CLARIFY INC, 10-K405, 1999-03-31

CLARIFY INC
10-K405, 1999-03-31
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE CALENDAR YEAR ENDED DECEMBER 31, 1998

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

COMMISSION FILE NUMBER 0-26776

CLARIFY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 77-0259235
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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2125 O'NEL DRIVE
SAN JOSE, CALIFORNIA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 573-3000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, $0.0001 PAR VALUE
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS, NO PAR VALUE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Approximate aggregate market value of the registrant's voting and
non-voting common equity held by nonaffiliates of the Registrant (based on the
closing sales price of such stock as reported in the NASDAQ Stock Market) on
February 26, 1999 was $511,406,341. Excludes shares of Common Stock held by
directors, officers and each person who holds 5% or more of the outstanding
Common Stock at February 26, 1999 because such persons may be deemed to be
affiliates. This exclusion is not a conclusive determination of such status for
other purposes.

The number of shares of Common Stock, $0.0001 par value, outstanding as of
February 26, 1999 was 22,405,171.

DOCUMENTS INCORPORATED BY REFERENCE

PART III -- PORTIONS OF THE REGISTRANT'S DEFINITIVE PROXY STATEMENT TO BE
ISSUED IN CONJUNCTION WITH THE REGISTRANT'S ANNUAL MEETING OF STOCKHOLDERS TO BE
HELD ON JUNE 10, 1999.

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PART I

In addition to historical information, this annual report on Form 10-K
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from those projected. Factors
that might cause or contribute to such differences include, but are not limited
to, those discussed in the section entitled "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations" and
"Certain Factors That May Affect Future Results of Operations." Readers should
carefully review the risks described in other documents the Company files from
time to time with the Securities and Exchange Commission, including the
quarterly reports on Form 10-Q to be filed by the Company in 1999. Readers are
cautioned not to place undue reliance on the forward-looking statements,
including statements regarding the Company's expectations, beliefs, intentions
or strategies regarding the future, which speak only as of the date of this
annual report on Form 10-K. The Company undertakes no obligation to release
publicly any updates to the forward-looking statements included herein after the
date of this document.

ITEM 1. BUSINESS

OVERVIEW

Clarify Inc. ("Clarify" or the "Company"), founded in August 1990, is a
leading developer and provider of enterprise-scale, Internet-ready front office
applications for managing the quality and life of customer relationships.
Clarify helps companies build service into every customer interaction across a
variety of media with integrated solutions that automate call center, sales and
marketing, technical support, field service and logistics, quality assurance,
and help desk processes. By uniting the entire virtual enterprise around the
customer, including suppliers and partners who help meet customer needs, Clarify
helps companies attract, acquire and retain customers at significantly reduced
costs.

Clarify markets its software and services primarily through its direct
sales organization. Clarify maintains sales and support offices throughout North
America, Europe, and the Asia/Pacific region. A variety of industries employ
Clarify's solutions, including telecommunications, high technology, financial
services, healthcare, consumer products, and travel and entertainment. Clarify
has approximately 650 customers including Automatic Data Processing, Inc., BP
Amoco, Cisco Systems, Inc., General Electric Company, Georgia Pacific, The
Gillette Company, Hewlett-Packard Company, Microsoft Corporation, and Sprint
PCS. Clarify maintains its executive offices at 2125 O'Nel Drive, San Jose,
California 95131.

INDUSTRY BACKGROUND

Globalization, fierce competition, and a networked economy are
significantly changing business dynamics. The opening of previously closed
markets, the explosion of the Internet, and partnerships and alliances are all
driven by a growing demand for better products and services in all areas of the
world. Adding to these factors are industry deregulation, the growing number of
mergers and acquisitions, and the continued flow of new capital to fund new
business ventures. In addition, the Internet has spawned a virtual free flow of
information around the globe affecting business models everywhere. The result is
fierce competition in practically all markets.

In today's highly competitive, fast-paced economy, businesses are finding
that winning and keeping customers is an increasingly difficult challenge, a
trend that poses a very real threat to a business's bottom line, while
concurrently driving up the cost of acquiring new customers. Today's customers
want more personalized service, and faster, unfettered access to products and
services, as well as anytime, anywhere access to businesses across a variety of
mediums, including the phone, fax, email, and the Web. Companies that cannot
adapt to this new business model are losing their customers to those that can.

Many companies and vendors have responded to these business trends by
focusing their efforts on automating the direct sales force in an attempt to
reduce sales costs. Others have focused their energies on support solutions in
order to retain existing customers, often at the expense of acquiring new ones.
However,

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neither of these strategies has provided companies with an integrated, long-term
solution for effectively managing customer relationships across the entire
customer life cycle.

Businesses increasingly view customer loyalty as the key to maintaining
long-term profitability, and they seek technology solutions that can directly
improve the quality and life of customer relationships. In 1998, recognizing the
need for an integrated solution across all customer-facing organizations,
Clarify introduced the industry's first fully integrated front office solution.
Clarify's front office solution integrates and automates marketing, sales, and
service operations and provides a centralized database that maintains all
customer information. By uniting the enterprise's approach to customers,
Clarify's solutions promote collaboration that nurtures customer loyalty while
serving the unique business needs of each organization within the business
enterprise.

PRODUCTS

Clarify's business solutions are designed for enterprises that place a
premium on customer relationships. Clarify's solutions enable a company's
customer-facing organizations to work together to provide superior customer
service. For example, because of the power of Clarify's workflow management
engine, Clarify customers can make commitments to certain business standards via
Clarify business rules, such as responding to customer requests within 24 hours.
Accountable managers are automatically notified when these commitments are not
met.

In 1998, Clarify adapted its business initiatives to address the emerging
market for front office applications by introducing new products and
enhancements of existing products.

A key initiative in 1998 was Clarify's announcement of a major new release
of its integrated suite of sales and service applications, Clarify FrontOffice
98(TM). With Clarify FrontOffice 98, Clarify delivered a mobile solution for
field sales and service organizations. In addition, Clarify FrontOffice 98
addresses the needs of global enterprises by running in other operating system
environments, supporting entry of data in other languages, and offering language
localization for the Japanese market.

Clarify FrontOffice 98

Clarify FrontOffice 98 serves as the front line for customer interactions
as well as the centralized resource for all customer information. Clarify
FrontOffice 98 does this by integrating the efforts of a business's
customer-facing organizations and unifying information about customers in a
central database that is updated in real time. Clarify's Call Center Solution,
Sales and Marketing Solution, Customer Service Solution, Field Service Solution,
and Help Desk Solution leverage the latest database, Web, mobile, and
intelligent software agent technology to help businesses make customer
interaction consistent, knowledge-based, personalized, and shared across
organizations.

Clarify's Call Center Solution

Industries such as telecommunications, financial services, insurance, and
utilities are transforming the traditional roles of their call centers from
sales-only or service-only organizations to multi-function "contact" centers
that serve as the focal point for proactive customer relationship management.
These call centers are consolidated entities that handle all types of contacts
from all types of sources from customers calling for general information or
requesting simple service to submitting an order via fax, email, or the Web.
Competitive companies need a centralized resource for collecting and managing
this data, plus representatives who are empowered to provide a broad range of
services.

In 1997, Clarify introduced ClearCallCenter(TM), a comprehensive solution
that supports both inbound/outbound sales and service. In 1998, Clarify
introduced an advanced scripting module with the latest release of
ClearCallCenter called Script Manager. Script Manager features point-and-click
tools to help call center managers design, test, and modify scripts to meet
changing business needs. This capability promotes appropriate follow-up actions
and initiates a wide range of actions, such as creating an order, launching
another application, or sending an email.

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Clarify's Sales and Marketing Solution

In 1998, Clarify also announced a major new release of its sales force
automation system, Clarify ClearSales(R). Clarify ClearSales provides field
sales teams with personalized customer and prospect information to maximize
sales effectiveness. This application automates the entire sales process from
opportunity and territory management to revenue forecasting, configuration, and
quote generation.

The new release includes mobile data synchronization and supports Target
Account Selling (TAS), a popular sales methodology. TAS methodology leverages
findings from empirical research and best practices gleaned from actual sales
experiences to help sales people focus on the right issues, plan for sales
opportunities, and communicate more effectively with other members of the sales
team.

Clarify's Customer Service Solution

Clarify's customer service solution turns every customer interaction into
an opportunity to capture valuable information which, in turn, can be utilized
to create new programs, services, products, and enhancements, all custom
designed to meet specific customer needs. The customer service solution ensures
that customers have consistent access and results and closed-loop problem
resolution.

Clarify ClearContracts(TM) provides comprehensive out-of-the-box
functionality for managing service contracts, by automating key contract
information and processes. With ClearContracts, services marketing and sales
representatives can quickly quote and sell complex offerings, and support
representatives have entitlement information at their fingertips, ensuring
service level agreement compliance and accurate billing.

Clarify ClearSupport(R) utilizes features like configuration control,
workflow, problem resolution, and ownership and commitment tracking to manage
information flow within a service organization, By automating the entire
customer service relationship, ClearSupport ensures that individual customer
needs are addressed quickly and efficiently.

Clarify ClearQuality(R) identifies, traces, catalogs, and verifies repairs
on a continuous basis.

Clarify Field Service Solution

Clarify's field service solution is also comprised of ClearContracts and
ClearSupport, in addition to, ClearLogistics(R) and ClearEnterprise
Traveler(TM).

ClearLogistics is a comprehensive, easy-to-use field service and logistics
management system that consists of three components: Field Operation, Order
Operation, and Spares Manager. Together, they provide functionality for
dispatching field technicians and managing spare parts and inventory. A key
component of Clarify's field service and logistics solutions, ClearLogistics
Depot Repair, automates and tracks the critical components of the repair process
for service inventory, such as time, materials, and repair expense, allowing
organizations to repair orders faster and improve profitability.

In 1998, Clarify announced the next generation of its field service
solution and its incorporation of ClearEnterprise Traveler, Clarify's highly
scalable data synchronization module for mobile field service users.

Clarify Help Desk Solution

For internal support needs, Clarify's ClearHelpdesk(TM) enables businesses
to quickly handle employee inquiries regarding a wide variety of issues such as
technology, benefits, and facilities. In 1997, Clarify introduced new asset
management capabilities, including an Inventory Management Utility that works
with Microsoft's Systems Management Server (SMS). In 1998, additional
functionality that automated the fulfillment of recurring change requests was
introduced. Widely adopted by large corporations with enterprise help desks,
including Transamerica Corporation, The Gillette Company, Hewlett Packard
Company, BP Amoco, Georgia Pacific, and Corning Clinical Labs, ClearHelpdesk was
honored with a "product of the year" award from CTI Magazine in 1998.

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Telecommunications

An industry in evolution, the telecommunications market is moving towards
the concept of integrated carriers, with service providers seeking broader
portfolios and initiating mergers and partnerships with other industry players.
As competition increases and technologies converge, service becomes the best and
sometimes the only differentiator among telecommunications providers.

Clarify's solution for the telecommunications marketplace, Clarify
CommCenter(TM), is an enterprise-scale, Internet-ready suite of operations
support systems (OSS) applications. Clarify CommCenter uniquely links the sales
and service sides of the telecommunications business. Within the same
application, providers can create orders, answer questions, process trouble
tickets, and update the status as problems move towards resolution. Because it
spans both the sales and service sides of telecommunications, Clarify CommCenter
streamlines the communication of critical customer and problem information
across the enterprise. Clarify CommCenter also allows service providers with
disparate customer care systems to communicate service orders, trouble-ticket
information, and resolutions automatically across organizational boundaries.

Clarify entered the telecommunications market in 1996, and today
telecommunications comprises approximately 25% of Clarify's total global
business. Clarify is a leading provider of end-to-end solutions in the
telecommunications industry with customers in every segment of the market:
Competitive Local Exchange Carriers (CLEC's) , Incumbent Local Exchange Carriers
(ILEC's). Internet Service Providers (ISP's), networking vendors, Telecom
Equipment providers, wireless providers, direct broadcast satellite companies,
and Interexchange Carriers (ISC's)/global carriers.

TECHNOLOGY

The Clarify product family is based upon an open and flexible client/server
architecture that easily adapts to growth and change. The architecture ensures
high performance and scalability by optimizing resource usage at all levels
(client, server, and network) even as an organization expands its operation from
tens to thousands of users. Clarify's strategic yet flexible distribution of
application logic across clients and servers delivers application functionality
to organizations, regardless of how the customer chooses to deploy Clarify's
products, i.e. over LANs, WANs, the Internet, or mobile connections.

Clarify devotes substantial resources to develop technologies that enable
front office organizations to ensure internal accountability and unique
treatment of customers, which Clarify believes provides it with a competitive
advantage. Key technologies include:

Workflow Engine. Clarify integrates a powerful workflow management engine
into its support products to ensure that every customer request is "owned" by a
single individual, with automated notification and escalation capabilities to
ensure that commitments are always met. Clarify also allows users to base
commitments on their customers' business hours, enabling organizations to run a
more customer-focused business. Desktop reports, real-time alerts and messaging
functions help schedule tasks and manage activities, while business rules notify
managers of potential issues, giving them more time to spend on proactive
account management.

Problem Resolution System. Clarify helps companies leverage their experts'
knowledge across the enterprise, providing a public knowledge base of solutions
that enables front-line staff to address more customer requests on the first
call. Clarify's Full-Text Search product helps support specialists solve
problems for the first time and build the business's knowledge base. All of the
support specialists' diagnostic work, such as the symptoms identified and
diagnostic hints answered, can be captured by the system and associated with the
new problem description. In this way, the problem description is entered only
once by the support specialist who has done all the research, and who is
therefore the most qualified to describe the problem and solution accurately.
Together, these products enable support representatives to identify previously
solved problems efficiently and provide customers rapidly with consistent,
high-quality solutions. Tasks can even be "subcontracted" to other specialists
to complete, enabling enterprise-wide teams to collaborate on customer requests.

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World Wide Web Access. Clarify's ClearExpress(TM) products enable customers
and employees to help themselves by putting them in direct contact with a
business's knowledge base over the World Wide Web for access to product,
solution and support information. These products are ready to use "out of the
box" and require no customization or application building to integrate Web
functionality into a business's front office solution. Customers can create
cases, verify status and troubleshoot problems. ClearExpress products can also
be used to leverage corporate Intranets to support internal information-sharing
needs, such as those of a help desk or human resources organization.

In 1998 Clarify introduced its next-generation architecture: Clarify
Business Object architecture. This is an advanced multi-tier, object-oriented
technology infrastructure that will serve as the foundation for all new Clarify
products as well as upgrades to the existing product line. Clarify's new
architecture moves beyond the capabilities of traditional client/server and
three-tier architectures to provide increased flexibility to meet changing
business needs. Clarify customers will be able to customize applications with a
single tool and deploy them via LANs, WANs, and the Internet on a wide variety
of desktop platforms. As a result, Clarify customers will be able to customize
and distribute functionality quickly based on business needs rather than
technological constraints.

Benchmarks of Clarify's front office suite demonstrated Clarify's ability
to support up to 5,000 concurrent users with sub-second average response times
on Microsoft's Windows NT Server and SQL Server platforms and up to 30,000
concurrent users with sub-second average response times on an HP-UX server and
Oracle database. These record-setting benchmarks more than double existing
benchmark results of other enterprise front office solutions and demonstrate
both the exceptional performance and scalability of Clarify's product suite.

SALES AND MARKETING

Clarify markets its software and services primarily through its direct
sales organization. To support its sales force, the Company conducts marketing
programs that include public relations, advertising, World Wide Web and Internet
marketing, direct mail, trade shows, product seminars, user group conferences,
and ongoing customer communication programs. Field sales professionals and sales
engineers are located throughout the United States, the United Kingdom, Germany,
France, Japan, Australia, Canada, and Singapore.

Clarify announced reseller agreements with Hewlett Packard Co., Fujitsu,
and NEC in 1998, which are in addition to its existing reseller agreements with
Ernst & Young Technologies, Inc. (EYT) and Compaq Computer Corporation. NEC will
resell the Japanese version of the Clarify front office suite.

An integral part of Clarify's strategy is to expand its direct sales
internationally. International revenue amounted to 25% of Clarify's total
revenues in 1998, up from 14% of total revenues in 1996 and 10% of total
revenues in 1997.

There can be no assurance that Clarify can retain its existing sales
personnel or that it can attract, assimilate and retain highly qualified sales
personnel in the future. If Clarify is unable to hire such people on a timely
basis, the Company's business, operating results, and financial condition could
be adversely affected. Furthermore, there can be no assurance that the expansion
of Clarify's sales force will result in significant revenue growth. See "Certain
Factors That May Affect Future Results of Operations -- International
Operations."

CUSTOMER SERVICE AND SUPPORT

Clarify's solutions approach to this marketplace is uniquely focused on
driving business results. After installation and deployment, Clarify offers its
customers dedicated services for improving the effectiveness of their Clarify
applications with a focus on achieving specific business goals.

Clarify's shift to a solutions focus began in 1997, when Clarify began to
expand its professional consulting service offerings as well as its service and
support staff and revamp the service delivery model to increase accessibility
and speed resolution time. A CustomerCARE call center introduced in 1997
provided Clarify customers with a single point of contact where they could get
answers to a sales or service question across a
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variety of media, including phone, fax, email, or Web interactions. The new
service model included comprehensive system administration courses and project
team training programs for applications, customization tools, and data models.

Clarify's emphasis on a solutions approach to this marketplace continued in
1998. During 1998, the Company implemented proactive internal training programs
to improve the quality of customer service and established new laboratories for
testing and improving customer responsiveness.

Today Clarify delivers services through a variety of programs. Clarify's
professional services organization focuses on rapid deployment, knowledge
transfer, and customer self-sufficiency. Clarify's network of software and
system integration alliance partners extend those services globally. Clarify
University provides a complete portfolio of education for customer knowledge and
productivity with Clarify software. On-site training services are also provided
to customers upon request at a higher cost. Exceptional technical and
non-technical customer service is enabled by improved CustomerCARE services.
ClearEdge services help Clarify customers maintain the competitive advantage
gained through Clarify solutions with programs for continuous improvement.

Supplementing its training and technical support services, Clarify's
consultants and third-party consulting organizations, such as Andersen
Consulting, Ernst & Young, Technology Solutions, and Cambridge Technology
Partners, support Clarify's customers and provide customization, interface
specification, and implementation and integration services. To help deploy
Clarify solutions more quickly and more smoothly, in 1998, Clarify developed
several service packages for use by its internal staff, system integrators, and
consultants. The Company also developed a single, globally deployed service
delivery methodology to support its growth as a provider of global solutions. In
addition, Clarify expanded its training centers worldwide, ending 1998 with
training centers throughout North America, Europe, and Australia.

PRODUCT DEVELOPMENT

The market for the Company's products is characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions,
and rapid changes in customer requirements. Clarify believes that its future
performance will depend in large part on its ability to maintain and enhance its
current product line, develop new products that achieve market acceptance,
maintain technological competitiveness, and meet an expanding range of customer
requirements. There can be no assurance, however, that Clarify will be
successful in developing and marketing product enhancements or new products that
respond to technological change or evolving industry standards, or that Clarify
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. If Clarify is unable, for
technological or other reasons, to develop and introduce new products or
enhancements successfully, Clarify's business, operating results, and financial
condition would be materially adversely affected. See "Certain Factors That May
Affect Future Results of Operations -- Dependence on New Products and Rapid
Technological Change."

In addition, complex software products as complex such as those offered by
Clarify may contain undetected errors or failures when first introduced or when
new versions are released. Clarify has in the past discovered software errors in
certain of its new products and enhancements and has experienced delays or lost
revenues during the period required to correct those errors. There can be no
assurance that, despite testing by Clarify 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 or delay in market
acceptance, which could have a material adverse effect upon the Company's
business, operating results, and financial condition. See "Certain Factors That
May Affect Future Results of Operations -- Risk of Product Defects."

Since its inception, the Company has made substantial investments in
product development. The Company intends to expand its existing product
offerings and to introduce new products for the front office solutions market.
In the development of new products and enhancements to existing products, the
Company uses its own products and tools extensively. Although the Company
expects that certain of its new products

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will be developed internally, the Company may, based on timing and cost
considerations, acquire technology and products from third parties.

Clarify's total expenses for research and product development for fiscal
years, 1996, 1997, and 1998 were $10.4 million, $16.8 million, and $20.3
million, respectively. Clarify anticipates that it will continue to commit
substantial resources to research and product development in the future and that
product development expenses may increase in absolute dollars in future periods.
All of the Company's expenditures for research and development have been
expensed as incurred.

COMPETITION

The front office solutions market, including the markets for customer
service, field service and logistics, help desk, quality assurance and sales and
marketing applications, is currently intensely competitive, highly fragmented,
and subject to rapid change. More and more companies are entering this market as
technologies converge and awareness of the importance of managing customer
relationships heightens.

Clarify believes that the principal competitive factors affecting the
markets for its products include quality, functionality, performance, breadth of
product line, integration of products, frequency of upgrades and updates,
manageability of products, customer support, company reputation, and price.
Competitors vary in size and in the scope and breadth of the products and
services offered. Clarify 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, Clarify expects additional competition from other
established and emerging companies as the front office solutions market
continues to develop and expand. Among the most notable are the dominant vendors
of back office solutions who, as their market matures, see the potential of the
front office space. Increased competition could result in price reductions,
lower sales, reduced gross margins, and loss of market share, any of which could
materially adversely affect Clarify's business, operating results, and financial
condition.

Among software companies competing with Clarify, principal competitors
include Siebel Systems, Inc. and The Vantive Corporation. In addition, a number
of Enterprise Resource Planning vendors, including Oracle Corporation and SAP,
have announced front office offerings. Some of Clarify's current competitors,
and many of Clarify's potential competitors, have significantly greater
financial, technical, product development, marketing and other resources than
Clarify. Some companies, particularly those perceived to have businesses devoted
to the internet and e-commerce spaces, may be able to raise substantial amounts
of capital in the public or private equity markets to fund additional
expenditures and growth. 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 Clarify.

In addition, many competitors and potential competitors have significant
established distribution networks and large customer installed bases. The
Company also expects that competition may 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 these
competitors will rapidly acquire significant market share. Furthermore,
companies with greater technical, marketing and other resources than the Company
could compete directly with the Company either as a result of acquisition or by
direct entry into the market for the Company's products. There can be no
assurance that the Company will be able to compete successfully against current
or future competitors or that competitive pressures faced by the Company will
not materially adversely affect its business, operating results and financial
condition.

The Company relies on a number of systems consulting and systems
integration firms for implementation and other customer support services, as
well as recommendations of its products during the evaluation stage of the
purchase process. Although the Company seeks to maintain close relationships
with these third-party implementation providers, many of these third parties
have similar, and often more established, relationships

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with the Company's principal competitors. If the Company is unable to develop
and maintain effective, long-term relationships with these third parties, it
would adversely affect the Company's competitive position. Furthermore, there
can be no assurance that these third parties, many of which have significantly
greater financial, marketing and technical resources than the Company, will not
in the future compete directly with the Company or otherwise discontinue their
relationship with or their support of the Company and its products.

The Company competes on the basis of certain factors, including credibility
in the marketplace, proven implementations and key reference accounts, as well
as product quality, product functionality, product performance, ease of use and
customer support. Although the Company believes that it currently competes
favorably overall with respect to these factors, there can be no assurance that
the Company can maintain its competitive position against current and potential
competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

The Company's success is heavily dependent upon proprietary software
technology. The Company relies primarily on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy or infringe proprietary aspects of the Company's products or engage in the
unauthorized use of 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 countries do not protect the Company's proprietary
rights to the same 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 its 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 in the
Company's industry segment 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.

EMPLOYEES

As of December 31, 1998, the Company had approximately 630 employees. The
Company's future performance depends in significant part upon the continued
service of its key technical and senior management personnel and its continuing
ability to attract and retain highly qualified technical and managerial
personnel. Competition for such personnel is intense and there can be no
assurance that the Company can retain its key managerial and technical employees
or that it can attract, assimilate or retain other highly qualified technical
and managerial personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

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

8
<PAGE> 10

presented elsewhere in this report and in the Company's periodic filings with
the Securities and Exchange Commission.

Limited Operating History; Limited and Variable Profitability

The Company was founded in August 1990 and began shipping products in
September 1992. The Company has experienced substantial revenue growth in recent
years, but its profitability, as a percentage of net revenues, has varied widely
on a quarterly and annual basis, including net operating losses in each fiscal
year from inception through 1994. Due to the Company's limited operating history
on a significant international scale, the rate of growth of the Company's
business and the variability of operating results in past periods, there can be
no assurance that the Company's revenues will continue at the current level or
will grow, or that the Company will be able to sustain profitability on a
quarterly or annual basis.

Variability of Quarterly Operating Results

The Company's net revenues and operating results can vary, sometimes
substantially, from quarter to quarter. In general, the Company's revenues, and,
in particular, license fees, are relatively difficult to forecast for a number
of reasons, including (i) the size and timing of individual license
transactions, (ii) the level of price and product competition, (iii) demand for
the Company's products, (iv) the potential for deferral or delay of customer
implementations of the Company's software, (v) the timing of the introduction of
new products or product enhancements by the Company or its competitors, (vi)
changes in customer budgets, (vii) changes in pricing policies by the Company or
its competitors, and (viii) seasonality of technology purchases and other
general economic conditions.

The Company's software products generally are shipped as orders are
received. Furthermore, the Company has often recognized a substantial portion of
its revenues in the last month of a quarter, with a concentration of these
revenues in the last half of that month. As a result, license fees in any
quarter are substantially dependent on orders booked and shipped in that
quarter. In addition, there has been and continues to be a trend toward larger
enterprise license transactions, which often require approval by a customer's
upper management. These transactions are typically difficult to manage and
predict. Failure to close any expected individually significant transactions
could cause the Company's revenues and operating results in a period to fall
short of expectations, and could result in revenue losses. In addition, revenues
in any one quarter are not indicative of revenues in any future period.

The Company believes the purchase of its products generally involves a
significant commitment of capital; 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.

The Company's business has experienced and is expected to continue to
experience seasonality, in part due to customer buying patterns. In recent
years, for example, the Company has generally had weaker demand in the first
quarter.

new distribution and resale channels, greater levels of research and
development, and broader customer service and support capability, although
annual expenditures will depend upon ongoing operating results and evolving
business needs. To the extent such expenses precede or are not subsequently
followed by increased revenues, the Company's revenues, operating results and
financial condition would be materially adversely affected. Due to all the
foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the market price of the Company's common stock would
likely be materially adversely affected.

Continued Volatility of Stock Price

In the past, the price of the Company's common stock has been volatile.
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 or purchase recommendations 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 international currency and
stock market volatility, 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 brought against the Company 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.

Management of Growth

The Company has grown rapidly in the last three years. The growth of the
Company's business and the expansion of the Company's customer base has placed a
significant strain on the Company's management and operations. The Company's
recent growth and expansion have resulted in substantial increases in the number
its employees and the geographic area of its operations. The Company's ability
to support the growth of its operations will be substantially dependent upon
securing highly trained internal and third-party resources to conduct pre-sales
activity, product implementation, training and other customer support services.
To accommodate this growth and the expected expansion of its staff, the
Company's officers and other key employees will be required to improve and
implement a variety of operational and financial systems and procedures, to
expand, train and manage its employee base and to engage and work effectively
with third-party implementation providers. There can be no assurance that the
Company will be able to manage its recent or any future expansion successfully.
Any inability to do so would likely have a material adverse effect on the
Company's business, results of operations and financial condition.

Integration of Acquired Businesses or Technologies

The Company may acquire or make investments in complementary businesses,
products, services or technologies. From time to time, we have had discussions
with companies regarding the acquisition of, or investment in, their businesses,
products, services or technologies. There can be no assurance that the Company
will be able to identify suitable acquisition or investment candidates. Even if
the Company identifies suitable candidates, there can be no assurance that the
Company will be able to make sure acquisitions or investments on commercially
acceptable terms, if at all. The Company may have difficulty in assimilating the
personnel and operations of any company that the Company may acquire. In
addition, the key personnel of the acquired company may decide not to work for
the Company. Furthermore, the Company may have difficulty in converting the
business strategy of any acquired company into one that is consistent with the
Company's strategic goals, or assimilating the products, services or
technologies of companies we may acquire into our operations. These difficulties
could disrupt the Company's ongoing business, distract management and employees,
increase expenses and adversely affect results of operations due to accounting
requirements such as

10
<PAGE> 12

goodwill. Furthermore, we may incur debt or issue equity securities to pay for
any future acquisitions. The issuance of equity securities could be dilutive to
our existing stockholders.

International Operations

The Company established its European headquarters in the United Kingdom in
1994. Since then, additional offices have been opened in Germany, France, Japan,
Australia, Canada, and Singapore. To support the growth of the Company's
international operations, the Company continues to incur significant costs to
build its service and support infrastructure in advance of anticipated revenues.
Operating costs in many countries, including some of those in which the Company
operates, are often higher than in the United States. As a result of such
international expansion, the Company must continue to implement and improve its
operational and financial systems and procedures and to expand, train and manage
both its employee base and its relationships with third-party implementation
providers. International expansion has placed, and is expected to continue to
place, a significant strain on the Company's management and operations. There
can be no assurance that the Company's international operations will continue to
be successful or that the Company will be able to manage effectively the
increased level of international operations. To the extent that the Company is
unable to do so in a timely manner or is unable to manage these activities
effectively, the Company's growth in international revenues, if any, will be
limited, and the Company's business, operating results and financial condition
could be materially adversely affected. In addition, there can be no assurance
that the Company will be able to maintain or increase international market
demand for its products.

Furthermore, future increases in the value of the U.S. dollar abroad could
make the Company's products less competitive in international markets. As the
Company increases its international operations, it may be materially adversely
affected by fluctuations in international currency exchange rates, increases in
duty rates, exchange or price controls or other restrictions on foreign
currencies. While the Company's efforts to hedge foreign currency denominated
intercompany balances are designed to limit its exposure to fluctuations in
foreign currency exchange rates, there can be no assurance that its efforts will
have such an effect. To the extent that any exchange rate fluctuations would
have had a positive impact on the Company's financial performance, the effect of
such hedging transactions could be to eliminate or reduce the gains that would
have otherwise accrued to the Company. Furthermore, the Company is subject to
foreign exchange rate fluctuations as the financial results of its international
subsidiaries are translated into U.S. dollars in consolidation.

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 other 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
other 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 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 and subject to significant delays over which the Company has
little or no control.

Because of the attendant complexity, larger implementations can involve
multiple-quarter implementation cycles. 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,

11
<PAGE> 13

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 on New Products and Rapid Technological Change

The front office solutions market, including the markets for customer
service, field service and logistics, quality assurance, help desk, and sales
and marketing applications, is characterized by rapid technological change,
frequent new product introductions, evolving industry standards and rapid
changes in customer requirements. The introduction of products embodying new
technologies and the emergence of new industry standards can render existing
products obsolete and unmarketable. While the Company believes that it offers
one of the broadest product lines in the front office solutions market, this
market is continuing to evolve and customer requirements continue to change. The
Company's future success will depend upon its ability to enhance its current
products and develop and introduce new products on a timely basis that keep pace
with technological developments, industry standards and the increasingly
sophisticated needs of its customers. There can be no assurance that the Company
will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards, or
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these products, or
that its new products and product enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. Furthermore,
reallocation of resources by the Company, such as the diversion of research and
development personnel to development of a particular feature for a potential or
existing customer, can delay new products and certain product enhancements. If
the Company is unable, for technological or other reasons, to develop and
introduce new products or enhancements of existing products in a timely manner
in response to changing market conditions or customer requirements, the
Company's business, operating results and financial condition will be materially
adversely affected.

The Company has in the past introduced product upgrades and enhancements on
a frequent basis, and expects to continue to introduce upgrades and enhancements
of its existing products. The Company also currently plans to introduce and
market new products. The upgrades, enhancements and new products are subject to
significant technical risks, including the difficulty of ensuring that such
products will permit successful migration of customer data from a variety of
existing platforms. In the past, the Company has experienced delays in
development, 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

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, the Company has
experienced there has been turnover in certain key personnel, including
resignations by the Vice-President of Marketing and Vice-President of Customer
Service and Support in February 1998, and the Chief Financial Officer in August
1997. In March 1998, the Company's President and Chief Executive Officer, Dave
Stamm, assumed the position of Chairman of the Board and the current President
and Chief Executive Officer was appointed, and in April 1998, the current Chief
Financial Officer was appointed. Furthermore, in July 1998, the current Senior
Vice-President of Worldwide Professional Services and a Vice-President of
Worldwide Marketing were appointed. 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

12
<PAGE> 14

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. 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 increase the total number of employees
significantly in the future. Competition for such personnel is intense, and
there can be no assurance that the Company will be able to retain its key
technical, sales, financial and managerial employees or that it will be able to
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 Clarify FrontOffice 98 suite of products. As a result,
factors adversely affecting the pricing of or demand for Clarify FrontOffice 98,
such as competition or technological change, could have a material adverse
effect on the Company's business, operating result, and financial condition.
Clarify's future financial performance will depend, in significant part, on the
successful development, introduction and customer acceptance of new and enhanced
versions of Clarify FrontOffice 98. There can be no assurance that the Company
will continue to be successful in marketing Clarify FrontOffice 98 or other
products.

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.

Expansion of Distribution Channels

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

Year 2000 Compliance

As is true for most companies, the Year 2000 computer issue creates a risk
for the Company. If systems do not correctly recognize date information when the
year changes to 2000, there could be an adverse impact on the Company's
operations. For example, software with date-sensitive functions that is not Year
2000 compliant may not be able to distinguish whether "00" means 1900 or 2000,
which may result in failures or the creation of erroneous results. The Company
is aware of the issues associated with the programming code in existing computer
systems as the year 2000 approaches and has formed a task force to address its
Year 2000 readiness.
13
<PAGE> 15

Project

The Company's Year 2000 project is divided into four major
sections -- Information Technology (including both hardware systems and
application software), Product (including embedded software), Facilities (such
as security system and building equipment), and Suppliers. The general phases
common to all sections are (1) inventorying Year 2000 items; (2) assigning risks
to identified items as fatal, critical or marginal; (3) assessing the Year 2000
compliance of items; (4) testing of items; and (5) repairing, renovating or
replacing fatal or critical items that are determined not to be Year 2000
compliant.

Product

The Company has completed all phases of the Product section. The Company's
products have been developed from inception with consideration to the following
Year 2000 issues:

(1) General integrity -- no value for current date will cause
interruptions in desired operations.

(2) Data integrity -- all manipulations of time-related data will
produce desired results for all valid date values within the application
domain.

(3) Implicit century -- for any date element represented without
century, the correct century is unambiguous for all manipulations involving
that element.

(4) Leap year -- the product recognizes Year 2000 as a leap year.

The Company's current products meet all the requirements for general
integrity, data integrity, implicit century and recognize Year 2000 as a leap
year. As an added measure of security, the Company is negotiating a contract
with an independent third-party for certification of compliancy for its Clarify
FrontOffice 98 suite. The estimated completion of the results of the third-party
certification is April, 1999.

Information Technology

The Company has completed the first three phases of the Information
Technology section. A hardware and software inventory has been conducted and
relevant suppliers have been rated fatal, critical or marginal. Based on the
rating and other factors, a certification completion date has been assigned to
each item. Available vendors' statements of compliance have also been reviewed.
Internal testing plans have been developed for the Company's core business
systems. The Company has completed testing of its critical business systems and
is in the process of determining what, if any, remediation is required for such
systems. The Company expects to complete its testing of ancillary systems by May
31, 1999. Since the systems and technologies used internally have been developed
in the late 1980's and 1990's, the Company does not anticipate having major Year
2000 issues in its Information Technology section.

Facilities and Suppliers

The Company did not test and therefore does not warranty any third party
elements or applications distributed as part of Clarify FrontOffice 98 (CFO98)
Bill of Materials, when such elements or applications are run in standalone
mode. Clarify has tested, and therefore certifies to be Year 2000 complaint,
only the custom implementations of third party elements or applications,
accessible only from within the CFO98 application and only when CFO98 is
properly installed, properly used and unmodified by clients. The Company is,
however, seeking assurances from all its vendors that licensed software
contained within the CFO98 distribution is Year 2000 compliant.

The Company is moving its headquarters' facilities in May 1999 and is
requiring all products and facilities vendors participating in the new facility
to warranty their products as well as their company status as being Year 2000
ready. Also, the Company has completed approximately 90% of the inventorying,
prioritizing and assessing phases and approximately 50% of the testing and
repairing, renovating and replacing phases of the Suppliers section,
respectively. The Company does not believe it is in high risk with regard to
these two sections and plans to complete all phases by April 30, 1999.

14
<PAGE> 16

The total cost associated with required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The estimated cost of the Year 2000 project is approximately $400,000. The use
of internal resources or existing infrastructure is not accounted for in this
estimate. The total amount expended through December 31, 1998 was approximately
$45,000 to purchase lab testing equipment. The estimated future cost of
completing the Year 2000 project is estimated to be approximately an additional
$105,000 to augment staff and to purchase additional testing equipment and
approximately an additional $250,000 to obtain independent third-party
compliance certification on the company's current products. The Company's has
and plans to fund its Year 2000 project from its operating cash flows. The
estimated cost of the Company's Year 2000 project does not represent a
percentage of the Company's planned 1999 budget for computer hardware and
software. The Company does not anticipate that any existing Information
Technology projects will need to be deferred as of part of its Year 2000
efforts.

Though the Company's Year 2000 project is expected to reduce the Company's
level of uncertainty about Year 2000 problems significantly, failure to correct
known or unknown material Year 2000 problems could result in delay or loss of
revenues, diversion of development resources, damage to the Company's
reputation, or increased service and warranty costs, any of which could
materially adversely effect the Company's business, operating results, or
financial condition. The Company does not currently have any information
concerning the Year 2000 compliance status of its customers' business
operations, beyond compliance with respect to Clarify products. As is the case
with other similarly situated software companies, if the Company's current or
future customers fail to achieve Year 2000 compliance or if they divert
technology expenditures to address Year 2000 compliance problems, the Company's
business, results of operations, or financial condition could be materially
adversely affected. In addition, some commentators have predicted significant
litigation regarding Year 2000 compliance issues. Due to the unprecedented
nature of such litigation, the Company is uncertain whether or to what extent it
may be affected by it.

The Company is in the process of assessing compliance on plans to develop a
contingency plan which is expected to be complete during the third quarter of
fiscal 1999. This contingency plan will be for all core business functions to
protect against a potential break in continuity of operations in any of its
critical operational areas. The cost of developing and implementing such plans
is not projected to be material. The Company is also developing replacement and
renovation plans as necessary as a result of its internal tests.

Euro Conversion

The Company is aware of the issues associated with the forthcoming changes
in Europe aimed at forming an European economic and monetary union (the "EMU").
One of the changes resulting from this union required EMU member states to
irrevocably fix their respective currencies to a new currency, the "Euro", on
January 1, 1999. On that day, the Euro became a functional legal currency within
these countries. During the next three years, business in the EMU member states
will be conducted in both the existing national currency, such as the French
Franc or Deutschemark, and the Euro. As a result, companies operating in or
conducting business in EMU member states will need to ensure that their
financial and other software systems are capable of processing transactions and
properly handling these currencies, including the Euro.

The Company is dedicated to properly addressing issues associated with EMU.
The Company recognizes that by January 1, 2002, all its customers in the
participating countries in Europe will need to have converted all the values in
their databases to the Euro, having previously reflected all values in the
appropriate local currencies. Furthermore, the Company will ensure that its
internal systems will be able to deal with the changes that will be taking
place. At this time, it is not possible to say what the costs associated with
addressing the issue will be and there can be no assurance that this issue and
its related costs will not have a materially adverse effect on the Company's
business, operating results, and financial condition.

Effect of Certain Charter Provisions

15
<PAGE> 17

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.
Furthermore, certain provisions of the Company's Certificate of Incorporation,
Bylaws, Stockholder Rights Plan, and of Delaware law could delay or make more
difficult a merger, tender offer or proxy contest involving the Company.

ITEM 2. PROPERTIES

FACILITIES

The Company's principal administrative, sales, marketing, support, research
and development facility is located on approximately 100,375 square feet of
space in San Jose, California. This facility is leased to the Company through
November 2001. However, the Company has signed a lease for a new facility and is
planning to move its principal offices to another location in San Jose,
California consisting of four buildings totaling 258,048 square feet of space
each with a separate lease. The leases for these facilities commence upon
substantial completion of the leasehold improvements to each facility with
estimated completion dates ranging from May 1999 to August 2000. Each lease term
is seven years with three successive five-year renewal options. The lease on the
current facility will effectively be terminated upon moving to the new facility.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.

16
<PAGE> 18

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock is traded over-the-counter on the NASDAQ Stock
Market System under the symbol CLFY. The table below sets forth the high and low
closing prices per share of the Company's Common Stock for each quarterly period
during the past two fiscal years as reported by the National Association of
Securities Dealers, Inc.

<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------
1997 1998
-------------------------------------- --------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Closing Price:
High......................... $52.75 $26.75 $19.13 $15.88 $15.00 $15.19 $14.81 $24.44
Low.......................... $18.75 $ 6.50 $ 9.38 $10.06 $11.63 $11.00 $ 8.25 $ 7.38
</TABLE>

The trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, changes in financial estimates or purchase recommendations by
securities analysts and other events or factors. In addition, the stock market
has experienced volatility that has particularly affected the market prices of
equity securities of many high technology companies and that often has been
unrelated to the operating performance of such companies. These broad market
fluctuations may adversely affect the market price of the Company's Common
Stock. As of February 26, 1999, the approximate number of common stockholders of
record was 149. Since much of the Company's Common Stock is held by brokers and
other institutions on behalf of stockholders, the company is unable to estimate
the total number of stockholders represented by these record holders.

The Company has never paid any cash dividends on its capital stock and does
not expect to pay any cash dividends in the foreseeable future.

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.
Furthermore, certain provisions of the Company's Certificate of Incorporation,
Bylaws, Stockholder Rights Plan, and of Delaware law, could delay or make more
difficult a merger, tender offer or proxy contest involving the Company.

17
<PAGE> 19

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues:
License fees....................... $ 7,001 $15,749 $39,139 $59,214 $ 84,874
Services........................... 5,526 9,148 17,183 29,003 45,636
------- ------- ------- ------- --------
Total revenues................ 12,527 24,897 56,322 88,217 130,510
------- ------- ------- ------- --------
Cost of revenues:
License fees....................... 400 759 1,409 2,400 2,424
Services........................... 3,419 5,714 10,711 18,149 26,165
------- ------- ------- ------- --------
Total cost of revenues........ 3,819 6,473 12,120 20,549 28,589
------- ------- ------- ------- --------
Gross margin.......................... 8,708 18,424 44,202 67,668 101,921
Operating expenses:
Product development and
engineering...................... 3,951 5,547 10,384 16,777 20,329
Sales and marketing................ 4,162 9,017 20,351 38,054 61,389
General and administrative......... 1,632 2,336 4,920 7,903 10,094
Merger costs....................... -- -- 1,061 -- --
------- ------- ------- ------- --------
Total operating expenses...... 9,745 16,900 36,716 62,734 91,812
------- ------- ------- ------- --------
Operating income (loss)............... (1,037) 1,524 7,486 4,934 10,109
Interest and other income (expense),
net................................ (57) 109 1,644 1,304 1,507
------- ------- ------- ------- --------
Income (loss) before income taxes..... (1,094) 1,633 9,130 6,238 11,616
Provision for income taxes............ -- 129 940 2,308 4,298
------- ------- ------- ------- --------
Net income (loss)..................... $(1,094) $ 1,504 $ 8,190 $ 3,930 $ 7,318
======= ======= ======= ======= ========
Basic net income (loss) per share..... $ (0.28) $ 0.09 $ 0.41 $ 0.19 $ 0.34
======= ======= ======= ======= ========
Diluted net income (loss) per share... $ (0.28) $ 0.09 $ 0.38 $ 0.18 $ 0.32
======= ======= ======= ======= ========
Shares used in per share
computations:(1)
Basic.............................. 3,975 16,250 20,143 20,909 21,683
======= ======= ======= ======= ========
Diluted............................ 3,975 17,351 21,768 22,164 22,592
======= ======= ======= ======= ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance Sheets Data:
Working capital........................ $3,908 $30,129 $35,586 $40,911 $ 58,669
Total assets........................... 9,884 42,283 70,684 86,831 122,600
Long-term obligations.................. 654 1,047 -- -- --
Retained earnings (accumulated
deficit)............................ (7,950) (7,672) 1,565 5,492 12,810
Total stockholders' equity............. $4,368 $31,482 $46,945 $57,097 $ 71,319
</TABLE>

- ---------------
(1) See Note (2) to Consolidated Financial Statements.

18
<PAGE> 20

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following table sets forth the percentage of total revenues for certain
items in the Company's Consolidated Statements of Income data for the years
ended December 31, 1996, 1997 and 1998.

PERCENT OF TOTAL REVENUES

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues:
License fees.............................................. 69.5% 67.1% 65.0%
Services.................................................. 30.5 32.9 35.0
----- ----- -----
Total revenues.................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
License fees.............................................. 2.5 2.7 1.9
Services.................................................. 19.0 20.6 20.0
----- ----- -----
Total cost of revenues............................ 21.5 23.3 21.9
----- ----- -----
Gross margin................................................ 78.5 76.7 78.1
Operating expenses:
Product development and engineering....................... 18.4 19.0 15.6
Sales and marketing....................................... 36.1 43.1 47.0
General and administrative................................ 8.8 9.0 7.7
Merger costs.............................................. 1.9 -- --
----- ----- -----
Total operating expenses.......................... 65.2 71.1 70.3
----- ----- -----
Operating income............................................ 13.3 5.6 7.8
Interest and other income, net.............................. 2.9 1.5 1.1
----- ----- -----
Income before income taxes.................................. 16.2 7.1 8.9
Provision for income taxes.................................. 1.7 2.6 3.3
----- ----- -----
Net income.................................................. 14.5% 4.5% 5.6%
===== ===== =====
</TABLE>

RESULTS OF OPERATIONS

REVENUES

Total revenues increased from $56.3 million in 1996 to $88.2 million in
1997 to $130.5 million in 1998, representing year over year increases of 57% and
48%, respectively. The Company does not believe that the percentage increases in
revenues achieved in prior periods should necessarily be anticipated in future
periods. International revenue accounted for approximately 14%, 10% and 25% of
total revenues in 1996, 1997, and

19
<PAGE> 21

1998 respectively. No one customer accounted for more than 10% of total revenues
in 1996, 1997 or 1998. The Company's revenues are derived primarily from license
fees and charges for services, including maintenance, consulting and training.
License fee revenues consist of revenues from initial licenses for the Company's
products, sales of licenses to existing customers for additional users of the
Company's products, product documentation and fees from sublicensing third-party
software products. Service revenues consist primarily of maintenance, consulting
and training revenues. 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 from $39.1 million in 1996 to
$59.2 million in 1997 to $84.9 million in 1998, representing year over year
increases of 51% and 43%, respectively. The increase in license fee revenues was
due to further market acceptance of the Company's existing products, continued
enhancement of such products and increased breadth of the Company's product
offerings. Additionally, the growth was also attributable to 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. The Company expects that license
revenues will fluctuate as a percentage of total revenues in the future
depending on the timing of new product introductions, customer buying patterns,
the Company's pricing actions, competition, and other factors. Further, the
Company does not believe that license fee revenues in any one period are
indicative of license fee revenues in any future period.

Services. Revenues from services increased from $17.2 million in 1996 to
$29.0 million in 1997 to $45.6 million in 1998, representing year over year
increases of 69% and 57%, respectively. The growth in service revenues was due
to an increase in maintenance and maintenance renewals, and to a lesser extent,
consulting and training services associated with increased sales of the
Company's applications. The Company expects revenues from services to increase
in future periods as the customer installed base increases, though the
percentage increases in service revenues achieved in prior periods should not be
anticipated in future periods.

COST 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 expense as incurred. Cost of license fees increased from $1.4
million in 1996 to $2.4 million in 1997 and remained at $2.4 million in 1998,
representing 4%, 4% and 3% of license fee revenues for 1996, 1997 and 1998,
respectively. Cost of license fees as a percentage of license fees may fluctuate
from period to period due to the increased or decreased sale of royalty bearing
software products and related negotiations for such royalty agreements. The
dollar amount remained flat for 1998 compared to 1997 due to lower royalties
paid to third party software suppliers as a result of renegotiated royalty
agreements

Cost of Services. Cost of services consists primarily of costs incurred in
providing telephone support, consulting services, shipment of product upgrades
and training of customers. Cost of services increased from $10.7 million in 1996
to $18.1 million in 1997 to $26.2 million in 1998, representing 62%, 63% and
57%, respectively, of the related service revenues in 1996, 1997, and 1998. Cost
of services consists primarily of costs incurred in providing telephone support,
consulting services, shipment of product upgrades and training of customers. The
absolute dollar increases are due primarily to the increase in the number of
customer support and training personnel and related overhead costs necessary to
support a larger installed customer base. The Company expects to make continued
investments in its service organization in order to support the Company's
customer installed base and anticipates that cost of services will increase in
absolute dollars in future periods.

20
<PAGE> 22

Operating Expenses

Product Development and Engineering. Product development and engineering
expenses increased from $10.4 million in 1996 to $16.8 million in 1997 to $20.3
million in 1998, representing 18%, 19% and 16% of total revenues in 1996, 1997
and 1998, respectively. Product development and engineering expenses include
expenses associated with the development of new products, enhancements of
existing products and quality assurance activities. These expenses consist
primarily of employee salaries, benefits, consulting expenses and the cost of
software development tools. Costs related to research, design and development of
products are charged to product development and engineering expenses as
incurred. The increase in absolute dollars was primarily attributable to an
increase in personnel and related overhead costs as well as consulting expenses.
The Company currently anticipates that product development and engineering
expenses will increase in absolute dollars as the Company continues to commit
substantial resources to product development and engineering in future periods.

Sales and Marketing. Sales and marketing expenses increased from $20.4
million in 1996 to $38.1 million in 1997 to $61.4 million in 1998, representing
36%, 43% and 47% of total revenues in 1996, 1997 and 1998, respectively. Sales
and marketing expenses consist primarily of employee salaries, sales
commissions, travel and promotional expenses. The increase in dollar amount was
primarily due to the further expansion of the Company's worldwide sales and
marketing organization and 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 1998 compared to 1997 reflects
the continuing investment that the Company made during 1998 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
from $4.9 million in 1996 to $7.9 million in 1997 to $10.1 million in 1998,
representing 9% of total revenues in 1996 and 1997 and 8% of total revenues in
1998. General and administrative expenses consist primarily of salaries and
benefits, travel expenses, and related overhead costs for the finance, human
resources, and executive and administrative personnel of the Company. The
increase in dollar amount was due primarily to increases in personnel, related
overhead costs and expenses related to the Company's infrastructure expansion.
The Company currently expects general and administrative expenses to increase in
absolute dollars in the future as the Company continues to expand its
infrastructure.

Merger costs. The Company incurred $1.1 million of one time merger related
expenses in 1996 in connection with the acquisition of Metropolis Software, Inc.

Interest and Other Income (Expense), net. Interest and other income
(expense), net represents interest income earned on the Company's cash, cash
equivalents and short and long term investments, as well as other items
including foreign exchange gains and losses. The Company earned net interest
income of $1.6 million, $1.4 million and $1.5 million in 1996, 1997 and 1998
respectively. Interest income earned on excess cash balances decreased from $1.7
million in 1996 to $1.4 million in 1997 and increased to $1.5 million in 1998.

Provision for Income Taxes. The Company's effective tax rate for 1996 was
10% and 37% for both 1997 and 1998. The Company's effective tax rate increased
to 37% in 1997 compared to 1996 primarily due to federal and state operating
loss carryforwards having been recognized in 1996.

Variability of Quarterly Operating Results

21
<PAGE> 23

products or product enhancements by the Company or its competitors, (vi) changes
in customer budgets, (vii) changes in pricing policies by the Company or its
competitors, and (viii) seasonality of technology purchases and other general
economic conditions.

The foregoing factors make estimating quarterly revenues and operating
results prior to the end of a quarter uncertain. The Company's expense levels
are based, in significant part, on the Company's expectations as to future
revenues and are therefore relatively fixed in the short term. If revenue levels
are below expectations, the Company's business, operating results and financial
condition are likely to be adversely affected. Net income may be
disproportionately adversely affected by a reduction in revenues because a
substantial portion of the Company's expenses are relatively fixed in any given
quarter. As a result, the Company believes that period-to-period comparisons of
its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance. There can be no assurance that
the Company will be able to achieve or maintain profitability on a quarterly or
annual basis in the future. The Company plans to increase expenditures to fund
continued expansion of international operations, a larger worldwide direct and
indirect sales and marketing staff and related marketing expenditures,
development of new distribution and resale channels, greater levels of research
and development, and broader customer service and support capability, although
annual expenditures will depend upon ongoing operating results and evolving
business needs. To the extent such expenses precede or are not subsequently
followed by increased revenues, the Company's revenues, operating results and
financial condition would be materially adversely affected. Due to all the
foregoing factors, it is likely that in some future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the market price of the Company's common stock would
likely be materially adversely affected.

22
<PAGE> 24

The following table sets forth unaudited consolidated statements of income
data for each of the eight quarters beginning January 1, 1997 and ending
December 31, 1998. This information has been derived from unaudited consolidated
financial statements that, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information in accordance with generally accepted accounting
principles.

The Company's quarterly results have been in the past and may in the future
be subject to fluctuations. Therefore, these results are not necessarily
indicative of future quarterly results of operations.

<TABLE>
<CAPTION>
QUARTERS ENDED,
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1997 1997 1997 1997 1998 1998 1998 1998
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Income Data:
Revenues................ $19,360 $19,429 $21,891 $27,537 $24,899 $29,826 $34,457 $41,328
Gross Margin............ $14,863 $14,784 $16,553 $21,468 $19,214 $22,978 $27,006 $32,723
Net Income.............. $ 1,953 $ 1,018 $ 293 $ 666 $ 700 $ 1,101 $ 2,008 $ 3,509
Basic Net Income per
share................. $ 0.09 $ 0.05 $ 0.01 $ 0.03 $ 0.03 $ 0.05 $ 0.09 $ 0.16
Diluted Net Income per
share................. $ 0.09 $ 0.05 $ 0.01 $ 0.03 $ 0.03 $ 0.05 $ 0.09 $ 0.15
Shares used in per share
Computations:
Basic................... 20,668 20,776 21,084 21,265 21,371 21,602 21,739 22,008
Diluted................. 22,071 21,744 22,269 22,167 22,447 22,462 22,108 23,419
</TABLE>

BUSINESS ENVIRONMENT AND RISK FACTORS

RECOVERABILITY OF DEFERRED TAX ASSETS

Realization of the net deferred tax assets is dependent upon generating
sufficient taxable income prior to the expiration of loss carryforwards.
Although realization is not assured, management believes that it is more likely
than not that all of the net deferred tax assets will be realized. In the event
that the Company does not show profitability in the subsequent fiscal quarters,
the Company may be required to write off portions of the net deferred tax assets
previously recognized up to the entire amount of $5.7 million.

YEAR 2000 COMPLIANCE

Project

23
<PAGE> 25

Product

The Company has completed all phases of the Product section. The Company's
products have been developed from inception with consideration to the following
Year 2000 issues:

(1) General integrity -- no value for current date will cause
interruptions in desired operations.

(2) Data integrity -- all manipulations of time-related data will
produce desired results for all valid date values within the application
domain.

(3) Implicit century -- for any date element represented without
century, the correct century is unambiguous for all manipulations involving
that element.

(4) Leap year -- the product recognizes Year 2000 as a leap year.

The Company's current products meet all the requirements for general
integrity, data integrity, implicit century and recognize Year 2000 as a leap
year. As an added measure of security, the Company is negotiating a contract
with an independent third-party for certification of compliancy for its Clarify
FrontOffice 98(TM) suite. The estimated completion of the results of the
third-party certification is April, 1999.

Information Technology

Facilities and Suppliers

The Company is moving its facilities in May 1999 and is requiring all
products and facilities vendors participating in the new facility to warranty
their products as well as their company status as being Year 2000 ready. Also,
the Company has completed approximately 90% of the inventorying, prioritizing
and assessing phases and approximately 50% of the testing and repairing,
renovating and replacing phases of the Suppliers section, respectively. The
Company does not believe it is in high risk with regard to these two sections
and plans to complete all phases by April 30, 1999.

1999 budget for computer hardware and software. The Company does not anticipate
that any existing Information Technology projects will need to be deferred as of
part of its Year 2000 efforts.

The Company is in the process of assessing compliance on plans to develop a
contingency plan which is expected to be complete during the third quarter of
fiscal 1999. This contingency plan will be for all core business functions to
protect against a potential break in continuity of operations in any of its
critical operational areas. The case of developing and implementing such plans
is not projected to be material. The Company is also developing replacement and
renovation plans as necessary as a result of its internal tests.

EURO CONVERSION

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1998, the Company's primary sources of liquidity are cash,
cash equivalents and investments totaled $57.7 million representing
approximately 47% 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".

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

25
<PAGE> 27

the event that cash generated from operating activities are not 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.

CHANGES IN FINANCIAL CONDITION

Cash, cash equivalents and investments at December 31, 1998 totaled $57.7
million representing an increase of 59% from December 31, 1997. Operations and
changes in exchange rates generated $20.5 million. Investing activities used
$8.6 million including a net increase in investments of $2.1 million, $5.5
million was used to acquire property and equipment (net of proceeds from
disposition of property and equipment) and $1.0 million was used for other, net.
Financing activities generated $7.5 million from sales of shares under employee
benefit plans.

Net cash of $13.2 million was provided by operating activities in 1996, net
cash of $2.7 million was used for operating activities in 1997 and net cash
provided by operating activities in 1998 was $21.2 million. In 1996, net cash
provided by operating activities consisted primarily of net income, depreciation
and amortization and increases in accounts payable, accrued liabilities and
unearned revenue, which was partially offset by increases in accounts receivable
and deferred income taxes. Net cash used in operating activities in 1997
resulted primarily from increases in accounts receivable and deferred income
taxes partially offset by net income, depreciation and amortization, and
increases in accounts payable, payroll related accruals, and other accrued
liabilities. Net cash provided by operating activities in 1998 consisted
primarily of net income, depreciation and amortization, increases in unearned
revenue, payroll related accruals and other liabilities, partially offset by
increases in accounts receivable and deferred income taxes.

The increases in accounts receivable for all three years is primarily due
to the overall growth in customer licensing activity, more of the Company's
contracting activity concentrated toward the end of each quarter and extended
payment terms to certain creditworthy customers.

The increases in unearned revenue for all three years is due primarily due
to increased sales of maintenance contracts associated with increased sales
volumes.

Net cash used for investing activities was $12.3 million, $26.1 million and
$8.6 million in 1996, 1997 and 1998, respectively primarily resulting from net
purchases of investments and purchases of property and equipment.

Net cash provided by financing activities was $1.8 million, $6.1 million
and $7.5 million in 1996, 1997 and 1998, respectively. The net cash provided by
financing activities in all three years consisted primarily of the 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The following discussion about the Company's risk-management activities
includes "forward looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.

The following tables summarize the financial instruments and derivative
commodity instruments held by the Company at December 31, 1998, which are
sensitive to changes in interest rates and foreign exchange rates. The Company
uses forward foreign exchange contracts to manage these primary market exposures
associated with underlying assets, liabilities and anticipated transactions. The
Company uses these instruments to reduce risk by essentially creating offsetting
market exposures. The instruments held by the Company are not leveraged and are
held for purposes other than trading.

26
<PAGE> 28

In the normal course of business, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally included country
risk, credit risk, and legal risk, and are not represented in the following
tables.

INTEREST RATE SENSITIVITY

This table presents descriptions of the maturity dates of the financial
instruments that were held by the company at December 31, 1998 and which are
sensitive to changes in interest rates.

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 2000 TOTAL FAIR VALUE
(IN THOUSANDS) ------- ---- ----------------
<S> <C> <C> <C>
State and municipal securities...................... $21,652 $516 $22,168
US Government Agency securities..................... 2,065 -- 2,065
Corporate debt securities........................... 2,200 -- 2,200
------- ---- -------
Total..................................... $25,917 $516 $26,433
======= ==== =======
Average interest rate............................... 3.79% 4.99%
</TABLE>

FOREIGN CURRENCY EXCHANGE RISK

The Company has foreign subsidiaries through which the Company's products
are sold in various global markets. As a result, the Company's earnings and cash
flows are exposed to fluctuations in foreign currency exchange rates. The
Company attempts to limit these exposures through operational strategies and
financial market instruments. The Company utilizes hedge instruments, primarily
forward contracts with maturities of approximately 30 days, to manage its
exposure associated with firm intercompany positions denominated in
nonfunctional currencies. The Company does not use derivative financial
instruments for trading purposes.

The Company had $10.3 million of short-term forward exchange contracts,
denominated in major foreign currencies, which approximated the fair value of
such contracts and their underlying transactions at December 31, 1998. Gains and
losses related to these instruments at December 31, 1998 were not material. The
Company does not anticipate any material adverse effect on its consolidated
financial position, results of operations, or cash flows resulting from the use
of these instruments. There can be no assurance that these strategies will be
effective or that transaction losses can be minimized or forecasted accurately.

The following table provides information about the Company's foreign
exchange forward contracts at December 31, 1998. The table presents the value of
the contracts in U.S. dollars at the contract exchange rate as of the contract
maturity date. Due to the short-term nature of these contracts, the fair value
approximates the weighted average contractual foreign currency exchange rate
value of the contracts at December 31, 1998.

Forward contracts to sell foreign currencies for U.S. dollars:

(IN THOUSANDS, EXCEPT CONTRACT RATES)

<TABLE>
<CAPTION>
AVERAGE U.S.
CONTRACT NOTIONAL FAIR
RATE AMOUNT VALUE
-------- -------- ------
<S> <C> <C> <C>
Japanese Yen........................................... 117.3500 $5,198 $5,336
German Deutschemark.................................... 1.6661 2,024 2,023
British Pound Sterling................................. 1.6497 1,815 1,843
French Franc........................................... 5.5892 1,109 1,103
</TABLE>

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Balance Sheets of the Company as of December 31, 1997 and
1998 and the Consolidated Statements of Income, Stockholders' Equity and Cash
Flows for each of the three years in the period ended December 31, 1998,
together with the related notes and the report of PricewaterhouseCoopers LLP,
independent accountants, are set forth in the following pages. Other required
financial information is set forth herein, as more fully described in Item 14
hereof.

27
<PAGE> 29

CLARIFY INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... 29
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... 30
Consolidated Statements of Income for each of the three
years in the period ended December 31, 1998............ 31
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31,
1998................................................... 32
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1998...... 33
Notes to Consolidated Financial Statements.................. 34
</TABLE>

28
<PAGE> 30

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Clarify, Inc.:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Clarify, Inc. and its subsidiaries at December 31, 1997 and 1998, and the
results of their operations and their cash flows in each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
January 19, 1999, except for
Note 11 for which the date is
March 12, 1999

29
<PAGE> 31

CLARIFY INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $11,956 $ 31,271
Short-term investments.................................... 19,239 25,917
Accounts receivable, net of allowances of $1,310 in 1997
and $2,757 in 1998..................................... 32,854 45,224
Prepaid expenses and other current assets................. 2,463 2,604
Deferred tax assets....................................... 4,133 4,934
------- --------
Total current assets.............................. 70,645 109,950
Property and equipment, net................................. 8,611 8,437
Long-term investments....................................... 5,167 516
Non-current deferred tax assets............................. 1,559 1,860
Other non-current assets.................................... 849 1,837
------- --------
Total Assets...................................... $86,831 $122,600
======= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 5,047 $ 5,826
Payroll related accruals.................................. 6,833 9,589
Other accrued liabilities................................. 4,269 8,800
Income taxes payable...................................... 1,851 1,980
Unearned revenue.......................................... 11,734 25,086
------- --------
Total current liabilities......................... 29,734 51,281
------- --------
Commitments (Note 6)
Stockholders' equity:
Preferred stock, $.0001 par value, 5,000 shares
authorized; none outstanding Common stock, $.0001 par
value, 55,000 shares authorized; shares issued and
outstanding: 21,335 in 1997 and 22,168 in 1998............ 2 2
Additional paid-in-capital................................ 51,640 59,127
Accumulated other comprehensive income.................... 28 (602)
Deferred compensation..................................... (65) (18)
Retained earnings......................................... 5,492 12,810
------- --------
Total stockholders' equity........................ 57,097 71,319
------- --------
Total Liabilities and Stockholders' Equity........ $86,831 $122,600
======= ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE> 32

CLARIFY INC.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues:
License fees.............................................. $39,139 $59,214 $84,874
Services.................................................. 17,183 29,003 45,636
------- ------- -------
Total revenues.................................... 56,322 88,217 130,510
------- ------- -------
Cost of revenues:
License fees.............................................. 1,409 2,400 2,424
Services.................................................. 10,711 18,149 26,165
------- ------- -------
Total cost of revenues............................ 12,120 20,549 28,589
------- ------- -------
Gross margin................................................ 44,202 67,668 101,921
Operating expenses:
Product development and engineering....................... 10,384 16,777 20,329
Sales and marketing....................................... 20,351 38,054 61,389
General and administrative................................ 4,920 7,903 10,094
Merger costs.............................................. 1,061 -- --
------- ------- -------
Total operating expenses.......................... 36,716 62,734 91,812
------- ------- -------
Operating income............................................ 7,486 4,934 10,109
Interest income............................................. 1,653 1,437 1,536
Interest expense............................................ (9) (6) (31)
Other income (expense), net................................. -- (127) 2
------- ------- -------
Income before income taxes.................................. 9,130 6,238 11,616
Provision for income taxes.................................. 940 2,308 4,298
------- ------- -------
Net income.................................................. $ 8,190 $ 3,930 $ 7,318
======= ======= =======
Basic net income per share.................................. $ 0.41 $ 0.19 $ 0.34
======= ======= =======
Shares used in per share computation -- basic............... 20,143 20,909 21,683
======= ======= =======
Diluted net income per share................................ $ 0.38 $ 0.18 $ 0.32
======= ======= =======
Shares used in per share computation -- diluted............. 21,768 22,164 22,592
======= ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 33

CLARIFY INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
ACCUMULATED RETAINED
COMMON STOCK ADDITIONAL OTHER DEFERRED EARNINGS TOTAL
--------------- PAID-IN- COMPREHENSIVE STOCK ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL INCOME COMPENSATION (DEFICIT) TOTAL INCOME
------ ------ ---------- ------------- ------------ ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1996... 19,869 $2 $39,316 $ (5) $(159) $(7,672) $31,482
Net income.................. 8,190 8,190 $8,190
Other comprehensive income,
net of tax Translation
adjustment................ (61) (61) (61)
------
Total comprehensive
income............ $8,129
======
Exercise of stock options... 442 224 224
Employee stock purchases.... 289 1,845 1,845
Amortization of deferred
stock option
compensation.............. 47 47
Forgiveness of notes payable
to stockholders........... 1,047 1,047
Tax benefit from exercise of
nonqualified stock
options................... 4,171 4,171
------ -- ------- ----- ----- ------- -------
Balances, December 31,
1996...................... 20,600 2 45,556 (66) (112) 1,565 46,945
Net income.................. 3,930 3,930 $3,930
Other comprehensive income,
net of tax Translation
adjustment................ 72 72 72
Change in unrealized gain
on investment........... 22 22 22
------
Total comprehensive
income............ $4,024
======
Exercise of stock options... 305 436 436
Employee stock purchases.... 463 3,370 3,370
Amortization of deferred
stock option
compensation.............. 47 47
Common stock repurchased for
cash...................... (33) (23) (23)
Tax benefit from exercise of
nonqualified stock
options................... 2,301 2,301
Cumulative translation
adjustment................ (3) (3)
------ -- ------- ----- ----- ------- -------
Balances, December 31,
1997...................... 21,335 2 51.640 28 (65) 5,492 57,097
Net income.................. 7,318 7,318 $7,318
Other comprehensive income,
net of tax Translation
adjustment................ (618) (618) (618)
Change in unrealized gain
on investment........... (12) (12) (12)
------
Total comprehensive
income............ $6,688
======
Exercise of stock options... 369 1,383 1,383
Employee stock purchases.... 477 4,348 4,348
Amortization of deferred
stock option
compensation.............. 47 47
Common stock repurchased for
cash...................... (13) (3) (3)
Tax benefit from exercise of
nonqualified stock
options................... 1,621 1,621
Fair value of options for
services.................. 138 138
------ -- ------- ----- ----- ------- -------
Balances, December 31,
1998...................... 22,168 $2 $59,127 $(602) $ (18) $12,810 $71,319
====== == ======= ===== ===== ======= =======
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 34

CLARIFY INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 8,190 $ 3,930 $ 7,318
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization......................... 1,750 4,666 5,689
Provision for doubtful accounts....................... 596 874 2,285
Deferred income taxes................................. (801) (1,909) (1,101)
Loss on disposal of assets............................ 133 271 --
Other................................................. (61) 67 94
Changes in assets and liabilities:
Accounts receivable................................. (11,441) (15,913) (13,570)
Prepaid and other current assets.................... (663) (707) (25)
Accounts payable.................................... 2,811 1,157 765
Payroll related accruals............................ 2,777 2,085 2,693
Other accrued liabilities........................... 2,419 3,702 4,530
Unearned revenue.................................... 7,462 (955) 12,489
-------- -------- --------
Net cash provided by (used for) operating
activities.......................................... 13,172 (2,732) 21,167
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment....................... (8,048) (5,092) (5,521)
Purchase of investments.................................. (5,470) (31,483) (21,823)
Sale and maturities of investments....................... 1,995 10,519 19,690
Increase in other assets................................. (758) (9) (972)
-------- -------- --------
Net cash used for investing activities................ (12,281) (26,065) (8,626)
-------- -------- --------
Cash flows from financing activities:
Payments of capital lease obligations.................... (81) -- --
Proceeds from issuance of common stock, net.............. 2,069 6,084 7,487
Borrowings under (payments of) notes payable............. (215) -- --
-------- -------- --------
Net cash provided by financing activities............. 1,773 6,084 7,487
-------- -------- --------
Net increase in cash and cash equivalents.................. 2,664 (22,713) 20,028
Effect of foreign exchange rate changes on cash............ -- 192 (713)
Cash and cash equivalents, beginning of year............... 31,813 34,477 11,956
-------- -------- --------
Cash and cash equivalents, end of year................... $ 34,477 $ 11,956 $ 31,271
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................... $ 9 $ 6 $ 31
======== ======== ========
Cash paid during the year for taxes...................... $ 464 $ 233 $ 3,819
======== ======== ========
Supplemental disclosure of noncash investing and financing
activities:
Change in unrealized holding gains on investments.......... $ 22 $ (12)
======== ========
Tax benefit from exercise of nonqualified stock options.... $ 4,171 $ 2,301 $ 1,621
======== ======== ========
Forgiveness of notes payable to stockholders............... $ 1,047
========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 35

CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BUSINESS OF THE COMPANY

Clarify, Inc. (the "Company"), a Delaware corporation, was founded in
August 1990 to develop, market and support adaptable client/server application
software designed to address the external and internal service, support, and
product quality needs of today's global enterprises. The Company markets its
software and services primarily through its direct sales organization.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The functional currency for the majority of
the Company's foreign operations is the applicable local currency. The
translation from the applicable foreign currency to U.S. dollars is performed
for balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using the weighted average
exchange rate during the period. Adjustments resulting from such translation are
reflected in accumulated other comprehensive income. Gains or losses resulting
from foreign currency transactions are included in the results of operations.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Financial Instruments

The Company considers cash and all highly liquid investments purchased with
an original or remaining maturity of less than three months at the date of
purchase to be cash equivalents. Short-term and long-term investments are
classified as available-for-sale and are carried at fair market value.
Unrealized holding gains and losses on such investments are reported, net of
related taxes, as a part of accumulated other comprehensive income. Realized
gains and losses on sales of such investments are reported in earnings and
computed using the specific identification cost method.

The amounts reported for cash equivalents, accounts receivables and other
financial instruments are considered to approximate fair values based upon
comparable market information available at the respective balance sheet dates.

The financial instruments that potentially subject the Company to
concentrations of credit risk comprise principally cash investments and trade
accounts receivable. Cash and cash equivalents and investments are, for the most
part, custodied with three major financial institutions. Deposits held with
banks may exceed the amount of insurance provided on such deposits. These
deposits may generally be redeemed upon demand and, therefore, bear minimal
risk. The Company's customer base is dispersed across many different geographic
areas throughout the United States, Europe and Asia and consists principally of
companies in the networking equipment, high-end software, telecommunications and
computer systems industries. The Company performs ongoing credit evaluations of
its customers and maintains an allowance for potential credit losses.
Collateral, such as letters of credit and bank guarantees, is generally not
required.

In the normal course of business, the Company has exposures to foreign
currency fluctuations arising from foreign currency sales and purchases and
intercompany transactions, among other things. The Company

34
<PAGE> 36
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

uses foreign exchange forward contracts to limit its exposure to foreign
exchange losses arising from foreign currency payables and receivables. The
Company evaluates its net exposure therefrom and enters into forward contracts
to hedge the net exposure over a specified amount. These contracts are executed
with credit-worthy financial institutions and are denominated in currencies of
major industrial nations. Gains and losses on these contracts serve as hedges in
that they offset fluctuations that would otherwise impact the Company's
financial results. Costs associated with entering into such contracts are
generally amortized over the life of the instruments and are not material to the
Company's financial results.

At December 31, 1998, the Company had foreign currency forward contracts
outstanding to hedge foreign currency intercompany accounts receivable and
accounts payable. These contracts typically have 30 day maturities and are
intended to reduce exposure to foreign currency exchange risk. The total
aggregate fair value of and the net unrealized loss on foreign exchange
contracts were $10.3 million and $0.2 million, respectively.

Revenue Recognition

The Company's revenue is derived from primarily two sources, across many
industries: (i) product license revenue, derived primarily from product sales to
customers, including large scale enterprises; and (ii) service and support
revenue, derived primarily from providing software updates, support, training
and consulting services to customers.

The Company adopted the provisions of Statement of Position (SOP) 97-2
"Software Revenue Recognition", as amended by SOP 98-4 "Deferral of the
Effective Date of Certain Provisions of SOP 97-2", effective January 1, 1998.
SOP 97-2 supersedes SOP 91-1 "Software Revenue Recognition", and delineates the
accounting for software product and maintenance revenue. Under SOP 97-2, the
Company recognizes product revenue upon shipment if a signed contract exists,
the fee is fixed and determinable and collection of resulting receivables is
probable. In 1997 and 1996, the Company's revenue recognition policy was the
same as set forth above.

For contracts with multiple obligations (e.g. deliverable and undeliverable
products, maintenance and other services), the Company allocates revenue to each
component of the contract based on objective evidence of its fair value, which
is specific to the Company, or for products not being sold separately, the price
established by management. The Company recognizes revenue allocated to
undelivered products when the criteria for product revenue set forth above are
met. The Company recognizes revenue allocated to maintenance fees for ongoing
customer support and product updates ratably over the period of the maintenance
contract. Payments for maintenance fees are generally made in advance and are
non-refundable. For revenue allocated to training and consulting services, the
Company recognizes revenue as the related services are performed.

Comprehensive Income

In accordance with Statement of Financial Accounting Standards (SFAS) No.
130 "Reporting Comprehensive Income", the Company has elected to display the
total nonowner changes in equity as "Accumulated Other Comprehensive Income" on
the Consolidated Balance Sheets and in the Consolidated Statements of
Stockholders' Equity. Comprehensive income is the change in equity of a business
enterprise

35
<PAGE> 37
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

resulting from transactions from nonowner sources. The components of accumulated
other comprehensive income for the two years ended December 31, 1998 are as
follows (in thousands):

<TABLE>
<CAPTION>
1997 1998
---- -----
<S> <C> <C>
Unrealized net holding gain on investments.................. $22 $ 10
Cumulative translation adjustment........................... 6 (612)
--- -----
Accumulated other comprehensive income...................... $28 $(602)
=== =====
</TABLE>

Earnings per share

The Company calculates earnings per share in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share". Basic earnings per share is computed based on the weighted
average number of shares outstanding during the period. Diluted earnings per
share is computed based on the weighted average number of shares outstanding
during the period increased by the effect of dilutive stock options and stock
purchase contracts, using the treasury stock method.

The following table presents information necessary to calculate basic and
diluted earnings per common and common equivalent share:

<TABLE>
<CAPTION>
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Weighted average shares outstanding -- Basic.......... 20,143 20,909 21,683
Dilutive common stock equivalents..................... 1,625 1,255 909
------- ------- -------
Weighted average shares and equivalents -- Diluted.... 21,768 22,164 22,592
======= ======= =======
Net income for basic and diluted earnings per share
computation......................................... $ 8,190 $ 3,930 $ 7,318
======= ======= =======
</TABLE>

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
(generally three to five years). Assets under capital leases and leasehold
improvements are amortized over the lesser of their useful lives or the term of
the lease. Upon disposal, the assets and related accumulated depreciation are
removed from the Company's accounts, and the resulting gains or losses are
reflected in the statement of income.

Income Taxes

Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is required to adjust its
deferred tax liabilities in the period when tax rates or the provisions of the
income tax laws change. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.

Product Development and Engineering Expenditures

Costs related to research, design and development of products are charged
to product development and engineering expenses as incurred. Software
development costs are capitalized beginning when a product's technological
feasibility has been established and ending when a product is available for
general release to customers. Generally, the Company's products are released
soon after technological feasibility has been established. As a result, costs
subsequent to achieving technological feasibility have not been significant and
all software development cost have therefore been expensed.

36
<PAGE> 38
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Advertising Costs

Advertising costs are expensed as incurred and totaled $258,000, $690,000,
and $972,000 during the years ended December 31, 1996, 1997 and 1998,
respectively.

Stock Split

On September 18, 1996, the Company's Board of Directors authorized a
two-for-one stock split payable in the form of a dividend of one additional
share of the Company's Common Stock for each share owned by stockholders of
record on September 30, 1996. All share and per share information in the
accompanying financial statements has been restated to give retroactive
recognition to the stock split for all periods presented.

Stock-Based Compensation

Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting
for Stock-Based Compensation," encourages but does not require companies to
record compensation cost for stock-based compensation plans at fair value. The
Company has chosen to continue to account for employee stock options using the
intrinsic value method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.

Recently Issued Accounting Standards

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
Management has not yet evaluated the effects of this change on its operations.
SFAS No. 133 will be effective for the Company's fiscal year 2000. Management
believes that this statement will not have a significant impact on the Company.

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year presentation. Such reclassifications had no impact on net income or
stockholders' equity for any year presented.

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
outstanding capital stock 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.

37
<PAGE> 39
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Revenues and net income (loss) of the separate and combined companies are
as follows (in thousands):

Three months ended March 31, 1996:

<TABLE>
<S> <C>
Revenues:
The Company............................................... $7,784
Metropolis................................................ 1,170
------
Combined.................................................. $8,954
======
Net income (loss)
The Company............................................... $ 959
Metropolis................................................ (91)
------
Combined.................................................. $ 868
======
</TABLE>

4. INVESTMENTS

Investments at December 31, 1997 and 1998 are summarized below:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
State and municipal securities.......... $19,346 $20 $-- $19,366
US Gov't. Agency securities............. 4,038 2 -- 4,040
Corporate debt securities............... 1,000 -- -- 1,000
------- --- --- -------
$24,384 $22 $-- $24,406
======= === === =======
DECEMBER 31, 1998:
State and municipal securities.......... $22,160 $10 $(2) $22,168
US Gov't. Agency securities............. 2,063 2 -- 2,065
Corporate debt securities............... 2,200 -- -- 2,200
------- --- --- -------
$26,423 $12 $(2) $26,433
======= === === =======
</TABLE>

At December 31, 1998, investments with maturity dates of 90 days or less
totaled $20.5 million, investments with maturity dates ranging from 91 days to
one year totaled $5.4 million, and investments with maturity dates ranging from
one to three years totaled $0.5 million.

5. PROPERTY AND EQUIPMENT

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
Leasehold improvements.......................... $ 2,242 $ 2,395
Equipment....................................... 9,710 13,077
Furniture and fixtures.......................... 2,750 3,278
Purchased software.............................. 967 2,203
------- --------
15,669 20,953
Less accumulated depreciation................... (7,058) (12,516)
------- --------
Property and equipment, net..................... $ 8,611 $ 8,437
======= ========
</TABLE>

38
<PAGE> 40
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. COMMITMENTS

The Company leases its principal operating facility and off-site sales
offices under operating leases expiring no later than 2006. Future minimum lease
payments under these leases, as of December 31, 1998, are as follows (in
thousands):

<TABLE>
<S> <C>
1999............................................... $ 5,753
2000............................................... 7,533
2001............................................... 7,436
2002............................................... 7,134
2003............................................... 7,224
Thereafter......................................... 18,905
-------
$53,985
=======
</TABLE>

Rent expense was approximately $1,773,000, $4,150,000 and $4,790,000 in
1996, 1997 and 1998, respectively.

7. STOCKHOLDERS' EQUITY

Stockholder Rights Plan

In June 1997, the Company's Board of Directors adopted a Stockholder Rights
Plan (the "Rights Plan") in which preferred stock purchase rights were
distributed as a dividend at the rate of one Right for each share of Common
Stock held as of the close of business on June 30, 1997. The Company adopted the
plan to guard against partial tender offers and other abusive tactics that might
be used in an attempt to gain control of the Company without paying all
stockholders a fair price for their shares. The Rights Plan, which expires on
June 13, 2007, will not prevent takeovers, but it is designed to deter coercive
takeover tactics and to encourage anyone attempting to acquire the Company to
first negotiate with the Board.

Each Right will entitle each stockholder to buy one-one thousandth of a
newly issued share of Series A Junior Participating Preferred Stock of the
Company at an exercise price of $95.00. The Rights will be exercisable only if a
person or group, other than an exempted person, makes a tender offer for, or
acquires beneficial ownership, of 15% or more of the Company's then outstanding
Common Stock.

If any person other than an exempted person becomes the beneficial owner of
15% or more of the Company's outstanding Common Stock, then each Right not owned
by such person or certain related parties will entitle its holder to purchase,
at the Right's then current exercise price, shares of the Company's Common Stock
(or, in certain circumstances, cash, property or other securities of the
Company) having a market value equal to twice the then current exercise price.
In addition, if, after a person becomes the beneficial owner of 15% or more of
the Company's outstanding Common Stock, the Company is acquired in a merger or
other business combination transaction, or sells 50% or more of its assets or
earning power to another person, each Right will entitle its holder to purchase,
at the Right's then current exercise price, shares of Common Stock of such other
person having a market value equal to twice the then current exercise price.

The Company's Board of Directors will generally be entitled to redeem the
Rights at $.01 per Right at any time prior to a person or group acquiring 15% or
more of the Company's Common Stock.

Employee Stock-Based Compensation Plans

1995 Stock Option/Stock Issuance Plan

At December 31, 1998, approximately 5,315,300 shares of common stock were
authorized for issuance under the Company's 1995 Stock Option/Stock Issuance
Plan (the "1995 Plan"), which serves as the

39
<PAGE> 41
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

successor equity incentive program to the Company's 1991 Stock Option/Stock
Issuance Plan (the "1991 Plan"). The 1995 Plan will terminate on September 13,
2005, unless sooner terminated by the Board of Directors.

The 1995 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted incentive or non-statutory
stock options to purchase shares of Common Stock at an exercise price not less
than 100% or 85%, respectively, of their fair market value on the grant date;
(ii) the Stock Issuance Program under which individuals may, at the Plan
Administrator's discretion, be issued shares of Common Stock directly either by
the purchase of such shares at a price not less than 85% of their fair market
value at the time of issuance or in consideration of the past performance of
services; and (iii) the Automatic Option Grant program under which non-statutory
stock option grants will be automatically made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to 100% of their fair market value on the grant date. Options are
exercisable at times and in increments as specified by the Plan Administrator
and generally expire ten years after grant.

On May 9, 1997, the Compensation Committee of the Board of Directors
approved the repricing of certain outstanding stock options under the Company's
1995 Plan with exercise prices in excess of the fair market value on May 9,
1997. Each employee or officer who elected prior to May 9, 1997 to participate
in the repricing program received a new option with an exercise price of $13.50
per share (the fair market value on May 9, 1997). Each repriced option retained
its original vesting schedule except that no portion of the option could be
exercised prior to December 9, 1997 and no vesting accrued between May 9, 1997
and December 9, 1997. Certain options granted within 12 months of May 9, 1997
were subject to a longer vesting schedule. Approximately 1,008,000 shares
subject to stock options were repriced pursuant to this program.

1999 Non-Employee Directors' Option Plan

In October 1998, the Board of Directors approved the new Non-Employee
Directors' Option Plan (subject to stockholder approval) to include an initial
pool of 300,000 shares available for issuance under the plan. This plan will
replace the automatic grant program of the 1995 Stock Option/Stock Issuance
Plan. Options are exercisable at times and in increments as specified by the
Plan Administrator and generally expire 10 years after grant date. The new plan
has a term of 10 years.

There were no repricings of outstanding stock options during the year ended
December 31, 1998.

The share reserve for the 1995 Plan automatically increases on the first
trading day in each of the 1996 (1,048,200 shares reserved), 1997 (1,158,600
shares reserved), 1998 (1,226,200 shares reserved), and 1999 (1,351,400 shares
reserved) calendar years by the number of shares equal to five percent of the
total number of shares of the Company's common and common stock equivalents
outstanding on December 31 of the immediately preceding calendar year.

40
<PAGE> 42
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Option activity for all plans is summarized as follows:

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE PER SHARE
---------- ------------------------
<S> <C> <C>
Outstanding, January 1, 1996 (1,744,700 exercisable at
a weighted average price of $1.35).................. 1,833,400 $ 1.57
Options granted....................................... 1,365,800 26.46
Options exercised..................................... (442,100) 0.51
Options cancelled..................................... (188,100) 13.12
---------- ------
Outstanding, December 31, 1996 (1,296,100 exercisable
at a weighted average price of $2.06)............... 2,569,000 14.14
Options granted....................................... 2,276,700 13.74
Options exercised..................................... (305,000) 1.42
Options cancelled..................................... (1,351,800) 26.81
---------- ------
Outstanding, December 31, 1997 (1,120,500 exercisable
at a weighted average price of $4.02)............... 3,188,900 9.71
Options granted....................................... 2,635,300 12.88
Options exercised..................................... (369,100) 3.88
Options cancelled..................................... (597,500) 11.99
---------- ------
Outstanding, December 31, 1998 (1,343,100 exercisable
at a weighted average price of $8.30)............... 4,857,600 $11.59
========== ======
</TABLE>

The weighted average fair value of options granted for 1996, 1997, and 1998
was $12.82, $5.88, and $7.75, respectively.

At December 31, 1998, approximately 10,000 shares of common stock issued
under the 1991 Plan were subject to repurchase. At December 31, 1998, an
aggregate of approximately 455,100 shares were available for future grant under
the 1991 and 1995 plans.

The following information applies to options outstanding at December 31,
1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE ----------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.11 - 3.56.. 510,700 6.23 $ 1.67 510,700 $1.67
4.00 - 8.69... 563,100 8.81 7.77 149,300 6.31
9.22 - 11.25... 510,100 8.84 10.87 124,100 11.04
11.31 - 12.25... 623,600 9.07 11.87 89,600 11.61
12.31 - 13.44... 651,400 9.21 13.05 25,400 12.95
13.50 - 13.50... 695,900 8.28 13.50 283,200 13.50
13.56 - 14.81... 556,300 9.15 14.17 48,500 14.32
14.88 - 16.88... 508,900 8.96 15.00 35,900 15.45
17.00 - 24.13... 236,600 8.75 19.73 75,900 20.08
34.50 - 34.50... 1,000 8.07 34.50 500 34.50
- -------------- --------- ---- ------ --------- -----
$0.11 - 34.50.. 4,857,600 8.60 $11.59 1,343,100 $8.30
============== ========= ==== ====== ========= =====
</TABLE>

41
<PAGE> 43
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Employee Stock Purchase Plan

At December 31, 1998, the Company had a total of approximately 642,000
shares of common stock reserved for future issuance under its Employee Stock
Purchase Plan (the ESPP). The purpose of the ESPP is to provide eligible
employees of the Company with a means of acquiring common stock of the Company
through payroll deductions. The plan consists of four six-month purchase periods
in each two year offering period. Employees purchase stock at 85% of the market
value at either the beginning of the offering period or at the end of the
purchase period, whichever price is lower. No participant may purchase more than
$25,000 worth of common stock in any calendar year. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment with the Company.
During 1996, 1997 and 1998, approximately 289,000, 463,000 and 477,000 shares,
respectively, were sold through the ESPP.

Stock-Based Compensation

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." If compensation cost for the 1995 Plan and the ESPP had been
determined based on the fair value on the grant dates for all awards since
January 1, 1995 consistent with the provisions of SFAS No. 123, the Company's
net income (loss) and diluted net income (loss) per share would have been
reduced to the pro forma amounts indicated below (in thousands except per share
data):

<TABLE>
<CAPTION>
1996 1997 1998
------ ------ -----
<S> <C> <C> <C>
Pro forma net income (loss)....................... $6,398 $ (849) $ 434
====== ====== =====
Pro forma basic net income (loss) per share....... $ 0.32 $(0.04) $0.02
====== ====== =====
Pro forma diluted net income (loss) per share..... $ 0.29 $(0.04) $0.02
====== ====== =====
</TABLE>

Pro forma net income (loss) reflects only options granted since January 1,
1995. Therefore, the full impact of calculating compensation cost under SFAS 123
is not reflected in the pro forma amounts presented above because compensation
cost is reflected over the options' vesting period of generally four or five
years and compensation cost for options granted prior to January 1, 1995 is not
considered.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used:

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Risk free interest rate................................ 6.00% 5.74% 5.15%
Expected life (years).................................. 4 4 4
Volatility............................................. 0.55 0.55 0.77
Dividends yield........................................ 0.00 0.00 0.00
</TABLE>

The fair value of employees' stock purchase rights under the ESPP was
estimated using the Black-Scholes model with the following assumptions:

<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----
<S> <C> <C> <C>
Risk free interest rate........................ 6.00% 5.74% 5.50%
Expect life (months)........................... 6 and 12 6 and 12 6
Volatility..................................... 0.55 0.55 0.77
Dividends yield................................ 0.00 0.00 0.00
</TABLE>

42
<PAGE> 44
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. INCOME TAXES

The components of the provision for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
1996 1997 1998
------- ------ ------
<S> <C> <C> <C>
Federal -- current payable...................... $ 152 $3,185 $5,284
Federal -- deferred............................. 3,172 (802) (735)
State -- current payable........................ 5 452 686
State -- deferred............................... 612 (142) 61
Foreign -- deferred............................. -- (961) (1,385)
Valuation allowance............................. (3,001) 576 387
------- ------ ------
Provision for income tax........................ $ 940 $2,308 $4,298
======= ====== ======
</TABLE>

The reconciliation of the statutory federal income tax rate to the
effective rate is as follows (as a percent of pretax income):

<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal statutory tax rate.............................. 34% 34% 35%
State tax, net of federal tax benefit................... 6 5 4
Permanent differences................................... 3 (3) 1
Tax credits utilized.................................... (4) (4) (5)
Utilization of net operating losses..................... (19) 0 0
Change in valuation allowance........................... (14) 9 3
Other................................................... 4 (4) (1)
--- -- --
Provision for income tax................................ 10% 37% 37%
=== == ==
</TABLE>

The significant components of deferred tax assets are as follows (in
thousands):

<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Foreign loss carryforwards................................. $ 961 $2,124
Tax credit carryforwards................................... 1,360 600
Reserves................................................... 862 1,525
Accrued expenses........................................... 1,798 1,367
Deferred revenue........................................... 788 2,232
Other...................................................... 499 (91)
Valuation allowance........................................ (576) (963)
------ ------
Net deferred tax assets.................................... $5,692 $6,794
====== ======
Current deferred tax assets................................ $4,133 $4,934
Non-current deferred tax assets............................ 1,559 1,860
------ ------
Net deferred tax assets.................................... $5,692 $6,794
====== ======
</TABLE>

The Company has not recorded a valuation allowance for those deferred tax
assets that management believes are more likely than not to be realized through
taxable income in the carryback period or through future taxable income.
However, at December 31, 1998, a valuation allowance of approximately $963,000
has been recorded because of the uncertainty regarding realization of certain
foreign tax net operating losses as a result of the limited profitable operating
history in certain foreign tax jurisdictions.

At December 31, 1998, the Company had a foreign loss carryforwards of
$6,069,000 and state tax credit carryforwards totalling $923,000. The
carryforwards will expire between 2001 and 2008.

43
<PAGE> 45
CLARIFY INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. SEGMENT INFORMATION AND MAJOR CUSTOMERS

In accordance with Statement of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information", the
Company is required to disclose information about its products, services, the
geographic area in which it operates and major customers. The Company operates
in a single industry segment encompassing the design, development, marketing and
technical support for front-office automation software.

The following are revenues and long-lived assets by geographic area as of
and for the years ended December 31 (in thousands):

<TABLE>
<CAPTION>
REVENUES LONG-LIVED ASSETS
------------------------------ ------------------
1996 1997 1998 1997 1998
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
U.S. ............................. $48,620 $79,121 $ 97,928 $7,639 $7,257
International..................... 7,702 9,096 32,582 972 1,180
------- ------- -------- ------ ------
Total................... $56,322 $88,217 $130,510 $8,611 $8,437
======= ======= ======== ====== ======
</TABLE>

No one customer accounted for more than 10% of total revenues in 1996, 1997
and 1998.

10. RETIREMENT PLAN

Effective August 1991, the Company began a voluntary 401(k) plan covering
substantially all employees. The plan provides for discretionary employer
contributions. No employer contributions were made or authorized in 1996, 1997
or 1998.

11. SUBSEQUENT EVENT

On March 12, 1999, the Board of Directors approved an amendment to the
current ESPP. The Company anticipates that the shares available for future
purchase under the current plan will be depleted on or before April 30, 2000.
The Board approved the following amendment to include one final six-month
offering period commencing May 1, 1999 and ending October 31, 1999. All other
terms for participation by employees will remain the same. The current plan will
terminate after this final purchase period. Additionally, the Board approved the
new 1999 Employee Stock Purchase Plan (subject to stockholder approval) to
include an initial pool of 1,000,000 shares available for purchase under the
Plan plus an annual increase to the shares reserved under the Plan on the first
day of each fiscal year in 2000,2001,2002, 2003 and 2004 equal to the lesser of
(i) 500,000, (ii) 5% of the Company's Common Stock outstanding on the last day
of the preceding fiscal year, or (iii) a lesser number of shares as determined
by the Board, for stock purchases. The new Plan has a term of 20 years.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable

44
<PAGE> 46

PART III

Certain information required by Part III is omitted from this Report in
that the Company will file a definitive proxy statement within 120 days after
the end of this fiscal year pursuant to Regulation 14A (the "Proxy Statement")
for its 1999 Annual Meeting of Stockholders proposed to be held on June 10, 1999
and the information included therein is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company's directors and executive officers
required by this Item is incorporated by reference from the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders under the headings
"Election of Directors" and "Executive Compensation and Related Information,"
respectively.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the
heading "Executive Compensation and Related Information."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference from the
Company's Proxy Statement for the 1999 Annual Meeting of Stockholders under the
heading "Stock Ownership of Certain Beneficial Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

45
<PAGE> 47

PART IV

ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS
REPORT:
1. Consolidated Financial Statements
The consolidated financial statements of Clarify,
Inc. are included in Item 8........................ 27
2. Consolidated Financial Statements Schedules
Independent Accountants' Report on Schedule......... 48
Schedule II -- Valuation and Qualifying Accounts.... 49

Schedules not listed above have been omitted because
the matter or conditions are not present or the
information required to be set forth therein is
included in the Consolidated Financial Statements
hereto.
</TABLE>

(b) REPORTS ON FORM 8-K.

No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1998.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
1.0(5) 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
3.1(1) Certificate of Incorporation of the Registrant, as amended
to date
3.2(6) Amended and Restated Bylaws of the Company
4.1(1) Specimen Common Stock Certificate
4.2(1) Restated Investor Rights Agreement, dated March 7, 1994,
among the Registrant and the investors and founders named
therein
10.1(1) Form of Indemnification Agreement
10.2(1) 1991 Stock Option/Stock Issuance Plan
10.3(2) 1995 Stock Option/Stock Issuance Plan
10.4(2) Employee Stock Purchase Plan
10.5(1) Loan and Security Agreement between Silicon Valley Bank and
Clarify Inc.
10.6(1) Lease by and between Orchard Investment Company Number 6.9
and Clarify Inc. dated March 16, 1992, as amended by the
Second 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 Registrant, dated
February 18, 1992
10.8(1) Master Equipment Lease Agreement by and between Venture
Leasing Assoc. and the Registrant, dated May 7, 1991
10.9(1) Master Equipment Lease Agreement by and between Phoenix
Leasing Incorporated and the Registrant, dated June 30, 1993
10.10(3) Offer Letter dated February 23,1998 between Anthony Zingale
and Clarify, Inc.
10.11(3) Stock Option Agreement between Anthony Zingale and Clarify,
Inc.
10.12(4) Lease by and between CarrAmerica Realty Corporation and
Clarify, Inc. dated June 23, 1998.
</TABLE>

46
<PAGE> 48

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<S> <C>
10.13(4) Stock Option Agreement between Jan A. Praisner and Clarify,
Inc.
10.14(4) Stock Option Agreement between Kisten Berg-Painter and
Clarify, Inc.
10.15(4) Stock Option Agreement between Jeanne Urich and Clarify,
Inc.
10.16 Proposed 1999 Non-Employee Directors' Option Plan.
10.17 Proposed 1999 Employee Stock Purchase Plan.
21.1 Subsidiaries of the Registrant.
23.1(1) Consent of Independent Accountants.
24.1(1) Power of Attorney.
</TABLE>

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

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

(3) Incorporated by reference from an exhibit filed with the Company's Annual
Report on Form 10-K filed (File Number 000-26776) with the Securities and
Exchange Commission on March 31, 1998.

(4) Incorporated by reference from an exhibit filed with the Company's Quarterly
Report on Form 10-Q filed (File Number 000-26776) with the Securities and
Exchange Commission on November 10, 1998.

(5) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form 8-A (File Number 000-26776) with the
Securities and Exchange Commission on June 24, 1997.

(6) Incorporated by reference from an exhibit filed with the Company's
Registration Statement on Form 8-K (File Number 000-26776) with the
Securities and Exchange Commission on June 25, 1997.

(d) Financial Statement Schedule. See (a)(2) above.

47
<PAGE> 49

INDEPENDENT ACCOUNTANTS' REPORT ON SCHEDULE

Our report on the consolidated financial statements of Clarify, Inc. is
included on page 29 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 51 of this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basis financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.

PricewaterhouseCoopers LLP

San Jose, California
January 19, 1999

48
<PAGE> 50

SCHEDULE II

CLARIFY INC.

VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS, DEDUCTIONS BALANCE AT
BEGINNING COSTS AND AND END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts............... $ 219 $ 596 $ 52 $ 763
====== ====== ==== ======
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts............... $ 763 $ 874 $327 $1,310
====== ====== ==== ======
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts............... $1,310 $2,285 $838 $2,757
====== ====== ==== ======
</TABLE>

49
<PAGE> 51

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California, on March 31, 1999.

CLARIFY INC.

By: /s/ ANTHONY ZINGALE

------------------------------------
Anthony Zingale
President and Chief Executive
Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David A. Stamm and Anthony Zingale and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ANTHONY ZINGALE President, Chief Executive March 31, 1999
- -------------------------------------------------------- Officer (Principal Executive
Anthony Zingale Officer) and Director

/s/ JAN A. PRAISNER Vice President and Chief March 31, 1999
- -------------------------------------------------------- Financial Officer (Principal
Jan A. Praisner Financial and Accounting
Officer)

/s/ DAVID A. STAMM Chairman of the Board March 31, 1999
- --------------------------------------------------------
David A. Stamm

/s/ THOMAS H. BREDT Director March 31, 1999
- --------------------------------------------------------
Thomas H. Bredt

/s/ MARY JANE ELMORE Director March 31, 1999
- --------------------------------------------------------
Mary Jane Elmore

/s/ CHRISTOPHER H. GREENDALE Director March 31, 1999
- --------------------------------------------------------
Christopher H. Greendale

/s/ JOSEPH B. COSTELLO Director March 31, 1999
- --------------------------------------------------------
Joseph B. Costello
</TABLE>

50
<PAGE> 52

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
- ------- ------- ------------
<C> <S> <C>
10.16 Proposed 1999 Non-Employee Director's Plan..................
10.17 Proposed 1999 Employee Stock Purchase Plan..................
21.1 Subsidiaries of the Registrant..............................
23.1 Consent of Independent Accountants..........................
24.1 Power of Attorney...........................................
27.1 Financial Data Schedule.....................................
</TABLE>

All other exhibits required to be filed as part of this report have been
incorporated by reference. See item 14(c) for a complete index of such exhibits.

<PAGE> 1
EXHIBIT 10.16

CLARIFY INC.
NON-EMPLOYEE DIRECTORS OPTION PLAN

ARTICLE 1. PURPOSE OF THE PLAN

The Plan is intended to promote the interests of the Corporation by
providing the non-employee members of the Board with the opportunity to acquire
a proprietary interest, or otherwise increase their proprietary interest, in the
Corporation as an incentive for them to remain in the service of the
Corporation.

ARTICLE 2. ADMINISTRATION

The terms and conditions of each automatic option grant (including the
timing and pricing of the option grant) shall be determined by the express terms
and conditions of the Plan, and neither the Board nor any committee of the Board
shall exercise any discretionary functions with respect to option grants made
pursuant to the Plan.

ARTICLE 3. STOCK SUBJECT TO THE PLAN

A. Shares of Common Stock shall be available for issuance under the
Plan and shall be drawn from either the Corporation's authorized but unissued
shares of Common Stock or from reacquired shares of Common Stock, including
shares repurchased by the Corporation on the open market. The number of shares
of Common Stock reserved for issuance over the term of the Plan shall be fixed
at 300,000 shares.

B. Should one or more outstanding options under this Plan expire or
terminate for any reason prior to exercise in full, then the shares subject to
the portion of each option not so exercised shall be available for subsequent
option grant under the Plan. In addition, should the exercise price of an
outstanding option under the Plan be paid with shares of Common Stock, then the
number of shares of Common Stock available for issuance under the Plan shall be
reduced by the net number of shares of Common Stock actually issued to the
holder of such option.

C. Should any change be made to the Common Stock issuable under the
Plan by reason of any stock split, stock dividend, recapitalization, combination
of shares, exchange of shares or other change affecting the outstanding Common
Stock as a class without the Corporation's receipt of consideration, then
appropriate adjustments shall be made to (i) the maximum number and/or class of
securities issuable under the Plan, (ii) the number and/or class of securities
for which automatic option grants are to be subsequently made to each
newly-elected or continuing non-employee Board member under the Plan, and (iii)
the number and/or class of securities and price per share in effect under each
option outstanding under the Plan. The adjustments to the outstanding options
shall be made by the Board in a manner which shall preclude the enlargement or
dilution of rights and benefits under such options and shall be final, binding
and conclusive.

<PAGE> 2
ARTICLE 4. ELIGIBILITY

The individuals eligible to receive automatic option grants pursuant to
the provisions of this Plan shall be limited to (i) those individuals serving as
non-employee Board members on the Effective Date and (ii) those individuals who
are first elected or appointed as non-employee Board members after the Effective
Date, whether through appointment by the Board or election by the Corporation's
stockholders. A non-employee Board member shall not be eligible to receive the
initial automatic option grant if such individual has previously been in the
employ of the Corporation (or any parent or subsidiary). However, a non-employee
Board member shall be eligible to receive one or more annual option grants,
whether or not he or she has previously been in the employ of the Corporation
(or any parent or subsidiary). Each non-employee Board member eligible to
participate in the Plan pursuant to the foregoing criteria is hereby designated
an Eligible Director.

ARTICLE 5. TERMS AND CONDITIONS OF AUTOMATIC OPTION GRANTS

A. Grant Date. Option grants shall be made on the dates specified
below:

- Each individual who first becomes an Eligible Director
on or after the Effective Date, whether through election by the Corporation's
stockholders or appointment by the Board, shall automatically be granted, at the
time of such initial election or appointment, a non-statutory option to purchase
20,000 shares of Common Stock (an "Initial Option").

- On the date of each Annual Meeting, beginning with the
1999 Annual Meeting, each Eligible Director who serves on the Board at the time
of that Annual Meeting, whether or not standing for re-election, shall
automatically be granted a non-statutory option to purchase 10,000 shares of
Common Stock (an "Annual Option"). An Eligible Director who resigns effective at
an Annual Meeting shall not be eligible to be granted a non-statutory option at
that time to purchase an additional 10,000 shares of Common Stock.

There shall be no limit on the number of Annual Option grants
any one Eligible Director may receive over his or her period of continued Board
service.

B. Exercise Price. The exercise price per share of Common Stock
subject to each automatic option grant shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the automatic grant
date.

C. Payment.

The exercise price shall become immediately due upon exercise of
the option and shall be payable in one of the alternative forms specified below;

(i) full payment in cash or check made payable to the
Corporation's order; or

(ii) full payment in shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings for
financial-reporting purposes and

-3-
<PAGE> 3
valued at Fair Market Value on the Exercise Date (as such term is defined
below); or

(iii) full payment in a combination of shares of Common Stock
held for the requisite period necessary to avoid a charge to the Corporation's
earnings for financial-reporting purposes and valued at Fair Market Value on the
Exercise Date and cash or check payable to the Corporation's order; or

(iv) full payment through a broker-dealer sale and remittance
procedure pursuant to which the non-employee Board member (i) shall provide
irrevocable written instructions to a Corporation-designated brokerage firm to
effect the immediate sale of the purchased shares and remit to the Corporation,
out of the sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares and (ii)
shall concurrently provide written directives to the Corporation to deliver the
certificates for the purchased shares directly to such brokerage firm in order
to complete the sale transaction.

For purposes of this Section 5.C, the Exercise Date shall be the
date on which written notice of the option exercise is delivered to the
Corporation. Except to the extent the sale and remittance procedure specified
above is used, payment of the exercise price for the purchased shares must
accompany the exercise notice.

D. Exercisability/Vesting. Each automatic grant shall be
immediately exercisable for all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each Initial Option Grant shall vest,
and the Corporation's repurchase right shall lapse, in a series of three (3)
equal annual installments over the Optionee's period of continued service as a
Board Member, with each installment to vest upon each of the successive
anniversaries of the Initial Option Grant date. Each Annual Option grant shall
vest, and the Corporation's repurchase right shall lapse, in a series of three
(3) equal annual installments over the Optionee's period of continued service as
a Board member, with each installment to vest on the day preceding the Annual
Meeting date on each of the following three (3) years.

Exercisability of the option shall be subject to acceleration as
provided in Section 5.G and Article 6. In no event, however, shall the option
become exercisable for any additional option shares after the Optionee's
cessation of Board service.

E. Option Term. Each automatic grant under the Plan shall have a
maximum term of ten (10) years measured from the automatic grant date.

F. Non-Transferability. During the lifetime of the Optionee, each
automatic option grant shall be exercisable only by the Optionee and shall not
be assignable or transferable by the Optionee other than a transfer of the
option effected by will or by the laws of descent and distribution following
Optionee's death.

G. Effective of Termination of Board Service.

-4-
<PAGE> 4
1. The Optionee (or, in the event of Optionee's death, the
personal representative of the Optionee's estate or the person or persons to
whom the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution) shall have a twelve (12)-month period
following the date of such cessation of Board service in which to exercise each
such option.

2. During the twelve (12)-month exercise period, the option
may not be exercised in the aggregate for more than the number of vested shares
of Common Stock for which the option is exercisable at the time of the
Optionee's cessation of Board service.

3. Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time subject to
the option shall immediately vest so that such option may, during the twelve
(12)-month exercise period following such cessation of Board service, be
exercised for all or any portion of such shares as fully-vested shares of Common
Stock.

4. In no event shall the option remain exercisable after
the expiration of the option term. Upon the expiration of the twelve (12)-month
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares for
which the option has not been exercised. However, the option shall, immediately
upon the Optionee's cessation of Board service, terminate and cease to be
outstanding to the extent it is not exercisable for vested shares on the date of
such cessation of Board service.

H. Stockholder Rights. The holder of an automatic option grant
shall have none of the rights of a stockholder with respect to any shares
subject to such option until such individual shall have exercised the option and
paid the exercise price for the purchased shares.

I. Remaining Terms. The remaining terms and conditions of each
automatic option grant shall be as set forth in the form Stock Option Agreement
approved for use under the Plan.

ARTICLE 6. SPECIAL ACCELERATION EVENTS

A. In the event of any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise fully
exercisable shall automatically accelerate in full so that each such option
shall, immediately prior to the specified effective date for the Change in
Control, become fully exercisable for all of the shares of Common Stock at the
time subject to that option. Immediately following the consummation of the
Change in Control, each automatic option grant under the Plan shall terminate
and cease to be outstanding, except to the extent assumed by the successor
corporation or its parent company.

B. The automatic option grants outstanding under the Plan shall in
no way affect the right of the Corporation to adjust, reclassify, reorganize or
otherwise change its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.

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ARTICLE 7. AMENDMENT OF THE PLAN AND AWARDS

The Board has complete and exclusive power and authority to amend or
modify the Plan (or any component thereof) in any or all respects whatsoever.
However, no such amendment or modification shall adversely affect rights and
obligations with respect to options at the time outstanding under the Plan,
unless the affected Optionee's consent to such amendment. Stockholder approval
shall be obtained to the extent required by applicable law.

ARTICLE 8. EFFECTIVE DATE AND TERM OF PLAN

A. The Plan shall become effective on the Effective Date. One or
more automatic option grants shall be made in accordance with the terms of the
Plan after the Effective Date.

B. The Plan shall terminate upon the earlier of (i) __________,
2009 or (ii) the date on which all shares available for issuance under the Plan
shall have been issued pursuant to the exercise of the options granted under the
Plan. If the date of termination is determined under clause (i) above, then all
option grants outstanding on such date shall thereafter continue to have force
and effect in accordance with the provisions of the agreements evidencing those
option grants.

ARTICLE 9. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
pursuant to option grants under the Plan shall be used for general corporate
purposes.

ARTICLE 10. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any option under
the Plan and the issuance of Common Stock upon the exercise of the option grants
made hereunder shall be subject to the Corporation's procurement of all
approvals and permits required by regulatory authorities having jurisdiction
over the Plan, the options granted under it, and the Common Stock issued
pursuant to it.

B. No shares of Common Stock or other assets shall be issued or
delivered under this Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of the Nasdaq National Market or any Stock Exchange on which the Common Stock is
then listed for trading.

ARTICLE 11. NO IMPAIRMENT OF RIGHTS

Neither the action of the Corporation in establishing the Plan nor any
provision of the Plan shall be construed or interpreted so as to affect
adversely or otherwise impair the right of the Corporation or the stockholders
to remove any individual from the Board at any time in accordance with the
provisions of applicable law.

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ARTICLE 12. MISCELLANEOUS PROVISIONS

A. The right to acquire Common Stock or other assets under the Plan
may not be assigned, encumbered or otherwise transferred by any Optionee.

B. The provisions of the Plan relating to the exercise of options
shall be governed by the laws of the State of California, as such laws are
applied to contracts entered into and performed in such State.

C. The provisions of the Plan shall inure to the benefit of, and be
binding upon, the Corporation and its successors or assigns, whether by Change
in Control or otherwise, and the Optionees, the legal representatives of their
respective estates, their respective heirs or legatees and their permitted
assignees.

ARTICLE 13. DEFINITIONS

ANNUAL MEETING: the annual meeting of the Corporation's stockholders.

BOARD: the Corporation's Board of Directors.

CODE: the Internal Revenue Code of 1986, as amended.

COMMON STOCK: shares of the Corporation's common stock.

CORPORATION: Clarify Inc., a Delaware corporation.

CHANGE IN CONTROL: a change in ownership or control of the Corporation
effected through any of the following transactions:

a. the consummation of a merger or consolidation of
the Corporation with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting power of the continuing
or surviving entity's securities outstanding immediately after such merger,
consolidation or other reorganization is owned by persons who were not
stockholders of the Corporation immediately prior to such merger, consolidation
or other reorganization;

b. the sale, transfer or other disposition of all
or substantially all of the Corporation's assets;

c. a change in the composition of the Board, as a
result of which fewer than one-third of the incumbent directors are directors
who either (i) had been directors of the Corporation on the date 24 months prior
to the date of the event that may constitute a Change in Control (the "original
directors") or (ii) were appointed to the Board to fill an existing vacancy or
were nominated for election to the Board with the affirmative votes of at least
a majority of the aggregate of the original directors who were still in office
at the time of the appointment or nomination and the directors whose appointment
or nomination was previously so approved; or

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<PAGE> 7
d. any transaction as a result of which any person
is the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act),
directly or indirectly, of securities of the Corporation representing at least
50% of the total voting power represented by the Corporation's then outstanding
voting securities. For purposes of this Paragraph (d), the term "person" shall
have the same meaning as when used in sections 13(d) and 14(d) of the 1934 Act
but shall exclude (i) a trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or of a Parent or Subsidiary and (ii) a
corporation owned directly or indirectly by the stockholders of the Corporation
in substantially the same proportions as their ownership of the Common Stock of
the Corporation.

e. A transaction shall not constitute a Change in
Control if its sole purpose is to change the state of the Corporation's
incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Corporation's securities
immediately before such transaction.

EFFECTIVE DATE: __________, 1999.

ELIGIBLE DIRECTOR: shall have the meaning assigned to such term in
Article 4.

FAIR MARKET VALUE: the Fair Market Value per share of Common Stock
determined in accordance with the following provisions:

a. If the Common Stock is at the time traded on The
Nasdaq Stock Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on The Nasdaq Stock
Market or any successor system if there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be the
closing selling price on the last preceding date for which such quotation
exists.

b. If the Common Stock is at the time listed on any
Stock Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the Common
Stock, as such price is officially quoted in the composite tape of transactions
on such exchange. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing selling
price on the last preceding date for which such quotation exists.

1934 ACT: the Securities Exchange Act of 1934, as amended.

OPTIONEE: any person to whom an option is granted under the Plan.

PERMANENT DISABILITY: the inability of the Optionee to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment expected to result in death or to be of continuous duration of
twelve (12) months or more.

PLAN: this Clarify Inc. Non-Employee Directors Option Plan.

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<PAGE> 8
STOCK EXCHANGE: either The American Stock Exchange or the New York Stock
Exchange.

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<PAGE> 1
EXHIBIT 10.17

CLARIFY, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN

The following constitute the provisions of the 1999 Employee Stock
Purchase Plan of Clarify, Inc.

1. PURPOSE. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.

2. DEFINITIONS.

(a) "BOARD" means the Board of Directors of the Company.

(b) "CODE" means the Internal Revenue Code of 1986, as
amended.

(d) "COMPANY" means Clarify, Inc., a Delaware corporation.

(e) "COMPENSATION" means all cash compensation paid to an
Employee plus any pre-tax contributions made by an Employee to any Code Section
401(k) salary deferral plan or any Code Section 125 cafeteria program now or
hereafter established by the Company or any Designated Subsidiary.

(f) "CONTINUOUS STATUS AS AN EMPLOYEE" means the absence of
any interruption or termination of service as an Employee. Continuous Status as
an Employee shall not be considered interrupted in the case of (i) sick leave;
(ii) military leave; (iii) any other leave of absence approved by the
Administrator, provided that such leave is for a period of not more than 90
days, unless reemployment upon the expiration of such leave is guaranteed by
contract or statute, or unless provided otherwise pursuant to Company policy
adopted from time to time; or (iv) in the case of transfers between locations of
the Company or between the Company and its Designated Subsidiaries.

(g) "CONTRIBUTIONS" means all amounts credited to the
account of a participant pursuant to the Plan.

(h) "CORPORATE TRANSACTION" means a sale of all or
substantially all of the Company's assets, or a merger, consolidation or other
capital reorganization of the Company with or into another corporation.

(i) "DESIGNATED SUBSIDIARIES" means the Subsidiaries which
have been designated by the Board from time to time in its sole discretion as
eligible to participate in the

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<PAGE> 2
Plan; provided however that the Board shall only have the discretion to
designate Subsidiaries if the issuance of options to such Subsidiary's Employees
pursuant to the Plan would not cause the Company to incur adverse accounting
charges.

(j) "EMPLOYEE" means any person, including an Officer, who
is customarily employed for at least twenty (20) hours per week and more than
five (5) months in a calendar year by the Company or one of its Designated
Subsidiaries.

(k) "EXCHANGE ACT" means the Securities Exchange Act of
1934, as amended.

(l) "OFFERING DATE" means the first business day of each
Offering Period of the Plan.

(m) "OFFERING PERIOD" means a period of twenty-four (24)
months commencing on November 1 and May 1 of each year.

(n) "OFFICER" means a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.

(o) "PLAN" means this Employee Stock Purchase Plan.

(p) "PURCHASE DATE" means the last day of each Purchase
Period of the Plan.

(q) "PURCHASE PERIOD" means a period of six (6) months
within an Offering Period.

(r) "PURCHASE PRICE" means with respect to a Purchase Period
an amount equal to 85% of the Fair Market Value (as defined in Section 7(b)
below) of a Share of Common Stock on the Offering Date or on the Purchase Date,
whichever is lower; provided, however, that in the event (i) of any increase in
the number of Shares available for issuance under the Plan as a result of a
stockholder-approved amendment to the Plan, and (ii) all or a portion of such
additional Shares are to be issued with respect to one or more Offering Periods
that are underway at the time of such increase ("Additional Shares"), and (iii)
the Fair Market Value of a Share of Common Stock on the date of such increase
(the "Approval Date Fair Market Value") is higher than the Fair Market Value on
the Offering Date for any such Offering Period, then in such instance the
Purchase Price with respect to Additional Shares shall be 85% of the Approval
Date Fair Market Value or the Fair Market Value of a Share of Common Stock on
the Purchase Date, whichever is lower.

(s) "SHARE" means a share of Common Stock, as adjusted in
accordance with Section 19 of the Plan.

(t) "SUBSIDIARY" means a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.

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<PAGE> 3
3. ELIGIBILITY.

(a) Any person who is an Employee as of the Offering Date of
a given Offering Period shall be eligible to participate in such Offering Period
under the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code; provided however that eligible Employees
may not participate in more than one Offering Period at a time.

(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted an option under the Plan (i) if,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or of any subsidiary of
the Company, or (ii) if such option would permit his or her rights to purchase
stock under all employee stock purchase plans (described in Section 423 of the
Code) of the Company and its Subsidiaries to accrue at a rate which exceeds
Twenty-Five Thousand Dollars ($25,000) of the Fair Market Value (as defined in
Section 7(b) below) of such stock (determined at the time such option is
granted) for each calendar year in which such option is outstanding at any time.

4. OFFERING PERIODS AND PURCHASE PERIODS.

(a) OFFERING PERIODS. The Plan shall be implemented by a
series of Offering Periods of twenty-four (24) months' duration, with new
Offering Periods commencing on or about November 1 and May 1 of each year (or at
such other time or times as may be determined by the Board of Directors). The
first Offering Period shall commence on November 1, 1999 and continue until
October 31, 2001. The Plan shall continue until terminated in accordance with
Section 19 hereof. The Board of Directors of the Company shall have the power to
change the duration and/or the frequency of Offering Periods with respect to
future offerings without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected.

(b) PURCHASE PERIODS. Each Offering Period shall consist of
four (4) consecutive purchase periods of six (6) months' duration. The last day
of each Purchase Period shall be the "Purchase Date" for such Purchase Period. A
Purchase Period commencing on November 1 shall end on the next April 30. A
Purchase Period commencing on May 1 shall end on the next October 31. The first
Purchase Period shall commence on November 1, 1999 and shall end on April 30,
2000. The Board of Directors of the Company shall have the power to change the
duration and/or frequency of Purchase Periods with respect to future purchases
without stockholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Purchase Period to be affected.

5. PARTICIPATION.

(a) An eligible Employee may become a participant in the
Plan by completing a subscription agreement on the form provided by the Company
and filing it with the Company's

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<PAGE> 4
payroll office prior to the applicable Offering Date, unless a later time for
filing the subscription agreement is set by the Board for all eligible Employees
with respect to a given Offering Period. The subscription agreement shall set
forth the percentage of the participant's Compensation (subject to Section 6(a)
below) to be paid as Contributions pursuant to the Plan.

(b) Payroll deductions shall commence on the first payroll
following the Offering Date and shall end on the last payroll paid on or prior
to the last Purchase Period of the Offering Period to which the subscription
agreement is applicable, unless sooner terminated by the participant as provided
in Section 10.

6. METHOD OF PAYMENT OF CONTRIBUTIONS.

(a) A participant shall elect to have payroll deductions
made on each payday during the Offering Period in an amount not less than one
percent (1%) and not more than twenty percent (20%) (or such greater percentage
as the Board may establish from time to time before an Offering Date). All
payroll deductions made by a participant shall be credited to his or her account
under the Plan. A participant may not make any additional payments into such
account.

(b) A participant may discontinue his or her participation
in the Plan as provided in Section 10, or, on one occasion only during a
Purchase Period may increase and on one occasion only during a Purchase Period
may decrease the rate of his or her Contributions with respect to the Offering
Period by completing and filing with the Company a new subscription agreement
authorizing a change in the payroll deduction rate. A change increasing the
payroll deduction rate shall be effective as of the beginning of the next
Purchase Period following the date of filing of the new subscription agreement.
A change decreasing the payroll deduction rate shall be effective as soon as
possible following the date of filing of the new subscription agreement.

(c) Notwithstanding the foregoing, to the extent necessary
to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during a Purchase Period. Payroll deductions shall re-commence at Purchase
Offering Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10.

7. GRANT OF OPTION.

(a) On the Offering Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Purchase Date a number of Shares of the Company's
Common Stock determined by dividing such Employee's Contributions accumulated
prior to such Purchase Date and retained in the participant's account as of the
Purchase Date by the applicable Purchase Price; provided however that the
maximum number of Shares an Employee may purchase during each Purchase Period
shall be 2,000 Shares (subject to any adjustment pursuant to Section 19 below),
and provided further that such purchase shall be subject to the limitations set
forth in Sections 3(b) and 13.

(b) The fair market value of the Company's Common Stock on a
given date

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<PAGE> 5
(the "Fair Market Value") shall be determined by the Board in its discretion
based on the closing sales price of the Common Stock for such date (or, in the
event that the Common Stock is not traded on such date, on the immediately
preceding trading date), as reported by the National Association of Securities
Dealers Automated Quotation (Nasdaq) National Market or, if such price is not
reported, the mean of the bid and asked prices per share of the Common Stock as
reported by Nasdaq or, in the event the Common Stock is listed on a stock
exchange, the Fair Market Value per share shall be the closing sales price on
such exchange on such date (or, in the event that the Common Stock is not traded
on such date, on the immediately preceding trading date), as reported in The
Wall Street Journal.

8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan
as provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued. The Shares purchased upon
exercise of an option hereunder shall be deemed to be transferred to the
participant on the Purchase Date. During his or her lifetime, a participant's
option to purchase Shares hereunder is exercisable only by him or her.

9. DELIVERY. As promptly as practicable after each Purchase Date of
each Offering Period, the Company shall deposit the Shares purchased upon
exercise of a participant's option into the participant's account with the
broker selected by the Company for administration of Plan stock purchases. Any
payroll deductions accumulated in a participant's account which are not
sufficient to purchase a full Share shall be retained in the participant's
account for the subsequent Purchase Period or Offering Period, subject to
earlier withdrawal by the participant as provided in Section 10 below. Any other
amounts left over in a participant's account after a Purchase Date shall be
returned to the participant.

10. VOLUNTARY WITHDRAWAL; TERMINATION OF EMPLOYMENT.

(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company. All of the
participant's Contributions credited to his or her account will be paid to him
or her promptly after receipt of his or her notice of withdrawal and his or her
option for the current period will be automatically terminated, and no further
Contributions for the purchase of Shares will be made during the Offering
Period.

(b) Upon termination of the participant's Continuous Status
as an Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto, and his or her option will be automatically
terminated.

(c) In the event an Employee fails to remain in Continuous
Status as an Employee of the Company for at least twenty (20) hours per week
during the Offering Period in which the employee is a participant, he or she
will be deemed to have elected to withdraw from

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<PAGE> 6
the Plan and the Contributions credited to his or her account will be returned
to him or her and his or her option terminated.

(d) A participant's withdrawal from an offering will not
have any effect upon his or her eligibility to participate in a succeeding
offering or in any similar plan which may hereafter be adopted by the Company.

11. AUTOMATIC WITHDRAWAL. If the Fair Market Value of the Shares on
any Purchase Date of an Offering Period is less than the Fair Market Value of
the Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period.

12. INTEREST. No interest shall accrue on the Contributions of a
participant in the Plan.

13. STOCK.

(a) Subject to adjustment as provided in Section 19, the
maximum number of Shares which shall be made available for sale under the Plan
shall be 1,000,000 Shares, plus an annual increase on the first day of each of
the Company's fiscal years beginning in 2000, 2001, 2002, 2003 and 2004 equal to
the lesser of (i) 500,000 Shares, (ii) five percent (5%) of the Shares
outstanding on the last day of the immediately preceding fiscal year, or (iii)
such lesser number of Shares as is determined by the Board. If the Board
determines that, on a given Purchase Date, the number of shares with respect to
which options are to be exercised may exceed (i) the number of shares of Common
Stock that were available for sale under the Plan on the Offering Date of the
applicable Offering Period, or (ii) the number of shares available for sale
under the Plan on such Purchase Date, the Board may in its sole discretion
provide (x) that the Company shall make a pro rata allocation of the Shares of
Common Stock available for purchase on such Offering Date or Purchase Date, as
applicable, in as uniform a manner as shall be practicable and as it shall
determine in its sole discretion to be equitable among all participants
exercising options to purchase Common Stock on such Purchase Date, and continue
all Offering Periods then in effect, or (y) that the Company shall make a pro
rata allocation of the shares available for purchase on such Offering Date or
Purchase Date, as applicable, in as uniform a manner as shall be practicable and
as it shall determine in its sole discretion to be equitable among all
participants exercising options to purchase Common Stock on such Purchase Date,
and terminate any or all Offering Periods then in effect pursuant to Section 20
below. The Company may make pro rata allocation of the Shares available on the
Offering Date of any applicable Offering Period pursuant to the preceding
sentence, notwithstanding any authorization of additional Shares for issuance
under the Plan by the Company's stockholders subsequent to such Offering Date.

(b) The participant shall have no interest or voting right
in Shares covered by his or her option until such option has been exercised.

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<PAGE> 7
the name of the participant or in the name of the participant and his or her
spouse.

14. ADMINISTRATION. The Board, or a committee named by the Board,
shall supervise and administer the Plan and shall have full power to adopt,
amend and rescind any rules deemed desirable and appropriate for the
administration of the Plan and not inconsistent with the Plan, to construe and
interpret the Plan, and to make all other determinations necessary or advisable
for the administration of the Plan.

15. TRANSFERABILITY. Neither Contributions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive Shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such attempt
at assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 10.

16. USE OF FUNDS. All Contributions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such Contributions.

17. REPORTS. Individual accounts will be maintained for each
participant in the Plan. Statements of account will be given to participating
Employees at least annually, which statements will set forth the amounts of
Contributions, the per Share Purchase Price, the number of Shares purchased and
the remaining cash balance, if any.

18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE
TRANSACTIONS.

(a) ADJUSTMENT. Subject to any required action by the
stockholders of the Company, the number of Shares covered by each option under
the Plan which has not yet been exercised and the number of Shares which have
been authorized for issuance under the Plan but have not yet been placed under
option (collectively, the "Reserves"), as well as the maximum number of shares
of Common Stock which may be purchased by a participant in a Purchase Period,
the number of shares of Common Stock set forth in Section 13(a)(i) above, and
the price per Share of Common Stock covered by each option under the Plan which
has not yet been exercised, shall be proportionately adjusted for any increase
or decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of Shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided however that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.

(b) CORPORATE TRANSACTIONS. In the event of a dissolution or
liquidation of

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the Company, any Purchase Period and Offering Period then in progress will
terminate immediately prior to the consummation of such action, unless otherwise
provided by the Board. In the event of a Corporate Transaction, each option
outstanding under the Plan shall be assumed or an equivalent option shall be
substituted by the successor corporation or a parent or Subsidiary of such
successor corporation. In the event that the successor corporation refuses to
assume or substitute for outstanding options, each Purchase Period and Offering
Period then in progress shall be shortened and a new Purchase Date shall be set
(the "New Purchase Date"), as of which date any Purchase Period and Offering
Period then in progress will terminate. The New Purchase Date shall be on or
before the date of consummation of the transaction and the Board shall notify
each participant in writing, at least ten (10) days prior to the New Purchase
Date, that the Purchase Date for his or her option has been changed to the New
Purchase Date and that his or her option will be exercised automatically on the
New Purchase Date, unless prior to such date he or she has withdrawn from the
Offering Period as provided in Section 10. For purposes of this Section 19, an
option granted under the Plan shall be deemed to be assumed, without limitation,
if, at the time of issuance of the stock or other consideration upon a Corporate
Transaction, each holder of an option under the Plan would be entitled to
receive upon exercise of the option the same number and kind of shares of stock
or the same amount of property, cash or securities as such holder would have
been entitled to receive upon the occurrence of the transaction if the holder
had been, immediately prior to the transaction, the holder of the number of
Shares of Common Stock covered by the option at such time (after giving effect
to any adjustments in the number of Shares covered by the option as provided for
in this Section 19); provided however that if the consideration received in the
transaction is not solely common stock of the successor corporation or its
parent (as defined in Section 424(e) of the Code), the Board may, with the
consent of the successor corporation, provide for the consideration to be
received upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in Fair Market Value to the per Share
consideration received by holders of Common Stock in the transaction.

The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as the price
per Share of Common Stock covered by each outstanding option, in the event that
the Company effects one or more reorganizations, recapitalizations, rights
offerings or other increases or reductions of Shares of its outstanding Common
Stock, and in the event of the Company's being consolidated with or merged into
any other corporation.

19. AMENDMENT OR TERMINATION.

(a) The Board may at any time and for any reason terminate
or amend the Plan. Except as provided in Section 19, no such termination of the
Plan may affect options previously granted, provided that the Plan or an
Offering Period may be terminated by the Board on a Purchase Date or by the
Board's setting a new Purchase Date with respect to an Offering Period and
Purchase Period then in progress if the Board determines that termination of the
Plan and/or the Offering Period is in the best interests of the Company and the
stockholders or if continuation of the Plan and/or the Offering Period would
cause the Company to incur adverse accounting charges as a result of a change
after the effective date of the Plan in the generally

-8-
<PAGE> 9
accepted accounting rules applicable to the Plan. Except as provided in Section
19 and in this Section 20, no amendment to the Plan shall make any change in any
option previously granted which adversely affects the rights of any participant.
In addition, to the extent necessary to comply with Rule 16b-3 under the
Exchange Act, or under Section 423 of the Code (or any successor rule or
provision or any applicable law or regulation), the Company shall obtain
stockholder approval in such a manner and to such a degree as so required.

(b) Without stockholder consent and without regard to
whether any participant rights may be considered to have been adversely
affected, the Board (or its committee) shall be entitled to change the Offering
Periods and Purchase Periods, limit the frequency and/or number of changes in
the amount withheld during an Offering Period, establish the exchange ratio
applicable to amounts withheld in a currency other than U.S. dollars, permit
payroll withholding in excess of the amount designated by a participant in order
to adjust for delays or mistakes in the Company's processing of properly
completed withholding elections, establish reasonable waiting and adjustment
periods and/or accounting and crediting procedures to ensure that amounts
applied toward the purchase of Common Stock for each participant properly
correspond with amounts withheld from the participant's Compensation, and
establish such other limitations or procedures as the Board (or its committee)
determines in its sole discretion advisable which are consistent with the Plan.

20. NOTICES. All notices or other communications by a participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.

21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
with respect to an option unless the exercise of such option and the issuance
and delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.

As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.

22. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective
upon its approval by the Company's stockholders. It shall continue in effect for
a term of twenty (20) years unless sooner terminated under Section 20.

23. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions
of options granted hereunder to, and the purchase of Shares by, persons subject
to Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be

-9-
<PAGE> 10
deemed to contain, and such options shall contain, and the Shares issued upon
exercise thereof shall be subject to, such additional conditions and
restrictions as may be required by Rule 16b-3 to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to Plan transactions.

-10-
<PAGE> 11
CLARIFY, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT

New Election ______
Change of Election ______

1. I, ________________________, hereby elect to participate in the
Clarify, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the Offering
Period ______________, ____ to _______________, ____, and subscribe to purchase
shares of the Company's Common Stock in accordance with this Subscription
Agreement and the Plan.

2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 20% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).

3. I hereby authorize payroll deductions from each paycheck during
the Offering Period at the rate stated in Item 2 of this Subscription Agreement.
I understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.

4. I understand that I may discontinue at any time prior to the
Purchase Date my participation in the Plan as provided in Section 10 of the
Plan. I also understand that I can increase or decrease the rate of my
Contributions on one occasion only with respect to any increase and one occasion
only with respect to any decrease during any Purchase Period by completing and
filing a new Subscription Agreement with any such increase taking effect as of
the beginning of the Purchase Period following the date of filing of the new
Subscription Agreement and any such decrease taking effect as soon as possible
following the date of filing of the new Subscription. Further, I may change the
rate of deductions for future Offering Periods by filing a new Subscription
Agreement, and any such change will be effective as of the beginning of the next
Offering Period. In addition, I acknowledge that, unless I discontinue my
participation in the Plan as provided in Section 10 of the Plan, my election
will continue to be effective for each successive Offering Period.

5. I have received a copy of the Company's most recent description
of the Plan and a

-11-
<PAGE> 12
copy of the complete "Clarify, Inc. 1999 Employee Stock Purchase Plan." I
understand that my participation in the Plan is in all respects subject to the
terms of the Plan.

6. Shares purchased for me under the Plan should be issued in the
name(s) of (name of employee or employee and spouse only):

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

7. I understand that if I dispose of any shares received by me
pursuant to the Plan within 2 years after the Offering Date (the first day of
the Offering Period during which I purchased such shares) or within 1 year after
the Purchase Date, I will be treated for federal income tax purposes as having
received ordinary compensation income at the time of such disposition in an
amount equal to the excess of the fair market value of the shares on the
Purchase Date over the price which I paid for the shares, regardless of whether
I disposed of the shares at a price less than their fair market value at the
Purchase Date. The remainder of the gain or loss, if any, recognized on such
disposition will be treated as capital gain or loss.

I hereby agree to notify the Company in writing within 30 days after the
date of any such disposition, and I will make adequate provision for federal,
state or other tax withholding obligations, if any, which arise upon the
disposition of the Common Stock. The Company may, but will not be obligated to,
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.

8. If I dispose of such shares at any time after expiration of the
2-year and 1-year holding periods, I understand that I will be treated for
federal income tax purposes as having received compensation income only to the
extent of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase price
which I paid for the shares under the option, or (2) 15% of the fair market
value of the shares on the Offering Date. The remainder of the gain or loss, if
any, recognized on such disposition will be treated as capital gain or loss.

I understand that this tax summary is only a summary and is subject to
change. I further understand that I should consult a tax advisor concerning the
tax implications of the purchase and sale of stock under the Plan.

-12-
<PAGE> 13
9. I hereby agree to be bound by the terms of the Plan. The
effectiveness of this Subscription Agreement is dependent upon my eligibility to
participate in the Plan.

SIGNATURE:

SOCIAL SECURITY #:

DATE:

-13-
<PAGE> 14
CLARIFY, INC.

1999 EMPLOYEE STOCK PURCHASE PLAN

NOTICE OF WITHDRAWAL

I, __________________________, hereby elect to withdraw my participation
in the Clarify, Inc. 1999 Employee Stock Purchase Plan (the "Plan") for the
Offering Period that began on _________ ___, _____. This withdrawal covers all
Contributions credited to my account and is effective on the date designated
below.

I understand that all Contributions credited to my account will be paid
to me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.

The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.

Dated:___________________
Signature of Employee

Social Security Number

-14-

<PAGE> 1

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

1. Clarify Limited, incorporated in the United Kingdom.

2. Clarify GmbH, incorporated in the Federal Republic of Germany.

3. Clarify SARL, incorporated in France.

4. Clarify (Asia Pacific) PTY LTD, incorporated in Australia.

5. Clarify K.K., incorporated in Japan.

6. Clarify (S) PTE LTD, incorporated in Singapore.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statement
of Clarify, Inc. on Form S-8 (File No. 333-66135) of our report dated January
19, 1999, except for Note 11 for which the date is March 12, 1999, on our audit
of the consolidated financial statements of Clarify, Inc. as of December 31,
1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, and our
report dated January 19, 1999, on our audit of the financial statement schedule,
which reports are included in this Form 10-K.

PricewaterhouseCoopers LLP

San Jose, California
March 30, 1999

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE
SHEETS, CONSOLIDATED STATEMENTS OF OPERATIONS AND CONSOLIDATED STATEMENTS OF
CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FORM 10-K.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000

<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 0 11,956 31,271
<SECURITIES> 0 19,239 25,917
<RECEIVABLES> 0 32,854 45,224
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 70,645 109,950
<PP&E> 0 8,611 8,437
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 0 86,831 122,600
<CURRENT-LIABILITIES> 0 29,734 51,281
<BONDS> 0 0 0
0 2 2
0 0 0
<COMMON> 0 0 0
<OTHER-SE> 0 51,640 59,127
<TOTAL-LIABILITY-AND-EQUITY> 0 86,831 122,600
<SALES> 39,139 59,214 84,874
<TOTAL-REVENUES> 56,322 88,217 130,510
<CGS> 0 0 0
<TOTAL-COSTS> 12,120 20,549 28,589
<OTHER-EXPENSES> 36,716 62,734 91,812
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 9 6 31
<INCOME-PRETAX> 9,130 6,238 11,616
<INCOME-TAX> 940 2,308 4,298
<INCOME-CONTINUING> 8,190 3,930 7,318
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 8,190 3,930 7,318
<EPS-PRIMARY> 0.41<F1> 0.19<F1> 0.34<F1>
<EPS-DILUTED> 0.38 0.18 0.32
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>

</TABLE>