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

                                  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 September 30, 1997

                                       OR

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


                         Commission file number 0-26776

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


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


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

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

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

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

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

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

         Indicate by check 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 October 31, 1997 there were 21,309,044 shares of the Registrant's
$0.0001 par value Common Stock outstanding.

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<PAGE>

                                  CLARIFY INC.
                                    FORM 10-Q
<TABLE>

                                TABLE OF CONTENTS

<CAPTION>
PART I.        FINANCIAL INFORMATION                                                                             PAGE
                                                                                                                 ----
<S>            <C>                                                                                                <C>
Item 1.        Condensed Consolidated Financial Statements:

               Condensed Consolidated Balance Sheets as
               of September 30, 1997 and December 31, 1996................................................        2

               Condensed Consolidated Statements of Operations for the
               three and nine months ended September 30, 1997 and 1996....................................        3

               Condensed Consolidated Statements of Cash Flows for the
               nine months ended September 30, 1997 and 1996..............................................        4

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

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


PART II.       OTHER INFORMATION

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



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

</TABLE>

<PAGE>

PART I.        FINANCIAL INFORMATION.

Item 1.        Condensed Consolidated Financial Statements.

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

                                                     September 30,  December 31,
                                                        1997           1996
                                                     -------------  ------------

                                     ASSETS

Current assets:
    Cash and cash equivalents .......................  $ 20,537     $ 34,477
    Short-term investments ..........................    12,492        1,486
    Accounts receivable, net ........................    22,961       17,977
    Prepaid expenses and other current assets .......     2,694        1,601
    Deferred income tax assets ......................     3,784        3,784
                                                       --------     --------
       Total current assets .........................    62,468       59,325
Property and equipment, net .........................     9,438        8,470
Long-term investments ...............................     5,186        1,989
Other assets ........................................       770          900
                                                       --------     --------
          Total assets ..............................  $ 77,862     $ 70,684
                                                       ========     ========
                                                                 

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable ................................  $  5,584     $  3,920
    Accrued payroll and related accruals ............     6,501        4,771
    Other accrued liabilities .......................     5,011        2,284
    Unearned revenue ................................     8,595       12,764
                                                       --------     --------
       Total current liabilities ....................    25,691       23,739
                                                       --------     --------
                                                                  
Stockholders' equity:                                             
    Common stock ....................................         2            2
    Additional paid-in-capital ......................    47,455       45,556
    Cumulative translation adjustment ...............       (38)         (66)
    Deferred compensation ...........................       (77)        (112)
    Retained earnings ...............................     4,829        1,565
                                                       --------     --------
       Total stockholders' equity ...................    52,171       46,945
                                                       --------     --------
          Total liabilities and
             stockholders' equity ...................  $ 77,862     $ 70,684
                                                       ========     ========
                                                                 
         The accompanying notes are an integral part of these condensed
                       consolidated financial statements.

                                       2
<PAGE>
<TABLE>
                                  CLARIFY INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except per share data; unaudited)

<CAPTION>
                                                Three Months Ended  Nine Months Ended
                                                  September 30,       September 30,
                                                -----------------   -----------------
                                                 1997      1996      1997      1996
                                                -------   -------   -------   -------
<S>                                             <C>       <C>       <C>       <C>    
Revenues:
  License fees ...............................  $13,946   $12,168   $39,400   $25,692
  Services ...................................    7,945     4,833    21,280    11,400
                                                -------   -------   -------   -------
     Total revenues ..........................   21,891    17,001    60,680    37,092
                                                -------   -------   -------   -------

Cost of revenues:
  License fees ...............................      585       425     1,596       914
  Services ...................................    4,753     2,973    12,884     7,102
                                                -------   -------   -------   -------
    Total cost of revenues ...................    5,338     3,398    14,480     8,016
                                                -------   -------   -------   -------
     Gross profit ............................   16,553    13,603    46,200    29,076
                                                -------   -------   -------   -------

Operating expenses:
  Product development and engineering ........    4,434     2,957    11,807     6,986
  Sales and marketing ........................    9,811     5,770    24,977    13,450
  General and administrative .................    2,203     1,304     5,286     3,176
  Merger costs ...............................     --        --        --       1,061
                                                -------   -------   -------   -------
     Total operating expenses ................   16,448    10,031    42,070    24,673
                                                -------   -------   -------   -------
     Operating income ........................      105     3,572     4,130     4,403

Interest and other income, net ...............      360       389     1,052     1,110
                                                -------   -------   -------   -------
         Income before provision
            for income taxes .................      465     3,961     5,182     5,513
Provision for income taxes ...................      172       792     1,918       214
                                                -------   -------   -------   -------
   Net income ................................  $   293   $ 3,169   $ 3,264   $ 5,299
                                                =======   =======   =======   =======

Net income per share .........................  $  0.01   $  0.15   $  0.15   $  0.25
                                                =======   =======   =======   =======

Shares used to compute net income per share ..   22,269    21,720    21,968    21,355
                                                =======   =======   =======   =======

<FN>

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

                                       3
<PAGE>
<TABLE>
                                  CLARIFY INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands; unaudited)

<CAPTION>
                                                                                 Nine Months Ended
                                                                                   September 30,
                                                                               --------------------
                                                                                 1997        1996
                                                                               --------    --------
<S>                                                                            <C>         <C>     
Cash flows from operating activities:
   Net income ..............................................................   $  3,264    $  5,299
   Adjustments  to  reconcile  net  income  to net cash  provided  by
   operating activities:
    Depreciation and amortization ..........................................      2,836       1,124
    Deferred income taxes ..................................................       --          (801)
    Noncash charges, net ...................................................        338         649
    Changes in operating assets and liabilities:
      Accounts receivable ..................................................     (5,378)     (5,931)
      Prepaid expenses and other current assets ............................     (1,019)     (1,305)
      Accounts payable .....................................................      1,688         163
      Accrued payroll and related accruals .................................      1,750       2,256
      Other accrued liabilities ............................................      2,564       2,698
      Unearned revenue .....................................................     (4,024)      5,638
                                                                               --------    --------
Net cash provided by operating activities ..................................      2,019       9,790
                                                                               --------    --------

Cash flows from investing activities:
    Purchase of property and equipment .....................................     (4,078)     (3,595)
    Proceeds from disposal of property and equipment .......................        267        --
    Purchase of investments ................................................    (22,695)     (2,987)
    Proceeds from sale and maturity of investments .........................      8,492         993
    Increase (decrease) in other assets ....................................         84      (2,342)
                                                                               --------    --------
Net cash used in investing activities ......................................    (17,930)     (7,931)
                                                                               --------    --------

Cash flows from financing activities:
    Payments of capital lease obligations ..................................       --           (81)
    Proceeds from issuance of common stock .................................      1,899         779
    Payments of notes payable ..............................................       --          (215)
                                                                               --------    --------
Net cash provided by financing activities ..................................      1,899         483
                                                                               --------    --------

Net increase (decrease) in cash and cash equivalents .......................    (14,012)      2,342
Effect of foreign exchange rate changes on cash ............................         72        --
Cash and cash equivalents, beginning of period .............................     34,477      31,813
                                                                               --------    --------
Cash and cash equivalents, end of period ...................................   $ 20,537    $ 34,155
                                                                               ========    ========

Supplemental disclosure of cash flow information:
   Cash paid during the period for interest ................................   $      1    $      9
                                                                               ========    ========
   Cash paid during the period for income taxes ............................   $     94    $    250
                                                                               ========    ========

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

<FN>
         The accompanying notes are an integral part of these condensed
                       consolidated financial statements.
</FN>
</TABLE>
                                       4
<PAGE>

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

Note 1.        Basis of Presentation

The  unaudited  condensed  consolidated  financial  statements  included  herein
reflect all adjustments,  consisting only of normal recurring adjustments, which
in the opinion of  management  are  necessary to fairly  state the  consolidated
financial  position,  results of operations,  and cash flows of Clarify Inc. and
its subsidiaries  ("Clarify" or the "Company") for the periods presented.  These
financial  statements  should be read in conjunction with the Company's  audited
consolidated  financial  statements  as  included in the  Company's  1996 Annual
Report on Form 10-K as filed with the  Securities  and  Exchange  Commission  on
March 31, 1997. The  consolidated  results of operations for the interim periods
presented are not necessarily indicative of the results that may be expected for
any future  interim  periods or for the entire  fiscal year ended  December  31,
1997.  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  using the  weighted  average  number of common
stock and  common  equivalent  shares  outstanding  during  the  period.  Common
equivalent shares consist of stock options  calculated using the treasury method
and are excluded from the  computation  if their effect is  antidilutive.  Fully
diluted per share amounts are not presented, as the effect is not material.

Note 3.        Stock Option Repricing Program

On May 9, 1997 the Compensation  Committee of the Board of Directors  authorized
employees  the right to convert  certain  outstanding  stock  options for option
grants with an exercise  price of $13.50 per share (the fair market value on May
9, 1997),  provided  that such  employees  made the  election to convert by that
date. The converted  option grants vest on a date that is seven months after the
date such  installment  would have vested had the option not been amended by the
employee exercising this conversion right. Approximately 1,009,000 stock options
were repriced pursuant to this program.

Note 4.        Recent Accounting Pronouncements

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

In June 1997,  the FASB  issued  Statement  No.  130,  "Reporting  Comprehensive
Income,"   (SFAS  130)  which   establishes   requirements   for  disclosure  of
comprehensive  income and becomes  effective for the Company for the year ending
December 31, 1998.  Comprehensive income includes such items as foreign currency
translation  adjustments  that are currently being presented by the Company as a
component   of   stockholders'   equity.   The  Company  does  not  expect  this
pronouncement to materially impact the Company's results of operations.

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

                                       5
<PAGE>

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

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

Overview

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

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

     The Company's quarterly operating results have varied  significantly in the
past and may vary  significantly in the future. To achieve its quarterly revenue
objectives,  the Company is dependent upon obtaining product orders in any given
quarter for shipment and installation in that quarter.  Furthermore, the Company
has often recognized a substantial  portion of its revenues in the last month of
a  quarter,  with a  concentration  of these  revenues  in the last half of that
month.  As a result,  license fee  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  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.

     In addition,  significant  portions of the Company's revenues are typically
derived from non-recurring sales to a limited number of customers.  Accordingly,
revenues in any one quarter are not indicative of revenues in any future period.

     Due to the foregoing  factors,  quarterly revenue and operating results are
not predictable with any significant  degree of accuracy.  The Company's expense
levels are based,  in  significant  part,  on the Company's  expectations  as to
future revenues and are therefore relatively fixed in the short term. If revenue
levels are below  expectations,  the Company's  business,  operating results and
financial condition are likely to be adversely affected.  Net income may also be

                                       6
<PAGE>

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.

Results of Operations
<TABLE>

    The following table sets forth,  as a percentage of total revenues,  certain
condensed consolidated statement of operations data for the periods indicated:
<CAPTION>
                                                Three Months Ended   Nine Months Ended
                                                  September 30,        September 30,
                                                ------------------  -------------------
                                                 1997     1996          1997    1996
                                                 -----    -----        -----    -----
<S>                                               <C>      <C>          <C>      <C>    
Revenues:
  License fees .............................      63.7%    71.6%        64.9%    69.3%  
  Services .................................      36.3     28.4         35.1     30.7
                                                 -----    -----        -----    -----
     Total revenues ........................     100.0    100.0        100.0    100.0
                                                 -----    -----        -----    -----
Cost of revenues:                                                     
  License fees .............................       2.7      2.5          2.6      2.5
  Services .................................      21.7     17.5         21.3     19.1
                                                 -----    -----        -----    -----
     Total cost of revenues ................      24.4     20.0         23.9     21.6
                                                 -----    -----        -----    -----
     Gross profit ..........................      75.6     80.0         76.1     78.4
                                                 -----    -----        -----    -----

Operating expenses:                                                   
  Product development and engineering ......      20.2     17.4         19.4     18.8
  Sales and marketing ......................      44.8     33.9         41.2     36.3
  General and administrative ...............      10.1      7.7          8.7      8.6
  Merger costs .............................       --       --           --       2.8
                                                 -----    -----        -----    -----
     Total operating expenses ..............      75.1     59.0         69.3     66.5
                                                 -----    -----        -----    -----
     Operating income ......................       0.5     21.0          6.8     11.9
                                                                      
Interest income, net .......................       1.6      2.3          1.7      3.0
                                                 -----    -----        -----    -----
        Income before provision                                      
            for income taxes ...............       2.1     23.3          8.5     14.9
Provision for income taxes .................       0.8      4.7          3.1      0.6
                                                 -----    -----        -----    -----
           Net income ......................       1.3%    18.6%         5.4%    14.3%
                                                 =====    =====        =====    =====
</TABLE>
                                                                  
Revenues

    Total  revenues  increased  29% to $21.9  million for the three months ended
September 30, 1997 from $17.0  million for the three months ended  September 30,
1996, and increased 64% to $60.7 million for the nine months ended September 30,
1997 from $37.1  million for the nine  months  ended  September  30,  1996.  The
Company's   revenues  are  derived   primarily  from  license  fees,  fees  from
sublicensing  third-party software products and charges for services,  including
maintenance, consulting and training. For all periods presented, the Company has
recognized  revenue in  accordance  with  Statement  of Position  91-1  entitled
"Software  Revenue  Recognition."  License fee revenues consist of revenues from
initial  licenses  for the  Company's  products,  sales of  licenses to existing
customers for additional users of the Company's products,  product documentation
and fees from sublicensing  third-party software products. The Company generally
recognizes  initial  license fee  revenues  upon  delivery and  installation  of
software  products  if  there  are no  remaining  significant  post-installation
obligations  and if collection  is probable.  If  significant  post-installation
obligations  exist or if a product is subject to customer  acceptance,  revenues
are deferred until no  significant  obligations  remain or until  acceptance has
occurred.  Sales of additional  licenses to the Company's existing customers are
generally 

                                       7
<PAGE>

recognized  upon  shipment  provided no  significant  post-shipment  obligations
exist.  Service  revenues  consist  primarily  of  maintenance,  consulting  and
training revenues.  Maintenance revenues are recognized ratably over the term of
the support period,  which is typically  twelve months.  Consulting and training
revenues  generally are recognized  when the services are performed.  Consulting
services   consist   primarily  of   implementation   services  related  to  the
installation  of  the  Company's   software  and  do  not  include   significant
customization to or development of the underlying software code.

     License  Fees.  License fee revenues  increased by 15% to $13.9 million for
the three  months  ended  September  30,  1997 from $12.2  million for the three
months ended September 30, 1996, and increased 53% to $39.4 million for the nine
months  ended  September  30, 1997 from $25.7  million for the nine months ended
September  30,  1996.  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 Company's  direct sales
force and  marketing  organization.  One customer  accounted  for a  significant
portion of total  license  fee  revenue  recognized  in the three  months  ended
September 30, 1997.  Although the Company's  customer base has grown as revenues
have  increased,  on a quarterly  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 quarter 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 by 64% to $7.9 million for the
three  months  ended  September  30, 1997 from $4.8 million for the three months
ended September 30, 1996, and increased 87% to $21.3 million for the nine months
ended  September 30, 1997 from $11.4 million for the nine months ended September
30, 1996.  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
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 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.  Cost of license fees increased by 38% to $0.6
million for the three months ended  September 30, 1997 from $0.4 million for the
three months ended September 30, 1996, and increased 75% to $1.6 million for the
nine months ended September 30, 1997 from $0.9 million for the nine months ended
September 30, 1996, representing 4% and 3% of license fee revenues for the three
months ended  September 30, 1997 and 1996,  respectively,  and 4% of license fee
revenues for the nine months ended  September 30, 1997 and 1996. Cost of license
fees as a percentage of license fee revenues may fluctuate from period to period
due to  increased  or  decreased  sales of royalty  bearing  software  products.
Although  cost of license fees as a percentage  of license fee revenues has been
relatively  consistent,  the  Company  expects  the  cost of  license  fees as a
percentage of license fee revenue to fluctuate in future  periods as a result of
increases and decreases in sales of royalty bearing  products and as the Company
enters into additional agreements to sublicense third-party software.

     Cost of Services.  Cost of services consists primarily of costs incurred in
providing telephone support,  consulting services,  shipment of product upgrades
and training to customers. Cost of services increased by 60% to $4.8 million for
the three months ended September 30, 1997 from $3.0 million for the three months
ended September 30, 1996, and increased 81% to $12.9 million for the nine months
ended  September 30, 1997 from $7.1 million for the nine months ended  September
30,  1996,  representing  60% and 62% of service  revenues  for the three months
ended  September  30,  1997 and 1996,  respectively,  and 61% and 62% of service
revenues for the nine months ended  September  30, 1997 and 1996,  respectively.
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 cost of services as a percentage
of service revenues may vary between periods due to the mix of services provided
by the Company.  Generally the margins on maintenance  are greater than those on
training and consulting.  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.

                                        8
<PAGE>

Operating Expenses

     Product  Development and Engineering.  Product  development and engineering
expenses  increased  $1.5 million in the three months ended  September  30, 1997
over the three months ended  September 30, 1996,  and increased  $4.8 million in
the nine months ended  September  30, 1997 over the nine months ended  September
30, 1996.  This represents an increase to 20% from 17% of total revenues for the
three months ended September 30, 1997 and 1996,  respectively,  and 19% of total
revenues  for the  nine  months  ended  September  30,  1997 and  1996.  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 $4.0 million in
the three months ended  September 30, 1997 over the three months ended September
30, 1996,  and increased  $11.5  million in the nine months ended  September 30,
1997 over the nine months ended  September 30, 1996. This represents an increase
to 45% from 34% of total revenues for the three months ended  September 30, 1997
and 1996,  respectively,  and an increase to 41% from 36% of total  revenues for
the nine  months  ended  September  30, 1997 and 1996,  respectively.  Sales and
marketing  expenses consist primarily of employee  salaries,  sales commissions,
travel and promotional expenses. The increase in dollar amount was primarily due
to the expansion of the Company's  worldwide  sales and marketing  organization,
higher  sales  commissions  associated  with  increased  revenue  and  increased
marketing  activities.  The  increase  in  sales  and  marketing  expenses  as a
percentage  of total  revenues  for the three months  ended  September  30, 1997
compared to the three months ended  September 30, 1996 reflects the  significant
investment  that the Company  made  during 1997 to expand both its direct  sales
force and other distribution channels. The Company intends to continue to invest
substantial  resources in expanding  its direct sales force,  both  domestic and
international,   expanding  its  other  distribution  channels,  and  conducting
marketing programs to support existing and new product  offerings.  Accordingly,
sales and  marketing  expenses are  expected to increase in absolute  dollars in
future periods.

     General and Administrative.  General and administrative  expenses increased
$0.9 million in the three months ended  September 30, 1997 over the three months
ended  September 30, 1996,  and increased  $2.1 million in the nine months ended
September  30,  1997  over  the nine  months  ended  September  30,  1996.  This
represents  an increase to 10% from 8% of total  revenues  for the three  months
ended  September 30, 1997 and 1996,  respectively,  and 9% of total revenues for
the nine months ended  September 30, 1997 and 1996.  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, related overhead costs and increases to the provision
for doubtful accounts.  The Company currently expects general and administrative
expenses to increase  in absolute  dollars in the future as the Company  expands
its infrastructure.

     Merger  Costs.  During the three months  ended June 30,  1996,  the Company
incurred $1.1 million of one-time merger related expenses in connection with the
acquisition of Metropolis Software, Inc.

     Operating Income.  Operating income decreased by 97% to $105,000,  or 1% of
total revenue,  for the three months ended September 30, 1997 from $3.6 million,
or 21% of total  revenue,  for the three months ended  September  30, 1996,  and
decreased 6% to $4.1 million, or 7% of total revenue,  for the nine months ended
September  30, 1997 from $4.4  million,  or 12% of total  revenue,  for the nine
months ended  September  30, 1996.  During the three months ended  September 30,
1997, the Company continued to make increased  investments in resources required
to address the anticipated opportunity in the front office software marketplace.
Most notable were significant investments made in expanding the Company's direct
sales force. As a result,  operating  expenses,  especially  sales and marketing
expenses,  have  increased  at a more  rapid  rate than the  growth in  revenue,
thereby  negatively  affecting  operating  income. As new sales personnel become
more  effective in subsequent  quarters,  the Company  anticipates  that revenue
growth will exceed the growth in operating expenses, resulting in an increase in
the Company's operating income in subsequent periods.

                                       9
<PAGE>

     Interest and Other Income,  net.  Interest and other income,  net, consists
primarily of interest income earned on the Company's cash and cash  equivalents,
short and long-term  investments,  and other items including  interest  expense.
Interest  and other  income,  net,  decreased 7% to $360,000 in the three months
ended  September 30, 1997 from $389,000 for the three months ended September 30,
1996 and decreased 5% to $1,052,000 for the nine months ended September 30, 1997
from  $1,110,000  for the nine months ended  September 30, 1996. The decrease is
primarily due to lower excess cash balances in 1997.

     Provision  for Income Taxes.  The  provision for income taxes  reflects the
estimated  annualized effective tax rate of 37% applied to earnings for the nine
months ended  September 30, 1997 and 18% applied to earnings for the nine months
ended  September 30, 1996 offset by a benefit  resulting from the recognition of
deferred  income  tax  assets of  $800,000  in  accordance  with  SFAS No.  109,
"Accounting for Income Taxes." The Company's effective tax rate increased to 37%
in 1997 due to  federal  and state  operating  loss  carryforwards  having  been
recognized in 1996.

Recent Accounting Pronouncements

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

     In June 1997, the FASB issued Statement No. 130,  "Reporting  Comprehensive
Income,"   (SFAS  130)  which   establishes   requirements   for  disclosure  of
comprehensive  income and becomes  effective for the Company for the year ending
December 31, 1998.  Comprehensive income includes such items as foreign currency
translation  adjustments  that are currently being presented by the Company as a
component   of   stockholders'   equity.   The  Company  does  not  expect  this
pronouncement to materially impact the Company's results of operations.

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

Liquidity and Capital Resources

     The Company's cash, cash equivalents and investments  totaled $38.2 million
at September 30, 1997 representing 49% 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 SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities" such investments are classified as "available for sale".

     Net cash provided by operating activities was $2.0 million and $9.8 million
for the nine  months  ended  September  30,  1997 and  1996,  respectively.  The
decrease in cash  provided by  operating  activities  for the nine months  ended
September  30, 1997 is  attributed  principally  to a decrease in net income and
unearned  revenue and an increase in accounts  receivable,  prepaid expenses and
other  current  assets.  These changes were  partially  offset by an increase in
accounts  payable,  accrued  payroll  and  related  accruals  and other  accrued
liabilities.  The  increase in accounts  receivable  corresponds  to the overall
growth in  revenue.  The  decrease  in  unearned  revenue was due to the Company
installing  and  fulfilling  certain  post-installation  obligations  for orders
deferred at December  31,  1996,  as well as a large  portion of product  orders
received in the nine months ended September 30, 1997 being shipped and installed
within that period.

     Investing  activities  used net cash of $17.9  million  in the nine  months
ended  September  30,  1997  compared to $7.9  million in the nine months  ended
September 30, 1996.  Purchases of short and long-term  investments  used cash of
$18.5 million and $4.2 million, respectively, and the sale and maturity of short
and long-term investments generated cash of $7.5 million

                                       10
<PAGE>

     and $1.0 million, respectively,  during the nine months ended September 30,
1997.  During the nine months ended September 30, 1996,  purchases of short-term
investments  used net cash of $3.0  million  while  the  sale  and  maturity  of
short-term investments generated net cash of $1.0 million. The Company used $4.1
million and $3.6 million of cash during the nine months ended September 30, 1997
and 1996,  respectively,  to  purchase  property  and  equipment  to support its
increased headcount.  The Company expects that the rate of purchases of property
and equipment  will remain  constant or increase as the Company's  employee base
grows.

     Financing activities generated cash of $1.9 million and $0.5 million in the
nine months ended September 30, 1997 and 1996, respectively.  Cash provided from
financing  activities  during the nine months ended  September 30, 1997 and 1996
consisted of proceeds from the issuance of common stock pursuant to the Employee
Stock  Purchase  Plan and the exercise of options  granted  under the  Company's
Stock Option Plans.

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

Risk Factors That May Affect Future Results

     The Company  operates in a rapidly  changing  environment  that  involves a
number of risks, some of which are beyond the Company's  control.  The following
discussion  highlights some of these risks. Other risks are presented  elsewhere
in this report and in the Company's 1996 annual report on Form 10-K.

     Fluctuations  in  Quarterly  Results.  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  of the Company's  products.  In the past,  the
Company has experienced delays in recognizing revenue with respect to particular
orders. There can be no assurance that the Company will not experience delays in
recognizing  revenue in the future,  particularly if the Company receives orders
for  large,  complex  installations.  Product  revenues  are also  difficult  to
forecast  because  the  market for front  office  software  products  is rapidly
evolving,  and the Company's sales cycle, from initial trial to purchase and the
provision of support services,  varies  substantially from customer to customer.
See  "Risk   Factors  That  May  Affect   Future   Results--Lengthy   Sales  and
Implementation Cycles."

     To achieve its quarterly revenue objectives,  the Company is dependent upon
obtaining  product orders in any given quarter for shipment and  installation in
that  quarter.  Furthermore,  the Company  has often  recognized  a  substantial
portion of its 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 fee 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  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.

                                       11
<PAGE>

     In addition,  significant  portions of the Company's revenues are typically
derived from non-recurring sales to a limited number of customers.  Accordingly,
revenues in any one quarter are not indicative of revenues in any future period.

     Due to the foregoing  factors,  quarterly revenue and operating results are
not predictable with any significant  degree of accuracy.  The Company's expense
levels are based,  in  significant  part,  on the Company's  expectations  as to
future revenues and are therefore relatively fixed in the short term. If revenue
levels are below  expectations,  the Company's  business,  operating results and
financial  condition  are  likely to be  adversely  affected.  Net income may be
disproportionately  adversely  affected  by a reduction  in  revenues  because a
proportionately  smaller  amount  of the  Company's  expenses  varies  with  its
revenues. As a result, the Company believes that period-to-period comparisons of
its  results of  operations  are not  necessarily  meaningful  and should not be
relied upon as indications of future performance. There can be no assurance that
the Company will be able to achieve or maintain  profitability on a quarterly or
annual basis in the future. Due to all the foregoing factors,  it is likely that
in some  future  quarter  the  Company's  operating  results  will be below  the
expectations of public market analysts and investors.  In such event,  the price
of the Company's common stock would likely be materially adversely affected.

     Limited Operating  History;  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,  the Company  incurred net operating  losses in each fiscal year
from inception  through 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. The Company is currently
investing,  and intends to continue to invest,  significant resources to develop
its sales  strategy,  which  could  adversely  affect  the  Company's  operating
margins.  In this regard,  the Company has recently  hired and continues to hire
significant  numbers of direct sales personnel.  Competition for sales personnel
is  intense,  and there can be no  assurance  that the  Company  can  retain its
existing  sales  personnel or that it can attract,  train and retain  additional
highly  qualified  sales  personnel  in  the  future.   If  revenues  are  below
expectations,  operating results are likely to be adversely affected. Net income
may be  disproportionately  affected  by a  reduction  in  revenues,  because  a
significant portion of the Company's expenses do not vary with revenues.

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

                                       12
<PAGE>

     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  initial license revenues for new customers where  installation is
contracted with Clarify's  implementation staff 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  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 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 Chief Financial Officer in August 1997. 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, financial 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, 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 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 

                                       13
<PAGE>

that  its new  products  and  product  enhancements  will  adequately  meet  the
requirements  of the  marketplace  and achieve market  acceptance.  Furthermore,
reallocation of resources by the Company,  such as the diversion of research and
development  personnel to development of a particular feature for a potential or
existing customer,  can delay new products and certain product enhancements.  If
the  Company is unable,  for  technological  or other  reasons,  to develop  and
introduce new products or enhancements  of existing  products in a timely manner
in  response  to  changing  market  conditions  or  customer  requirements,  the
Company's business, operating results and financial condition will be materially
adversely effected.

     The Company has in the past introduced product upgrades and enhancements on
a frequent basis, and expects to continue to introduce upgrades and enhancements
of its existing  products.  The Company also  currently  plans to introduce  and
market new products. The upgrades,  enhancements and new products are subject to
significant  technical  risks,  including  the  difficulty of ensuring that such
products  will permit  successful  migration of customer  data from a variety of
existing  platforms.  In the past,  the  Company has  experienced  developmental
delays,  which  have  resulted  in  delays  in the  commencement  of  commercial
shipments of new products and  enhancements.  There can be no assurance that the
Company  will not  experience  difficulties  that  could  delay or  prevent  the
successful  development,  introduction or marketing of new or enhanced products.
In  addition,  there  can be no  assurance  that  such  products  will  meet the
requirements of the marketplace and achieve market acceptance on a timely basis,
or that the  Company's  current or future  products  will  conform  to  industry
requirements. If any potential new products, upgrades or enhancements, including
the next version of ClearSupport, are delayed, experience quality problems or do
not achieve market  acceptance,  the Company's  business,  operating results and
financial condition will be materially adversely affected.

     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.

     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  effect on the
Company's business, results of operations 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  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.  

                                       14
<PAGE>

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.

     International  Operations;   Foreign  Currency  Fluctuations.  The  Company
established its European headquarters in the United Kingdom in 1994. Since then,
additional  offices have been opened in Germany,  France,  Japan,  Australia and
Canada.  As part of its  strategy  to  increase  growth and  profitability,  the
Company  intends  to expand  its  existing  international  operations  and enter
additional  international  markets,  which will require  significant  management
attention  and  financial  resources  and could  adversely  affect the Company's
operating margins and earnings.  To successfully expand international sales, the
Company  must  establish  additional  foreign  operations  and  hire  additional
personnel. To the extent that the Company is unable to do so in a timely manner,
the Company's  growth in international  sales, if any, will be limited,  and the
Company's   business,   operating  results  and  financial  condition  could  be
materially adversely affected.  In addition,  there can be no assurance that the
Company will be able to maintain or increase international market demand for its
products.

     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 foreign  sales,  it may be materially  and 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  effect on the
Company's future international sales and, consequently, the Company's results of
operations.

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

     Dependence on Proprietary  Technology;  Risks of Infringement.  The Company
relies  primarily  on a  combination  of copyright  and  trademark  laws,  trade
secrets,  confidentiality  procedures and contractual  provisions to protect its
proprietary rights. The Company seeks to protect its software, documentation and
other written  materials  under trade secret and copyright  laws,  which affords
only limited protection.  The Company has submitted only one patent application.
Despite the Company's  efforts to protect its proprietary  rights,  unauthorized
parties may attempt to copy aspects of the  Company's  products or to obtain and
use information that the Company regards as proprietary.  Policing  unauthorized
use of the Company's  products is difficult,  and while the Company is unable to
determine the extent to which piracy of its software  products exists,  software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to as great an
extent as the laws of the  United  States.  There can be no  assurance  that the
Company's  means of protecting its  proprietary  rights will be adequate or that
the competitors will not independently  develop similar technology.  The Company
is not aware that any of its  products  infringe  on the  proprietary  rights of
third parties.  There can be no assurance,  however, that third parties will not
claim  infringement  by the Company with respect to current or future  products.
The Company  expects that  software  product  developers  will  increasingly  be
subject to infringement  claims as the number of products and competitors in the
Company's  industry segment grows and the functionality of products in different
industry  segments  overlaps.  Any such claims,  with or without  merit could be
time-consuming,  result in costly  litigation,  cause product shipment delays or
require the Company to enter into royalty or licensing agreements.  Such royalty
or  licensing  agreements,  if required,  may not be  available on  commercially
reasonable  terms or at all, which could have a material adverse effect upon the
Company's business, operating results and financial condition.

     Acquisition;  Significant Growth;  Management of Expanding  Operations.  In
April 1996, the Company acquired  Metropolis  Software,  Inc.  Management of the
Company has been and will be required to devote  substantial  time and attention
to the  integration  of these  businesses  for an extended  period of time.  The
integration of merged  companies is

                                       15
<PAGE>

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  approximately  320  employees at September  30,
1996 to over 450  employees  at  September  30,  1997,  and  currently  plans to
continue to expand its staff.  To accommodate  this growth,  the Company will be
required to implement a variety of new and upgraded  operational  and  financial
systems,  procedures and controls,  including the  improvement of its accounting
and  other  internal  management  systems,  some of  which  require  substantial
management effort. There can be no assurance that the Company will be able to do
so successfully.  In addition, the increase in the Company's number of employees
and the Company's market diversification and product development activities have
resulted in increased  responsibility for the Company's management.  The Company
anticipates that continued growth, if any, will require it to recruit and hire a
substantial number of new engineering,  managerial, finance, sales and marketing
and support personnel;  however, there can be no assurance that the Company will
be successful at hiring or retaining these personnel.

     The Company's  ability to compete  effectively and to manage future growth,
if  any,  will  require  the  Company  to  continue  to  implement  and  improve
operational,  financial and management information systems on a timely basis and
to expand,  train, motivate and manage its work force. There can be no assurance
that the Company's personnel,  systems, procedures and controls will be adequate
to support the  Company's  operations.  Any failure to implement and improve the
Company's  operational,  financial and management  systems or to expand,  train,
motivate or manage employees, including additional finance personnel, could have
a  material  adverse  effect on the  Company's  business,  operating  results or
financial condition.

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

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

                                       16
<PAGE>


PART II.          OTHER INFORMATION.

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

(a)   Exhibits

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

3.1(3)    Certificate of Incorporation of the Company, as amended to date

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

4.1(1)    Specimen Common Stock certificate

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

10.1(1)   Form of Indemnification Agreement

10.2(1)   1991 Stock Option/Stock Issuance Plan

10.3(2)   1995 Stock Option/Stock Issuance Plan

10.4(2)   Employee Stock Purchase Plan

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

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

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

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

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

10.10(3)  Lease by and between Orchard Investment Company Number 901 and Clarify
          Inc. dated August 8, 1996

11.1      Computation of Net Income Per Share

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

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

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

          (3)  Incorporated   by  reference  from  an  exhibit  filed  with  the
               Company's Form 10-Q for the quarterly period ended June 30, 1997.

(b)  Reports on Form 8-K

There were no reports filed on Form 8-K during the quarter  ended  September 30,
1997.

                                       17
<PAGE>


SIGNATURE


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


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



                                   By:  /s/ Dave A. Stamm
                                        ----------------------------------------
                                        Dave A. Stamm
                                        President and Chief Executive Officer
                                        (Duly Authorized Officer and Interim
                                        Principal Financial Officer)

                                       18