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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, 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 May 1, 1997 there were 21,054,788  shares of the Registrant's  common
stock outstanding.

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<PAGE>

                                  CLARIFY INC.
                                    FORM 10-Q

                                TABLE OF CONTENTS



PART I.        FINANCIAL INFORMATION                                       PAGE
                                                                           ----

Item 1.        Financial Statements

               Condensed Consolidated Balance Sheets
               At March 31, 1997 and December 31, 1996...................    3

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

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

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

Item 2.        Management's Discussion and Analysis of Financial
               Condition and Results of Operations.......................    7



PART II.       OTHER INFORMATION

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



SIGNATURES
               ..........................................................   18


<PAGE>


PART I.        FINANCIAL INFORMATION.

Item 1.        Financial Statements.
<TABLE>

                                  CLARIFY INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      March 31, 1997 and December 31, 1996
                (in thousands, except per share data; unaudited)
<CAPTION>

                                                                              March 31,    December 31,
                                     ASSETS                                     1997          1996
                                                                            -------------- ------------
<S>                                                                             <C>         <C>     
Current assets:
    Cash and cash equivalents ...............................................   $ 31,441    $ 34,477
    Short-term investments ..................................................      1,495       1,486
    Accounts receivable, net ................................................     20,431      17,977
    Prepaid expenses and other current assets ...............................      1,281       1,601
    Deferred tax ............................................................      3,784       3,784
                                                                                --------    --------
       Total current assets .................................................     58,432      59,325
Property and equipment, net .................................................      8,666       8,470
Long-term investments .......................................................      1,486       1,989
Other noncurrent assets .....................................................      1,057         900
                                                                                --------    --------
       Total assets .........................................................   $ 69,641    $ 70,684
                                                                                ========    ========

                                   LIABILITIES

Current liabilities:
    Accounts payable ........................................................   $  3,366    $  3,920
    Accrued payroll and related accruals ....................................      4,122       4,771
    Other accrued liabilities ...............................................      3,177       2,284
    Unearned revenue ........................................................      9,966      12,764
                                                                                --------    --------
       Total current liabilities ............................................     20,631      23,739
                                                                                --------    --------

                              STOCKHOLDERS' EQUITY

Preferred stock, $.0001 par value:
    Authorized:  5,000 shares;
    Issued and outstanding:  none
Common stock, $.0001 par value:
    Authorized:  25,000 shares;
    Issued and outstanding: 20,761 at March 31, 1997 and
      20,600 at December 31, 1996  ..........................................          2           2
Capital in excess of par value ..............................................     45,684      45,556
Cumulative translation adjustment ...........................................        (94)        (66)
Deferred compensation .......................................................       (100)       (112)
Retained earnings ...........................................................      3,518       1,565
                                                                                --------    --------
       Total stockholders' equity ...........................................     49,010      46,945
                                                                                --------    --------
          Total liabilities and stockholders' equity ........................   $ 69,641    $ 70,684
                                                                                ========    ========
<FN>

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


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


                                                             Three Months Ended
                                                                 March 31,
                                                            -------------------
                                                            1997           1996
                                                            ----           ----

Revenues:
  License fees .....................................       $13,008       $ 5,816
  Services .........................................         6,352         3,138
                                                           -------       -------
     Total revenues ................................        19,360         8,954
                                                           -------       -------

Cost of revenues:
  License fees .....................................           520           183
  Services .........................................         3,977         1,987
                                                           -------       -------
     Total cost of revenues ........................         4,497         2,170
                                                           -------       -------
     Gross margin ..................................        14,863         6,784
                                                           -------       -------

Operating expenses:
  Product development and engineering ..............         3,593         1,878
  Sales and marketing ..............................         7,017         3,447
  General and administrative .......................         1,515           868
                                                           -------       -------
     Total operating expenses ......................        12,125         6,193
                                                           -------       -------
     Operating income ..............................         2,738           591

Interest income, net ...............................           362           384
                                                           -------       -------
   Income before provision for income taxes ........         3,100           975
Provision for income taxes .........................         1,147           107
                                                           -------       -------
           Net income ..............................       $ 1,953       $   868
                                                           =======       =======

Net income per share ...............................       $  0.09       $  0.04
                                                           =======       =======

Shares used in per share computations ..............        22,071        21,485
                                                           =======       =======

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

                                       4
<PAGE>


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


                                                           Three Months Ended
                                                                March 31,
                                                           ------------------
                                                             1997        1996
                                                             ----        ----
Cash flows from operating activities:
   Net income ..........................................   $  1,953    $    868
   Adjustments  to  reconcile  net  income  to
   net cash  provided  by (used  in)
   operating activities:
    Depreciation and amortization ......................        865         304
    Noncash charges (credits), net .....................         (7)         (4)
    Changes in assets and liabilities:
      Accounts receivable ..............................     (2,522)        723
      Prepaid expenses and other current assets ........        405        (209)
      Accounts payable .................................       (529)        334
      Accrued payroll and related accruals .............       (634)        371
      Other accrued liabilities ........................        844         510
      Unearned revenue .................................     (2,779)       (887)
                                                           --------    --------
Net cash provided by (used in) operating activities ....     (2,404)      2,010
                                                           --------    --------
Cash flows from investing activities:
    Purchase of property and equipment .................     (1,097)       (871)
    Purchase of investments ............................     (5,500)       --
    Sales and maturities of investments ................      5,996        --
    Increase in other assets ...........................       (217)         (7)
                                                           --------    --------
Net cash used in investing activities ..................       (818)       (878)
                                                           --------    --------
Cash flows from financing activities:
    Payments of capital lease obligations ..............       --           (36)
    Proceeds from issuance of common stock .............        128           9
    Borrowings under notes payable .....................       --           135
                                                           --------    --------
Net cash provided by financing activities ..............        128         108
                                                           --------    --------
Effect of foreign exchange rate changes on cash ........         58        --
                                                           --------    --------
Net increase (decrease) in cash and cash equivalents ...     (3,036)      1,240
Cash and cash equivalents, beginning of period .........     34,477      31,813
                                                           --------    --------
Cash and cash equivalents, end of period ...............   $ 31,441    $ 33,053
                                                           ========    ========
Supplemental disclosure of cash flow information:
   Cash paid during the period for interest ............   $   --      $      3
                                                           ========    ========
   Cash paid during the period for income taxes ........   $     28    $     71
                                                           ========    ========
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.

                                       5
<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 as included in its 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 effected 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.        Subsequent Event

On May 9, 1997 the  Compensation  Committee of the Company's  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 this date), provided that such employees made the election to convert by this
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.


                                       6
<PAGE>

                                  CLARIFY INC.

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  those set forth  below,
under  "Overview,"  "Risk Factors That May Affect Future Results," and elsewhere
in this report.

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.

    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,  the continued  overall growth in the front office
software  industry  and the  Company's  ability to  integrate a recently  merged
company.  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 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  have tended to implement  the products on a large scale and must also
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 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.

                                       7
<PAGE>
Results of Operations

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

                                                              Three Months Ended
                                                                  March 31,
                                                              ------------------
                                                              1997         1996
                                                              ----         ----
Statement of Operations Data:
    Revenues:
      License fees ...................................        67.2%        65.0%
      Services .......................................        32.8         35.0
                                                             -----        -----
         Total revenues ..............................       100.0        100.0
                                                             -----        -----
    Cost of revenues:
      License fees ...................................         2.7          2.0
      Services .......................................        20.5         22.2
                                                             -----        -----
         Total cost of revenues ......................        23.2         24.2
                                                             -----        -----
         Gross margin ................................        76.8         75.8
                                                             -----        -----
    Operating expenses:
      Product development and engineering ............        18.6         21.0
      Sales and marketing ............................        36.2         38.5
      General and administrative .....................         7.8          9.7
                                                             -----        -----
         Total operating expenses ....................        62.6         69.2
                                                             -----        -----
         Operating income ............................        14.2          6.6

    Interest income ..................................         1.8          4.3
                                                             -----        -----
       Income before provision
                for income taxes .....................        16.0         10.9
    Provision for income taxes .......................         5.9          1.2
                                                             -----        -----
               Net income ............................        10.1%         9.7%
                                                             =====        =====
  

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," dated December 12, 1991, issued by the American
Institute  of Certified  Public  Accountants.  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 revenues after 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
recognized  upon shipment  providing 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.

    Total  revenues  increased from $9.0 million in the first quarter of 1996 to
$19.4 million in the first quarter of 1997,  representing an increase of 116% as
a result of growth in both  license  fees and  services  revenues.  The  Company
anticipates  little,  if any, revenue growth for the second quarter of 1997 over
the first quarter of 1997 as a result of slower than  expected  expansion of the
direct  sales  force.  Accordingly,  the  Company  does  not  believe  that  the
percentage increases in revenues achieved in prior periods should be anticipated
in future periods.

                                       8
<PAGE>

    License Fees.  License fee revenues increased from $5.8 million in the first
quarter of 1996 to $13.0 million in the first quarter of 1997,  representing  an
increase of 124%. The increase is primarily due to increased  market  acceptance
of the  Company's  existing  products,  continuing  enhancement  and  increasing
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.  Two  customers  accounted  for 14% and 10%,
respectively, of license fee revenues in the first quarter of 1997.

    Services.  Revenues from services  increased  from $3.1 million in the first
quarter of 1996 to $6.4 million in the first  quarter of 1997,  representing  an
increase  of 102%.  The  increase  in dollar  amount  was due  primarily  to the
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 $0.2 million in
the  first  quarter  of 1996 to $0.5  million  in the  first  quarter  of  1997,
representing  an increase of 184%.  Cost of license fees represents 3% and 4% of
license fee revenues for the first quarters of 1996 and 1997, 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   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.  The Company expects the cost of license
fees as a  percentage  of license fee revenue to continue to fluctuate in future
periods.

    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 $2.0 million for the
first  quarter  of  1996  to  $4.0  million  for  the  first  quarter  of  1997,
representing  an increase of 100%. The increase is 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 and costs related to
the increased use of independent  consultants for systems integrations.  Cost of
services  represents  63% of service  revenues in the both the first  quarter of
1996 and the first  quarter  of 1997.  The  Company  expects  to make  continued
investments  in its service  organization  in  anticipation  of  supporting  the
increasing  number  of users in the  customer  installed  base  and,  therefore,
currently 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  $1.9  million  in the first  quarter  of 1996 to $3.6
million  in the  first  quarter  of  1997,  representing  21% and  19% of  total
revenues,  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 dollar amount was primarily attributable to an increase in personnel
and related overhead costs. The decrease in product  development and engineering
expenses as a percentage  of total  revenues was  primarily due to the growth in
revenues.  The  Company  currently  anticipates  that  product  development  and
engineering  expenses may 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 $3.4
million  in the first  quarter of 1996 to $7.0  million in the first  quarter of
1997,  representing  39% and 36% 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  decrease  in  sales  and  marketing  expenses  as a
percentage of total  revenues was  primarily due to the growth in revenues.  The
Company

                                       9
<PAGE>

plans to continue to invest  substantial  resources in  expanding  its sales and
marketing activities and therefore, sales and marketing expenses are expected to
increase in absolute dollars in future periods.

    General and  Administrative.  General and administrative  expenses increased
from $0.9  million  in the first  quarter  of 1996 to $1.5  million in the first
quarter  of  1997,  representing  10% 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 operations.

    Interest Income (Expense),  net. Net interest income decreased from $384,000
in the first  quarter of 1996 to  $362,000  in the first  quarter  of 1997.  The
decrease is primarily due to lower excess cash balances in 1997 partially offset
by a decrease in interest  expense due to the  retirement  of capital  equipment
leases during 1996.

    Provision for Income Taxes.  Income taxes were provided at a rate of 11% for
the first  three  months of 1996 as compared to 37% for the same period of 1997.
The Company's effective income tax rate increased to 37% in the first quarter of
1997  due  to  federal  and  state  operating  loss  carryforwards  having  been
recognized in fiscal year 1996.  The Company  recognized  deferred tax assets in
accordance  with SFAS No. 109,  "Accounting  for Income  Taxes," of $800,000 and
$2,984,00 in the second and fourth quarters of 1996, respectively,  amounting to
total deferred income tax assets of $3,784,000 at March 31, 1997.

Recent Accounting Pronouncements

    During  February  1997,  the  Financial  Accounting  Standards  Board 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 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.

Liquidity and Capital Resources

    The  Company's  operating  activities  used net cash of $2.4  million in the
first  quarter of 1997  compared to $2.0 million of net cash being  generated in
the first quarter of 1996. The increase in cash used in operating  activities in
the first quarter of 1997 is attributed  principally to the decrease in unearned
revenue,  accounts  payable,  and accrued  payroll and related  accruals and the
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 from a higher
percentage of orders being received in the last month of the quarter as compared
to prior  quarters.  The  decrease  in  unearned  revenue was due to the Company
installing orders and fulfilling certain post-installation  obligations relating
to orders  deferred at December  31, 1996,  as well as a large  portion of first
quarter orders being shipped and installed within the first quarter.

    Investing  activities  used net cash of $0.8 million in the first quarter of
1997 as compared to $0.9 million in the first quarter of 1996. Included in these
totals is net cash provided and used by the purchase and sale of investments and
purchases  of  property  and   equipment.   Purchases  of  short  and  long-term
investments  used $5.0 million and $0.5 million,  respectively,  of cash and the
sale of short and long-term investments generated $5.0 million and $1.0 million,
respectively,  of cash during the first quarter of 1997. There were no purchases
or sales of  investments  in the first  quarter of 1996.  The Company  used $1.1
million  and $0.9  million of cash  during  the first  quarter 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  $0.1  million  both in the  first
quarter of 1997 and the first  quarter of 1996.  Cash  provided  from  financing
activities in the first quarter of 1997  consisted of proceeds from the issuance
of common stock  pursuant to the exercise of options  granted under the 1991 and
1995 Stock Option Plans. Net cash provided from financing  activities during the
first  quarter  of 1996  consisted  principally  of  borrowings  under a line of
credit.

    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

                                       10
<PAGE>

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 any  necessary  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.

    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 ten  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.

    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 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 and
implementation  of the  Company's  products.  The Company's  license  agreements
typically  provide  that a majority of payment is due upon  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  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.  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 also 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

                                       11
<PAGE>

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,  internal 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, 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.

                                       12
<PAGE>

    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.

    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 or upgrades or  enhancements  are
delayed,  including  the next version of  ClearSupport  or if any  potential new
products or  upgrades  or  enhancements  experience  quality  problems or do not
achieve  market  acceptance,  the  Company's  business,  operating  results  and
financial condition will be materially adversely affected.

                                       13
<PAGE>

    Expansion of Distribution  Channels.  The Company has historically  sold its
products  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.

    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 in 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 

                                       14
<PAGE>

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  effect upon the  Company's  business,  operating
results and financial condition.

    Recent  Acquisition;  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 recently
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 223  employees  at March 31, 1996 to 406
employees  at March 31,  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

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<PAGE>

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.




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<PAGE>

PART II.       OTHER INFORMATION.

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

               (a)  Exhibits

                    11.1         Computation of Earnings Per Common Share
                    27.0         Commercial and Industrial Companies Article 5 
                                 of Regulation S-X

               (b)  Reports on Form 8-K

                    No Reports on Form 8-K were  filed  during the three  months
                    ended March 31, 1997.


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<PAGE>


SIGNATURES



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.


Date:  May 12, 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)



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