UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission File Number 0-25361

ONYX SOFTWARE CORPORATION

1100 – 112^th Avenue NE
Suite 100
Bellevue, Washington 98004
(Address of principal executive offices) (Zip code)

(425) 451-8060
(Registrant’s telephone number)

     Indicate by check mark whether the registrant (1) 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 þ No o

     Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

     The number of shares of common stock, par value $0.01 per share, outstanding on April 29, 2005 was 14,986,285

ONYX SOFTWARE CORPORATION

CONTENTS

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PART I—FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed consolidated financial statements.

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ONYX SOFTWARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business and Basis of Presentation

Description of the Company

Overview

     Onyx Software Corporation and subsidiaries is a leading provider of enterprise solutions that combine customer management, process management and performance management technologies to help organizations more effectively acquire, service, manage and maintain customer and partner relationships. We market our solutions to enterprises that want to integrate their business processes and functions with the help of software in order to increase their market share, enhance customer service and improve profitability. We consider our solutions to be leading edge in terms of software design and architecture. As a result, enterprises using our solutions can take advantage of lower costs, a high degree of adaptability and flexibility, and a faster deployment than what we believe is available from other suppliers in the industry. Our solutions are designed to be easy to use, widely accessible, rapidly deployable, scalable, flexible, customizable and reliable, which can result in a comparatively low total cost of ownership and rapid return on investment. Our integrated product family allows enterprises to automate the customer lifecycle, along with the associated business processes, across the entire enterprise. We offer specialized solutions directly to the market and with partners for industries such as financial services, insurance and government. Our Internet-based solutions can be easily implemented and flexibly configured to address an enterprise’s specific business needs and unique processes. We were incorporated in Washington on February 23, 1994 and maintain our headquarters in Bellevue, Washington.

Interim Financial Information

     The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed, or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the Company’s opinion, the statements include all adjustments necessary (which are of a normal and recurring nature) for a fair presentation of the results for the interim periods presented. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2004, included in its Form 10-K filed with the SEC on March 24, 2005. The Company’s results of operations for any interim period are not necessarily indicative of the results of operations for any other interim period or for a full fiscal year.

Reclassifications

     Certain prior period amounts have been reclassified to conform to the current period presentation, with no effect on the Company’s financial position, cash flows or net loss.

2. Summary of Significant Accounting Policies

Principles of Consolidation

     The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

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Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts reported in the financial statements. Changes in these estimates and assumptions may have a material impact on the financial statements. The Company has used estimates in determining certain provisions, including uncollectible trade accounts receivable, useful lives for property and equipment, usefulness for intangibles, tax liabilities, deferred tax valuation allowances and restructuring liabilities. The Company has also used estimates in assessing impairment of goodwill and equity investments.

Revenue Recognition

     The Company recognizes revenue in accordance with accounting standards for software companies, including Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, and related interpretations, including Technical Practice Aids.

     The Company generates revenue through two sources: (a) software license revenue and (b) support and service revenue. Software license revenue is generated from licensing the rights to use the Company’s products directly to end-users and indirectly through value-added resellers (VARs) and, to a lesser extent, through third-party products the Company distributes. Support and service revenue is generated from sales of customer support services, consulting services and training services performed for customers that license the Company’s products.

     License revenue is recognized when a noncancellable license agreement becomes effective as evidenced by a signed contract, the product has been shipped, the license fee is fixed or determinable, and collectibility is probable.

     In software arrangements that include rights to multiple software products and/or services, the Company allocates the total arrangement fee among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of fair value of such undelivered elements and the residual amounts of revenue are allocated to delivered elements. Elements included in multiple-element arrangements could consist of software products, maintenance (which includes customer support services and unspecified upgrades), or consulting services. Vendor-specific objective evidence is based on the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change once the element is sold separately.

     Standard terms for license agreements call for payment within 90 days. Probability of collection is based on the assessment of the customer’s financial condition through the review of its current financial statements or credit reports. For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. Revenue from distribution agreements with VARs is typically recognized on the earlier of receipt of cash from the VAR or identification of an end-user. In the latter case, probability of collection is evaluated based on the creditworthiness of the VAR. The Company’s agreements with its customers and VARs do not contain product return rights.

     Revenue from maintenance arrangements is recognized ratably over the term of the contract, typically one year. Consulting revenue is primarily related to implementation services performed on a time-and-materials basis or, in certain situations, on a fixed-fee basis, under separate service arrangements. Implementation services are periodically performed under fixed-fee arrangements and, in such cases, consulting revenue is recognized as services are performed. Revenue from consulting and training services is recognized as services are performed. Standard terms for renewal of maintenance arrangements, consulting services and training services call for payment within 30 days.

     Revenue for certain long-term contracts is recognized in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” and is recognized on the percentage-of-completion method.

     Revenue consisting of fees from licenses sold together with consulting services are generally recognized upon shipment of the software, provided that the above criteria are met, payment of the license fees do not depend on the performance of the services, and the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or payment of the license fees depends on the performance of the services, both the software license and consulting fees are recognized under the percentage of completion method of contract accounting.

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     If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If a nonstandard acceptance period is provided, revenue is deferred and recognized upon the earlier of customer acceptance and the expiration of the acceptance period.

Cash and Cash Equivalents

     The Company considers all highly liquid investments with a remaining maturity of three months or less at the date of purchase to be cash equivalents. At December 31, 2004 and March 31, 2005, the Company’s cash equivalents consisted of money market funds. The company had no restricted cash at December 31, 2004 or at March 31, 2005.

Stock-Based Compensation

     The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, including Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation,” an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Under APB Opinion No. 25, because the exercise price of the Company’s employee stock options generally equals the fair value of the underlying stock on the date of grant, no compensation expense is generally recognized.

     In December 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” This statement amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transistion for a voluntary change to a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 148, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 148. The following table illustrates the effect on net loss had the fair-value-based method been applied to all outstanding and unvested awards in each period.

Other Comprehensive Income

     SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and display of comprehensive income and its components in the financial statements. The only items of other comprehensive income (loss) that the Company currently reports are foreign currency translation adjustments. Total comprehensive loss for the three months ended March 31, 2004 and 2005 was $103,000 and $979,000, respectively, which included a translation gain (loss) of approximately $492,000 and ($360,000), respectively.

Recently Issued Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R will require that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123R replaces SFAS 123, “Accounting for Stock Based Compensation.” In March 2005, the SEC issued Staff Accounting Bulletin No. 107 “Share Based Payment,” which provides

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additional guidance for adoption of SFAS No 123R. SFAS 123R will be effective for the Company in the first quarter ending March 31, 2006. The Company is in the process of evaluating the impact of adopting SFAS 123R.

3. Purchased Technology

     On April 7, 2004, the Company acquired business process management technology from Visuale, Inc. in an asset acquisition valued at $4.1 million. Under the terms and conditions of the purchase agreement, the Company purchased the acquired technology with a purchase price valued at $4.1 million, including (a) an initial payment of $400,000 in cash, (b) 504,891 shares of common stock valued at $1.7 million, and (c) on the one-year anniversary of closing, a subsequent payment valued at $1.0 million, to be paid at the Company’s option in either cash or stock. In April of 2005, the Company issued 367,647 shares of common stock to Visuale, Inc. in fulfillment of the one-year anniversary payment obligation. The number of shares was calculated based on the average closing price of the Company’s stock on the 15 trading days prior to issuance. In addition, the Company agreed to make royalty payments for a period of four years to Visuale on sales of certain Company products incorporating the acquired technology, with a guaranteed minimum royalty payment in each of the third and fourth years following closing of $500,000. The Company also assumed employee liabilities of $115,000 and incurred professional fees associated with the acquisition of $155,000. The above future payments have been recorded on the balance sheet as purchased technology obligations net of imputed interest in long-term liabilities. The purchased technology is being amortized over four years starting from the general release of the product, while the imputed interest is being amortized on a straight-line basis, which approximates the effective interest method, as interest expense. The Company amortized $256,000 of the purchased technology to cost of licenses during the first quarter of 2005.

4. Restructuring and Other Related Charges

     Restructuring and other related charges represent the Company’s efforts to reduce its overall cost structure. During 2004, the Company recorded approximately $442,000 in restructuring and other related charges. No restructuring charges were recorded during the first quarter of 2005.

     The components of the first quarter 2005 roll-forward of the related liability are as follows (in thousands):

     As part of the restructuring in 2002 the Company issued three five-year warrants in January 2003 for the purchase of up to an aggregate of 198,750 shares of the Company’s common stock at prices ranging from $10.38 to $13.84 per share. If the Company had either a change of control or issued securities with rights and preferences superior to the Company’s common stock before January 2005, the warrant holder would have had the option of canceling any unexercised warrants and receiving a cash cancellation payment aggregating $3.2 million. In January 2005, the contingent cash payment options expired as the company had neither undergone a change in control nor issued securities with rights and preferences superior to the Company’s common stock.

     The warrant value as of December 31, 2002 was estimated at $920,000 based on (a) the estimated value of the warrants using the Black-Scholes model with an expected dividend yield of 0.0%, a risk-free interest rate of 5.0%, volatility of 85% and an expected life of five years and (b) the estimated value of the cash cancellation payments in the event of a change in control. Prior to the expiration of the contingent cash payment, the warrants were subject to variable accounting and the Company was required to mark the warrants to market at each reporting period.

     The Company estimated the fair value of the warrants on the date of expiration of the contingent cash payment to be $54,000 based on the Black-Scholes model with an expected dividend yield of 0.0%, a risk-free interest rate of 3.3%, volatility of 56% and an expected life of three years. During the first quarter of 2005, the Company reclassified the warrant value into

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equity as the contingent cash payment options had expired as the company had neither undergone a change in control nor issued securities with rights and preferences superior to the Company’s common stock.

     The Company also entered into a registration rights agreement with the warrant holder, pursuant to which the Company filed a registration statement on February 14, 2003 covering the resale of the shares of the Company’s common stock subject to purchase under the warrants.

     The accounting for excess facilities is complex and requires judgment and as a consequence adjustments may be required to the Company’s restructuring-related liabilities. Restructuring-related liabilities totaled $547,000 at March 31, 2005 and future cash outlays are anticipated through March 2006 unless estimates and assumptions change.

5. Loss Per Share

     Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution of securities by including other common stock equivalents, including stock options and convertible preferred stock, in the weighted average number of common shares outstanding for a period, if dilutive.

6. Line of Credit

     Under the loan and security agreements with Silicon Valley Bank, or SVB, the Company has an $8.0 million working capital revolving line of credit and a $500,000 term loan facility. The $8.0 million working capital revolving line of credit is split between a $6.0 million domestic facility and a $2.0 million Export Import Bank of the United States, or Exim Bank, facility. All of the facilities are secured by accounts receivable, property and equipment and intellectual property. The domestic facility allows the Company to borrow up to the lesser of (a) 70% of eligible domestic and individually approved foreign

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accounts receivable and (b) $6.0 million. The Exim Bank facility allows the Company to borrow up to the lesser of (a) 75% of eligible foreign accounts receivable and (b) $2.0 million. The amount available to borrow under the working capital revolving line of credit is reduced by reserves for outstanding standby letters of credit issued by SVB on the Company’s behalf and 50% of any borrowings under the term loan facility. If the calculated borrowing base falls below the reserves, SVB may require the Company to cash secure the amount by which the reserves exceed the borrowing base. Based on this calculation, no restriction on cash was required under the loan agreement as of March 31, 2005. Due to the variability in the Company’s borrowing base, the Company may be subject to restrictions on its cash at various times throughout the year. Any borrowings will bear interest at SVB’s prime rate, which was 5.75% as of March 31, 2005, plus 1.5% (plus 2% for the term loan facility), subject to a minimum rate of 6.0%. The loan agreements require that the Company maintain certain financial covenants based on its adjusted quick ratio and tangible net worth. The Company was in compliance with these covenants at March 31, 2005. The Company is also prohibited under the loan and security agreements from paying dividends. The facilities expire in March 2006. At March 31, 2005, the Company had $4.9 million outstanding standby letters of credit relating to long-term lease obligations and $347,000 outstanding under the term loan facility.

7. Segment and Geographic Information

     The Company is principally engaged in the design, development, marketing and support of enterprise solutions that combine customer management, process management and performance management technologies to help organizations more effectively acquire, service, manage and maintain customer and partner relationships. Substantially all revenue results from licensing the Company’s software products and related consulting and customer support (maintenance) services. The Company’s Chief Executive Officer and Chief Financial Officer, who are the Company’s chief operating decision makers, review financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. Accordingly, the Company considers itself to be in a single industry segment, specifically the license, implementation and support of its software applications, and to have only one operating segment. The Company does not prepare reports for, or measure the performance of, its individual software applications and, accordingly, the Company has not presented revenue or any other related financial information by individual software product.

     The Company evaluates the performance of its geographic regions primarily based on revenues. In addition, the Company’s assets are primarily located in its corporate office in the United States and not allocated to any specific region. The Company does not produce reports for, or measure the performance of, its geographic regions on any asset-based metrics. Therefore, geographic information is presented only for revenues. Total revenue of the North America segment, primarily relates to revenue within the United States.

     Total revenue outside of North America for the three months ended March 31, 2004 and 2005 was $5.2 million and $5.4 million, respectively.

     The following geographic information is presented for the three months ended March 31, 2004 and 2005 (in thousands):

8. Guarantees

     Indemnification and warranty provisions contained within our customer license and service agreements are generally consistent with those prevalent in our industry. The duration of our product warranties generally does not exceed 90 days following delivery of our products. We have not incurred significant obligations under customer indemnification or warranty provisions historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential customer indemnification or warranty-related obligations.

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9. Onyx Japan

     In September 2000, the Company entered into a joint venture with Softbank Investment Corporation(SoftBank), and Prime Systems Corporation to create Onyx Software Co., Ltd. (Onyx Japan), a Japanese corporation, for the purpose of distributing the Company’s technology and product offerings in Japan. In October 2000, the Company made an initial contribution of $4.3 million in exchange for 58% of the outstanding common stock of Onyx Japan. The Company’s joint venture partners invested an additional $3.1 million for the remaining 42% of the common stock of Onyx Japan. Because the Company has a controlling interest, Onyx Japan has been included in its consolidated financial statements. The minority shareholders’ interest in Onyx Japan’s earnings or losses is separately reflected in the statement of operations.

     Under the terms of the joint venture agreement, Prime Systems may, at any time, sell its shares of Onyx Japan stock to a third party, provided that it notifies the Company 90 days prior to doing so. The Company has a right of first refusal to purchase any of Prime Systems’ shares that are offered for resale at the same price for which those shares are being offered to a third party. Under the terms of an investment agreement with Softbank, Softbank also has the right to sell its shares of Onyx Japan, subject to the approval of the Board of Directors of Onyx Japan and certain conditions of the Japanese Commercial Code. Further, either the Company or Prime Systems may terminate the joint venture agreement at its discretion. If Prime Systems exercises its right of termination, the Company has the right, at its election, to either (a) buy Prime Systems’ shares at the current fair market value as determined by an appraiser or (b) force a liquidation of Onyx Japan.

     The Company has entered into a distribution agreement with Onyx Japan, which was approved by the minority shareholders, that provides the Company with a fee based on license and maintenance revenues in Japan. During the three months ended March 31 of 2004 and 2005, fees charged under this agreement were $145,000 and $225,000, respectively. The intercompany fees are eliminated in consolidation; however, the Company allocates 42% of the fees to the minority shareholders.

     The minority shareholders’ interest in Onyx Japan’s earnings or losses is accounted for in the statement of operations for each period. During the three months ended March 31, 2004 and 2005, the minority shareholders’ interest in Onyx Japan’s losses totaled $55,000 and $78,000, respectively. At March 31, 2005, the minority shareholders’ remaining interest in Onyx Japan totaled $25,000. Any future losses of Onyx Japan will be shared by the minority shareholders to the extent of its interest in the joint venture. As a result, additional Onyx Japan losses above approximately $60,000 in the aggregate will be absorbed 100% by the Company, as compared to 58% in all other periods since inception of the joint venture.

10. Liquidity

     Under the loan and security agreements with Silicon Valley Bank, or SVB, the Company has an $8.0 million working capital revolving line of credit and a $500,000 term loan facility. The $8.0 million working capital revolving line of credit is split between a $6.0 million domestic facility and a $2.0 million Export Import Bank of the United States, or Exim Bank, facility. All of the facilities are secured by accounts receivable, property and equipment and intellectual property. The domestic facility allows the Company to borrow up to the lesser of (a) 70% of eligible domestic and individually approved foreign accounts receivable and (b) $6.0 million. The Exim Bank facility allows the Company to borrow up to the lesser of (a) 75% of eligible foreign accounts receivable and (b) $2.0 million. The amount available to borrow under the working capital revolving line of credit is reduced by reserves for outstanding standby letters of credit issued by SVB on the Company’s behalf and 50% of any borrowings under the term loan facility. If the calculated borrowing base falls below the reserves, SVB may require the Company to cash secure the amount by which the reserves exceed the borrowing base. Based on this calculation, no restriction on cash was required under the loan agreement as of March 31, 2005. Due to the variability in the Company’s borrowing base, the Company may be subject to restrictions on its cash at various times throughout the year. Any borrowings will bear interest at SVB’s prime rate, which was 5.75% as of March 31, 2005, plus 1.5% (plus 2% for the term loan facility), subject to a minimum rate of 6.0%. The loan agreements require that the Company maintain certain financial covenants based on its adjusted quick ratio and tangible net worth. The Company was in compliance with these covenants at March 31, 2005. The Company is also prohibited under the loan and security agreements from paying dividends. The facilities expire in March 2006. At March 31, 2005, the Company had $4.9 million outstanding standby letters of credit relating to long-term lease obligations and $347,000 outstanding under the term loan facility.

     The Company believes that its existing cash and cash equivalents will be sufficient to meet its capital requirements for at least the next 12 months. Due to the fact that lower cash balances could negatively impact the Company’s sales efforts, the Company may seek additional funds through public or private equity financing or from other sources to fund its operations and

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pursue the Company’s growth strategy. The Company may experience difficulty in obtaining funding on favorable terms, if at all. Any financing the Company might obtain may contain covenants that restrict the Company’s freedom to operate its business or may require the Company to issue securities that have rights, preferences or privileges senior to its common stock and may dilute current shareholders’ ownership interest in the Company.

     At March 31, 2005, the Company had received cash of $936,000 as part of a fourth quarter 2004 transaction with the Queensland Government. The transaction is contingent on the achievement of two milestones: (i) an election by the Queensland Government to move forward with the project and (ii) achievement of the criteria required for acceptance of the system. In the event either of these milestones are not met, the Company is obligated to refund $936,000. No revenue has been recognized on this transaction as of March 31, 2005

11. Subsequent Events

     In April 2005 the company issued 367,467 shares of common stock to Visuale, Inc. in fulfillment of the one-year anniversary payment obligation. The number of shares was calculated based on the average closing price of the Company’s stock on the 15 trading days prior to issuance.

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

Forward-Looking Information

     Our disclosure and analysis in this report contain forward-looking statements, which provide our current expectations or forecasts of future events. Forward-looking statements in this report include, without limitation:

	•	information concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth;
	•	statements about the level of our costs and operating expenses relative to our revenues, and about the expected composition of our revenues;
	•	statements about our future capital requirements and the sufficiency of our cash, cash equivalents, investments and available bank borrowings to meet these requirements;
	•	information about the anticipated release dates of new products;
	•	statements about the expected costs and timing of terminating our excess facility commitments;
	•	other statements about our plans, objectives, expectations and intentions; and
	•	other statements that are not historical facts.

     Words such as “believes,” “anticipates” and “intends” may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in the section entitled “Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price” in this report. Other factors besides those described in this report could also affect actual results. You should carefully consider the factors described in the section entitled “Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price” in evaluating our forward-looking statements.

     You should not unduly rely on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this report, or to reflect the occurrence of unanticipated events.

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Overview

     Onyx Software Corporation and its subsidiaries (Company) is a leading provider of enterprise solutions that combine customer management, process management and performance management technologies to help organizations more effectively acquire, service, manage and maintain customer and partner relationships. We market our solutions to enterprises that want to integrate their business processes and functions with the help of software in order to increase their market share, enhance customer service and improve profitability. We consider our solutions to be leading edge in terms of software design and architecture. As a result, enterprises using our solutions can take advantage of lower costs, a high degree of adaptability and flexibility, and a faster deployment than what we believe is available from other suppliers in the industry. Our solutions are designed to be easy to use, widely accessible, rapidly deployable, scalable, flexible, customizable and reliable, which can result in a comparatively low total cost of ownership and rapid return on investment. Our integrated product family allows enterprises to automate the customer lifecycle, along with the associated business processes, across the entire enterprise. We offer specialized solutions directly to the market and with partners for industries such as financial services, insurance and government. Our Internet-based solutions can be easily implemented and flexibly configured to address an enterprise’s specific business needs and unique processes.

Overview of the Results for the Three Months Ended March 31, 2005

     Key financial data points relating to our first quarter 2005 performance include:

	•	Revenue of $14.1 million, down 6% from the fourth quarter of 2004 and down 1% from the first quarter of 2004;
	•	License revenue of $3.9 million, down 6% from the fourth quarter of 2004 and up 7% from the first quarter of 2004;
	•	Service revenue of $10.2 million, down 6% from the fourth quarter of 2004 and down 4% from the first quarter of 2004;
	•	Service margins of 56%, up from 54% in the fourth quarter of 2004 and down from 58% in the first quarter of 2004;
	•	Operating expenses, excluding acquisition-related amortization, stock compensation and restructuring charges, of $9.7 million, down from $9.8 million in the fourth quarter 2004 and up from $9.3 million in the first quarter of 2004;
	•	Cash and restricted cash balances of $11.4 million at March 31, 2005, down from $14.4 million at December 31, 2004; and down from $13 million at March 31, 2004.
	•	Days sales outstanding, based on end of period receivable balances, up to 79 days in the first quarter of 2005 compared to 69 days in the fourth quarter of 2004 and 72 days in the first quarter of 2004.

     In recent years the global economy has remained quite challenging. However, based on our observations, we believe that the macroeconomic environment is now slowly improving. We remain somewhat cautious, however, as to the speed at which these macroeconomic conditions will improve, particularly as it relates to the information technology and communications industries. The majority of our revenue has been generated from customers in the high-technology, financial services, government, business services and healthcare industries. Accordingly, our business is affected by the economic and business conditions of these industries and the business service demand for information technology within these industries.

     We are constantly reevaluating our business operations and strategy to determine what changes are likely to give us the greatest opportunity to successfully grow. As this process continues, we will likely refine our focus on selected market segments and adjust our market positioning accordingly.

     We will be focused on the following objectives in the near term:

	•	successfully integrate new talent in our sales and marketing organizations;
	•	increase our pipeline of sales opportunities;
	•	enhance our market position and awareness;
	•	manage our costs to allow our return to profitability;
	•	focus our resources and efforts on the market opportunities with the highest probability of success;

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	•	diversify and expand partnerships with key system integration and technology vendors;
	•	aggressively market our recent major product releases;
	•	enhance our solutions portfolio to address more customer needs;
	•	continue our focus on compliance with the Sarbanes-Oxley Act of 2002; and
	•	maintain high customer satisfaction levels.

     We hope that, by focusing our efforts on these key objectives, we will be able to return to profitability and successfully grow our business, although we cannot offer any assurance regarding when, or whether, this will occur.

Critical Accounting Policies and Estimates

     Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, bad debts, intangible assets, restructuring, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

     Revenue recognition rules for software companies are very complex and often subject to interpretation. We follow very specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. Revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses.

     We recognize revenue in accordance with accounting standards for software companies, including Statement of Position, or SOP, 97-2, “Software Revenue Recognition,” as amended by SOP 98-9 and related interpretations, including Technical Practice Aids.

     We generate revenue through two sources: (a) software license revenue and (b) support and service revenue. Software license revenue is generated from licensing the rights to use our products directly to end-users and indirectly through value added resellers, or VARs and, to a lesser extent, through third-party products we distribute. Support and service revenue is generated from sales of customer support services (maintenance contracts), consulting services and training services performed for customers that license our products.

     License revenue is recognized when a non-cancelable license agreement becomes effective as evidenced by a signed contract, the product has been shipped, the license fee is fixed or determinable, and collection is probable.

     In software arrangements that include rights to multiple software products and/or services, we allocate the total arrangement fee among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on vendor-specific objective evidence of fair value of such undelivered elements and the residual amounts of revenue are allocated to delivered elements. Elements included in multiple-element arrangements could consist of software products, maintenance (which includes customer support services and unspecified upgrades), or consulting services. Vendor-specific objective evidence is based on the price charged when an element is sold separately or, in the case of an element not yet sold separately, the price established by authorized management, if it is probable that the price, once established, will not change once the element is sold separately.

     Standard terms for license agreements call for payment within 90 days. Probability of collection is based on the assessment of the customer’s financial condition through the review of its current financial statements or credit reports. For follow-on sales to existing customers, prior payment history is also used to evaluate probability of collection. Revenue from distribution agreements with VARs is typically recognized upon the earlier of receipt of cash from the VAR or identification of an end-

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user. In the latter case, probability of collection is evaluated based on the creditworthiness of the VAR. Our agreements with customers and VARs do not contain product return rights.

     Revenue from maintenance arrangements is recognized ratably over the term of the contract, typically one year. Consulting revenue is primarily related to implementation services performed on a time-and-materials basis or, in certain situations, on a fixed-fee basis, under separate service arrangements. Implementation services are periodically performed under fixed-fee arrangements and, in such cases, consulting revenue is recognized as services are performed. Revenue from consulting and training services is recognized as services are performed. Standard terms for renewal of maintenance arrangements, consulting services and training services call for payment within 30 days.

     Revenue for certain long-term contracts is recognized in accordance with SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” and is recognized on the percentage-of-completion method.

     Revenue consisting of fees from licenses sold together with consulting services is generally recognized upon shipment of the software, provided that the above criteria are met, payment of the license fees do not depend on the performance of the services, and the consulting services are not essential to the functionality of the licensed software. If the services are essential to the functionality of the software, or payment of the license fees depends on the performance of the services, both the software license and consulting fees are recognized under the percentage of completion method of contract accounting.

     If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer. If a nonstandard acceptance period is provided, revenue is recognized upon the earlier of customer acceptance or the expiration of the acceptance period.

Allowance for Doubtful Accounts

     A considerable amount of judgment is required when we assess the ultimate realization of receivables, including assessing the probability of collection and the current creditworthiness of each customer. Although we recorded a net benefit in 2003 and a small amount of expenses were recorded to increase our allowance for doubtful accounts in 2004, significant expenses were recorded to increase our allowance for doubtful accounts in prior years due to the rapid downturn in the economy, and in the technology sector in particular, and we may record additional expenses in the future.

Impairment of Goodwill

     We periodically evaluate goodwill asset valuations of businesses we acquired as impairment indicators arise. Our judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of our acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill and other intangible assets associated with our acquired businesses are impaired. In addition to testing goodwill for impairment when impairment indicators arise, we perform an annual impairment test of goodwill per the guidance outlined in Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets.” Our chosen annual impairment testing date is November 30, 2004.

Restructuring

     During 2001 and 2002, we recorded significant write-offs and accruals in connection with our restructuring program under Emerging Issues Task Force, or EITF, Issue No. 94-3. These write-offs and accruals include estimates pertaining to employee separation costs and the settlements of contractual obligations related to excess leased facilities and other contracts. Although we believe that we have made reasonable estimates of our restructuring costs in calculating these write-offs and accruals, the actual costs could differ from these estimates. With the contractual settlement of the majority of our excess facilities, the range of outcomes that must be estimated has narrowed significantly.

     In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities, and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 has not had a material effect on our consolidated financial statements.

Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R will require that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123R covers a wide range of share-based compensation arrangements, including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. SFAS 123R replaces SFAS 123, “Accounting for Stock Based

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Compensation.” In March 2005, the SEC issued Staff Accounting Bulletin No. 107 “Share Based Payment,” which provides additional guidance for adoption of SFAS No 123R. SFAS 123R will be effective for the Company in the first quarter ending March 31, 2006. The Company is in the process of evaluating the impact of adopting SFAS 123R.

Results of Operations

     The following table presents certain financial data, derived from our unaudited statements of operations, as a percentage of total revenue for the periods indicated. The operating results for the three months ended March 31, 2004 and 2005 are not necessarily indicative of the results that may be expected for the full year or any future period.

Revenue

     Total revenue, which consists of software license and support and service revenue, was $14.1 million in the first quarter of 2005, which decreased from $14.2 million in the first quarter of 2004. No single customer accounted for more than 10% of our total revenue in the first quarter of 2005.

     Our license revenue increased 7%, from $3.6 million in the first quarter of 2004 to $3.9 million in the first quarter of 2005. Although our license revenue in the first quarter of 2005 showed incremental improvement and we believe there has been a modest improvement in the global economy, we remain cautious as to the speed at which macroeconomic conditions will improve.

     Our support and service revenue decreased 4% from $10.6 million in the first quarter of 2004 to $10.2 million in the first quarter of 2005. The decrease was primarily due to a decrease in consulting revenue, resulting from delays in the commencement of new consulting engagements. Support and service revenue represented 75% of our total revenue in the first quarter of 2004 and 73% in the first quarter of 2005. We expect that the proportion of support and service revenue to total revenue to fluctuate in the future, depending in part on our customers’ direct use of third-party consulting and implementation service providers, the degree to which we provide opportunities for our partners to engage with our customers and the ongoing renewals of customer support contracts, as well as our overall sales of software licenses to new and existing customers.

     Revenue outside of North America was $5.4 million in the first quarter of 2005, an increase from the first quarter of 2004 when revenue outside of North America was $5.2 million.

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Cost of Revenue

Cost of license revenue

     Cost of license revenue consists of license fees for third-party software, product media, product duplication and manuals. Cost of license revenue increased 127%, from $193,000 in the first quarter of 2004 to $437,000 in the first quarter of 2005. Cost of license revenue as a percentage of related license revenue was 5% in the first quarter of 2004 and 11% in the first quarter of 2005. The increase was due to the additional third party products sold during the first quarter of 2005.

Amortization of acquired technology

     On April 7, 2004, the Company acquired business process management technology from Visuale, Inc. in an asset acquisition valued at $4.1 million. Under the terms and conditions of the purchase agreement, the Company purchased the acquired technology with a purchase price valued at $4.1 million, including (a) an initial payment of $400,000 in cash, (b) 504,891 shares of common stock valued at $1.7 million, and (c) on the one-year anniversary of closing, a subsequent payment valued at $1.0 million, to be paid at the Company’s option in either cash or stock. In April of 2005, the company issued 367,647 shares of common stock to Visuale, Inc. in fulfillment of the one year anniversary payment obligation. The number of shares calculated was based on the average closing price of the company’s common stock 15 trading days prior to issuance. In addition, the Company agreed to make royalty payments for a period of four years to Visuale on sales of certain Company products incorporating the acquired technology, with a guaranteed minimum royalty payment in each of the third and fourth years following closing of $500,000. The Company also assumed employee liabilities of $115,000 and incurred professional fees associated with the acquisition of $155,000. The above future payments have been recorded on the balance sheet as purchased technology obligations net of imputed interest in long-term liabilities. The purchased technology is being amortized over four years starting from the general release of the product, while the imputed interest will be amortized on a straight-line basis, which approximates the effective interest method, as interest expense. The Company amortized $256,000 of the purchased technology to cost of licenses during the first quarter of 2005.

Cost of support and service revenue

     Cost of support and service revenue consists of personnel and third-party service provider costs related to consulting services, customer support and training. Cost of support and service revenue decreased 6%, from $4.5 million in the first quarter of 2004 to $4.2 million in the first quarter of 2005. Cost of support and service revenue as a percentage of related support and service revenue remained relatively steady at 42% in the first quarter of 2004 and 41% in the first quarter of 2005. The slight decrease in cost of support and service revenue as a dollar amount of related support and service revenue in the first quarter of 2005 compared to the first quarter of 2004 was primarily due to a reduction in consulting personnel of approximately 10%. The cost of support and services as a percentage of support and services revenue may vary between periods primarily for two reasons: (1) the mix of services we provide (consulting, customer support, training) which have different cost structures, and (2) the resources we use to deliver these services (internal versus third parties).

Operating Expenses and Other

Sales and marketing

     Sales and marketing expenses consist primarily of salaries, commissions and bonuses earned by sales and marketing personnel, travel and promotional expenses and facility and communication costs for direct sales offices. Sales and marketing expenses decreased 8%, from $4.8 million in the first quarter of 2004 to $4.4 million in the first quarter of 2005. The decrease in sales and marketing expenses from the first quarter of 2004 to the first quarter of 2005 was primarily due to the reduction in sales and marketing headcount. Sales and marketing full-time employees decreased 24% from March 31, 2004 to March 31, 2005. Sales and marketing expenses represented 34% of our total revenue in the first quarter of 2004, compared to 31% in the first quarter of 2005.

     To fully realize our long-term sales growth opportunity, we believe that we will need to increase our sales and marketing efforts to expand our market position and further increase acceptance of our products.

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Research and development

     Research and development expenses consist primarily of salaries, benefits and equipment for software developers, quality assurance personnel, program managers and technical writers, and payments to outside contractors. Research and development expenses decreased 5%, from $2.6 million in the first quarter of 2004 to $2.5 million in the first quarter of 2005. Research and development full-time employees decreased 8% from March 31, 2004 to March 31, 2005. The decrease in research and development expenses from the first quarter of 2004 to the first quarter of 2005 was primarily due to a decrease in the number of development personnel. Research and development costs represented 18% of our total revenue in the first quarter of 2004, remaining steady at 18% in the first quarter of 2005.

     We believe that our research and development investments are essential to our long-term strategy. To fully realize our long-term sales growth opportunity, we will need to increase our research and development investment in the future.

General and administrative

     General and administrative expenses consist primarily of salaries, benefits and related costs for our executive, finance, human resource and administrative personnel, professional services fees and allowances for doubtful accounts. General and administrative expenses increased 44%, from $1.9 million in the first quarter of 2004 to $2.8 million in the first quarter of 2005. General and administrative cost represent 14% of our total revenue in the first quarter of 2004 and 20% of our total revenue in the first quarter of 2005. The increase in dollar amount from the first quarter of 2004 to the first quarter of 2005 was primarily due to an increase in professional services fees related to the compliance requirements under the Sarbanes-Oxley Act of 2002.

Restructuring and other related charges

     Restructuring and other related charges represent our efforts to reduce our overall cost structure. In April 2003, we approved a restructuring plan to reduce headcount. During 2004 we recorded approximately $442,000 in restructuring and other related charges. During the first quarter of 2005, we did not record any restructuring charges.

     The components of the first quarter 2005 roll-forward of the related liability are as follows (in thousands):

     As part of the restructuring in 2002 the Company issued three five-year warrants in January 2003 for the purchase of up to an aggregate of 198,750 shares of the Company’s common stock at prices ranging from $10.38 to $13.84 per share. If the Company had either a change of control or issued securities with rights and preferences superior to the Company’s common stock before January 2005, the warrant holder would have had the option of canceling any unexercised warrants and receiving a cash cancellation payment aggregating $3.2 million. In January 2005, the contingent cash payment options expired as the company had neither undergone a change in control nor issued securities with rights and preferences superior to the Company’s common stock.

     The warrant value as of December 31, 2002 was estimated at $920,000 based on (a) the estimated value of the warrants using the Black-Scholes model with an expected dividend yield of 0.0%, a risk-free interest rate of 5.0%, volatility of 85% and an expected life of five years and (b) the estimated value of the cash cancellation payments in the event of a change in control. The warrants are subject to variable accounting and the Company is required to mark the warrants to market at each reporting period.

     The Company estimated the fair value of the warrants on the date of expiration of the contingent cash payment to be $54,000 based on the Black-Scholes model with an expected dividend yield of 0.0%, a risk-free interest rate of 3.3%, volatility

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of 56% and an expected life of three years. During the first quarter of 2005, the Company reclassified the warrant value into equity.

     The Company also entered into a registration rights agreement with the warrant holder, pursuant to which the Company filed a registration statement on February 14, 2003 covering the resale of the shares of the Company’s common stock subject to purchase under the warrants.

     The accounting for excess facilities is complex and requires judgment and as a consequence adjustments may be required to the Company’s current restructuring-related liabilities. Restructuring-related liabilities totaled $547,000 at March 31, 2005 and future cash outlays are anticipated through March 2006 unless estimates and assumptions change.

Other Income (Expense), Net

     Other income (expense), net consists of earnings on our cash and cash equivalents and short-term investment balances and foreign currency transaction gains, offset by interest expense, bank fees associated with debt obligations and credit facilities and foreign currency transaction losses. Other income (expense) was a net expense of $193,000 and $201,000 for the quarters ended March 31, 2004 and 2005, respectively.

Change in Fair Value of Outstanding Warrants

     The warrants issued in connection with the partial lease termination of excess facilities in Bellevue, Washington, were subject to variable accounting and we were required to mark the warrants to market at each reporting period. In January 2005, the contingent cash payment options expired as the company had neither undergone a change in control nor issued securities with rights and preferences superior to the Company’s common stock. The Company estimated the fair value of the warrants on the date of expiration of the contingent cash payment to be $54,000 and recorded an expense of $2,000, representing the change in fair value of the outstanding warrants. During January of 2005, the Company reclassified the warrant value into equity as the contingent cash payment options had expired as the company had neither undergone a change in control nor issued securities with rights and preferences superior to the Company’s common stock.

Income Taxes

     We recorded an income tax provision of $56,000 in the first quarter of 2004 and a benefit of $19,000 in the first quarter of 2005. Our income tax provision (benefit) in both the first quarter of 2004 and the first quarter of 2005 is the net result of income taxes in connection with our foreign operations, offset by the deferred tax benefit recorded as we amortize the intangibles associated with our international acquisitions. We made only insignificant provisions and recorded no benefit for federal or state income taxes in either the first quarter of 2004 or the first quarter of 2005 due to our historical operating losses. We have recorded a valuation allowance for all but $124,000 of our deferred tax assets as a result of uncertainties regarding the realization of the asset balance at March 31, 2005.

Minority Interest in Consolidated Subsidiary

     Softbank Investments Corporation and Prime Systems Corporation together own 42% of Onyx Japan, our Japanese joint venture. We have a controlling interest and, therefore, Onyx Japan has been included in our consolidated financial statements. The minority shareholders’ interest in Onyx Japan’s earnings or losses is accounted for in the statement of operations for each period. In the first quarter of 2004, the minority shareholders’ interest in Onyx Japan’s losses totaled $55,000. In the first quarter of 2005, the minority shareholders’ interest in Onyx Japan’s loss totaled $78,000. At March 31, 2005, the minority shareholders’ remaining interest in the joint venture totaled $25,000. As a result, additional Onyx Japan losses above approximately $60,000 in the aggregate will be absorbed 100% by us, as compared to 58% in all prior periods since inception of the joint venture.

Liquidity and Capital Resources

     At March 31, 2005, we had unrestricted cash and cash equivalents of $11.4 million, a decrease of $3 million from unrestricted cash and cash equivalents held at December 31, 2004. We invest our cash in excess of current operating requirements in a portfolio of investment-grade securities. We did not hold any short-term marketable securities at December 31, 2004 or at March 31, 2005. At March 31, 2005, we had no restricted cash balance.

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     At March 31, 2005, our principal obligations consisted of restructuring-related liabilities totaling $547,000, accrued liabilities of $3.3 million, of which $2.9 million is expected to be paid within the next 12 months, trade payables of $1.1 million and salaries and benefits payable of $1.4 million. The majority of the restructuring-related liabilities relate to excess facilities in domestic and international markets, the most significant portion of which relates to the termination agreement signed in December 2002 in connection with excess facilities in Bellevue, Washington. We expect that the majority of our accounts payable, salaries and benefits payable and accrued liabilities at March 31, 2005 will be settled during the second quarter of 2005 and will result in a corresponding decline in the amount of cash and cash equivalents, offset by liabilities associated with activity in the second quarter of 2005. Our purchased technology obligations relate to our asset acquisition of business process management technology from Visuale, Inc.

     Off-balance sheet obligations at March 31, 2005 primarily consisted of operating leases associated with facilities in Bellevue, Washington and other domestic and international field office facilities. Our contractual commitments at March 31, 2005 are substantially similar to those at December 31, 2004 that were disclosed in our annual report on Form 10-K.

     Under the Loan and Security Agreements with Silicon Valley Bank, or SVB, we have an $8 million working capital revolving line of credit and a $500,000 term loan facility. The $8 million working capital revolving line of credit is split between a $6.0 million domestic facility and a $2.0 million Export Import Bank of the United States, or Exim Bank, facility. All of the facilities are secured by accounts receivable, property and equipment and intellectual property. The domestic facility allows us to borrow up to the lesser of (a) 70% of eligible domestic and individually approved foreign accounts receivable and (b) $6.0 million. The Exim Bank facility allows us to borrow up to the lesser of (a) 75% of eligible foreign accounts receivable and (b) $2.0 million. The amount available to borrow under the working capital revolving line of credit is reduced by reserves for outstanding standby letters of credit issued by SVB on our behalf and 50% of any borrowings under the term loan facility. If the calculated borrowing base falls below the reserves, SVB may require us to cash secure the amount by which the reserves exceed the borrowing base. Based on this calculation, no restriction on cash was required under the loan agreement as of March 31, 2005. Due to the variability in our borrowing base, we may be subject to restrictions on our cash at various times throughout the year. Any borrowings will bear interest at SVB’s prime rate, which was 5.75% as of March 31, 2005, plus 1.5% (plus 2% for the term loan facility), subject to a minimum rate of 6.0%. The loan agreements require that we maintain certain financial covenants based on our adjusted quick ratio and tangible net worth. We were in compliance with these covenants at March 31, 2005. We are also prohibited under the loan and security agreements from paying dividends. The facilities expire in March 2006. At March 31, 2005, we had $4.9 million outstanding standby letters of credit relating to long-term lease obligations and $347,000 outstanding under the term loan facility.

     Our operating activities resulted in net cash inflows of $1.2 million in the first quarter of 2004 and net outflows of $2.7 million in the first quarter of 2005. The operating cash inflow in the first quarter of 2004 was primarily the result of cash provided by collections on accounts receivable, increases in deferred revenue and adjustment for non-cash depreciation and amortization charges, offset by our operating loss for the period and decreases in restructuring-related liabilities. The net cash outflow of $2.7 million in the first quarter of 2005 was primarily the result of our operating loss for the period adjusted for non cash amortization and depreciation, decreases in salaries and benefits payable, decreases in deferred revenues and increases in accounts receivable, offset in part by increases in other accrued liabilities.

     Investing activities provided cash of $271,000 in the first quarter of 2004, primarily due to the reduction in the restriction of cash used to secure outstanding letters of credit, offset by capital expenditures. Investing activities used cash of $88,000 in the first quarter of 2005 due to capital expenditures.

     Financing activities provided cash of $32,000 in the first quarter of 2004, due to proceeds from the exercise of stock options. Financing activities used cash of $37,000 in the first quarter of 2005, primarily due to the repayment of the term loan.

     The Company believes that its existing cash and cash equivalents will be sufficient to meet its capital requirements for at least the next 12 months. Due to the fact that lower cash balances could negatively impact the Company’s sales efforts, the Company may seek additional funds through public or private equity financing or from other sources to fund its operations and pursue the Company’s growth strategy. The Company may experience difficulty in obtaining funding on favorable terms, if at all. Any financing the Company might obtain may contain covenants that restrict the Company’s freedom to operate its business or may require the Company to issue securities that have rights, preferences or privileges senior to its common stock and may dilute current shareholders’ ownership interest in the Company.

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     At March 31, 2005, we had received cash of $936,000 as part of a fourth quarter transaction with the Queensland Government. The transaction is contingent on the achievement of two milestones: (i) an election by the Queensland Government to move forward with the project and (ii) achievement of the criteria required for acceptance of the system. In the event either of these milestones are not met, we are obligated to refund $936,000. No revenue has been recognized on this transaction as of March 31, 2005.

Important Factors That May Affect Our Business, Our Results of Operations and Our Stock Price

Our operating results fluctuate and could fall below expectations of investors, resulting in a decrease in our stock price.

     Our operating results have varied widely in the past, and we expect that they will continue to fluctuate in the future. We anticipate this may be particularly evident in 2005 as we focus our efforts on the sale of our products and services to a greater number of larger enterprises and governmental entities. We believe that selling to these target markets typically results in a higher degree of unpredictability in the sales cycle. If our operating results fall below the expectations of investors, it could result in a decrease in our stock price. Some of the factors that could affect the amount and timing of our revenue and related expenses and cause our operating results to fluctuate include:

	•	general economic conditions, which may affect our customers’ capital investment levels in management information systems and the timing of their purchases;
	•	the loss of any key technical, sales, customer support or management personnel and the timing of any new hires;
	•	budget and spending decisions by our prospective and existing customers;
	•	customers’ and prospects’ decisions to defer orders or implementations, particularly large orders or implementations, from one quarter to the next, or to proceed with smaller-than-forecasted orders or implementations;
	•	level of purchases by our existing customers, including additional license and maintenance revenues;
	•	our ability to compete in the highly competitive customer management systems market;
	•	our ability to develop, introduce and market new products and product versions on a timely basis;
	•	rate of market acceptance of our software solutions;
	•	variability in the mix of our license versus service revenue, the mix of our direct versus indirect license revenue and the mix of services that we perform versus those performed by third-party service providers;
	•	our ability to successfully expand our operations, and the amount and timing of expenditures related to this expansion;
	•	the costs we incur as a result of our ongoing efforts to comply with the regulations promulgated under the Sarbanes-Oxley Act of 2002;
	•	the cost and financial accounting effects of any acquisitions of companies or complementary technologies that we may complete; and
	•	the expense we incur as a result of an impairment in our goodwill.

     As a result of all of these factors, we cannot predict our revenue or expenses with any significant degree of certainty, and future revenue may differ from historical patterns. It is particularly difficult to predict the timing or amount of our license revenue because:

	•	our sales cycles are lengthy and variable, typically ranging between six and twelve months from our initial contact with a potential new customer to the signing of a license agreement, although the sales cycle varies substantially from customer to customer, and occasionally requires substantially more time;
	•	a substantial portion of our sales are completed at the end of the quarter and, as a result, a substantial portion of our license revenue is recognized in the last month of a quarter, and often in the last weeks or days of a quarter;
	•	the contracting process of our sales cycle may take more time than we have historically experienced;

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	•	the amount of unfulfilled orders for our products at the beginning of a quarter is small because our products are typically shipped shortly after orders are received; and
	•	delay of new product releases can result in a customer’s decision to delay execution of a contract or, for contracts that include the new release as an element of the contract, will result in deferral of revenue recognition until such release.

     Even though our revenue is difficult to predict, we base our decisions regarding our operating expenses on anticipated revenue trends. Many of our expenses are relatively fixed, and we cannot quickly reduce spending if our revenue is lower than expected. As a result, revenue shortfalls could result in significantly lower income or greater loss than anticipated for any given period, which could result in a decrease in our stock price.

We have incurred losses in prior periods, and may not be able to return to profitability, which could cause a decrease in our stock price.

     We incurred net losses in each quarter from Onyx’s inception through the third quarter of 1994, from the first quarter of 1997 through the second quarter of 1999, from the first quarter of 2000 through the first quarter of 2004 and from the third quarter of 2004 through the first quarter of 2005. We may not be able to achieve profitability in future quarters. As of March 31, 2005, we had an accumulated deficit of $131.6 million. Our accumulated deficit and financial condition have caused some of our potential customers to question our viability, which we believe has in turn hampered our ability to sell some of our products.

     In the near-term, we believe our costs and operating expenses may increase in certain areas as we fund certain new initiatives — including those relating to the marketing efforts surrounding our new corporate strategy. We anticipate these expenses will be offset to some extent by smaller cost associated with compliance with the Sarbanes-Oxley Act of 2002, relative to those expenses incurred to date. While we will strive to keep our costs and operating expenses in the near-term to be at a level that is in line with our expected revenue, we may not be able to increase our revenue sufficiently to keep pace with any growth in expenditures. As a result, we may be unable to return to profitability in future periods.

     Although profitable in the third and fourth quarters of 2003 and the first and fourth quarters of 2004, Onyx Japan Software Co. Ltd., our Japanese joint venture, or Onyx Japan, incurred substantial losses in previous periods as well as the first quarter of 2005. The minority shareholders’ capital account balance as of March 31, 2005 was $25,000. Additional Onyx Japan losses above approximately $60,000 in the aggregate will be absorbed 100% by us, as compared to 58% in all prior periods since inception of the joint venture, which could affect our ability to achieve profitability in future periods.

If our new corporate strategy and market positioning is unsuccessful, we may not be able to generate revenue and achieve profitability.

     Historically we have been known as a leading provider of customer relationship management, or CRM, solutions. Over time, however, we have learned that automating relationships with customers is but one business problem that our customers and prospects are trying to solve. As such, we recently announced a new corporate strategy which focuses not only on traditional CRM, but also on process management and performance management. While we have developed products which we believe can help businesses automate, manage and report on their operations, we are uncertain of the market acceptance of our solution. In the event our new marketing strategy fails to generate the level of sales we anticipate, our business will be materially adversely impacted.

If we are unable to compete successfully in the highly competitive customer management systems market, our business will fail.

     Our solutions target what is typically referred to as the customer management systems market. This market is intensely competitive, fragmented, rapidly changing and significantly affected by new product introductions. We face competition primarily from front-office software application vendors, providers of hosted solutions, large enterprise software vendors and our potential customers’ information technology departments, which may seek to develop proprietary systems. The dominant competitor in our industry is Siebel Systems, Inc., which holds a significantly greater percentage of the market than we do. Other companies with which we compete include, but are not limited to, Amdocs Limited, E.piphany, Inc., Oracle Corporation, PeopleSoft, Inc. (recently acquired by Oracle Corporation), Pivotal Corporation (a wholly owned subsidiary of CDC Software), RightNow Technologies, Salesforce.com, SalesLogix (part of Sage, Inc.) and SAP AG.

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     In addition, as we develop new products we may begin competing with companies with whom we have not previously competed. It is also possible that new competitors will enter the market. In recent years we have experienced an increase in competitive pressures in our market, which has led to enhanced price competition. We expect this trend to continue.

     Many of our competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, marketing and other resources than we do. Furthermore, there has been increasing consolidation among our competitors and we believe this consolidation will continue. As a result of consolidation among our competitors, our competitors may be able to adapt more quickly to new technologies and customer needs, devote greater resources to promoting or selling their products and services, initiate and withstand substantial price competition, take advantage of acquisition or other strategic opportunities more readily or develop and expand their product and service offerings more quickly than we can. In addition, our competitors may form strategic relationships with each other and with other companies in attempts to compete more successfully against us. These relationships may take the form of strategic investments, joint marketing agreements, licenses or other contractual arrangements, any of which may increase our competitors’ ability, relative to ours, to address customer needs with their software and service offerings and that may enable them to rapidly increase their market share.

If we do not retain our key employees and management team our ability to execute our business strategy will be limited.

     Our future performance will depend largely on the efforts and abilities of our key executive, technical, sales, customer support and managerial personnel and on our ability to attract and retain them. In March 2005, Brian C. Henry, our Chief Financial Officer, and Benjamin E. Kiker, our Chief Marketing Officer, announced their resignations. We subsequently announced the hiring of Robert J. Chamberlain as our new Chief Financial Officer. Additional changes to our senior management team, if they were to occur, and the integration of new senior executives, including Mr. Chamberlain, could result in some disruption to our business while these new executives become familiar with our business model and establish new management systems. If our new management team, including any additional senior executives who join us in the future, is unable to work together effectively to implement our strategies and manage our operations and accomplish our business objectives, our ability to grow our business and successfully meet operational challenges could be severely impaired. In addition, our ability to execute our business strategy will depend on our ability to recruit and retain key personnel. Our key employees are not obligated to continue their employment with us and could leave at any time. The competition for qualified personnel in the computer software and technology markets is particularly intense. We have in the past experienced difficulty in hiring qualified technical, sales, customer support and managerial personnel, and we may be unable to attract and retain such personnel in the future. As part of our strategy to attract and retain personnel, we offer stock option grants to certain employees. However, given the fluctuations of the market price of our common stock, potential employees may not perceive our equity incentives such as stock options as attractive, and current employees whose options are no longer priced below market value may choose not to remain employed by us. In addition, due to the intense competition for qualified employees, we may be required to increase the level of compensation paid to existing and new employees, which could materially increase our operating expenses.

We may be unable to obtain the funding necessary to support the expansion of our business, and any funding we do obtain could dilute our shareholders’ ownership interest in Onyx.

     Our future revenue may be insufficient to support the expenses of our operations, capital needs of Onyx Japan, and the expansion of our business. We may therefore need additional equity or debt capital to finance our operations. If we are unable to generate sufficient cash flow from operations or to obtain funds through additional financing, we may have to reduce our development and sales and marketing efforts and limit the expansion of our business.

     Under Loan and Security Agreements with Silicon Valley Bank (SVB), the Company has an $8.0 million working capital revolving line of credit and a $500,000 term loan facility. The $8.0 million working capital revolving line of credit is split between a $6.0 million domestic facility and a $2.0 million Export Import Bank of the United States (Exim Bank) facility. All of the facilities are secured by accounts receivable, property and equipment and intellectual property. The domestic facility allows the Company to borrow up to the lesser of (a) 70% of eligible domestic and individually approved foreign accounts receivable and (b) $6.0 million. The Exim Bank facility allows the Company to borrow up to the lesser of (a) 75% of eligible foreign accounts receivable and (b) $2.0 million. The amount available to borrow under the working capital revolving line of credit is reduced by reserves for outstanding standby letters of credit issued by SVB on the Company’s behalf and 50% of any borrowings under the term loan facility. If the calculated borrowing base falls below the reserves, SVB may require the Company to cash secure the amount by which the reserves exceed the borrowing base. Based on this calculation, no restriction on cash was required under the loan agreement as of March 31, 2005. Due to the variability in the Company’s borrowing base, the Company may be subject to restrictions on its cash at various times throughout the year. Any borrowings will bear interest at SVB’s prime rate, which was 5.75% as of March 31, 2005, plus 1.5% (plus 2% for the term loan facility), subject to a minimum rate of 6.0%. The loan agreements require that the Company maintain certain financial covenants based on its

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adjusted quick ratio and tangible net worth. The Company was in compliance with these covenants at March 31, 2005. The Company is also prohibited under the loan and security agreements from paying dividends. The facilities expire in March 2006. At March 31, 2005, the Company had $4.9 million outstanding standby letters of credit relating to long-term lease obligations and $347,000 outstanding under the term loan facility.

     The Company believes that its existing cash and cash equivalents will be sufficient to meet the Company’s capital requirements for at least the next 12 months. Due to the fact that lower cash balances could negatively impact the Company’s sales efforts, the Company may seek additional funds through public or private equity financing or from other sources to fund its operations and pursue the Company’s growth strategy. The Company may experience difficulty in obtaining funding on favorable terms, if at all. Any financing the Company might obtain may contain covenants that restrict the Company’s freedom to operate its business or require the Company to issue securities that have rights, preferences or privileges senior to its common stock and may dilute current shareholders’ ownership interest in the Company.

If we are unable to develop and maintain effective long-term relationships with our key partners, or if our key partners fail to perform, our ability to sell our solution will be limited.

     We rely on our existing relationships with a number of key partners, including consulting firms, system integrators, VARs and third-party technology vendors, that are important to worldwide sales and marketing of our solutions. Key partners often provide consulting, implementation and customer support services, and endorse our solutions during the competitive evaluation stage of the sales cycle. We expect an increasing percentage of our revenue to be derived from sales that arise out of our relationships with these key partners.

     Although we seek to maintain relationships with our key partners, and to develop relationships with new partners, many of these existing and potential key partners have similar, and often more established, relationships with our competitors. These existing and potential partners, many of which have significantly greater resources than we have, may in the future market software products that compete with our solutions or reduce or discontinue their relationships with us or their support of our solutions. In addition, our sales will be limited if:

	•	we are unable to develop and maintain effective, long-term relationships with existing and potential key partners;
	•	our existing and potential key partners endorse a product or technology other than our solutions;
	•	we are unable to adequately train a sufficient number of key partners; or
	•	our existing and potential key partners do not have or do not devote resources necessary to implement our solutions.

Economic and business conditions could adversely affect our revenue growth and ability to forecast revenue.

     Our revenue growth and potential for profitability depend on the overall demand for customer management systems software and services. Because our sales are primarily to corporate customers, we are greatly affected by general economic and business conditions. A softening of demand for computer software caused by an uncertain economy, both domestic and international, has affected our sales and may continue to result in decreased revenue and growth rates. When economic conditions weaken, sales cycles for software products tend to lengthen, and, as a result, we experienced prolonged sales cycle in 2002, 2003 and 2004. We expect this trend to continue through at least 2005.

     Our management team uses our software to identify, track and forecast future revenue, backlog and trends in our business. Our sales force monitors the status of proposals, such as the date when they estimate that a transaction will close and the potential dollar amount of such sale. We aggregate these estimates regularly in order to generate a sales pipeline and then evaluate the pipeline at various times to look for trends in our business. While this pipeline analysis provides us with visibility about our potential customers and the associated revenue for budgeting and planning purposes, these pipeline estimates may not consistently correlate to revenue in a particular quarter or over a longer period of time. The uncertainty in the domestic and international economies may continue to cause customer purchasing decisions to be delayed, reduced in amount or cancelled, which could reduce the rate of conversion of the pipeline into contracts during a particular period of time. We believe that our customers also face increasing budgetary pressures due to increased compliance costs in the current regulatory environment, such as costs associated with establishing and maintaining satisfactory internal controls under Section 404 of the Sarbanes-Oxley Act of 2002.

     As a result of the uncertain economy and these increasing budget pressures, we believe that a number of our potential customers may delay or cancel their purchase of our software, consulting services or customer support services or may elect to develop their own solution. A variation in the pipeline or in the conversion of the pipeline into contracts could adversely affect our business and operating results. In addition, because a substantial portion of our sales are completed at the end of the quarter, and often in the last weeks or days of a quarter, we may be unable to adjust our cost structure in response to a variation

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in the conversion of the pipeline into contracts in a timely manner, which could adversely affect our business and operating results. Some customers are reluctant to make large purchases before they have had the opportunity to observe how our software performs in their organization, and have opted instead to make their planned purchase in stages. Additional purchases, if any, may follow only if the software performs as expected. We believe that this trend is a symptom of lack of successful deployments by competitors and increasing averseness to risk among our customers and potential customers. To the extent that this trend continues, it will adversely affect our revenue.

The internal controls implemented under the Sarbanes-Oxley Act of 2002 may not prevent or detect all material weaknesses or significant deficiencies.

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, we are required to furnish an internal controls report of management’s assessment of the design and effectiveness of our internal controls as part of our Annual Report on Form 10-K beginning with the fiscal year ending December 31, 2004. Our independent registered accounting firm is then required to attest to, and report on, management’s assessment. Although our internal testing, as well as our independent registered accounting firm’s report, identified no material weaknesses in our internal controls, certain weaknesses may be subsequently discovered that will require remediation. This remediation may require implementing additional controls, the costs of which could have a material adverse effect on our operating results. Moreover, if we are not able to annually comply with the requirements of Section 404, our reputation might be harmed and we might be subject to sanctions or investigation by regulatory authorities, such as the SEC, or de-listing by the Nasdaq Stock Market. Any such action could adversely affect our financial results and the market price of our common stock.

Fluctuations in support and service revenue could decrease our total revenue or decrease our gross margins, which could cause a decrease in our stock price.

     Although our support and service revenue represented a lower percentage of our total revenue in 2004 and in the first quarter of 2005 as compared to 2003, during 2002 and 2003, our support and service revenue represented a higher percentage of our total revenue than in past periods, which negatively affected our gross margins. To the extent that this trend continues, our gross margins will continue to suffer. Due largely to the decrease in license revenue in 2002 and 2003, support and service revenue represented 67% of our total revenue in 2002 and 79% of our total revenue in 2003. In 2004, support and service revenue represented 76% of our total revenue and 73% in the first quarter of 2005. We anticipate that support and service revenue will continue to represent a significant percentage of our total revenue. Because support and service revenue has lower gross margins than license revenue, a continued increase in the percentage of total revenue represented by support and service revenue or a further decrease in license revenue, as we experienced in 2002 and 2003, could have a detrimental effect on our overall gross margins and thus on our operating results. Our support and service revenue is subject to a number of risks. First, we subcontract some of our consulting, customer support and training services to third-party service providers. Third-party contract revenue generally carries even lower gross margins than our service business overall. As a result, our support and service revenue and related margins may vary from period to period, depending on the mix of third-party contract revenue. Second, support and service revenue depends in part on ongoing renewals of support contracts by our customers, some of which may not renew their support contracts. Finally, support and service revenue could decline further if customers select third-party service providers to install and service our products more frequently than they have in the past. If support and service revenue is lower than anticipated, our operating results could fall below the expectations of investors, which could result in a decrease in our stock price.

We have a limited operating history and are subject to the risks of new enterprises.

     We commenced operations in February 1994 and commercially released the first version of our flagship product in December 1994. Accordingly, we have a limited operating history, and we face all of the risks and uncertainties encountered by early-stage companies. These risks and uncertainties include:

	•	no history of sustained profitability;
	•	uncertain growth in the market for, and uncertain market acceptance of, our solutions;
	•	reliance on one product family;
	•	the risk that competition, technological change or evolving customer preferences, such as preferences for different computing platforms, could harm sales of our solutions;
	•	the need to implement our sales, marketing and after-sales service initiatives, both domestically and internationally;

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	•	the need to execute our product development activities;
	•	dependence on a limited number of key technical, customer support, sales and managerial personnel; and
	•	the risk that our management will be unable to effectively manage growth, a downturn or any acquisition we may undertake.

     The evolving nature of the customer management systems market increases these risks and uncertainties. Our limited operating history makes it difficult to predict how our business will develop.

Our solutions may not achieve significant market acceptance.

     Continued growth in demand for customer management systems and our new products remains uncertain. Even if the market grows, businesses may purchase our competitors’ solutions or develop their own. We believe that many of our potential customers are not fully aware of the benefits of customer management systems and that, as a result, these systems have not achieved, and may not achieve, market acceptance. We also believe that many of our potential customers perceive the implementation of such a system to require a great deal of time, expense and complexity. This perception has been exacerbated by well-publicized failures of certain projects of some of our competitors. This, in turn, has caused some potential customers to approach purchases of customer management systems with caution or to postpone their orders or decline to make a purchase altogether. We have spent, and will continue to spend, considerable resources educating potential customers not only about our solutions but also about customer management systems in general. Even with these educational efforts, however, continued market acceptance of our solutions may not increase. We will not succeed unless we can educate our target market about the benefits of customer management systems and the cost effectiveness, ease of use and other benefits of our solutions.

If potential customers do not accept the Onyx product family, our business will fail.

     We rely on one product family for the success of our business. License revenue from the Onyx product family has historically accounted for nearly all of our license revenue. We expect product license revenue from the Onyx product family to continue to account for a substantial majority of our future revenue. As a result, factors adversely affecting the pricing of or demand for the Onyx product family, such as competition or technological change, could dramatically affect our operating results. If we are unable to successfully deploy current versions of the Onyx product family and to develop, introduce and establish customer acceptance of new and enhanced versions of the Onyx product family, our business will fail.

We may be unable to efficiently restructure or expand our sales organization, which could harm our ability to expand our business.

     To date, we have sold our solutions primarily through our direct sales force, with this trend especially pronounced in the North American market. Our future revenue growth will depend in large part on recruiting, training and retaining direct sales personnel and expanding our indirect distribution channels. These indirect channels include VARs, OEM partners, systems integrators and consulting firms. We have experienced and may continue to experience difficulty in recruiting qualified direct sales personnel and in establishing third-party relationships with VARs, OEM partners, systems integrators and consulting firms.

If our customers cannot successfully implement our products in a timely manner, demand for our solutions will be limited.

     The implementation of our products involves a significant commitment of resources by prospective customers. Our customers frequently deploy our products to large numbers of sales, marketing and customer service personnel, which can increase the complexity of the implementation. Further, our products are also used in combination with, or integrated to, a number of third-party software applications and programming tools, which may also increase the complexity of the implementation. If an implementation is not successful, we may be required to deliver additional consulting services free of charge in order to remedy the problem. If our customers have difficulty deploying our products or for any other reason are not satisfied with our products, our operating results and financial condition may be harmed.

Rapid changes in technology could render our products obsolete or unmarketable, and we may be unable to introduce new products and services successfully and in a timely manner.

     The market for customer management systems is characterized by rapid change due to changing customer needs, rapid technological developments and advances introduced by competitors. Existing products can become obsolete and unmarketable when products using new technologies are introduced and new industry standards emerge. New technologies could change the way customer management systems are sold or delivered. We may also need to modify our products when

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third parties change software that we integrate into our products. As a result, the life cycles of our products are difficult to estimate.

     To be successful, we must continue to enhance our current product line and develop new products that successfully respond to changing customer needs, technological developments and competitive product offerings. We may not be able to successfully develop or license the applications necessary to respond to these changes, or to integrate new applications with our existing products. We have recently introduced new products to the market. While we anticipate that these products will be licensed and successfully deployed by our customers, the products may not receive the market acceptance we expect. We have delayed enhancements or new product release dates several times in the past, and may be unable to introduce enhancements or new products successfully or in a timely manner in the future. If we delay release of our products and product enhancements, or if they fail to achieve market acceptance when released, it could harm our reputation and our ability to attract and retain customers, and our revenue may decline. In addition, customers may defer or forego purchases of our products if we, our competitors or major technology vendors introduce or announce new products or product enhancements.

If we do not expand our international operations and successfully overcome the risks inherent in international business activities, the growth of our business will be limited.

     To be successful in the long term, we will likely need to expand our international operations, particularly in Europe. This expansion may be delayed as a result of our desire to minimize expenses. If we do expand internationally, it will require significant management attention and financial resources to successfully translate and localize our software products to various languages and to develop direct and indirect international sales and support channels. Even if we successfully translate our software and develop new channels, we may not be able to maintain or increase international market demand for our solutions. We, or our VARs, may be unable to sustain or increase international revenues from licenses or from consulting and customer support. In addition, our international sales are subject to the risks inherent in international business activities, including

	•	costs of customizing products for foreign countries;
	•	export and import restrictions, taxes, tariffs and other trade barriers;
	•	the need to comply with multiple, conflicting and changing laws and regulations;
	•	reduced protection of intellectual property rights and increased liability exposure; and
	•	regional economic, cultural and political conditions, including the direct and indirect effects of terrorist activity and armed conflict in countries in which we do business.

     As noted above, Onyx Japan has incurred substantial losses in previous periods. The minority shareholders’ capital account balance at March 31, 2005 was $25,000. Additional Onyx Japan losses above approximately $60,000 in the aggregate will be absorbed 100% by us, as compared to 58% in all prior periods since inception of the joint venture. Additional funding may be required to continue the operation of the joint venture. Our joint venture partners are not obligated to participate in any capital call and have indicated that they do not currently intend to invest additional sums in Onyx Japan. We are, however, discussing other ways our partners can assist Onyx Japan. If Onyx Japan incurs losses in future periods and no additional capital is invested, we may have to further restructure Onyx Japan’s operations.

     Our foreign subsidiaries operate primarily in local currencies, and their results are translated into U.S. dollars. We do not currently engage in currency hedging activities, but we may do so in the future. Changes in the value of the U.S. dollar relative to foreign currencies have not materially affected our operating results in the past. Our operating results could, however, be materially harmed if we enter into license or other contractual agreements involving significant amounts of foreign currencies with extended payment terms if the values of those currencies fall in relation to the U.S. dollar over the payment period.

We may be unable to adequately protect our proprietary rights, which may limit our ability to compete effectively.

     Our success depends in part on our ability to protect our proprietary rights. To protect our proprietary rights, we rely primarily on a combination of copyright, trade secret and trademark laws, confidentiality agreements with employees and third parties, and protective contractual provisions such as those contained in license agreements with consultants, vendors and customers, although we have not signed these agreements in every case. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Other parties may breach confidentiality agreements and other protective contracts we have entered into, and we may not become aware of, or have adequate remedies in the event of, a breach. We face additional risk when conducting business in countries that have poorly developed or inadequately enforced intellectual property laws. While we are unable to determine the extent to which piracy of our software products exists, we expect piracy to be a continuing concern, particularly in international markets.

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In any event, competitors may independently develop similar or superior technologies or duplicate the technologies we have developed, which could substantially limit the value of our intellectual property.

Intellectual property claims and litigation could subject us to significant liability for damages and result in invalidation of our proprietary rights.

     In the future, we may have to resort to litigation to protect our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless of its success, would probably be costly and require significant time and attention of our key management and technical personnel. Although we have not been sued for intellectual property infringement, we may face infringement claims from third parties in the future. The software industry has seen frequent litigation over intellectual property rights, and we expect that participants in the industry will be increasingly subject to infringement claims as the number of products, services and competitors grows and the functionality of products and services overlaps. Infringement litigation could also force us to:

	•	stop or delay selling, incorporating or using products that incorporate the challenged intellectual property;
	•	pay damages;
	•	enter into licensing or royalty agreements, which may be unavailable on acceptable terms; or
	•	redesign products or services that incorporate infringing technology, which we might not be able to do at an acceptable price, in a timely fashion or at all.

Our products may suffer from defects or errors, which could result in loss of revenue, delayed or limited market acceptance of our products, increased costs and damage to our reputation.

     Software products as complex as ours frequently contain errors or defects, especially when first introduced or when new versions are released. Our customers are particularly sensitive to such defects and errors because of the importance of our solutions to the day-to-day operation of their businesses. We have had to delay commercial release of past versions of our products until software problems were corrected, and in some cases have provided product updates to correct errors in released products. Our new products or releases may not be free from errors after commercial shipments have begun. Any errors that are discovered after commercial release could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our reputation, increased service and warranty costs or claims against us.

     In addition, the operation of our products could be compromised as a result of errors in the third-party software we incorporate into our products. It may be difficult for us to correct errors in third-party software because that software is not in our control.

You may be unable to resell your shares at or above the price at which you purchased them, and our stock price may be volatile.

     Since our initial public offering in February 1999, the price of our common stock has been volatile. Our common stock, on a split-adjusted basis, reached a high of $176.00 per share on March 6, 2000 and traded as low as $2.24 per share on April 30, 2003. As a result of fluctuations in the price of our common stock, you may be unable to sell your shares at or above the price at which you purchased them. The trading price of our common stock could be subject to fluctuations for a number of reasons, including:

	•	significant trading activity by shareholders with large holdings in our common stock;
	•	future announcements concerning us or our competitors;
	•	actual or anticipated quarterly variations in operating results;
	•	changes in analysts’ earnings projections or recommendations;
	•	announcements of technological innovations;
	•	the introduction of new products;
	•	changes in product pricing policies by us or our competitors;
	•	proprietary rights litigation or other litigation; or
	•	changes in accounting standards that adversely affect our revenue and earnings.

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     In addition, future sales of substantial numbers of shares of our common stock in the public market, or the perception that these sales could occur, could adversely effect the market price of our common stock.

     Stock prices for many technology companies fluctuate widely for reasons that may be unrelated to operating results of these companies. These fluctuations, as well as general economic, market and political conditions, such as national or international currency and stock market volatility, recessions or military conflicts, may materially and adversely affect the market price of our common stock, regardless of our operating performance and may expose us to class action securities litigation which, even if unsuccessful, would be costly to defend and distracting to management.

Our articles of incorporation and bylaws and Washington law contain provisions that could discourage a takeover.

     Certain provisions of our restated articles of incorporation and bylaws, our shareholder rights plan and Washington law would make it more difficult for a third party to acquire us, even if doing so would be beneficial for our shareholders. This could limit the price that certain investors might be willing to pay in the future for shares of our common stock. For example, certain provisions of our articles of incorporation or bylaws:

	•	stagger the election of our board members so that only one-third of our board is up for reelection at each annual meeting;
	•	allow our board to issue preferred stock without any vote or further action by the shareholders;
	•	eliminate the right of shareholders to act by written consent without a meeting, unless the vote to take the action is unanimous;
	•	eliminate cumulative voting in the election of directors;
	•	specify a minimum threshold for shareholders to call a special meeting;
	•	specify that directors may be removed only with cause; and
	•	specify a supermajority requirement for shareholders to change those portions of our articles that contain the provisions described above.

     In October 1999, we adopted a shareholder rights plan, which is triggered upon commencement or announcement of a hostile tender offer or when any one person or group acquires 15% or more of our common stock. Once triggered, the rights plan would result in the issuance of preferred stock to the holders of our common stock other than the acquirer. The holders of this preferred stock would be entitled to ten votes per share on corporate matters. In addition, these shareholders receive rights under the rights plan to purchase our common stock, and the stock of the entity acquiring us, at reduced prices.

     We are also subject to certain provisions of Washington law that could delay or make more difficult a merger, tender offer or proxy contest involving us. In particular, Chapter 23B.19 of the Washington Business Corporation Act prohibits corporations based in Washington from engaging in certain business combinations with any interested shareholder for a period of five years unless specific conditions are met.

     These provisions of our articles of incorporation, bylaws and rights plan and Washington law could have the effect of delaying, deferring or preventing a change in control of Onyx, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of our common stock. The provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to financial market risks, including changes in interest rates and foreign currencies.

Interest Rate Risk

     We typically do not attempt to reduce or eliminate our market exposures on our investment securities because all of our investments are short-term in nature and are classified as cash equivalents as of March 31, 2005. Due to the short-term nature of these investments, their fair value would not be significantly impacted by either a 100 basis point increase or decrease in interest rates. We do not use any hedging transactions or any financial instruments for trading purposes and we are not a party to any leveraged derivatives.

Foreign Currency Risk

     In the first quarter of 2004, international revenue accounted for 37% of our consolidated revenue remaining relatively consistent at 39% in the first quarter of 2005. International revenue, as well as most of the related expenses incurred, is denominated in the functional currencies of the corresponding country. Operating results from our foreign subsidiaries are exposed to foreign currency exchange rate fluctuations as the financial results of these subsidiaries are translated into U.S. dollars upon consolidation. As exchange rates vary, revenues and other operating results, when translated, may differ materially from expectations. The effect of foreign exchange transaction gains and losses were not material to us during the first quarter of 2005 or in the prior two fiscal years.

     At March 31, 2005, we were also exposed to foreign currency risk related to the assets and liabilities of our foreign subsidiaries, in particular our United Kingdom operation denominated in British pounds. Cumulative unrealized translation gains related to the consolidation of Onyx UK, including the goodwill and other intangible assets resulting from the acquisition of Market Solutions Limited in 1999, amounted to $2.5 million at March 31, 2005. The unrealized gain at March 31, 2005 specifically associated with the goodwill and other acquisition-related intangibles of Market Solutions amounted to $1.9 million. This unrealized translation gain combined with the cumulative unrealized translation gains and losses related to the consolidation of our other foreign subsidiaries, resulted in net consolidated cumulative unrealized translation gains of $2.6 million.

     Although we have not engaged in foreign currency hedging to date, we may do so in the future.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

     Our chief executive officer and our chief financial officer, after evaluating the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report, have concluded that as of that date, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in this quarterly report is accumulated and communicated by our management, to allow timely decisions regarding required disclosure.

Changes in internal controls

     There have been no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 6. Exhibits

(a) Exhibits

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SIGNATURES

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

	ONYX SOFTWARE CORPORATION (Registrant)
Date: May 10, 2005	By:	/s/ Janice P. Anderson
		Janice P. Anderson
		Chief Executive Officer and Chairman of the Board

Date: May 10, 2005	By:	/s/ Robert J. Chamberlain
		Robert J. Chamberlain
		Chief Financial Officer (Principal Financial Officer)

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