained  in this  report  that are not purely
historical are forward looking  statements  within the meaning of Section 27A of
the  Securities  Act of 1933 and Section 21E of the  Securities  Exchange Act of
1934,   including  without  limitation,   statements   regarding  the  Company's
expectations,  beliefs,  intentions  or  strategies  regarding  the future.  All
forward  looking  statements  included in this  report are based on  information
available  to the  Company  on the  date  hereof,  and the  Company  assumes  no
obligation to update any such forward looking  statements.  The Company's actual
results could differ  materially from those anticipated in these forward looking
statements as a result of certain factors,  including, but not limited to, those
set forth herein under the sections entitled  "Overview," "Risk Factors That May
Affect Future  Results," and those found in the Company's  annual report on Form
10-K filed with the Securities and Exchange Commission on March 31, 1997.

Overview

     Clarify Inc.  ("Clarify"  or the  "Company")  was founded in August 1990 to
develop  customer-centric  front office solutions,  including  customer service,
field  service  and  logistics,  quality  assurance,  help  desk and  sales  and
marketing applications.  The Company shipped its first  product--ClearSupport(R)
Version  1,  the  Company's   cornerstone   product  for  the  customer  service
organization--in  September 1992. The Company's other product  offerings include
ClearLogistics(R),  a field service and logistics  management  system that first
shipped in April 1996;  ClearQuality(R),  which first shipped in May 1993 and is
used by quality assurance and product development organizations to track defects
and enhancement requests; ClearHelpdesk(R),  an employee support center that was
released  for  commercial  use in  December  1995;  and  ClearSales(R),  a sales
automation  solution that was first released for commercial use in January 1996.
The Company  introduced its latest product  offerings,  ClearTelebusiness(R),  a
turnkey   solution  for  developing  and  managing   effective   sales/marketing
campaigns,  and ClearContracts(R),  an integrated contracts management solution,
in April and June 1997, respectively. In conjunction with its software products,
the Company also offers consulting, training and technical support services.

     Clarify operates in a highly competitive environment that involves a number
of risks,  some of which are beyond the Company's  control.  Some of these risks
include  continuing  acceptance of Clarify's  products in the  marketplace,  the
Company's ability to grow from the sales of these products,  general competitive
pressures  in the  marketplace  and the  continued  overall  growth in the front
office software industry. In addition,  the management of any future growth will
require the Company to continue to improve  both its  financial  and  management
controls and its reporting  systems and procedures on a timely basis, as well as
to effectively expand, train and manage its workforce.

     The Company's quarterly operating results have varied  significantly in the
past and may vary  significantly in the future. To achieve its quarterly revenue
objectives,  the Company is dependent upon obtaining product orders in any given
quarter for shipment and installation in that quarter.  Furthermore, the Company
has often recognized a substantial  portion of its revenues in the last month of
a  quarter,  with a  concentration  of these  revenues  in the last half of that
month. As a result, product revenues in any quarter are substantially  dependent
on orders  booked and  installed  in that  quarter.  The  Company  believes  the
purchase of its products generally involves a significant  commitment of capital
because  customers  tend to  implement  the  products  on a large scale and must
establish certain minimum hardware capabilities.  As a result, in the event of a
downturn in any  existing  or  potential  customer's  business or the economy in
general,  purchases of the Company's products may be deferred or canceled, which
could  have a  material  adverse  effect on the  Company's  business,  operating
results and financial condition. Due to the foregoing factors, quarterly revenue
and  operating  results  are not  predictable  with any  significant  degree  of
accuracy.  The Company's  expense levels are based, in significant  part, on the
Company's  expectations as to future revenues and are therefore relatively fixed
in the short  term.  If revenue  levels are below  expectations,  the  Company's
business,  operating results and financial  condition are likely to be adversely
affected.  Net income may also be  disproportionately  adversely  affected  by a
reduction in revenues because a proportionately  smaller amount of the Company's
expenses  varies  with its  revenues.  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.
There can be no  assurance  that the Company will be able to achieve or maintain
profitability on a quarterly or annual basis in the future. It is likely that in
some  future  quarter  the  Company's   operating  results  will  be  below  the
expectations of public market analysts and investors.  In such event,  the price
of the Company's common stock would likely be materially adversely affected.

                                       6
<PAGE>

Results of Operations
<TABLE>

    The following table sets forth,  as a percentage of total revenues,  certain
condensed consolidated statement of operations data for the periods indicated:
<CAPTION>

                                                             Three Months Ended             Six Months Ended
                                                                 June 30,                      June 30,
                                                          ------------------------      -----------------------
                                                            1997           1996           1997           1996
                                                          --------       ---------      ---------       -------
<S>                                                        <C>             <C>           <C>             <C>   
    Revenues:
      License fees ....................................     64.1%           69.2%         65.6%           67.3% 
      Services ........................................     35.9            30.8          34.4            32.7
                                                           -----           -----         -----           -----
         Total revenues ...............................    100.0           100.0         100.0           100.0
                                                           -----           -----         -----           -----
                                                                                                        
    Cost of revenues:                                                                                   
      License fees ....................................      2.5             2.8           2.6             2.4
      Services ........................................     21.4            19.2          21.0            20.6
                                                           -----           -----         -----           -----
         Total cost of revenues .......................     23.9            22.0          23.6            23.0
                                                           -----           -----         -----           -----
         Gross margin .................................     76.1            78.0          76.4            77.0
                                                           -----           -----         -----           -----
                                                                                                        
    Operating expenses:                                                                                 
      Product development and engineering .............     19.5            19.3          19.0            20.1
      Sales and marketing .............................     41.9            38.0          39.1            38.2
      General and administrative ......................      8.1             9.0           7.9             9.3
      Merger costs ....................................       --              9.5           --             5.3
                                                           -----           -----         -----           -----
         Total operating expenses .....................     69.5            75.8          66.0            72.9
                                                           -----           -----         -----           -----
         Operating income .............................      6.6             2.2          10.4             4.1
                                                                                                        
    Interest income, net ..............................      1.7             3.0           1.8             3.6
                                                           -----           -----         -----           -----
             Income before provision                                                                    
                for income taxes ......................      8.3             5.2          12.2             7.7
    Provision for (benefit from) income taxes .........      3.1            (6.1)          4.5            (2.9)
                                                           -----           -----         -----           -----
               Net income .............................      5.2%           11.3%          7.7%           10.6%
                                                           =====           =====         =====           =====
</TABLE>

Revenues

     The Company's  revenues are derived  primarily from license fees, fees from
sublicensing  third-party software products and charges for services,  including
maintenance, consulting and training. For all periods presented, the Company has
recognized  revenue in  accordance  with  Statement  of Position  91-1  entitled
"Software  Revenue  Recognition."  License fee revenues consist of revenues from
initial  licenses  for the  Company's  products,  sales of  licenses to existing
customers for additional users of the Company's products,  product documentation
and fees from sublicensing  third-party software products. The Company generally
recognizes  initial  license fee  revenues  upon  delivery and  installation  of
software  products  if  there  are no  remaining  significant  post-installation
obligations  and if collection  is probable.  If  significant  post-installation
obligations  exist or if a product is subject to customer  acceptance,  revenues
are deferred until no  significant  obligations  remain or until  acceptance has
occurred.  Sales of additional  licenses to the Company's existing customers are
generally  recognized  upon  shipment  provided  no  significant   post-shipment
obligations exist. Service revenues consist primarily of maintenance, consulting
and training revenues. Maintenance revenues are recognized ratably over the term
of the support period, which is typically twelve months. Consulting and training
revenues  generally are recognized  when the services are performed.  Consulting
services   consist   primarily  of   implementation   services  related  to  the
installation  of  the  Company's   software  and  do  not  include   significant
customization to or development of the underlying software code.

     Total  revenues  increased from $11.1 million in the second quarter of 1996
to $19.4 million in the second quarter of 1997, representing an increase of 74%,
while total  revenues  increased  from $20.1 million for the first six months of
1996 to $38.8 million for the first six months of 1997, representing an increase
of 93%.  The  increases  are a result of 

                                       7
<PAGE>

growth in both  license fee and service  revenues.  The Company does not believe
that the  percentage  increases in revenues  achieved in prior periods should be
anticipated in future periods.

     License  Fees.  License fee  revenues  increased  from $7.7  million in the
second  quarter  of 1996  to  $12.4  million  in the  second  quarter  of  1997,
representing an increase of 61%, while license fee revenues increased from $13.5
million  for the first six  months  of 1996 to $25.5  million  for the first six
months of 1997, representing an increase of 88%. The increases are primarily due
to increased market  acceptance of the Company's  existing  products,  continued
enhancement  and  increased  breadth of the  Company's  product  offerings,  the
expansion of the  Company's  direct sales force and marketing  organization  and
sales of the Company's products to new industry segments.

     Services.  Revenues from services increased from $3.4 million in the second
quarter of 1996 to $7.0 million in the second quarter of 1997,  representing  an
increase of 104%,  while service  revenues  increased  from $6.6 million for the
first six  months  of 1996 to $13.3  million  for the first six  months of 1997,
representing  an  increase  of 103%.  The  increases  in dollar  amount were due
primarily to an increase in maintenance and maintenance renewals, consulting and
training services associated with increased sales of the Company's applications.
The Company expects  revenues from  maintenance to increase in future periods as
the  customer  installed  base  increases,  though the  percentage  increases in
service  revenues  achieved in prior periods should not be anticipated in future
periods.

Costs of Revenues

     Cost of License Fees.  Cost of license fees  increased from $0.3 million in
the  second  quarter  of 1996 to $0.5  million  in the  second  quarter of 1997,
representing  an increase of 60%, while cost of license fees increased from $0.5
million  for the first  six  months  of 1996 to $1.0  million  for the first six
months  of  1997,  representing  an  increase  of  107%.  Cost of  license  fees
represents  4% of license fee revenues  for both the second  quarter of 1996 and
1997 as well as the first six  months of 1996 and  1997.  Cost of  license  fees
consists primarily of the costs of sublicensing  third-party  software products,
product media, product duplication,  product  documentation and shipping.  Costs
related to research,  design and  development of products are charged to product
development and engineering expenses as incurred.  Accordingly,  cost of license
fees includes no amortization of capitalized software development costs. Cost of
license fees as a percentage of license fee revenues may  fluctuate  from period
to period  due to  increased  or  decreased  sales of royalty  bearing  software
products.  Although cost of license fees as a percentage of license fee revenues
has been relatively consistent,  the Company expects the cost of license fees as
a percentage  of license fee revenue to fluctuate in future  periods as a result
of  increases  and decreases  in sales of royalty  bearing  products  and as the
Company enters into additional agreements to sublicense third-party software.

     Cost of Services.  Cost of services consists primarily of costs incurred in
providing telephone support,  consulting services,  shipment of product upgrades
and training to customers.  Cost of services increased from $2.1 million for the
second  quarter  of  1996 to  $4.2  million  for the  second  quarter  of  1997,
representing  an increase of 94%,  while cost of  services  increased  from $4.1
million  for the first  six  months  of 1996 to $8.1  million  for the first six
months of 1997, representing an increase of 97%. The increases are due primarily
to the  increase in the number of customer  support and training  personnel  and
related  overhead costs necessary to support a larger  installed  customer base.
Cost of  services  represents  62% and 59% of  service  revenues  for the second
quarter of 1996 and the second  quarter of 1997,  respectively,  and 63% and 61%
for the first six months of 1996 and the first six months of 1997, respectively.
The Company expects to make continued investments in its service organization in
order to support the Company's customer installed base and anticipates that cost
of services will increase in absolute dollars in future periods.

Operating Expenses

     Product  Development and Engineering.  Product  development and engineering
expenses  increased  from $2.2  million  in the  second  quarter of 1996 to $3.8
million in the second  quarter of 1997,  representing  19% of total revenues for
both quarters.  Product development and engineering expenses increased from $4.0
million  for the first  six  months  of 1996 to $7.4  million  for the first six
months of 1997,  representing 20% and 19% of total revenues for the two periods,
respectively.  Product  development and engineering  expenses  include  expenses
associated  with the  development  of new  products,  enhancements  of  existing
products  and quality  assurance  activities  and consist  primarily of employee
salaries,  benefits,  consulting  expenses and the cost of software  development
tools. Costs related to research, design and development of products are charged
to product  development  and engineering  expenses as incurred.  The increase in
absolute  dollars was  primarily  attributable  to an increase in personnel  and
related  overhead  costs.  The decrease in product  development  and engineering
expenses for the first six months of 1997 as a percentage 

                                       8
<PAGE>

of total  revenues  was  primarily  due to the growth in  revenues.  The Company
currently  anticipates  that product  development and engineering  expenses will
increase in  absolute  dollars as the Company  continues  to commit  substantial
resources to product  development  and  engineering in future periods, and these
expenses are expected to increase at the same or at a slightly greater rate than
the revenue growth rate.

     Sales and  Marketing.  Sales and  marketing  expenses  increased  from $4.2
million in the second  quarter of 1996 to $8.1 million in the second  quarter of
1997,  representing  38% and 42% of  total  revenues,  respectively.  Sales  and
marketing  expenses increased from $7.7 million for the first six months of 1996
to $15.2 million for the first six months of 1997,  representing  38% and 39% of
total revenues,  respectively. Sales and marketing expenses consist primarily of
employee  salaries,  sales  commissions,  travel and promotional  expenses.  The
increase in dollar  amount was  primarily  due to the expansion of the Company's
worldwide sales and marketing organization,  higher sales commissions associated
with increased revenue and increased marketing activities. The increase in sales
and marketing  expenses as a percentage of total revenues for the second quarter
of 1997  compared  to the  second  quarter  of  1996  reflects  the  significant
investments  that the Company  made during the second  quarter of 1997 to expand
both its direct sales force and other distribution channels. The Company intends
to continue to invest substantial resources in expanding its direct sales force,
both domestic and international,  expanding its other distribution channels, and
conducting  marketing  programs to support  existing and new product  offerings.
Accordingly,  sales and marketing  expenses are expected to increase in absolute
dollars in future  periods  and are  expected  to  increase  at the same or at a
slightly greater rate than the revenue growth rate.

     General and Administrative.  General and administrative  expenses increased
from $1.0  million in the second  quarter of 1996 to $1.6  million in the second
quarter of 1997, representing 9% and 8% of total revenues, respectively. General
and administrative expenses increased from $1.9 million for the first six months
of 1996 to $3.1 million for the first six months of 1997, representing 9% and 8%
of total revenues,  respectively.  General and  administrative  expenses consist
primarily of salaries and  occupancy  costs for  administrative,  executive  and
finance personnel.  The increase in dollar amount was due primarily to increases
in  personnel  and  related   overhead  costs.   The  decrease  in  general  and
administrative  expenses as a percentage of total  revenues was primarily due to
the growth in revenues. The Company currently expects general and administrative
expenses to increase  in absolute  dollars in the future as the Company  expands
its infrastructure.

     Merger Costs.  During the second quarter of 1996, the Company incurred $1.1
million of one-time  merger related  expenses in connection with the acquisition
of Metropolis Software, Inc.

     Interest  Income,  net. Net interest income  decreased from $337,000 in the
second  quarter  of 1996 to  $330,000  in the  second  quarter  of 1997 and from
$721,000  for the first six months of 1996 to $692,000  for the first six months
of 1997. The decrease is primarily due to lower excess cash balances in 1997.

     Provision  for (Benefit  from) Income Taxes.  The  Company's  provision for
(benefit  from) income taxes  increased from a benefit of $685,000 in the second
quarter of 1996 to an expense of  $599,000  in the second  quarter of 1997,  and
from a benefit  of  $578,000  for the first six  months of 1996 to an expense of
$1.7 million for the first six months of 1997.  The benefit from income taxes in
the first six months of 1996 was a result of the  recognition of deferred income
tax assets in accordance  with SFAS No. 109,  "Accounting  for Income Taxes," of
$800,000,  partially offset by the Company's first and second quarter income tax
provisions calculated at effective tax rates of 11% and 20%,  respectively.  The
Company's  effective tax rate  increased to 37% in 1997 due to federal and state
operating loss carryforwards having been recognized in fiscal 1996.

Recent Accounting Pronouncements

     In February 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement  No.  128,  "Earnings  Per  Share,"  (SFAS  128) which  specifies  the
computation,  presentation  and disclosure  requirements for earnings per share.
SFAS 128 supersedes  Accounting  Principles  Board Opinion No. 15, "Earnings Per
Share," and will become  effective for the Company's 1997 fiscal year.  SFAS 128
requires restatement of all prior-period earnings per share data presented after
the effective  date.  SFAS 128 is not expected to have a material  impact on the
Company's financial position, results of operations or cash flows.

     In June 1997, the FASB issued Statement No. 130,  "Reporting  Comprehensive
Income,"   (SFAS  130)  which   establishes   requirements   for  disclosure  of
comprehensive  income and becomes  effective for the Company for the year

                                       9
<PAGE>

ending  December 31, 1998.  Comprehensive  income includes such items as foreign
currency  translation  adjustments  that are  currently  being  presented by the
Company as a component of stockholders' equity. The Company does not expect this
pronouncement to materially impact the Company's results of operations.

     In June  1997,  the FASB  issued  Statement  No.  131,  "Disclosures  about
Segments  of an  Enterprise  and  Related  Information,"  (SFAS  131).  SFAS 131
establishes   standards  for  disclosure  about  operating  segments  in  annual
financial  statements and selected  information in interim financial reports. It
also establishes  standards for related disclosures about products and services,
geographic  areas and major  customers.  This statement  supersedes SFAS No. 14,
"Financial  Reporting for Segments of a Business  Enterprise."  SFAS 131 becomes
effective  for the Company for the year ending  December 31, 1998,  and requires
that  comparative  information  from earlier years be restated to conform to the
requirements of this standard. The Company does not expect this pronouncement to
materially change the Company's current reporting and disclosures.

Liquidity and Capital Resources

     The Company's operating activities provided net cash of $0.3 million in the
first six  months of 1997  compared  to $3.2  million in the first six months of
1996.  The decrease in cash  provided by operating  activities  in the first six
months of 1997 is  attributed  principally  to a decrease in  unearned  revenue,
accounts  payable,  and accrued payroll and related  accruals and an increase in
accounts  receivable.  These  changes  were  partially  offset by a decrease  in
prepaid  expenses  and other  current  assets and an increase  in other  accrued
liabilities.  The  increase in accounts  receivable  resulted  primarily  from a
higher  percentage  of orders  being  received  in the last  month of the second
quarter of 1997 as compared to the second quarter of 1996 and due to the overall
growth in  revenue.  The  decrease  in  unearned  revenue was due to the Company
installing  and  fulfilling  certain  post-installation  obligations  for orders
deferred at December  31,  1996,  as well as a large  portion of product  orders
received in the first six months of 1997 being shipped and installed within that
period.

     Investing  activities used net cash of $6.9 million in the first six months
of 1997  compared to $2.2  million in the first six months of 1996.  Included in
these  totals  is net  cash  used  and  provided  by the  purchase  and  sale of
investments  and the purchase and disposal of property and equipment.  Purchases
of short and long-term  investments used cash of $10.0 million and $2.1 million,
respectively,  and the sale of short and long-term investments generated cash of
$6.5  million  and $1.0  million,  respectively,  during the first six months of
1997.  There  were no  purchases  or sales of  investments  during the first six
months of 1996.  The Company  used $2.1  million and $2.0 million of cash during
the first six months of 1997 and 1996,  respectively,  to purchase  property and
equipment.  The Company  expects  that the rate of  purchases  of  property  and
equipment will remain constant or increase as the Company's employee base grows.

     Financing activities generated cash of $1.8 million and $0.8 million in the
first six months of 1997 and 1996,  respectively.  Cash provided from  financing
activities  in the  first six  months of 1997  consisted  of  proceeds  from the
issuance of common stock  pursuant to the Employee  Stock  Purchase Plan and the
exercise of options granted under the Company's  Stock Option Plans.  Similarly,
cash  provided  from  financing  activities  during the first six months of 1996
consisted  of $0.7  million of proceeds  from the issuance of common stock under
the aforementioned plans in addition to $0.1 million of proceeds from borrowings
under a note.

     The Company  believes that cash generated from  operations and its existing
cash and cash  equivalents and short-term  investment  balances will satisfy the
Company's projected working capital and other cash requirements for at least the
next twelve months.  Although  operating  activities may provide cash in certain
periods,  to the extent the  Company  grows in the  future,  its  operating  and
investing  activities  may use cash.  In the  event  that  cash  generated  from
operating  activities  may not be sufficient  to meet future cash  requirements,
there can be no assurance  that  additional  financing  will be available to the
Company on commercially reasonable terms, or at all.

Risk Factors That May Affect Future Results

     The Company  operates in a rapidly  changing  environment  that  involves a
number of risks, some of which are beyond the Company's  control.  The following
discussion  highlights some of these risks. Other risks are presented  elsewhere
in this report.

     Fluctuations in Quarterly  Results;  Seasonality.  The Company's  quarterly
operating   results  have  varied   significantly  in  the  past  and  may  vary
significantly in the future, depending on factors such as the size and timing of
significant

                                       10
<PAGE>

orders,  the level of price and product  competition,  demand for the  Company's
products,  changes in pricing policies by the Company or its competitors and the
number,  timing  and  significance  of  product  enhancements  and  new  product
announcements  by the Company and its  competitors.  In addition,  the Company's
quarterly  operating results are dependent on factors such as the ability of the
Company  to  develop,  introduce  and market new and  enhanced  versions  of the
Company's  products  on a timely  basis,  the  size,  timing  and  structure  of
significant  licenses,  changes in the Company's sales incentive  strategy,  the
timing of revenue recognition, budgeting cycles of its customers, customer order
deferrals  in  anticipation  of  enhancements  or new  products,  the  impact of
acquisitions  of  competitors,  the  cancellation  of  licenses  or  maintenance
agreements,  product  life  cycles,  software  bugs and  other  product  quality
problems, personnel changes, changes in Company strategy, investments to develop
sales distribution channels,  seasonal trends, changes in the level of operating
expenses  and  general  domestic  and   international   economic  and  political
conditions,  among others. In particular,  the timing of revenue recognition can
be affected by many factors,  including the timing of customer  installation  of
the  Company's  products.  In the past,  the Company has  experienced  delays in
recognizing revenue with respect to particular orders. There can be no assurance
that the  Company  will not  experience  delays in  recognizing  revenue  in the
future,   particularly  if  the  Company  receives  orders  for  large,  complex
installations.  Product  revenues  are also  difficult  to forecast  because the
market for front office software products is rapidly evolving, and the Company's
sales  cycle,  from  initial  trial to  purchase  and the  provision  of support
services, varies substantially from customer to customer. See "Risk Factors That
May Affect Future Results--Lengthy Sales and Implementation Cycles."

     To achieve its quarterly revenue objectives,  the Company is dependent upon
obtaining  product orders in any given quarter for shipment and  installation in
that  quarter.  Furthermore,  the Company  has often  recognized  a  substantial
portion  of its  product  revenues  in  the  last  month  of a  quarter,  with a
concentration  of these  revenues in the last half of that  month.  As a result,
product revenues in any quarter are substantially dependent on orders booked and
installed in that  quarter.  Further,  the Company  believes the purchase of its
products  generally  involves  a  significant   commitment  of  capital  because
customers  have  tended to  implement  the  products  on a large  scale and must
establish  certain minimum hardware  capabilities.  As a result, in the event of
any downturn in any existing or potential  customer's business or the economy in
general,  purchases of the Company's products may be deferred or canceled, which
could  have a  material  adverse  effect on the  Company's  business,  operating
results and financial condition. Due to the foregoing factors, quarterly revenue
and  operating  results  are not  predictable  with any  significant  degree  of
accuracy.  The Company's  expense levels are based, in significant  part, on the
Company's  expectations as to future revenues and are therefore relatively fixed
in the short  term.  If revenue  levels are below  expectations,  the  Company's
business,  operating results and financial  condition are likely to be adversely
affected. Net income may be disproportionately adversely affected by a reduction
in revenues because a proportionately  smaller amount of the Company's  expenses
varies   with  its   revenues.   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.
There can be no  assurance  that the Company will be able to achieve or maintain
profitability  on a  quarterly  or annual  basis in the  future.  Due to all the
foregoing  factors,  it is likely  that in some  future  quarter  the  Company's
operating  results will be below the  expectations of public market analysts and
investors.  In such event,  the price of the Company's common stock would likely
be materially adversely affected.

     The  Company's  business  has  experienced  and is  expected to continue to
experience significant seasonality,  in part due to customer buying patterns. In
recent years,  the Company has  generally  had stronger  demand for its products
during the quarters ending in June and December and weaker demand in the quarter
ending in March.  To the extent  international  operations  constitute  a higher
percentage of the Company's total revenues,  the Company anticipates that it may
also experience relatively weaker demand in the quarter ending in September.

     Intense  Competition.  The front office  solutions  market,  including  the
market for customer  service,  field service and logistics,  help desk,  quality
assurance and sales and marketing applications, is intensely competitive, highly
fragmented  and  subject to rapid  change.  Competitors  vary in size and in the
scope and breadth of the products and services offered.  The Company  encounters
competition from a number of sources,  including:  (i) other software companies,
(ii)  third-party   professional  services  organizations  that  develop  custom
software  and (iii)  management  information  systems  departments  of potential
customers that develop custom internal software. In addition,  because there are
relatively  low barriers to entry in the software  market,  the Company  expects
additional  competition  from other  established  and emerging  companies as the
front  office  solutions  market  continues  to develop  and  expand.  Increased
competition could result in price reductions,  reduced gross margins and loss of
market  share,  any of which could  materially  adversely  affect the  Company's
business,  operating  results and  financial  condition.  Some of the  Company's
current  competitors,  and many of the  Company's  potential  competitors,  have
significantly greater financial, technical,

                                       11
<PAGE>

product  development,  marketing  and other  resources  than the  Company.  As a
result, they may be able to respond more quickly to new or emerging technologies
and changes in customer  requirements,  or to devote  greater  resources  to the
development, promotion and sale of their products than the Company. In addition,
many  competitors  and  potential   competitors  have  significant   established
distribution  networks  and large  customer  installed  bases.  The Company also
expects  that  competition  will  increase  as a  result  of  software  industry
consolidations.  In addition, current and potential competitors have established
or may  establish  cooperative  relationships  among  themselves  or with  third
parties to increase  the  ability of their  products to address the needs of the
Company's  prospective   customers.   Accordingly,   it  is  possible  that  new
competitors  or  alliances  among  competitors  may emerge and  rapidly  acquire
significant  market share.  In  particular,  companies  with greater  technical,
marketing and other  resources than the Company could compete  directly with the
Company either as a result of acquisition or by direct entry into the market for
the Company's products.  There can be no assurance that the Company will be able
to  compete   successfully  against  current  and  future  competitors  or  that
competitive  pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition.

     Lengthy  Sales  and  Implementation  Cycles.  The  Company's  products  are
typically  intended for use in applications that may be critical to a customer's
business.  The license and  implementation  of the Company's  software  products
generally  involves  a  significant   commitment  of  resources  by  prospective
customers.  As a result,  the Company's sales process is often subject to delays
associated with lengthy approval processes that typically accompany  significant
capital  expenditures.  For these and other reasons,  the sales cycle associated
with the license of the Company's products is often lengthy (recently  averaging
approximately  four to six months) and subject to a number of significant delays
over which the Company has little or no control.  In addition,  the Company does
not recognize the majority of license revenues until  installations are complete
and does not recognize the  consulting  component of service  revenues until the
services are rendered,  which, in certain cases, can take several quarters. As a
result, revenue recognition may be delayed in many instances.  The time required
to implement the Company's products can vary significantly with the needs of its
customers and is generally a process that extends for several months. Because of
their complexity,  larger implementations can involve implementation cycles that
can take multiple quarters. When the Company has provided consulting services to
implement  certain  larger  projects,  a few customers  have in the past delayed
payment of a portion of license  fees until  implementation  was complete and in
some cases have disputed the consulting fees charged for  implementation.  There
can be no  assurance  the  Company  will not  experience  additional  delays  or
disputes  regarding payment in the future,  particularly if the Company receives
orders for large, complex  installations.  Therefore,  the Company believes that
its quarterly operating results are likely to vary significantly in the future.

     Dependence  Upon Key Personnel.  The loss of the services of one or more of
the Company's  executive  officers  could have a material  adverse effect on the
Company's business,  operating results and financial condition.  There can be no
assurance  that  the  Company  will be  able to  retain  its key  personnel.  In
addition,  in the past there has been  turnover in certain key  positions in the
Company,  including Vice President,  Sales and Vice President,  Customer Service
and Support. Additions of new and departures of existing personnel, particularly
in key  positions,  could  have a material  adverse  effect  upon the  Company's
business,  operating  results and  financial  condition.  The  Company's  future
performance depends  significantly upon the continued service and performance of
these  officers.  The Company's  future  success also depends on its  continuing
ability to attract and retain highly qualified  technical,  sales and managerial
personnel.  In the event the Company experiences sales growth,  there will be an
increased  need  for  technical  personnel  to  facilitate   successful  product
installations. Significant delays in product installations could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.  The Company recently hired a significant number of employees, and in
order to  maintain  its  ability  to grow in the  future,  the  Company  will be
required to  significantly  increase the total number of employees.  Competition
for such  personnel is intense,  and there can be no assurance  that the Company
can retain its key  technical,  sales and  managerial  employees  or that it can
attract,  assimilate  or retain  other  highly  qualified  technical,  sales and
managerial personnel in the future.

     Limited  Operating  History;  History of Operating  Losses;  Uncertainty of
Future  Operating  Results.  The  Company was founded in August 1990 and did not
begin shipping  products until September 1992.  Although the Company's  revenues
have increased in each of the last six years,  and the Company had net operating
income in each of the last twelve  quarters,  the Company incurred net operating
losses in each year from  inception  through the year ended 1994.  The Company's
limited  operating  history  makes the  prediction of future  operating  results
difficult  or  impossible.   Accordingly,  although  the  Company  has  recently
experienced  significant  revenue  growth,  such growth should not be considered
indicative of future revenue  growth,  if any, or of future  operating  results.
There can be no assurance that any of the Company's business  strategies will be
successful  or that  the  Company  will be able to  sustain  profitability  on a
quarterly or annual basis.

                                       12
<PAGE>

     Product Concentration. To date, the majority of the Company's revenues have
been  attributable  to sales of  ClearSupport,  the Company's  primary  product.
ClearSupport  has  typically  been the  first of the  Company's  products  to be
deployed with the greatest  number of users and often as a foundation  for other
applications.  The Company  expects  ClearSupport  to account for a  significant
portion  of the  Company's  future  revenues.  As a  result,  factors  adversely
affecting  the  pricing  of or  demand  for  the  ClearSupport  product  such as
competition or technological  change could have a material adverse effect on the
Company's  business,  operating results and financial  condition.  The Company's
future financial performance will depend, in significant part, on the successful
development,  introduction and customer  acceptance of new and enhanced versions
of the Company's product and other products.  There can be no assurance that the
Company will continue to be successful in marketing the ClearSupport  product or
other products.

     Dependence on New Products and Rapid Technological Change. The front office
solutions market,  including the market for customer service,  field service and
logistics, quality assurance, helpdesk, and sales and marketing applications, is
characterized by rapid technological change,  frequent new product introductions
and evolving  industry  standards.  The  introduction of products  embodying new
technologies  and the emergence of new industry  standards  can render  existing
products  obsolete and  unmarketable.  Any modification of third-party  software
packages  that the Company  sublicenses  for inclusion  with its products  could
require modification of the Company's products. The life cycles of the Company's
products are  difficult to estimate.  The Company's  future  success will depend
upon its ability to enhance its current  products and develop and  introduce new
products  on a timely  basis  that keep pace  with  technological  developments,
industry  standards and the increasingly  sophisticated  needs of its customers.
There can be no assurance  that the Company will be successful in developing and
marketing  product  enhancements  or new products that respond to  technological
change or evolving industry  standards,  or that the Company will not experience
difficulties   that  could   delay  or  prevent  the   successful   development,
introduction  and  marketing  of these  products,  or that its new  products and
product  enhancements  will adequately meet the  requirements of the marketplace
and achieve market  acceptance.  Furthermore,  reallocation  of resources by the
Company,  such  as the  diversion  of  research  and  development  personnel  to
development of a particular  feature for a potential or existing  customer,  can
delay new products and certain product  enhancements.  If the Company is unable,
for  technological  or other  reasons,  to develop and introduce new products or
enhancements  of existing  products  in a timely  manner in response to changing
market conditions or customer  requirements,  the Company's business,  operating
results and financial  condition  will be  materially  adversely  effected.  The
Company  has in the past  introduced  product  upgrades  and  enhancements  on a
frequent basis,  and expects to continue to introduce  upgrades and enhancements
of its existing  products.  The Company also  currently  plans to introduce  and
market new products. The upgrades,  enhancements and new products are subject to
significant  technical  risks,  including  the  difficulty of ensuring that such
products  will permit  successful  migration of customer  data from a variety of
existing  platforms.  In the past,  the  Company has  experienced  developmental
delays,  which  have  resulted  in  delays  in the  commencement  of  commercial
shipments of new products and  enhancements.  There can be no assurance that the
Company  will not  experience  difficulties  that  could  delay or  prevent  the
successful  development,  introduction or marketing of new or enhanced products.
In  addition,  there  can be no  assurance  that  such  products  will  meet the
requirements of the marketplace and achieve market acceptance on a timely basis,
or that the  Company's  current or future  products  will  conform  to  industry
requirements. If any potential new products, upgrades or enhancements, including
the next version of ClearSupport, are delayed, experience quality problems or do
not achieve market  acceptance,  the Company's  business,  operating results and
financial condition will be materially adversely affected.

     Expansion of Distribution  Channels.  The Company has historically sold its
products  primarily  through its direct sales force.  The  Company's  ability to
achieve  significant  revenue  growth in the future will depend in large part on
its  success  in  recruiting  and  training   sufficient   sales  personnel  and
establishing relationships with distributors, resellers and systems integrators.
The Company is currently investing, and plans to continue to invest, significant
resources  to expand its  domestic  and  international  direct  sales  force and
develop  distribution  relationships  with  certain  third  party  distributors,
resellers and systems  integrators.  There can be no assurance  that the Company
will be able to attract a sufficient number of third party distribution partners
or that such partners will  recommend the Company's  products.  The inability to
establish  successful  relationships  with  distributors,  resellers  or systems
integrators  could have a material  adverse  effect on the  Company's  business,
operating results or financial condition. In addition, there can be no assurance
that the Company will be able to  successfully  expand its direct sales force or
other  distribution  channels.  Any  failure by the Company to expand its direct
sales force or other distribution channels would materially adversely affect the
Company's business, operating results and financial condition.

                                       13
<PAGE>

     Risk of Product Defects.  Software  products as complex as those offered by
the  Company  frequently  contain  errors or  failures,  especially  when  first
introduced  or when new versions  are  released.  Although the Company  conducts
extensive  product testing,  the Company has in the past released  products that
contained  defects,  and has  discovered  software  errors in certain of its new
products  and  enhancements  after  their  introduction  and,  as a result,  has
experienced delays in recognizing revenues during the period required to correct
these  errors.  The  Company  could in the future  lose  revenues as a result of
software errors or defects.  The Company's  products are typically  intended for
use in applications that may be critical to a customer's business.  As a result,
the Company  expects that its customers and potential  customers  have a greater
sensitivity to product defects than the market for software products  generally.
Although the Company has not experienced material adverse effects resulting from
any such errors to date, 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 releases after  commencement of commercial  shipments,  resulting in
loss of  revenue  or  delay  in  market  acceptance,  diversion  of  development
resources, damage to the Company's reputation, or increased service and warranty
costs,  any of which could have a material  adverse  effect  upon the  Company's
business, operating results and financial condition.

     International Operations. The Company established its European headquarters
in the United Kingdom in 1994. Since then,  additional  offices have been opened
in Germany,  France,  Japan,  Australia  and Canada.  As part of its strategy to
increase  growth and  profitability,  the Company intends to expand its existing
international  operations and enter additional international markets, which will
require  significant  management  attention  and  financial  resources and could
adversely affect the Company's  operating margins and earnings.  To successfully
expand  international  sales,  the Company  must  establish  additional  foreign
operations  and hire  additional  personnel.  To the extent  that the Company is
unable to do so in a timely manner, the Company's growth in international sales,
if any,  will be limited,  and the  Company's  business,  operating  results and
financial condition could be materially adversely affected.  In addition,  there
can be no  assurance  that the  Company  will be able to  maintain  or  increase
international  market demand for its products.  Additional risks inherent in the
Company's  international  business  activities include,  among others:  currency
fluctuations,  unexpected changes in regulatory requirements,  tariffs and other
trade  barriers,  costs of localizing  products for foreign  countries,  lack of
acceptance  of  localized  products  in  foreign   countries,   longer  accounts
receivable payment cycles,  difficulties in managing  international  operations,
potentially adverse tax consequences  including restrictions on the 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 a material  adverse
effect on the  Company's  future  international  sales  and,  consequently,  the
Company's results of operations.

     Dependence on Growth in the Front Office Software Market.  The front office
software market,  including the market for customer  support,  field service and
logistics, quality assurance, helpdesk, and sales and marketing applications, is
intensely competitive,  highly fragmented and subject to rapid change. The front
office  software  market  is still an  emerging  market.  The  Company's  future
financial  performance  will  depend in large  part on  continued  growth in the
number of  organizations  adopting  front office  applications.  There can be no
assurance  that the market for front office  software  will continue to grow. If
the front  office  software  market  fails to grow or grows more slowly than the
Company currently  anticipates,  the Company's  business,  operating results and
financial condition would be materially adversely affected.

    Dependence on Proprietary  Technology;  Risks of  Infringement.  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 affords
only limited protection.  The Company has submitted only one patent application.
Despite the Company's  efforts to protect its proprietary  rights,  unauthorized
parties may attempt to copy aspects of the  Company's  products or to obtain and
use information that the Company regards as proprietary.  Policing  unauthorized
use of the Company's  products is difficult,  and while the Company is unable to
determine the extent to which piracy of its software  products exists,  software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to as great an
extent as 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 competitors will not independently  develop similar technology.  The Company
is not aware that any of its  products  infringe  on the  proprietary  rights of
third parties.  There can be no assurance,  however, that third parties will not
claim  infringement  by the Company with respect to current or future  products.
The Company  expects that  software  product  developers  will  increasingly  be
subject to infringement  claims as the number of products and competitors in the
Company's  industry segment grows and the functionality of products in different
industry  segments  overlaps.  Any such claims,  with or without  merit could be
time-consuming,  result in costly  litigation,  cause product shipment delays or
require the Company to enter into royalty or licensing agreements.  Such royalty
or  licensing 

                                       14
<PAGE>

agreements,  if required, may not be available on commercially  reasonable terms
or at all,  which  could  have a  material  adverse  effect  upon the  Company's
business, operating results and financial condition.

     Acquisition; Significant Growth; Need to Manage Changing Business. In April
1996, the Company acquired Metropolis  Software,  Inc. Management of the Company
has been and will be required to devote  substantial  time and  attention to the
integration of these  businesses for an extended period of time. The integration
of merged companies is extensive,  difficult and time consuming and subject to a
number  of  inherent  risks.  There  can be no  assurance  that  operational  or
financial  problems  will not occur as a result of the merger.  The  requirement
that  management  devote  substantial  time  and  resources  to the  process  of
integrating the two companies and the occurrence of any material  operational or
financial  problems  as a result of the merger  could  have a  material  adverse
affect on the Company's business, operating results and financial condition. The
acquisition  and the  Company's  internal  development  efforts  have placed and
continue  to  place  a  significant  strain  upon  its  management  systems  and
resources. The Company has grown from 238 employees at June 30, 1996 to over 400
employees at June 30, 1997, and currently plans to continue to expand its staff.
To accommodate this growth,  the Company will be required to implement a variety
of new and upgraded operational and financial systems,  procedures and controls,
including  the  improvement  of its  accounting  and other  internal  management
systems,  some of which require substantial  management effort.  There can be no
assurance that the Company will be able to do so successfully.  In addition, the
increase  in  the  Company's  number  of  employees  and  the  Company's  market
diversification  and product  development  activities have resulted in increased
responsibility  for the  Company's  management.  The  Company  anticipates  that
continued  growth,  if any,  will  require it to recruit and hire a  substantial
number of new engineering,  managerial, finance, sales and marketing and support
personnel;  however,  there  can  be no  assurance  that  the  Company  will  be
successful at hiring or retaining  these  personnel.  The  Company's  ability to
compete  effectively  and to manage  future  growth,  if any,  will  require the
Company  to  continue  to  implement  and  improve  operational,  financial  and
management  information systems on a timely basis and to expand, train, motivate
and  manage  its work  force.  There  can be no  assurance  that  the  Company's
personnel,  systems,  procedures  and  controls  will be adequate to support the
Company's  operations.  Any  failure to  implement  and  improve  the  Company's
operational,  financial and management systems or to expand,  train, motivate or
manage employees,  including additional finance personnel, could have a material
adverse  effect  on the  Company's  business,  operating  results  or  financial
condition.

     Product  Liability.  The Company's  license  agreements  with its customers
typically  contain  provisions  designed  to limit  the  Company's  exposure  to
potential product liability claims.  However, it is possible that the limitation
of liability provisions contained in the Company's license agreements may not be
effective under the laws of certain jurisdictions.  Although the Company has not
experienced  any  product  liability  claims to date,  the sale and  support  of
products by the Company may entail the risk of such claims,  and there can be no
assurance  that the Company will not be subject to such claims in the future.  A
successful  product  liability  claim  brought  against the Company could have a
material  adverse  effect upon the  Company's  business,  operating  results and
financial condition.

     Effect of Certain Charter Provisions.  The Company's Board of Directors has
the  authority  to  issue up to  5,000,000  shares  of  Preferred  Stock  and to
determine the price, rights, preferences, privileges and restrictions, including
voting  rights,  of those  shares  without  any  further  vote or  action by the
stockholders.  The  Preferred  Stock could be issued with  voting,  liquidation,
dividend and other rights  superior to those of the Common Stock.  The rights of
the holders of Common  Stock will be subject to, and may be  adversely  affected
by, the rights of the holders of any  Preferred  Stock that may be issued in the
future. The issuance of Preferred Stock, while providing  desirable  flexibility
in connection with possible  acquisitions  and other corporate  purposes,  could
have the  effect of  making it more  difficult  for a third  party to  acquire a
majority of the  outstanding  voting  stock of the  Company.  The Company has no
current plans to issue shares of Preferred Stock. Further, certain provisions of
the Company's  Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger,  tender offer or proxy contest  involving
the Company.

                                       15
<PAGE>


PART II.          OTHER INFORMATION.

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

At the Annual  Meeting of  Stockholders  held on June 11,  1997,  the  following
proposals were adopted by the margins indicated:

1.   To elect a Board of Directors to hold office until the next annual  meeting
     of  stockholders  and until  their  successors  have been duly  elected and
     qualified.
                                                Number of Shares
                                                ----------------
                                          For                    Withheld
                                       ----------                --------
         James L. Patterson            18,544,601                  98,204
         David A. Stamm                18,544,601                  98,204
         Thomas H. Bredt               18,544,701                  98,104
         Mary Jane Elmore              18,544,701                  98,104
         Frederick Fluegel             18,544,701                  98,104

2.   To approve an amendment to the Company's  Certificate of  Incorporation  to
     increase the number of authorized shares of common stock, par value $0.0001
     per share, from 25,000,000 to 55,000,000.

         For                                          18,068,078
         Against                                         549,655
         Abstain                                          25,072

3.   To approve an amendment to the Company's 1995 Stock  Option/Stock  Issuance
     Plan to (i) provide for automatic  annual increases in the share reserve in
     1998 and 1999 and (ii) make certain other changes and delete  provisions as
     the result of changes to SEC rules governing  option grants to officers and
     directors subject to the short-swing profit rules of the Federal securities
     laws.

         For                                           8,965,996
         Against                                       1,955,131
         Abstain                                          27,232
         Non Vote                                      7,694,446

4.   To approve an amendment to the Company's  Employee  Stock  Purchase Plan to
     increase the number of shares issuable thereunder by 500,000 shares.

         For                                          10,209,592
         Against                                         717,799
         Abstain                                          20,968
         Non Vote                                      7,694,446

5.   To ratify the  appointment  of Coopers & Lybrand  L.L.P.  as the  Company's
     independent  public  accountants  for the fiscal year ending  December  31,
     1997.

         For                                          18,590,120
         Against                                          20,195
         Abstain                                          32,490

                                       16

<PAGE>

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

(a)   Exhibits

Number         Description
------         -----------

1.0      Rights  Agreement,  dated as of June 13,  1997  between the Company and
         Harris  Trust  Company of  California,  including  the  Certificate  of
         Designation of Series A Junior  Participating  Preferred Stock, Form of
         Right  Certificate and Summary of Rights to Purchase  Preferred  Shares
         attached  thereto  as  Exhibits  A, B and  C,  respectively,  which  is
         incorporated by reference to the Form 8-A filed with the Securities and
         Exchange Commission on June 24, 1997

3.1      Certificate of Incorporation of the Company, as amended to date

3.2      Amended and Restated  Bylaws of the Company  which is  incorporated  by
         reference to the 8-K filed with the Securities and Exchange  Commission
         on June 25, 1997

4.1(1)   Specimen Common Stock certificate

4.2(1)   Restated  Investor  Rights  Agreement,  dated March 7, 1994,  among the
         Company and the investors and founders named therein

10.1(1)  Form of Indemnification Agreement

10.2(1)  1991 Stock Option/Stock Issuance Plan

10.3(2)  1995 Stock Option/Stock Issuance Plan

10.4(2)  Employee Stock Purchase Plan

10.5(1)  Loan and Security  Agreement  between  Silicon  Valley Bank and Clarify
         Inc.

10.6(1)  Lease by and between Orchard  Investment Company Number 6.9 and Clarify
         Inc. dated March 16, 1992, as amended by the First  Amendment to Lease,
         dated February 28, 1995

10.7(1)  Master  Equipment Lease Agreement by and between  Costella  Kirsch/GATX
         Partnership No. 1 and the Company, dated February 18, 1992

10.8(1)  Master  Equipment Lease Agreement by and between Venture Leasing Assoc.
         and the Company, dated May 7, 1991

10.9(1)  Master  Equipment  Lease  Agreement by and between Phoenix Leasing Inc.
         and the Company, dated June 30, 1993

10.10    Lease by and between Orchard  Investment Company Number 901 and Clarify
         Inc. dated August 8, 1996

11.1     Computation of Net Income Per Share

27.0     Commercial and Industrial Companies Article 5 of Regulation S-X

         (1)      Incorporated  by  reference  from an  Exhibit  filed  with the
                  Company's  Registration  Statement  on Form S-1  (file  number
                  33-97004)  declared  effective by the  Securities and Exchange
                  Commission on November 2, 1995.

         (2)      Incorporated  by  reference  from an  exhibit  filed  with the
                  Company's  Registration  Statement  on Form S-8  (file  number
                  33-98928) filed with the Securities and Exchange Commission on
                  November 3, 1995.

(b)  Reports on Form 8-K

The Company filed a report on Form 8-K on June 25, 1997 reporting  under Item 5,
Other  Events,  that on June 11,  1997,  the Board of  Directors  of the Company
adopted and approved Amended and Restated Bylaws of the Company.

                                       17
<PAGE>


SIGNATURE



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.


Date: August 14, 1997             CLARIFY INC.
                                  (Registrant)



                                  By: /s/ Ray M. Fritz
                                      -----------------------------------------
                                      Ray M. Fritz
                                      Vice President and Chief Financial
                                      Officer (Duly Authorized Officer and 
                                      Principal Financial Officer)


                                       18