<PAGE>   1
 
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                                 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 MARCH 31, 1998
 
                                       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)
 
<TABLE>
<S>                                                       <C>
                        DELAWARE                                                 77-0259235
            (STATE OR OTHER JURISDICTION OF                                   (I.R.S. EMPLOYER
             INCORPORATION OR ORGANIZATION)                                IDENTIFICATION NUMBER)
</TABLE>
 
                                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 mark 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 May 1, 1998 there were 21,679,742 shares of the Registrant's $0.0001
par value Common Stock outstanding.
 
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<PAGE>   2
 
                                  CLARIFY INC.
                                   FORM 10-Q
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
                   PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:

        Condensed Consolidated Balance Sheets at March 31,
        1998 and December 31, 1997.........................     3

        Condensed Consolidated Statements of Operations
        for the three months ended March 31, 1998
        and 1997...........................................     4

        Condensed Consolidated Statements of Cash Flows
        for the three months ended March 31, 1998
        and 1997...........................................     5

        Notes to Condensed Consolidated Financial
        Statements.........................................     6

Item 2. Management's Discussion and Analysis of Financial
        Condition and Results of Operations.................    8
 
                    PART II OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K....................   20

Signature...................................................   22
</TABLE>
 
                                        2
<PAGE>   3
 
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
 
                                  CLARIFY INC.
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                (IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
 
<TABLE>
<CAPTION>
                                                              MARCH 31,    DECEMBER 31,
                                                                1998           1997
                                                              ---------    ------------
<S>                                                           <C>          <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 28,542       $ 20,744
  Short-term investments....................................     8,254         10,451
  Accounts receivable, net of allowance for doubtful
     accounts of $1,384 at March 31, 1998 and $1,310 at
     December 31, 1997......................................    29,429         32,854
  Prepaid expenses and other current assets.................     2,125          2,463
  Deferred income taxes.....................................     5,692          5,692
                                                              --------       --------
          Total current assets..............................    74,042         72,204
Property and equipment, net.................................     8,893          8,611
Long-term investments.......................................     3,148          5,167
Other noncurrent assets.....................................       790            849
                                                              --------       --------
          Total assets......................................  $ 86,873       $ 86,831
                                                              ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payables.........................................  $  4,594       $  5,047
  Accrued payroll and related accruals......................     7,947          6,833
  Other accrued liabilities.................................     4,284          4,269
  Income taxes payable......................................     1,735          1,851
  Deferred revenue..........................................    10,399         11,734
                                                              --------       --------
          Total current liabilities.........................    28,959         29,734
                                                              --------       --------
Stockholders' equity:
  Common stock, $.0001 par value:
     Authorized: 55,000 shares; issued and outstanding:
      21,416 at March 31, 1998 and 21,335 at December 31,
      1997..................................................         2              2
  Capital in excess of par value............................    51,751         51,640
  Unrealized holding gains on investments, net..............        17             22
  Cumulative translation adjustment.........................         5              6
  Deferred compensation.....................................       (53)           (65)
  Retained earnings.........................................     6,192          5,492
                                                              --------       --------
          Total stockholders' equity........................    57,914         57,097
                                                              --------       --------
          Total liabilities and stockholders' equity........  $ 86,873       $ 86,831
                                                              ========       ========
</TABLE>
 
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
                                        3
<PAGE>   4
 
                                  CLARIFY INC.
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Revenues:
  License fees..............................................  $ 16,132    $ 13,008
  Services..................................................     8,767       6,352
                                                              --------    --------
          Total revenues....................................    24,899      19,360
Cost of revenues:
  License fees..............................................       664         520
  Services..................................................     5,021       3,977
                                                              --------    --------
          Total cost of revenues............................     5,685       4,497
                                                              --------    --------
          Gross Margin......................................    19,214      14,863
                                                              --------    --------
Operating expenses:
  Product development and engineering.......................     4,610       3,593
  Sales and marketing.......................................    11,582       7,017
  General and administrative................................     2,303       1,515
                                                              --------    --------
          Total operating expenses..........................    18,495      12,125
                                                              --------    --------
          Operating income..................................       719       2,738
Interest and other income (expense), net....................       392         362
                                                              --------    --------
          Income before provision for income taxes..........     1,111       3,100
Provision for income taxes..................................       411       1,147
                                                              --------    --------
          Net income........................................  $    700    $  1,953
                                                              ========    ========
Basic net income per share..................................  $   0.03    $   0.09
                                                              ========    ========
Shares used in per share computation -- basic...............    21,371      20,668
                                                              ========    ========
Diluted net income per share................................  $   0.03    $   0.09
                                                              ========    ========
Shares used in per share computation -- diluted.............    22,447      22,071
                                                              ========    ========
</TABLE>
 
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
                                        4
<PAGE>   5
 
                                  CLARIFY INC.
 
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
                           (IN THOUSANDS; UNAUDITED)
 
<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED
                                                                   MARCH 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Cash flows from operating activities:
  Net income................................................  $    700    $  1,953
     Adjustments to reconcile net income to net cash
      provided by (used in) operating activities:
     Depreciation and amortization..........................     1,150         865
     Provision for doubtful accounts........................       635          --
     Other..................................................        29          (7)
     Changes in assets and liabilities:
       Accounts receivable..................................     3,427      (2,522)
       Prepaids and other current assets....................       406         405
       Accounts payable.....................................      (455)       (529)
       Accrued payroll and related accruals.................     1,115        (634)
       Other accrued liabilities............................       (72)        844
       Unearned revenue.....................................    (1,944)     (2,779)
                                                              --------    --------
     Net cash provided by (used in) operating activities....     4,991      (2,404)
                                                              --------    --------
Cash flows from investing activities:
  Purchase of property and equipment........................    (1,502)     (1,097)
  Purchase of investments...................................    (2,851)     (5,500)
  Sale and maturities of investments........................     7,040       5,996
  Increase in other assets..................................        52        (217)
                                                              --------    --------
     Net cash provided by (used in) investing activities....     2,739        (818)
                                                              --------    --------
Cash flows from financing activities:
  Proceeds from issuance of common stock, net...............       111         128
                                                              --------    --------
     Net cash provided by financing activities..............       111         128
                                                              --------    --------
Effect of foreign exchange rate changes on cash.............       (43)         88
                                                              --------    --------
Net increase (decrease) in cash and cash equivalents........     7,798      (3,006)
Cash and cash equivalents, beginning of period..............    20,774      34,447
                                                              --------    --------
Cash and cash equivalents, end of period....................  $ 28,542    $ 31,441
                                                              ========    ========
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest....................  $     --    $      3
                                                              ========    ========
  Cash paid during the year for income taxes................  $    528    $     71
                                                              ========    ========
Supplemental disclosure of non-cash investing and financing
  activities:
  Change in unrealized holding gain on investments..........  $     (5)   $     --
                                                              ========    ========
  Forgiveness of notes payable to stockholders..............  $     --    $  1,047
                                                              ========    ========
</TABLE>
 
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.
                                        5
<PAGE>   6
 
                                  CLARIFY INC.
 
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
NOTE 1. BASIS OF PRESENTATION
 
     The accompanying unaudited condensed consolidated balance sheets of Clarify
Inc. and its subsidiaries ("Clarify" or the "Company") as of March 31, 1998 and
December 31, 1997 and the related unaudited condensed consolidated statements of
operations and cash flow for the three months ended March 31, 1998 and 1997 have
been prepared on substantially the same basis as are the annual consolidated
financial statements. The December 31, 1997 balance sheet was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The results of operation for the three
months ended March 31, 1998 are not necessarily indicative of results to be
expected for the entire year.
 
     For software arrangements entered into after December 31, 1997, the Company
will recognize revenue in accordance with Statement of Position ("SOP") 97-2,
"Software Revenue Recognition." SOP 97-2 supercedes SOP 91-1 "Software Revenue
Recognition" and requires that if an arrangement to deliver software or a
software system does not require significant production, modification, or
customization of software, then revenue should be recognized when persuasive
evidence of an arrangement exists, delivery has occurred, the vendor's fee is
fixed or determinable, and collectibility is probable. Accordingly, the Company
will generally recognize license fee revenue upon product shipment provided
there are no contingencies and collection is probable.
 
     In the opinion of management, these interim financial statements reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position, operating results and cash flow
for those periods presented. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Company's 1997 Annual Report on Form 10-K.
 
NOTE 2. COMPREHENSIVE INCOME
 
     Comprehensive income as defined by Statements of Financial Accounting
Standards No 130, "Reporting Comprehensive Income," is net income plus direct
adjustments to stockholders' equity.
 
     The following table reconciles comprehensive income to reported net income
(in thousands):
 
<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED
                                                                MARCH 31,
                                                            ------------------
                                                             1998       1997
                                                            ------    --------
<S>                                                         <C>       <C>
Comprehensive income:
  Net income..............................................  $ 700     $ 1,953
  Cumulative translation adjustment.......................     (1)        (28)
  Unrealized holding gains on investments, net of tax.....     (3)         --
                                                            -----     -------
          Total comprehensive income......................  $ 696     $ 1,925
                                                            =====     =======
</TABLE>
 
                                        6
<PAGE>   7
                                  CLARIFY INC.
 
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)
 
NOTE 3. COMPUTATION OF NET INCOME PER SHARE
 
     Basic net income per share is computed using the weighted average common
shares outstanding during the period. Diluted net income per share is computed
using the weighted average common shares and common equivalent shares
outstanding during the period. The following table reconciles the numerator and
denominator used the computation of basic and diluted net income per share (in
thousands, except per share amounts):
 
<TABLE>
<CAPTION>
                                                          THREE MONTHS ENDED
                                                               MARCH 31,
                                                          -------------------
                                                            1998       1997
                                                          --------    -------
<S>                                                       <C>         <C>
Numerator - Basic and Diluted
Net income..............................................  $    700    $ 1,953
                                                          ========    =======
Net income available to common stockholders.............  $    700    $ 1,953
                                                          ========    =======
Denominator
Weighted average common shares outstanding..............    21,371     20,668
Effect of dilutive common stock options.................     1,076      1,403
                                                          --------    -------
Weighted average common shares and equivalents
  outstanding...........................................    22,447     22,071
                                                          ========    =======
Diluted net income per share............................  $   0.03    $  0.09
                                                          ========    =======
</TABLE>
 
NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS
 
     In July 1997, the Financial Accounting Standards Board issued Statements of
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information", which requires companies to report certain
information about operating segments, including certain information about their
products, services, the geographic area in which they operate and their major
customers. This statement supersedes FASB Statements Nos. 14, 18, 24 and 30.
SFAS 131 is effective for financial statements for fiscal years beginning after
December 15, 1997. The company is evaluating the requirements of SFAS 131 and
the effects, if any, on the Company's current reporting and disclosures.
 
                                        7
<PAGE>   8
 
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
     In addition to historical information, this report on Form 10-Q contains
forward-looking statements that involve risks and uncertainties that could cause
actual results to differ materially. Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the section
entitled "Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations" and "Certain Factors That May Affect Future
Results of Operations" in the Company's 1997 annual report on Form 10-K. Readers
should carefully review the risks described in other documents the Company files
from time to time with the Securities and Exchange Commission, including the
annual report on Form 10-K and the quarterly reports on Form 10-Q. Readers are
cautioned not to place undue reliance on the forward-looking statements,
including statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future, which speak only as of the date of this
report on Form 10-Q. The Company undertakes no obligation to publicly release
any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
 
OVERVIEW
 
     Clarify Inc. ("Clarify" or the "Company"), founded in August 1990, is a
leading developer and provider of integrated enterprise front office solutions.
Clarify helps companies build service into every customer interaction, with
solutions that automate call center, sales and marketing, technical support,
field service and logistics, quality assurance and help desk processes. By
uniting the entire virtual enterprise around the customer, Clarify allows
companies attract, acquire and retain customers at significantly reduced costs.
A variety of industries employ Clarify's solutions, including high-tech, health
care, telecommunications, financial services and retail.
 
     Clarify markets its software and services primarily through its direct
sales organization in the United States, the United Kingdom, Germany, France,
Canada, Japan and Australia. Clarify customers include, among others, ADP, Amoco
Corp., Cisco Systems, General Electric, Georgia-Pacific, Gillette, Hewlett-
Packard, Microsoft and Sprint PCS. The Company maintains its executive offices
at 2125 O'Nel Drive, San Jose, California 95131.
 
     In April 1996, the Company acquired Metropolis Software, Inc.
("Metropolis"), a sales force automation software provider. The Company issued
approximately 663,000 shares of common stock for all of the shares of common
stock of Metropolis in a transaction that was accounted for as a pooling of
interests. The Company also assumed options to purchase Metropolis stock that
remain outstanding as options to purchase the Company's common stock.
 
                                        8
<PAGE>   9
 
PERCENT OF TOTAL REVENUES
 
     The following tables sets forth for the three months ended March 31,1998
and 1997, the Company's Condensed Consolidated Statements of Income expressed as
a percentage of total revenue:
 
<TABLE>
<CAPTION>
                                                                THREE MONTHS
                                                              ENDED MARCH 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
Revenues:
  License fees..............................................   64.8%     67.2%
  Services..................................................   35.2      32.8
                                                              -----     -----
          Total revenues....................................  100.0     100.0
Cost of revenues:
  License fees..............................................    2.6       2.7
  Services..................................................   20.2      20.5
                                                              -----     -----
          Total cost of revenues............................   22.8      23.2
                                                              -----     -----
          Gross Margin......................................   77.2      76.8
                                                              -----     -----
Operating expenses:
  Product development and engineering.......................   18.5      18.6
  Sales and marketing.......................................   46.5      36.2
  General and administrative................................    9.3       7.8
                                                              -----     -----
          Total operating expenses..........................   74.3      62.6
                                                              -----     -----
          Operating income..................................    2.9      14.2
Interest and other income (expense), net....................    1.6       1.8
                                                              -----     -----
          Income before provision for income taxes..........    4.5      16.0
Provision for income taxes..................................    1.7       5.9
                                                              -----     -----
          Net income........................................    2.8%     10.1%
                                                              =====     =====
</TABLE>
 
  Revenues
 
     Total revenues increased from $19.4 million in the first quarter of 1997 to
$24.9 million in the first quarter of 1998, representing an increase of 29% as a
result of growth in both license fees and service revenues. The Company does not
believe that the percentage increases in revenues achieved in current periods
should be anticipated in future periods. International license fees accounted
for approximately 4% and 29% of total license fee revenue for the three months
ended March 31, 1997 and 1998, respectively. 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. 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 recognizes initial license fee
revenue and sales of additional licenses upon product shipment provided there
are no contingencies and collection is probable, in accordance with Statement of
Position 97-2 entitled "Software Revenue Recognition." 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 generally do not require significant production, modification or
customization to the underlying software code.
 
     License Fees. License fee revenues increased from $13.0 million in the
first quarter of 1997 to $16.1 million in the first quarter of 1998,
representing an increase of 24%. The growth in license fee revenues was due to
increased market acceptance of the Company's existing products, continued
enhancement and increased breadth of the Company's product offerings, increased
follow on sales to existing customers, sales of the Company's products to new
industry segments and increased sales as a result of the expansion of the
 
                                        9
<PAGE>   10
 
Company's direct sales force and marketing organization. Although the Company's
customer base has grown as revenues have increased, on a yearly basis,
significant portions of the Company's license fee revenues are typically derived
from non-recurring sales to a limited number of customers. Accordingly, license
fee revenues in any one period are not indicative of license fee revenues in any
future period. Further, the Company does not believe that the percentage
increases in revenues achieved in prior periods should be anticipated in future
periods.
 
     Services. Revenues from services increased from $6.4 million in the first
quarter of 1997 to $8.8 million in the first quarter of 1998, representing an
increase of 38%. The growth in service revenues was due 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 services 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 $0.5 million in
the first quarter of 1997 to $0.7 million in first of quarter 1998, representing
4% of license fee revenues for the three months ended March 31, 1997 and 1998,
respectively. 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
expense as incurred. Cost of license fees includes no amortization of
capitalized software development costs. Cost of license fees as a percentage of
license fees may fluctuate from period to period due to the increased or
decreased sale of royalty bearing software products. The increase in dollar
amount is primarily due to the higher volumes of products shipped during the
period and increases in royalties owed to third party software suppliers.
 
     Cost of Services. Cost of services increased from $4.0 million in the first
quarter of 1997 to $5.0 million in the first quarter of 1998, representing 63%
and 57% of the related service revenues for the three months ended March 31,
1997 and 1998, respectively. Cost of services consists primarily of costs
incurred in providing telephone support, consulting services, shipment of
product upgrades and training of customers. The absolute dollar 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. 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 $3.6 million in the first quarter of 1997 to $4.6
million in the first quarter of 1998, representing, 19% of total revenues for
the three months ended March 31, 1997 and 1998, 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 as
well as consulting expenses. 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.
 
     Sales and Marketing. Sales and marketing expenses increased from $7.0
million in the first quarter of 1997 to $11.6 million in the first quarter of
1998, representing 36% and 47% of total revenues for the three months ended
March 31, 1997 and 1998, 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
 
                                       10
<PAGE>   11
 
commissions associated with increased revenue and increased expenditures for
marketing activities. The increase in sales and marketing expenses as a
percentage of total revenues for the first quarter of 1998 compared to the first
quarter of 1997 reflects the significant investment that the Company made 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.
 
     General and Administrative. General and administrative expense consists
principally of salaries and benefits, travel expenses, and related overhead
costs for the finance, human resource and executive and administrative personnel
of the Company. General and administrative expenses increased from $1.5 million
in the first quarter of 1997 to $2.3 million in the first quarter of 1998,
representing, 8% and 9% of total revenues for the three months ended March 31,
1997 and 1998, respectively The increase in dollar amount was due primarily to
increases in personnel, related overhead costs, bad debt expense, and expenses
related to the Company's infrastructure expansion. The Company currently expects
general and administrative expenses to increase in absolute dollars in the
future as the Company continues to expand its infrastructure.
 
     Interest and Other Income (Expense), Net. Interest and other income
(expense), net represents interest income earned on the Company's cash, cash
equivalents and investments, and other items including foreign exchange gains
and losses. Interest and other income (expense), net increased slightly to
$392,000 in the first quarter of 1998 from $362,000 in the first quarter of
1997. This increase was primarily the result of foreign exchange gains offset by
a slight decrease in interest income.
 
     Provision for Income Taxes. The Company's effective tax rate for the first
quarter of 1997 and 1998 was 37%.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company's cash, cash equivalents and investments totaled $39.9 million
at March 31, 1998 representing about 46% of total assets compared to $36.4
million at December 31, 1997, representing about 42% of total assets. The
Company has invested its cash in excess of current operating requirements in a
portfolio of both taxable and tax-exempt investment grade securities. The
investments have variable and fixed interest rates and short and long term
maturities. In accordance with Financial Accounting Standards Board Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities" such
investments are classified as "available for sale".
 
     Net cash used in operating activities was $2.4 million in the first quarter
of 1997, and net cash provided by operating activities was $5.0 million in the
first quarter of 1998. Net cash provided by operating activities for the three
months ended March 31, 1998 was primarily attributable to a decrease in accounts
receivable and net income after adjustment for depreciation and amortization
expense, offset by deferred revenue and accounts payable.
 
     The change in accounts receivable corresponds to the overall growth in
customer licensing activity offset by cash collections. Accounts receivable days
sales outstanding ("DSO"), the ratio of the quarter-end accounts receivable
balance to quarterly revenues, multiplied by 90, was 106 days as of March 31,
1998 compared to 107 days as of December 31, 1997 and 95 days as of March 31,
1997. Since much of the Company's contracting activity is concentrated toward
the end of each quarter and the Company provides extended payment terms to
certain creditworthy customers, the Company believes that its DSO may be
elevated in future periods.
 
     Net cash used in investing activities was $0.8 million the first quarter
1997, and net cash provided by investing activities was $2.7 million in first
quarter 1998. The 1998 increase was primarily from the sales and maturities of
investments, partially offset by purchases of long and short-term investments
and by the acquisition of 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.
 
                                       11
<PAGE>   12
 
     Net cash provided by financing activities consisted primarily of the
proceeds from the issuance of common stock pursuant to the exercise of options
granted under the Company's Stock Option Plans.
 
     The Company believes that cash generated from operations and its existing
cash, cash equivalents and 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.
 
          CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
 
     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 and in the Company's 1997 annual report on Form 10-K.
 
  Limited Operating History; Limited and Variable Profitability
 
     The Company was founded in August 1990 and did not begin shipping products
until September 1992. The Company has experienced substantial revenue growth in
recent years, but its profitability, as a percentage of net revenues, has varied
widely on a quarterly and annual basis, including incurred net operating losses
in each fiscal year from inception through 1994. Due to the Company's limited
operating history on a significant international scale, the rate of growth of
the Company's business and the variability of operating results in past periods,
there can be no assurance that the Company's revenues will continue at the
current level or will grow, or that the Company will be able to sustain
profitability on a quarterly or annual basis.
 
  Variability of Quarterly Operating Results
 
     The Company's net revenues and operating results can vary, sometimes
substantially, from quarter to quarter. In general, the Company's revenues, and
in particular license fees, are relatively difficult to forecast for a number of
reasons, including (i) the size and timing of individual license transactions,
(ii) the level of price and product competition, (iii) demand for the Company's
products, (iv) the potential for deferral or delay of customer implementations
of the Company's software, (v) the timing of the introduction of new products or
product enhancements by the Company or its competitors, (vi) changes in customer
budgets, (vii) changes in pricing policies by the Company or its competitors,
and (viii) seasonality of technology purchases and other general economic
conditions.
 
     The Company's software products generally are shipped as orders are
received. 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, license fees in any
quarter are substantially dependent on orders booked and shipped in that
quarter. In addition, there has been and continues to be a trend toward larger
enterprise license transactions, which can have sales cycles of up to a year or
more and require approval by a customer's upper management. These transactions
are typically difficult to manage and predict. Failure to close any expected
individually significant transactions could cause the Company's revenues and
operating results in a period to fall short of expectations, and could result in
losses. In addition, since a significant portion of the Company's quarterly
revenues are typically derived from non-recurring sales to a limited number of
customers, revenues in any one quarter are not indicative of revenues in any
future period.
 
     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
 
                                       12
<PAGE>   13
 
canceled, which could have a material adverse affect on the Company's business,
operating results and financial condition.
 
     The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer buying patterns. In recent
years, for example, the Company has generally had 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.
 
     The foregoing factors make estimating quarterly revenue and operating
results prior to the end of a quarter uncertain. 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. The Company plans to increase expenditures to fund
continued build-up and expansion of international operations, a larger worldwide
direct and indirect sales and marketing staff, development of new distribution
and resale channels, greater levels of research and development, and broader
customer service and support capability, although annual expenditures will
depend upon ongoing results and evolving business needs. To the extent such
expenses precede or are not subsequently followed by increased revenues, the
Company's revenues, operating results and financial condition would be
materially adversely affected. 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.
 
  Continued Volatility of Stock Price
 
     Future announcements concerning the Company or its competitors, quarterly
variations in operating results, announcements of technological innovations, the
introduction of new products or changes in product pricing policies by the
Company or its competitors, proprietary rights or other litigation, changes in
earnings estimates by analysts or other factors could cause the market price of
the Company's common stock to fluctuate substantially, particularly on a
quarterly basis. In addition, stock prices for many technology companies
fluctuate widely for reasons which may be unrelated to operating results of such
companies. These fluctuations, as well as general economic, market and political
conditions such as recessions or military conflicts, may materially and
adversely affect the market price of the Company's common stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
companies. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse affect
on the Company's business, results of operations and financial condition.
 
  Management of Growth
 
     The Company has grown rapidly in the last three years. The growth of the
Company's business and the expansion of the Company's customer base has placed a
significant strain on the Company's management and operations. The Company's
recent growth and expansion has resulted in substantial increases in the number
its employees and the geographic area of its operations. The Company's ability
to support the growth of its operations will be substantially dependent upon
having in place highly trained internal and third party resources to conduct
pre-sales activity, product implementation, training and other customer support
services. To accommodate this growth and the expected expansion of its staff,
the Company's officers and other key employees will be required to improve and
implement a variety of operational and financial systems and procedures, to
expand, train and manage its employee base and to engage and work effectively
with third party implementation providers. There can be no assurance that the
Company will be able to manage its recent or
                                       13
<PAGE>   14
 
any future expansion successfully. Any inability to do so would likely have a
material adverse affect on the Company's business, results of operations 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, Canada, and Singapore. To support the growth of the Company's
international operations, the Company continues to incur significant costs to
build its service and support infrastructure ahead of anticipated revenues.
Operating costs in many countries, including some of those in which the Company
operates, are often higher than in the United States. As a result of this
expansion, the Company must continue to implement and improve its operational
and financial systems and procedures and to expand, train and manage both its
employee base and its relationships with third party implementation providers.
These factors have placed, and are expected to continue to place, a significant
strain on the Company's management and operations. There can be no assurance
that the Company's international operations will continue to be successful or
that the Company will be able to manage effectively the increased level of
international operations. To the extent that the Company is unable to do so in a
timely manner or is unable to manage these activities effectively, the Company's
growth in international revenues, 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.
 
     Furthermore, future increases in the value of the U.S. dollar could make
the Company's products less competitive in foreign markets. As the Company
increases its international operations, it may be materially adversely affected
by fluctuations in currency exchange rates, increases in duty rates, exchange or
price controls or other restrictions on foreign currencies. Additional risks
inherent in the Company's international business activities include, among
others, 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 affect on the
Company's future international sales and, consequently, the Company's results of
operations and financial condition.
 
  Intense Competition
 
     The front office solutions market, including the markets for customer
service, field service and logistics, help desk, quality assurance and sales and
marketing applications, is currently intensely competitive, highly fragmented
and subject to rapid change. The Company believes that the principal competitive
factors affecting the markets for its products include quality, functionality,
performance, breadth of product line, integration of products, frequency of
upgrades and updates, manageability of products, customer support, company
reputation and price. 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 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. Among software companies competing with the Company,
principal competitors include Astea International Inc., Metrix Inc., Scopus
Technology Inc., Siebel Systems, Inc. and The Vantive Corporation, Some of the
Company's current competitors, and many of the Company's potential competitors,
have significantly greater financial, technical, product development, marketing
and other resources than the Company. As a result, they may be able to respond
more quickly to new or emerging
 
                                       14
<PAGE>   15
 
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. As an example, an announcement was made in March 1998
that two of the Company's principal competitors, Scopus Technology Inc. and
Siebel Systems, Inc. intended to merge their operations. 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 these competitors will rapidly acquire
significant market share. Furthermore, 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 or future competitors or that
competitive pressures faced by the Company will not materially adversely affect
its business, operating results and financial condition.
 
     The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as recommendations of its products during the evaluation stage of the
purchase process. Although the Company seeks to maintain close relationships
with these third party implementation providers, many of these third parties
have similar, and often more established, relationships with the Company's
principal competitors. If the Company is unable to develop and maintain
effective, long-term relationships with these third parties, it would adversely
affect the Company's competitive position. Further, there can be no assurance
that these third parties, many of which have significantly greater financial,
marketing and technical resources than the Company, will not in the future
compete directly with the Company or otherwise discontinue their relationship
with or their support of the Company and its products.
 
  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 and subject to significant delays over which the Company has
little or no control.
 
     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 that 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 affect 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 of
Marketing and Vice-President of Customer Service and Support in February 1998,
and Chief Financial Officer in August 1997. Furthermore, in March 1998, the
Company's President and Chief Executive Officer, Dave Stamm, assumed the
position of Chairman of the Board and a new President and Chief Executive
Officer was named, and in April 1998, a new Chief Financial Officer was named.
Additions of new and departures of existing personnel, particularly in key
positions, could have a material adverse affect 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
 
                                       15
<PAGE>   16
 
officers. The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical, sales, financial and managerial
personnel. 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, financial and managerial employees or that
it can attract, assimilate or retain other highly qualified technical, sales,
financial and managerial personnel in the future.
 
  Product Concentration
 
     To date, a significant portion 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 affect 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 ClearSupport 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 markets for customer
service, field service and logistics, quality assurance, help desk, and sales
and marketing applications, is characterized by rapid technological change,
frequent new product introductions, evolving industry standards and rapid
changes in customer requirements. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. While the Company believes that it offers
one of the broadest product lines in the front office solutions market, this
market is continuing to evolve and customer requirements continue to change. 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 affected.
 
     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
 
                                       16
<PAGE>   17
 
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.
 
  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 affects 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 affect upon the Company's business, operating
results and financial condition.
 
  Dependence on Proprietary Technology; Risks of Infringement
 
     The Company's success is heavily dependent upon proprietary software
technology. 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 agreements, if required, may not be available on commercially
reasonable terms or at all, which could have a material adverse affect upon the
Company's business, operating results and 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
                                       17
<PAGE>   18
 
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 affect
upon the Company's business, operating results and financial condition.
 
  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
affect 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.
 
  "YEAR 2000" Issues
 
     The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. Many currently installed
computer systems and software products are coded to accept only two digit
entries in the date code field. These date code fields will need to accept four
digit entries to distinguish 21st century dates from 20th century dates. As a
result, many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements.
 
     The Company utilizes third party equipment and software that may not be
"Year 2000" compliant. Failure of such third party equipment or software to
operate properly with regard to the year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could have
a material adverse affect on the Company's business, operating results and
financial condition. The Company is still assessing the impact the "Year 2000"
issue will have on its products and internal information systems and will take
appropriate corrective actions based on the results of such analysis. Management
has not yet determined the cost related to achieving "Year 2000" compliance.
 
     In addition, the "Year 2000" issue could impact the products that the
Company sells. The Company is utilizing resources to identify, analyze,
reprogram and test the products it sells for the "Year 2000" compliance. It is
currently anticipated that all reprogramming efforts will be completed during
fiscal 1998.
 
  Issues Related to the European Monetary Conversion
 
     The Company is aware of the issues associated with the forthcoming changes
in Europe aimed at forming a European economic and monetary union (the "EMU").
One of the changes resulting from this union will require EMU member states to
irrevocably fix their respective currencies to a new currency, the euro, on
January 1, 1999. On that day, the euro will become a functional legal currency
within these countries. During the next three years, business in the EMU member
states will be conducted in both the existing national currency, such as the
Franc or Deutsche Mark, and the euro. As a result, companies operating in or
conducting business in EMU member states will need to ensure that their
financial and other software systems are capable of processing transactions and
properly handling these currencies, including the euro.
 
     The Company is still assessing the impact the EMU formation will have on
both its internal systems and the products it sells. The Company will take
appropriate corrective actions based on the results of such assessment. The
Company has not yet determined the cost related to addressing this issue and
there can be no
 
                                       18
<PAGE>   19
 
assurance that this issue and its related costs will not have a materially
adverse affect on 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.
 
                                       19
<PAGE>   20
 
                           PART II. OTHER INFORMATION
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
 
     (a) EXHIBITS
 
<TABLE>
<CAPTION>
    NUMBER                             DESCRIPTION
    ------                             -----------
    <S>        <C>
     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(3)    Certificate of Incorporation of the Registrant, as amended
               to date
     3.2       Amended and Restated Bylaws of the Company which is
               incorporated by reference to the 8K 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 Registrant 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 28-Feb-95
    10.7(1)    Master Equipment Lease Agreement by and between Costella
               Kirsch/GATXPartnership No. 1 and the Registrant, dated
               February 18, 1992
    10.8(1)    Master Equipment Lease Agreement by and between Venture
               Leasing Assoc. and the Registrant, dated May 7, 1991
    10.9(1)    Master Equipment Lease Agreement by and between Phoenix
               Leasing Incorporated and the Registrant, dated June 30, 1993
    10.10      Offer Letter dated February 23,1998 between Anthony Zingale
               and Clarify Inc.
    10.11      Stock Option Agreement between Anthony Zingale and Clarify
               Inc.
    27.0       Financial Data Schedule for the quarter ended March 31, 1998
               (included only in the copy of this report filed
               electronically with the Commission)
    27.1       Restated financial data schedules for the interim periods of
               1997 (included only with the copy of this report filed
               electronically with the Commission)
    27.2       Restated financial data schedules for the interim and annual
               periods of 1996 (included only with the copy of this report
               filed electronically with the Commission)
    27.3       Restated financial data schedule for the year ended December
               31, 1995 (included only with the copy of this report filed
               electronically with the Commission)
</TABLE>
 
---------------
(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.
 
                                       20
<PAGE>   21
 
     (b) REPORTS ON FORM 8-K.
 
     No reports on Form 8-K were filed by the Registrant during the first
quarter of March 31, 1998.
 
     (c) EXHIBITS
 
     See (a)(3) above.
 
     (d) FINANCIAL STATEMENT SCHEDULE.
 
     See (a)(2) above.
 
                                       21
<PAGE>   22
 
                                   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: May 11, 1998                        CLARIFY INC.
                                          (Registrant)
 
                                          By:      /s/ JAN A. PRAISNER
 
                                            ------------------------------------
                                            Jan A. Praisner
                                            Vice President and Chief Financial
                                            Officer (Duly Authorized Officer
                                            and Principal Financial Officer)
 
                                       22
<PAGE>   23
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
                                                                             SEQUENTIALLY
    EXHIBIT                                                                    NUMBERED
    NUMBER                       DESCRIPTION OF DOCUMENT                         PAGE
    -------    ------------------------------------------------------------  ------------
    <S>        <C>                                                           <C>
     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(3)    Certificate of Incorporation of the Registrant, as amended
               to date
     3.2       Amended and Restated Bylaws of the Company which is
               incorporated by reference to the 8K 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 Registrant 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 28-Feb-95
    10.7(1)    Master Equipment Lease Agreement by and between Costella
               Kirsch/ GATXPartnership No. 1 and the Registrant, dated
               February 18, 1992
    10.8(1)    Master Equipment Lease Agreement by and between Venture
               Leasing Assoc. and the Registrant, dated May 7, 1991
    10.9(1)    Master Equipment Lease Agreement by and between Phoenix
               Leasing Incorporated and the Registrant, dated June 30, 1993
    10.10      Offer Letter dated February 23,1998 between Anthony Zingale
               and Clarify Inc.
    10.11      Stock Option Agreement between Anthony Zingale and Clarify
               Inc.
    27.0       Financial Data Schedule for the quarter ended March 31, 1998
               (included only in the copy of this report filed
               electronically with the Commission)
    27.1       Restated financial data schedules for the interim periods of
               1997 (included only with the copy of this report filed
               electronically with the Commission)
    27.2       Restated financial data schedules for the interim and annual
               periods of 1996 (included only with the copy of this report
               filed electronically with the Commission)
    27.3       Restated financial data schedule for the year ended December
               31, 1995 (included only with the copy of this report filed
               electronically with the Commission)
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(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.