ONYX SOFTWARE CORP/WA - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

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

For the fiscal year ended December 31, 2000

OR

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

For the transition period from to

Commission File Number 0-25361

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ONYX SOFTWARE CORPORATION
(Exact Name of Registrant as Specified in its Charter)

Washington 91-1629814
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)

3180 - 139th Avenue S.E., Suite 500, Bellevue, Washington 98005-4091
(Address of Principal Executive Offices)

(425) 451-8060
(Registrant's Telephone Number, Including Area Code)

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Securities Registered Pursuant to Section 12(b) of the Act:

None.

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value Per Share

Preferred Stock Purchase Rights, $.01 Par Value Per Share

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

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

The aggregate market value of the voting and nonvoting stock held by
nonaffiliates of the registrant at February 12, 2001 was approximately
$431,006,161.

The number of shares of the registrant's common stock outstanding at
February 12, 2001 was 40,601,234.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set
forth herein, is incorporated herein by reference from the Registrant's
definitive proxy statement relating to the annual meeting of shareholders to
be held in 2001, which definitive proxy statement shall be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this report relates.

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ONYX SOFTWARE CORPORATION

FORM 10-K
For the Year Ended December 31, 2000

INDEX

Page
----

PART I
Item 1. Business...................................................... 1
Item 2. Properties.................................................... 24
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24

PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters.......................................... 25
Item 6. Selected Consolidated Financial Data.......................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 38
Item 8. Consolidated Financial Statements and Supplementary Data...... 39
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 62

PART III
Item 10. Directors and Executive Officers of the Registrant............ 63
Item 11. Executive Compensation........................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 63
Item 13. Certain Relationships and Related Transactions................ 63

PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.......................................................... 64
Signatures.............................................................. 67

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PART I

Our disclosure and analysis in this report contain forward-looking
statements, which provide our current expectations or forecasts of future
events. Forward-looking statements include statements about our plans,
objectives, expectations and intentions and other statements that are not
historical facts. When used in this discussion, the words "believes,"
"anticipates" and "intends" and similar expressions are intended to 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 these
forward-looking statements for many reasons, including the factors described
under "Important Factors That May Affect Our Business, Our Results of
Operations and Our Stock Price."

Readers should not unduly rely on the forward-looking statements, which
speak only as of the date of this report. We undertake no obligation to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events. Readers should, however, review the factors and risks we
describe in reports we file from time to time with the Securities and Exchange
Commission after the date of this report.

ITEM 1. BUSINESS

Overview

Onyx Software Corporation is a leading provider of enterprise-wide,
customer-centric e-business solutions designed to promote strategic business
improvement and revenue growth by enhancing the way businesses market, sell and
service their products. Using the Internet in combination with traditional
forms of interaction, including phone, mail, fax and email, our solution helps
enterprises to more effectively acquire, manage and maintain customer, partner
and other relationships. We designed our solution for companies that want to
merge new e-business processes with traditional business processes to enhance
their customer-facing operations, such as marketing, sales, customer service
and technical support. Our solution uses a single data model across all
customer interactions, resulting in a single repository for all marketing,
sales and service information. We designed our solution from inception to be
fully integrated across all customer-facing departments and interaction media.
Our solution is designed to be easy to use, widely accessible, rapidly
deployable, scalable, flexible, customizable and reliable, resulting in a low
total cost of ownership and rapid return on investment.

Our integrated product family allows enterprises to automate the customer
lifecycle across the entire enterprise, instead of automating only individual
departments. We target mid- to large-sized organizations and divisions of
Fortune 500 companies, marketing and selling our software and services through
a direct sales force, as well as through traditional value-added resellers, or
VARs, and application service providers, or ASPs. Our solution can be easily
implemented and flexibly configured to address an enterprise's specific
business needs. We believe our solution provides broad functionality that
enables our customers to compete more effectively in today's intensely
competitive and dynamic business environment.

Our principal executive offices are located at 3180 139th Avenue S.E., Suite
500, Bellevue, Washington 98005-4081. We were incorporated in Washington in
1994.

Industry Background

In recent years, an increasing number of enterprises have sought to use
technology to improve their interactions with their customers. Many of these
enterprises have implemented customer relationship

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management, or CRM, software systems to automate their customer-facing
departments. The market for CRM systems, however, has changed substantially in
the last five years. In the early 1990s, software vendors addressed the CRM
market by delivering systems designed specifically for individual departments.
For example, some vendors delivered systems for customer service or support,
some for help desk, some for sales force automation, and some for marketing
intelligence. These systems effectively automated the single department at
which they were targeted, but the companies that used them often were left with
the difficult task of integrating disparate customer information spread across
these separate systems to get a complete view of their relationship with each
customer.

When we delivered our first products in 1994, we were one of the few vendors
to offer a single system for all customer-facing departments. Since 1995, there
has been significant consolidation within the market, with most of the single
departmental vendors being acquired or acquiring complementary vendors so that
in combination they could offer a more complete CRM solution. These solutions,
however, remain limited in their ability to distribute and share information.
In addition, many of these applications require significant customization and
ongoing support. As a result, most of these vendors are still largely single-
department software vendors. In addition to consolidation among the CRM
vendors, enterprise resource planning vendors have also entered the CRM market
with their own technology, as well as by acquiring CRM companies.

We believe that, with the wide proliferation of the Internet over the last
several years, an increasing number of customers, partners, distributors and
suppliers want to employ e-business solutions in their operations; that is,
they want to use the Internet as a means of conducting business. Traditional
businesses are beginning to respond to this desire by deploying Internet- and
email-based interaction systems for their customer-facing departments. To
address these new demands, an increasing number of vendors are entering the CRM
market with e-business systems designed to automate Internet- and email-based
customer interactions. Like the CRM vendors of the early 1990s, these new
vendors typically offer solutions that automate only one department. In
addition, these new solutions typically have been designed to handle only
Internet- or email-based communication, rather than more traditional forms of
communication, such as phone, mail, fax or personal interaction. We believe
that companies adopting these new e-business applications will face a
significant integration challenge to get a comprehensive view of their business
relationships. They will be required to integrate data from multiple
departmental applications, and to integrate data collected from the Internet or
email with separate data collected by phone, mail, fax or personal interaction.
The appropriate deployment of CRM technologies to manage multiple revenue
streams will also be a challenge.

With this convergence of traditional businesses interacting online and e-
businesses interacting by traditional means, we believe there is a strong
opportunity for an enterprise-wide, customer-centric e-business solution that
automates and integrates Internet, email and traditional interactions across
all customer-facing departments. Such a solution would enable both traditional
and e-business enterprises to more effectively acquire, manage and maintain
customer, partner and other relationships. This solution would provide a high
return on investment by improving the effectiveness of sales, marketing and
support activities across all communication channels, while maintaining a low
total cost of ownership.

Our solution is designed specifically for companies that are combining e-
business communications with traditional business, regardless of whether they
started as an e-business or a traditional business. Our technology spans two
growth markets: e-commerce and CRM. According to AMR Research, through 2003,
the e-commerce market is expected to grow at an annual rate of 78% and the CRM
market is expected to grow at an annual rate of 49%. Our ability to align and
integrate strategy with enabling CRM technologies will provide an enhanced
solution for clients looking to acquire a competitive advantage in their
marketplace.

Advantages of the Onyx Solution

The Onyx solution is designed to promote strategic business improvement and
revenue growth for our customers by enhancing the way they market, sell, and
service their products, both directly and through partners. The Onyx solution
combines sales strategy with strong business processes and leading-edge

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technology to deliver a comprehensive CRM operating environment tailored to the
specific business needs of each customer. We believe our solutions enable our
customers to compete more effectively in today's intensely competitive and
dynamic business environment, which may result in increased revenue, higher
customer loyalty, stronger partnerships and superior financial performance for
our customers.

Our solution provides the following key advantages:

Strategic Business Our solution is designed to increase both the
Improvement effectiveness and the efficiency of how our
customers market and sell their products, and
service their customers and partners. Each of
our customers has a specific business objective
for their CRM operating environment, such as
increased revenues, increased customer loyalty
or increased margins. We tailor every
implementation and create appropriate operating
metrics to help our customers achieve the
specific business improvement that they desire.

Business Alignment Our solution aligns all customer-facing
departments around a common sales and marketing
strategy and around holistic customer
relationships. Onyx's integrated solution gives
organizations the ability to manage the entire
customer lifecycle from end to end, rather than
simply automating departmental functions. We
use integrated workflow and an integrated data
model that, unlike traditional customer
interaction software, such as sales force
automation software or other point solutions,
provides a single repository of marketing,
service and sales information throughout the
organization.

e-Business Integration Our solution enables companies to integrate
their e-business initiatives with traditional
forms of relationship management, so they can
utilize the Internet in the way that they
believe is most effective for their business.
This flexibility makes our solution attractive
to customers that vary widely in their approach
to combining traditional and electronic
interactions with their customers and partners.

Rapid Deployment From strategy development to technology
implementation, our solution is designed to be
rapidly deployable throughout the enterprise so
companies can quickly adapt to rapid changes in
the business environment. On average, our
customers complete initial deployments of their
Onyx solution in eight to ten weeks.

Ease of Use Our solution facilitates consistent
communication and collaboration across the
organization through clearly defined and
customized operating procedures and a suite of
easy-to-use interfaces. Interfaces and
processes can be tailored by audience, device,
and skill level. We have won user's choice
awards for leading ease of use.

Return on Investment Our solutions are designed to provide rapid and
significant results at a reasonable expense. As
a result, we believe our product offers higher
overall return on investment and faster payback
than other CRM products.

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Scalability and Flexibility We designed our solution so that it can scale
up and down to serve the needs of both very
large and small business operations. Studies
sponsored by us and run in scalability labs
showed our solution's ability to scale to
32,000 simultaneous users in a real-world
testing environment. However, in large
companies, solutions need to be able to scale
down as well so they can handle the needs of
smaller divisions or other smaller groups
within the larger enterprise. Our solution is
flexible, scalable, and widely deployable
across a wide spectrum of business sizes.

Internet Architecture We have developed our application using a
robust Internet architecture that provides
users with a comprehensive Internet interface
for managing customer and partner
relationships. The Internet interface gives our
customers and partners more flexibility for
integrating additional applications and for
deploying the system across a larger and more
distributed workforce than is capable with
traditional client-server architectures.

Strategy

Our objective is to be the leading provider of enterprise-wide, customer-
centric e-business solutions. Our strategy to achieve this goal includes the
following key elements:

Exploit Demand for We offer companies a single platform for
Integrated e-Business and automating both e-business and traditional
CRM Applications types of customer interactions. Integration
between these channels of interaction is
imperative as traditional businesses go online
and e-businesses add traditional infrastructure
to support growing customer bases.

Provide Rapidly Deployable We designed our solution to be quickly and
Solutions efficiently adopted, installed and deployed in
mid- to large-sized organizations. We believe
the length of time it takes to deploy
traditional CRM products and the high cost of
deployment are unacceptable to growing numbers
of organizations. Competitive pressures
encourage organizations of all sizes to adopt
information technology solutions that are
quickly deployed, meet business-critical needs
and provide interfaces that minimize user
training and facilitate incremental upgrades,
extensions and scalability. We plan to continue
to design our products to maintain low total
cost of ownership.

Pursue ASP Delivery Model We have a strong presence in the emerging ASP
market. ASPs typically host our software for
customers over the Internet with guaranteed
service level agreements. This model is well
suited for companies with limited information
technology resources, capital resources or time
necessary for implementing the Onyx solution
internally. We believe our solution is well
designed for this type of delivery because it
is rapidly deployable, customizable, scalable,
and reliable. We anticipate that many of our
ASPs will develop specialized versions of our
products and offer them to specific market
segments.

Expand Internationally Our products are currently installed and
operational in 25 countries. We plan to expand
our global operations by investing in our sales

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channels in major international markets. We may
also acquire service providers or establish
strategic relationships with distribution and
technology partners in new international
markets.

Maintain Industry-Leading We plan to maintain industry-leading customer
Customer Satisfaction satisfaction through high-quality products,
superior implementation, and responsive
customer service and support. In 1999, we won a
best practices award from Arthur Andersen for
exceeding customer expectations. We plan to
continue to develop and implement best
practices in CRM within our own company, as
well as for our customers.

Expand Strategic Partnerships We are actively adding both distribution and
technology partners. We believe that expanding
the number of our partnerships will provide us
with increased access to various geographic
markets and potential customers.

Increase Vertical Market We plan to design and deliver industry-specific
Penetration versions of our software to better meet the
requirements of specific vertical markets. We
believe industry-specific versions will give us
an advantage over competitors who sell more
generic applications.

Offer Go-to-Market Strategy We provide sales and marketing strategy
Consulting Services consulting to complement our e-business
solution. We believe our customers must clearly
understand their customer management strategies
to effectively implement a CRM solution. As a
result, we believe our ability to provide sales
and marketing strategy consulting gives us an
advantage over competitors who do not offer
these services.

Products and Services

Our customer-centric e-business solution enables companies to manage their
customer relationships through one integrated, enterprise-wide technology
platform. Users of our solution, including employees in sales, marketing,
service and support, as well as customers and partners, can access the system
through a variety of software interfaces and hardware devices.

Products

We offer a comprehensive, customer-centric e-business solution consisting of
our core e-Business Engine and three audience specific portals: the Onyx
Employee Portal, the Onyx Partner Portal and the Onyx Customer Portal. This
technology platform enables our customers to manage all aspects of their
customer management through our products' core capabilities, as well as through
links into peripheral enterprise-based and Internet-based applications.

The Onyx e-Business Engine is the backbone of our solution that enables
companies to manage customer relationships across departments. Our e-Business
Engine can be divided into four key elements: the Universal Interface
Framework, the e-Business Process Technology, the e-Business Data Center, and
the e-Business Integration Framework. These four elements in combination enable
customers to deploy enterprise-class CRM systems in a scalable and extensible
fashion:

. The Universal Interface Framework enables companies to deliver customer
data to multiple user communities through a variety of offline and
online interfaces, including Windows-based clients, Internet-based
clients, Outlook-based clients and handheld devices.

. The e-Business Process Technology manages the flow of information and
process through all customer-facing departments, including marketing,
sales and service organizations. The e-Business Process Technology is
responsible for CRM activity, including list management, marketing
campaign

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execution, email marketing, marketing collateral distribution, lead
management, sales process management, forecasting, quote generation,
reporting, service automation, knowledge management, incident escalation
and routing, workflow management, Internet-based qualification, email
support, Internet-based lead capture, Internet-based support, Internet-
based commerce, partner management and other Internet-based and non-
Internet-based customer management processes.

. The e-Business Data Center is an enterprise-wide customer-centric
solution for managing all customer-related information. The e-Business
Data Center consists of multiple data storage structures, including a
transactional data structure, a reporting/analytics data structure and a
content distribution data structure.

. The e-Business Integration Framework consists of multiple integration
technologies that enable companies to link our e-Business Engine with
other systems, including Internet-based content, Internet-based
applications, legacy ERP and accounting applications, computer telephony
solutions, reporting applications, commerce solutions and desktop
productivity applications.

Onyx Employee Portal is a personalizable Internet-based interface designed
for use by our customers' internal employees. The Onyx Employee Portal can be
configured for multiple internal teams, such as marketing, sales, service and
management, to provide the applications and content they require. In addition
to providing access to the Onyx solution, end users can access third-party
content and applications from within the Onyx Employee Portal. Onyx has
established multiple partnerships with leading third-party vendors who provide
applications and content that is relevant to the overall CRM process.

Onyx Partner Portal is a personalizable Internet-based interface designed
for use by partners of our customers. The Onyx Partner Portal includes a broad
set of capabilities that enable companies and their partners to share
information regarding prospects, customers, marketing, sales and service to
better serve customers.

Onyx Customer Portal is a personalizable Internet-based interface designed
for use by customers of our customers. The Onyx Customer Portal includes a
broad set of capabilities that enable companies to interact with their
customers online, including areas such as literature fulfillment, on-line
profiling, lead capture, on-line commerce, customer self help, incident
management and profile management. The Onyx Customer Portal is integrated with
Microsoft Index Server, Commerce Edition for its on-line commerce capabilities.

Product license revenues from the Onyx e-Business Engine product family
accounted for approximately 50% of our total revenues, or 79% of total license
revenues, in 1999 and for 52% of our total revenues, or 83% of total license
revenues in 2000. We expect product license revenues from the Onyx e-Business
Engine product family to continue to account for a substantial majority of our
future revenues.

We typically price our core applications on a per-user basis combined with a
database server fee that varies depending on the number of users licensed to
use the database server. We price several add-on applications on a per-server
basis.

We currently incorporate third-party software from Cognos, Greyware
Automation Products, Inso, Scribe Software, Sybase and Trilogy Software into
some of our products. This software is licensed to us pursuant to original
equipment manufacturer agreements that require us to pay a fee for each copy of
software we sublicense.

Professional Services

In addition to the products described above, we also provide consulting,
customer support and training services as follows:

Consulting We offer our customers high-quality consulting
services, including business process
reengineering, change management, systems
integration, configuration, installation and
project management. We work closely with our
customers to identify their individual

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business needs and tailor our solution to these
needs in an efficient, cost-effective manner.
We provide ongoing business consulting to help
our customers optimize the use of our system
over time.

Customer Support We have implemented a comprehensive customer
support program to assist customers who use our
products and to identify, analyze and solve any
problems that may result from that use. The
support program includes email support, on-line
support via the Internet and telephone support
from our four worldwide support centers. In
addition, we offer a premium support program
that allows our customers to contact our
support centers around the world seven days a
week, 24 hours a day.

Training We offer a number of educational classes
regarding the implementation and administration
of our solution, including end-user training
and in-depth technical training.

Go-to-Market Strategy Through our Revenue Lab division, we provide
Consulting sales and marketing strategy services in
advance of a software implementation. This
division can also provide training, coaching,
skills assessment and compensation strategy
services.

We typically price our consulting services based on the time spent and
resources used. We price our support programs as a percentage of the software
license fee plus additional amounts for premium support services. We price
training services on a per-class basis. We price RevenueLab services either on
a project basis or a time spent and resources used basis, depending on the type
of engagement.

We have established a number of relationships with systems integrators for
implementing our software. We have conducted joint implementations projects
with Accenture, Arthur Andersen, Breakaway Solutions, Crowe-Chizek, Deloitte &
Touche, ePartners, equarius, Interliant, KPMG, marchFIRST,
PriceWaterhouseCoopers, Solutions Consulting, Star IT, WaveBend Solutions, and
Yaletown Technologies. We frequently participate in joint sales and marketing
efforts with our systems integrators.

Onyx Technology

Internet-based Architecture

The Onyx Internet Architecture is built exclusively with Internet
technologies to deliver the superior accessibility and manageability required
for large-scale CRM deployments. This multi-tier architectural approach has
enabled us to deliver thin-client, portal-based offerings that target internal
front office employees (Onyx Employee Portal), as well as external customers
and partners (Onyx Customer Portal and Onyx Partner Portal). With the Onyx
Employee Portal, front office employees can access customer information anytime
and anywhere they have a secure Internet connection via their Web browser.
Relevant functionality and information is consolidated in a single interface
for sales, marketing, service and support users. In addition, Onyx's Internet
architecture reduces the costs associated with deploying and maintaining the
solution, since no software has to be installed or upgraded on client machines.

XML Integration Framework

The Onyx e-Business Engine delivers enterprise class integration through a
data-driven, component-based architecture that manages data natively as XML,
and leverages XML for customization and integration. This XML integration
approach allows our software to integrate directly with other enterprise-class
systems and leading middleware products through XML, COM, or CORBA. Such
flexibility enables the Onyx portal suite to act as the foundation and single
interface for managing mission-critical customer and partner relationships.
Simultaneously, this approach reduces the complexity and cost of integration
processes associated with non-XML-based, closed integration architectures.

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Enterprise Class Platform

Our CRM platform provides the extensibility, scalability, and flexibility
required by large, enterprise-class organizations and high-end systems
integrators seeking to create value-added, vertically focused solutions for
their customers. The Onyx platform is an interface-independent platform that
provides enterprise-wide front-office capabilities to the Onyx portal suite and
to audience- and industry- specific interfaces. Through highly extensible,
data-driven business services, the Onyx platform lets customers and partners
align and adapt their CRM solution to meet their unique business objectives.
Partners and customers can adapt existing functionality and create new
functionality by leveraging the object-level infrastructure delivered within
the platform. Through platform optimization, stateless operation, and caching
services, the Onyx e-Business Engine is also designed to scale to meet the
needs of even the largest and most demanding organizations. Onyx has scaled its
application suite to over 32,000 concurrent users in multiple operating
environments. Finally, the customization and integration framework in the Onyx
e-Business Engine provides flexibility for building business rules, workflow,
and integration components, which gives organizations the ability to customize
our products to meet complex business requirements.

Our products are based on Windows Distributed interNet Application, or DNA,
architecture and use industry-standard, low-cost modular components. We believe
this combination of technology and flexible design enables us to offer an
attractive combination of reliability, performance, scalability, integration
and low total cost of ownership. Key aspects of our technology that enable us
to provide a robust CRM solution are as follows:

Support for Multiple Platforms. Our software is currently optimized for the
Windows NT and Microsoft BackOffice platforms. We have announced plans to
expand beyond the Microsoft platform, which will give customers a broader
selection of platforms to choose from in intranet, extranet and Internet
environments over local and wide area network environments. We released the
developer's version of the first additional platform in December 2000, which is
designed to operate on the Sun Solaris operating system and the Oracle
platform. We do not code to the lowest common denominator in support of
multiple platforms. Rather, we maximize code reuse while leveraging vendor-
specific language extensions to optimize for operating systems and relational
database engines.

n-tiered Architecture. Our software consists of a relationship-centric,
integrated data model surrounded by a set of configurable business logic and
presentation objects. This architecture uses multiple tiers to deliver a
balance between configurability, performance and administration. The logical
tiers are user interface services, or presentation layer, business logic
services, or business rules, and data services, or data access and data
storage. All tiers can be customized, and customizations can be preserved
during system upgrades.

Configuration. To adapt to rapidly changing business needs, our software
solution architecture offers broad customization at all tiers:

. User Interface Services Tier. Our Internet-based portal interface can be
customized by leveraging our graphical administration tools and the
inherent openness, extensibility and customizability of Internet forms
architecture.

. Business Logic Services Tier. Our application's business logic can be
customized via a suite of graphical administration tools coupled with an
open programmatic customization framework. The graphical administration
tools allow customers to easily model business terminology, processes,
workflow and security. For more complex customizations, customers are
not limited by graphical user interface administration tools. Our
customization framework provides an industry-standard development
environment in which complex processes and rules can be modeled.
Business terminology, rules, workflows and security models are inherited
by alternative client interfaces.

. Data Services Tier. Our software application includes a generic data
access integration framework that can be used to manage data residing
outside the standard Onyx e-Business data center. By using this service
and the forms customization framework, the Onyx e-Business Engine can
manage information that extends beyond core CRM.

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Integration With Other Enterprise Applications. Through our e-Business
Integration Framework, Onyx supports integration at all tiers of the n-tier
architecture-user interface services, business logic services and data
services. This enables our software and other third-party applications to
integrate at the optimal interface point. The Onyx e-Business Integration
Framework enables integration with third-party or legacy systems via batch,
real-time, peer-to-peer or enterprise application integration. Data from third-
party or legacy systems can be managed through the Onyx e-Business Engine,
which offers employees a real-time view of enterprise information without
requiring redundant storage of information in multiple databases. These
interfaces are object-based and allow bi-directional integration between our
products and other business applications.

Real-Time Synchronization Architecture. Real-time synchronization
architecture creates a mobile user's data snapshot as a replica of the
enterprise database upon completion of synchronization between the mobile
client and enterprise database. In addition, our architecture provides error
detection and recovery by automatically restarting the data synchronization
process at the point of failure should a connectivity link fail. Our
synchronization system also provides configurable data conflict resolution
algorithms and enables synchronization to be performed without user
intervention or attention.

Integrated Data Model. Our solution includes a relationship-centric,
integrated data model--every task, form, campaign, opportunity management form,
forecasting tool and any other feature can be interrelated at any time within
the application. This fundamental part of the architecture allows any
relationship information to be shared with any other part of the organization
and ensures that every user within an organization can have access to the same
data. This data model also provides flexibility to make additions and changes
to the application as the needs of the enterprise change over time.

Multiple Interface Support. Due to the architectural design-enabling
integration in front of the business rules, the Onyx Universal Interface
Framework supports multiple interfaces, including Windows desktop applications,
Web applications and personal digital assistants.

Standards-Based Tools and Components. Our application's integration
interfaces and administration tools are built on open, published, industry-
standard tools and technologies.

Cross-Platform Interoperability. Although the Onyx e-Business Engine is
built on the Microsoft PC-based COM/DCOM standard, it can integrate with
applications running on disparate platforms such as a CORBA-based backbone.

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Customers and Markets

We target mid- to large-sized businesses and divisions of Fortune 500
companies in a wide variety of industries. We believe that these enterprises
have a strong need to move quickly and deliver increasing levels of customer
service through both e-business and traditional channels and that they are
deploying new technologies as a competitive advantage. We have licensed our
products to 745 customers through December 31, 2000. The following is a
representative list of our current customers who purchased more than $300,000
in software licenses from January 1, 1999 to December 31, 2000.

Telecommunications,
Technology Financial Services Internet & Application
Service Providers
Agile Software Brinson Partners
ANSYS Chairities Aid Broadwing Communications
AvantGo Foundation Cavillon Systems
Avid Technology Credit Suisse Cervalis
Bindview Development DBS Bank Ericsson Australia
BuildNet Equity Office Properties Eschelon Telecom
Cadence Design Systems Fisher Investments Evoke Communications
Commerce One Friends Ivory & Sime Futurelink
Crowe Chizek Trust Link GN Nettest
eShare Lease Plan Australia Interliant
eSoft NYCE marchFIRST
I-many Phillips Hager & North NTL Group
InfoSpace.com State Street Global Promon IP
Ingenix Advisors Q-Strategies
Interactive Intelligence Strong Capital Singapore Cable Vision
Interwoven Management Singapore Technologies
Mercator Telemedia
Mobius Management Health Care & Insurance The Sutherland Group
Systems Telstra
Netegrity Health Alliance Medical Verado Holdings
NeuVis Plans
Ontrack Data LIMRA International Other
International The Regence Group
OTG Software Swiss Life Adexa
Portal Software UPMC Health Plan Australian Business
Primus Limited
Rainbow Technologies Manufacturing Bedford, Freeman & Worth
Renaissance Learning Canter Group
Resonate AVT Factiva
Sagebrush Diagnostic Ultrasound Greenfield Online
SeeBeyond Fluke Networks Hostmark
Selkirk Financial IGo Intelligroup
Technologies Matsushita Avionics Jones Knowledge
StorageNetworks Zilog Lab Safety Supply
W-Technologies Merial Australia
Utilities Multiple Zones
New South Wales
ENMAX Department of Public
Mirant Works and Services
Wisconsin Public Service rivals.com
Singapore Press Holdings
Softek
techies.com
TietoEnator
Top Producer Systems

10

Sales and Marketing

We market and sell our software and services through a direct sales force,
as well as through our VARs. We have direct sales offices in the United States,
Australia, Canada, France, Germany, Hong Kong, Japan, Malaysia, New Zealand,
Singapore and the United Kingdom, and VARs in North America, Asia, Australia,
Europe, and Latin America. As of December 31, 2000, we employed 326 people in
sales and marketing. We support our field sales force with telemarketing
representatives and sales engineers.

VARs complement our direct sales effort in many of our markets. Our VARs
typically sell our software in conjunction with their implementation services.
Some also provide the first line of technical support for the customer.

We also distribute software through a network of ASPs, which host our
software to customers over the Internet, typically on a subscription basis.
This model is well suited for companies with limited information technology
resources, capital resources, or time necessary for implementing our system
internally. ASPs offer varying levels of managed services from simple system
administration operations to complete business consulting services.

Our marketing programs are focused on lead generation and brand awareness.
Direct marketing programs are targeted at key executives such as chief
executive officers and chief information officers, as well as vice presidents
of sales, service and marketing.

To support our direct and indirect sales channels, we have sponsored a
series of joint seminars, including Internet-based seminars, with key customers
and partners, such as Microsoft, and premier systems integration partners. Our
marketing personnel engage in a variety of marketing activities, including
managing and maintaining the Onyx Web site, conducting targeted direct-mail
campaigns, placing advertisements, conducting public relations programs and
establishing and maintaining relationships with recognized industry analysts.

Our sales process consists of several phases: lead generation, initial
contact, lead qualification, needs assessment, enterprise overview, product
demonstration, proposal generation and contract negotiation. Our initial sales
cycle typically ranges from two to six months, although it varies substantially
from customer to customer, and, in the past, some sales cycles have lasted
substantially longer.

We have a network of VARs who market, sell and install our systems in their
respective markets. We collaborate with our VARs in a variety of areas,
including seminars, trade shows and conferences. In some markets, our VARs also
create market-specific collateral and product demonstrations and assist in the
localization of our products and related documentation.

We typically enter into buy-sell contracts with VARs pursuant to which they
purchase our products with a right to re-license them to end users, provided
the licensing terms are materially consistent with those used by Onyx. The VARs
have no right to return the product, regardless of their ability to re-license
the product to an end user. In addition, our revenues from the sale of our
products to VARs are independent of the VAR's ability to collect payment from
an end user. We typically do not grant exclusive sales territories to our VARs,
but may do so if a proposed distribution transaction merits such an
arrangement.

We typically license our products to ASPs pursuant to contracts under which
they may include our products as part of their subscription-based services
offered over the Internet.

Research and Development

As of December 31, 2000, we employed 119 people in research and development.
This team is responsible for designing, developing and releasing our products.
The group is organized into four disciplines: development, quality assurance,
documentation and program management. Members from each of these disciplines,
along with a product manager from our marketing department, form separate
product teams that

11

work closely with sales, marketing, and professional services members, and with
customers and prospects to better understand market needs and requirements.
When required, we also use third-party development firms to expand the capacity
and technical expertise of our internal research and development team.
Additionally, we sometimes license third-party technology that is incorporated
into our products. We believe this approach significantly shortens our time to
market without compromising our competitive position or product quality.
Therefore, we expect to continue to draw on third-party resources in the
foreseeable future.

We have a well-defined software development methodology that we believe
allows us to deliver products that satisfy real business needs and meet
commercial quality expectations. This methodology is based on the following key
components:

. specification and review of business requirements, functional
requirements, prototypes, technical designs, test plans and
documentation plans;

. iterative, scheduled quality assurance of code and documentation;

. frequent stabilization of product;

. test automation definition, instrumentation and execution;

. test of functions, components, systems, integration, performance, stress
and internationalization;

. full product regression testing before beta or general availability
releases;

. trial deployments in an internal production environment prior to
release;

. external beta releases; and

. general availability release of English and localized products.

We emphasize quality assurance throughout the software development life
cycle. We believe that strong emphasis placed on analysis and design early in
the project life cycle reduces the number and costs of defects that may be
found in later stages. Our development methodology focuses on delivery of
product to an international market, which enables localization into multiple
languages from a single code base.

Intellectual Property and Other 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, any breach.

"Onyx," "Onyx Web Wizards," "Customer Center," "Customer Center-Unplugged"
and "Total Customer Management" are our registered trademarks in the United
States. "Onyx" is also our registered trademark in a number of international
jurisdictions. All other trademarks or service marks appearing in this report
are trademarks or service marks of the respective companies that use them.

We pursue the registration of some trademarks and service marks in the
United States and in other countries, but we have not secured registration of
all our marks. In addition, the laws of some foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States,
and effective copyright, trademark and trade secret protection may not be
available in other jurisdictions. A significant portion of our marks include
the word "Onyx." Other companies use "Onyx" in their marks alone or in
combination with other words, and we cannot prevent all third-party uses of the
word "Onyx." We license trademark rights to third parties. The licensees may
not abide by compliance and quality control guidelines with respect to the
licensed trademark rights and may take actions that would materially adversely
affect our business, financial condition and operating results.

12

Competition

Our solution targets the e-business systems market. This market is intensely
competitive, fragmented, rapidly changing and significantly affected by new
product introductions. We believe that we compete effectively as a result of
our integrated, relationship-centric, rapidly deployable, Internet-enabled
systems and our commitment to providing high-quality solutions that yield a
rapid return on investment and a low total cost of ownership.

We face competition in the e-business systems market primarily from

. front-office software application vendors, such as Nortel Networks,
Pivotal, and Siebel Systems,

. large enterprise software vendors, such as Oracle and PeopleSoft, and

. our potential customers' information technology departments, which may
seek to develop proprietary systems.

In addition, because we offer extensive e-business capabilities, we also
face competition from e-business software application vendors such as Kana,
E.piphany and Broadvision.

Employees

As of December 31, 2000, we had 745 employees, excluding independent
contractors and other temporary employees, including 119 people in research and
development, 326 people in sales and marketing, 205 people in consulting,
customer support and training and 95 people in general and administrative
services. Our future performance will depend largely on the efforts of our key
technical, sales, customer support and managerial personnel and on our ability
to attract and retain them. The competition for qualified personnel in the
computer software and technology markets is 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. None of our employees is represented by a labor union,
and we consider our employee relations to be good.

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 securities
analysts and 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. As a result, our operating
results for a particular quarter or year may fall below the expectations of
securities analysts and investors, which could result in a decrease in our
stock price. Some of the factors that could affect the amount and timing of our
software license revenues and related expenses and cause our operating results
to fluctuate include:

. market acceptance of our solution;

. our ability to compete in the highly competitive e-business systems
market;

. continued purchases by our existing customers, including additional
license and maintenance revenues;

. our ability to expand our sales and support infrastructure;

. our ability to successfully expand our international operations;

. our ability to develop, introduce and market new products on a timely
basis;

. our ability to enable our products to operate on multiple platforms;

. variability in the mix of our license versus service revenues, the mix
of our direct versus indirect license revenues and the mix of services
that we perform versus those performed by third-party service providers;

13

. the cost and financial accounting effects of any acquisitions of
companies or complementary technologies that we may complete;

. the loss of any key technical, sales, customer support or management
personnel and the timing of any new hires;

. the timing of customer orders, which can be affected by customer
ordering and budgeting cycles or by customer order deferrals in
anticipation of new products or product enhancements introduced by us or
our competitors; and

. general economic conditions, which may affect our customers' capital
investment levels in management information systems.

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

. our sales cycles are lengthy and variable, typically ranging between two
and six months from our initial contact with a potential customer to the
signing of a license agreement, although the sales cycle varies
substantially from customer to customer and occasionally sales require
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 revenues
are recognized in the last month of a quarter, and often in the last
weeks or days of a quarter; and

. 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.

Even though our revenues are 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
revenues are 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.

Our operating results may fluctuate seasonally, and these fluctuations may
cause our stock price to decrease.

Our stock price may decrease due to seasonal fluctuations in our revenues.
We continue to experience significant seasonality with respect to software
license revenues. In recent years, we have recognized more license revenues in
our fourth quarter than in each of the first three quarters of a fiscal year
and have experienced lower license revenues in our first quarter than in the
preceding fourth quarter. We believe that these fluctuations are caused in part
by customer buying patterns and the efforts of our direct sales force to meet
or exceed fiscal year-end quotas. We expect that these seasonal trends are
likely to continue in the future.

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 solution;

. reliance on one product family;

. the risk that competition, technological change or evolving customer
preferences, such as preferences for different computing platforms,
could adversely affect sales of our solution;

. the need to expand our sales and support infrastructure;

. the need to expand our international operations;

14

. dependence on a limited number of key technical, customer support, sales
and managerial personnel; and

. the risk that our management will not be able to effectively manage
growth or any acquisition we may undertake.

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

We have incurred losses in recent periods, and may not again achieve
profitability, which could cause a decrease in our stock price.

If we do not return to profitability in future quarters, our stock price
could decrease. We incurred net losses in each quarter from Onyx's inception
through the third quarter of 1994, from the first quarter of 1997 to the second
quarter of 1999, and in all four quarters of 2000. As of December 31, 2000, we
had an accumulated deficit of $10.6 million. We expect to continue to devote
substantial resources to our product development and sales and customer
support. In addition, we currently anticipate that we will continue to
experience significant growth in our operating expenses for the foreseeable
future as we

. increase sales and marketing activities;

. enter new markets for our solution;

. increase research and development spending;

. develop new distribution channels;

. expand our headquarters and field office facilities and infrastructure;

. expand our senior management team;

. improve our operational and financial systems; and

. broaden our professional service capabilities.

As a result, we will need to generate significant quarterly revenues to achieve
profitability. We cannot assure you that we will be able to do so. Our business
strategies may not be successful and, as a result, we may not be profitable in
any future period. Further, in the near term, we may elect to accelerate
investments in our operations at the potential expense of profitability to
capitalize on our opportunity within the rapidly emerging e-business systems
market.

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

Our solution targets the e-business systems market. This market is intensely
competitive, fragmented, rapidly changing and significantly affected by new
product introductions. We face competition in the e-business systems market
primarily from front-office software application vendors, large enterprise
software vendors and our potential customers' information technology
departments, which may seek to develop proprietary e-business systems. The
dominant competitor in our industry is Siebel Systems, Inc. Other companies
with which we compete include, but are not limited to, BroadVision, Inc.,
E.piphany, Inc., Kana Communications, Inc., Nortel Networks, Oracle
Corporation, PeopleSoft, Inc. and Pivotal Corporation.

In addition, as we develop new products, including new product versions
operating on new platforms, we may begin competing with companies with whom we
have not previously competed. It is also possible that new competitors will
enter the market or that our competitors will form alliances that may enable
them to rapidly increase their market share. An increase in competitive
pressures in our market or our failure to compete effectively may result in
pricing reductions, reduced gross margins and loss of market share. Many of our
competitors have longer operating histories, greater name recognition, larger
customer bases and

15

significantly greater financial, technical, marketing and other resources than
we do. In addition, a number of our competitors have recently been acquired by
other large technology companies, which further enhances their resources. As a
result, they 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.

If we are unsuccessful in our attempt to enable our products to operate on
multiple platforms, our revenue growth could be limited.

We originally designed our products to operate exclusively on the Windows NT
and Microsoft BackOffice platforms. As a result, we historically have only been
able to market our solution to customers which have developed their enterprise
computing systems around these platforms, which limits our potential sales. In
December 2000, we announced the release of a new product version designed to
operate on the Oracle platform. Because the Oracle version of our product is
relatively new, we cannot predict the degree to which it will achieve market
acceptance. If our new product version does not achieve market acceptance, our
revenue growth will be limited.

Because many potential customers are unaware of the benefits of e-business
systems, our products may not achieve market acceptance.

The market for e-business systems is still emerging, and continued growth in
demand for and acceptance of e-business systems remains uncertain. Even if the
market for e-business systems grows, businesses may purchase our competitors'
products or develop their own. We believe that many of our potential customers
are not fully aware of the benefits of e-business systems and that they may
never achieve market acceptance. We have spent, and will continue to spend,
considerable resources educating potential customers not only about our
solution but also about e-business systems in general. However, even with these
educational efforts, market acceptance of our solution may not increase. We
will not succeed unless we can educate our target market about the benefits of
e-business systems and about our ability to provide them in a cost-effective
and easy-to-use manner.

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

Product license revenues from the Onyx e-Business Engine product family
accounted for approximately 50% of our total revenues, or 79% of total license
revenues, in 1999 and for 52% of our total revenues, or 83% of total license
revenues, in 2000. We expect product license revenues from the Onyx e-Business
Engine product family to continue to account for a substantial majority of our
future revenues. As a result, factors adversely affecting the pricing of or
demand for the Onyx e-Business Engine 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 e-Business
Engine product family and to develop, introduce and establish customer
acceptance of new and enhanced versions of the Onyx e-Business Engine product
family, our business will fail.

If we are unable to continue to develop products that are compatible with the
Internet and if use of the Internet does not continue to expand, demand for our
products may be limited.

Our products communicate through public and private networks over the
Internet. The success of our products may depend, in part, on our ability to
continue developing products that are compatible with the Internet. We are
uncertain how businesses will use the Internet as a means of communication and
commerce and whether a significant market will develop for Internet-based e-
business systems. The use of the Internet is evolving rapidly, and many
companies are developing products and services that use the Internet. The
increased commercial use of the Internet could require substantial modification
of our products and the introduction of new products. We do not know what forms
of products and services may emerge as alternatives to our existing products or
to any future Internet-based or electronic commerce features and services we
may introduce.

16

In addition, critical issues concerning the commercial use of the Internet,
including security, demand, reliability, cost, ease of use, accessibility,
quality of service and potential tax or other government regulation, remain
unresolved and may affect the use of the Internet as a medium to support the
functionality of our products and distribution of our software. If these
critical issues are not favorably resolved, our Internet-related products may
not achieve market acceptance.

We may be unable to expand our sales infrastructure, which could harm our
ability to expand our business.

To date, we have sold our solution primarily through our direct sales force.
As a result, our future revenue growth will depend in large part on recruiting
and training additional direct sales personnel and expanding our indirect
distribution channels, such as VARs, ASPs, original equipment manufacturer, or
OEM, partners and system integrators and consultants. We have experienced and
continue to experience difficulty in recruiting qualified direct sales
personnel and in establishing third-party relationships with VARs, ASPs, OEM
partners and systems integrators and consultants. We may not be able to
successfully expand our direct sales force or other distribution channels,
which could limit our ability to expand our business. Even if we successfully
expand our direct sales force and other distribution channels, the expansion
may not result in expected revenue growth.

If we do not retain our key employees and expand our 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 technical, sales, customer support and managerial personnel and on our
ability to attract and retain them. In addition, our ability to execute our
business strategy will depend on our ability to recruit additional experienced
management personnel, including a chief financial officer, and to retain our
existing executive officers. 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. 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. Our key employees are not obligated to continue their
employment with us and could leave at any time.

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

The e-business systems market in which we compete 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, including the rapid growth of the
Internet, could change the way e-business systems are sold or delivered. We may
also need to modify our products when 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 delayed enhancements or new product release dates several times in the
past and may not be able 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 revenues may decline. In addition, customers may defer or
forego purchases of our products if we, our competitors or major hardware,
systems or software vendors introduce or announce new products or product
enhancements.

17

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, we must continue to expand our international operations
and enter new international markets. This expansion 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 the Onyx e-Business Engine product
family. We, or our VARs or ASPs, may not be able 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, 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.

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. Increases in the
value of the U.S. dollar relative to foreign currencies have not materially
affected our operating results in the past. However, our operating results
could be materially adversely affected if we enter into license agreements
providing for 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.

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 relationships with a number of key partners, including
management consulting firms, system integrators, VARs, ASPs and third-party
technology vendors, that are important to worldwide sales and marketing of our
solution. These key partners often provide consulting, implementation and
customer support services, and endorse our solution during the competitive
evaluation stage of the sales cycle. Although we seek to maintain relationships
with our key partners, many of them have similar, and often more established,
relationships with our competitors. These key partners, many of which have
significantly greater resources than we have, may in the future market software
products that compete with our solution or reduce or discontinue their
relationships with us or their support of our solution. In addition, our sales
will be limited if

. we are unable to develop and maintain effective, long-term relationships
with our key partners;

. we are unable to adequately train a sufficient number of key partners;

. our key partners do not have or do not devote the resources necessary to
implement our solution; or

. our key partners endorse a product or technology other than our
solution.

If our relationships with application service providers are unsuccessful, our
ability to market and sell our solution will be limited.

We expect a significant percentage of our revenues to be derived from our
relationships with domestic and international ASPs that market and sell our e-
business systems, such as Interliant, Inc., Singapore Telecommunications
Telemedia and Telstra, Ltd. If these ASPs do not successfully market our
solution, our operating results will be materially harmed. Because our
relationships with ASPs are relatively new, we cannot predict the degree to
which the ASPs will succeed in marketing and selling our solution. In addition,
because

18

the ASP model for selling software is relatively new and unproven, we cannot
predict the degree to which our potential customers will accept this delivery
model. If the ASPs fail to provide adequate implementation and support for our
products and services, end-users could decide not to subscribe, or cease
subscribing, for our products and services. The ASPs typically offer our
products and services in combination with other products and services, some of
which may compete with our products and services.

Our sales cycle is long, and sales delays could cause our operating results to
fluctuate, which could cause a decline in our stock price.

An enterprise's decision to purchase an e-business system is discretionary,
involves a significant commitment of its resources and is influenced by its
budget cycles. To successfully sell our solution, we generally must educate our
potential customers regarding the use and benefit of our solution, which can
require significant time and resources. Consequently, the period between
initial contact and the purchase of our solution is often long and subject to
delays associated with the lengthy budgeting, approval and competitive
evaluation processes that typically accompany significant capital expenditures.
Our sales cycles are lengthy and variable, typically ranging between two and
six months from our initial contact with a potential customer to the signing of
a license agreement, although the amount of time varies substantially from
customer to customer and occasionally sales require substantially more time.
Sales delays could cause our operating results to fall below the expectations
of securities analysts or investors, which could result in a decrease in our
stock price.

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

Support and service revenues represented 37% of our total revenues in 1999
and 38% of our total revenues in 2000. We anticipate that service revenues will
continue to represent a significant percentage of total revenues. Because
service revenues have lower gross margins than license revenues, a continued
increase in the percentage of total revenues represented by service revenues or
an unexpected decrease in license revenues could have a detrimental impact on
our overall gross margins and thus on our operating results. We subcontract
some of our consulting, customer support and training services to third-party
service providers. Third-party contract revenues generally carry even lower
gross margins than our service business overall. As a result, our service
revenues and related margins may vary from period to period, depending on the
mix of these third-party contract revenues. Service revenues depend in part on
ongoing renewals of support contracts by our customers, some of which may not
renew their support contracts. In addition, service revenues as a percentage of
total revenues could decline if customers select third-party service providers
to install and service our products more frequently than they have in the past.
If service revenues are lower than anticipated, our operating results could
fall below the expectations of securities analysts or investors, which could
result in a decrease in our stock price.

Delivery of our products and services may be delayed if we cannot continue to
license third-party technology that is important to the functionality of our
solutions.

We incorporate into our products software that is licensed to us by third-
party software developers, currently Cognos, Greyware Automation Products,
Inso, Scribe Software, Sybase and Trilogy Software. We depend on these third
parties' abilities to deliver and support reliable products, enhance their
current products, develop new products on a timely and cost-effective basis,
and respond to emerging industry standards and other technological changes. The
third-party software currently offered in conjunction with our products may
become obsolete or incompatible with future versions of our products. We
believe there are other sources for the functionality we derive from this
licensed software and that we could identify and incorporate alternative
software within a relatively short period of time, approximately four to six
months. However, a significant interruption in the supply of this technology
could delay our sales until we can find, license and integrate equivalent
technology.

19

We may have to reduce or cease operations if we are unable to obtain the
funding necessary to meet our working capital requirements.

Our future revenues may be insufficient to support the expenses of our
operations 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 some or all of our development and sales and
marketing efforts or cease operations. We have an equity financing arrangement
with Ramius Securities, LLC, or Ramius Securities, and Ramius Capital Group,
LLC, or Ramius Capital, under which we may from time to time in the next two
years elect to have Ramius Securities sell a limited number of shares of our
common stock (up to $30 million) on a best-efforts basis or to have Ramius
Capital purchase those shares if the selling efforts are unsuccessful. The
obligations of Ramius Securities and Ramius Capital under this arrangement are
subject to a number of conditions and limitations, and the amount of common
stock that we may sell depends on the daily trading volumes of our common stock
on the Nasdaq National Market. As a result, we may be unable to sell our common
stock under this facility in the amounts and at the times that we want. In
addition, the terms of the equity financing arrangement have not been reviewed
or approved by the National Association of Securities Dealers, or NASD. NASD
review is pending and no securities will be offered under the arrangement
unless and until NASD approval is obtained.

We completed a public offering of our common stock on February 12, 2001,
which resulted in net proceeds to us of approximately $31.3 million. We believe
that the net proceeds from this offering, together with our existing cash and
cash equivalents balances, our arrangement with Ramius Securities and Ramius
Capital and our existing lines of credit will be sufficient to meet our capital
requirements for at least the next twelve months. However, we may seek
additional funds before that time through public or private equity financing or
from other sources to fund our operations and pursue our growth strategy.
Except for the arrangement with Ramius Securities and Ramius Capital, we have
no commitment for additional financing, and we may experience difficulty in
obtaining funding on favorable terms, if at all. Any financing we obtain may
contain covenants that restrict our freedom to operate our business or may have
rights, preferences or privileges senior to our common stock and may dilute our
current shareholders' ownership interest in Onyx. Any common stock that we
issue under the arrangement with Ramius Securities and Ramius Capital, or
otherwise, will dilute our current shareholders' ownership interest in Onyx.

Failure to address strain on our resources caused by our rapid growth will
result in our inability to effectively manage our business.

Our current systems, management and resources will be inadequate if we
continue to grow. Our business has grown rapidly in size and complexity. This
rapid expansion has placed significant strain on our administrative,
operational and financial resources and has resulted in increasing
responsibilities for each of our management personnel. We will be unable to
effectively manage our business if we are unable to timely and successfully
alleviate the strain on our resources caused by our rapid growth.

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 and as a result of the growing use of the
Internet. In any event, competitors

20

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
revenues, delayed market acceptance of our products, increased costs and
reputational damage.

Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released. 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, including
our new Oracle version of our product, may not be free from errors after
commercial shipments have begun. Any errors that are discovered after
commercial release could result in loss of revenues 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 software. It may
be difficult for us to correct errors in third-party software because that
software is not in our control.

The integration of Market Solutions, CSN Computer Consulting, RevenueLab and
any future acquisitions may be difficult and disruptive.

In October 1999, we acquired Market Solutions, a privately held provider of
Internet-based CRM systems in the United Kingdom. In February 2000, we acquired
CSN Computer Consulting, a privately held e-business consulting, training and
technology development company headquartered in Germany. In January 2001, we
acquired RevenueLab, a provider of proprietary go-to-market strategy and
revenue acceleration programs. We are currently in the process of integrating
these companies into our business. This integration is subject to risks
commonly encountered in making acquisitions, including

. loss of key personnel;

. difficulties associated with assimilating technologies, products,
personnel and operations;

. potential disruption of our ongoing business; and

. the inability of our sales force, consultants and development staff to
adapt to the new product line in a timely manner.

21

We may not successfully overcome these or any other problems encountered in
connection with integrating Market Solutions, CSN and RevenueLab. As part of
our business strategy, we expect to consider acquiring other companies. We may
not be able to successfully integrate any technologies, products, personnel or
operations of companies that we have acquired or that we may acquire in the
future.

The concentrated ownership of our common stock could delay or prevent a change
of control, which could reduce the market price of our common stock.

As of February 12, 2001, our officers, directors and affiliated entities
together beneficially owned approximately 19.7% of the outstanding shares of
our common stock. As a result, these shareholders may, as a practical matter,
be able to exert significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions such as acquisitions, and to block unsolicited tender
offers. This concentration of ownership may delay, deter or prevent a third
party from acquiring control over us at a premium over the then-current market
price of our common stock, which could result in a decrease in our stock price.

Our stock price may be volatile.

Since our initial public offering in February 1999, the price of our common
stock has been volatile, particularly in the last year. 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

. 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 revenues and
earnings.

In addition, 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. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against these companies. Litigation brought against us could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect on our business, financial condition
and operating results.

Changes in accounting standards and in the way we charge for licenses could
affect our future operating results.

In October 1997, the American Institute of Certified Public Accountants
issued its Statement of Position 97-2, Software Revenue Recognition, and later
amended its position by its Statement of Position 98-4 and Statement of
Position 98-9. Based on our interpretation of the AICPA's position, we believe
our current revenue recognition policies and practices are consistent with
Statement of Position 97-2, Statement of Position 98-4 and Statement of
Position 98-9. However, Technical Practice Aids for these standards continue to
be issued by the accounting standard setters. Any such Technical Practice Aids
could lead to unanticipated

22

changes in our current revenue accounting practices, which could materially
adversely affect our business, financial condition and operating results.

Accounting standard setters, including the SEC and the Financial Accounting
Standards Board, are also currently reviewing the accounting standards related
to business combinations and other areas. Any changes to these accounting
standards or the way these standards are interpreted or applied could require
us to change the way we account for any acquisitions we may pursue, or other
aspects of our business, in a manner that could adversely affect our reported
financial results.

Future sales and issuances of our common stock may depress our stock price.

Sales by our shareholders of substantial numbers of shares of our common
stock in the public market, or the perception that these sales could occur,
could adversely affect the market price of our common stock. As of February 12,
2001, 40,601,234 shares of our common stock were outstanding. Of these shares,
11,500,851 are restricted as a result of securities laws or lock-up agreements
signed by the holders in connection with our public offering in February 2001.
We have agreed to register, on or before March 6, 2001, the public resale of
337,925 shares of our common stock. The shares of common stock that are
currently restricted will be available for sale in the public market as
follows:

Number of
Date of Availability for Sale Shares
----------------------------- ----------

On the date of this report...................................... 100,723
After March 6, 2001, upon effectiveness of the registration
statement described above...................................... 337,925
On May 8, 2001, upon the expiration of lock-up agreements signed
for our recent public offering................................. 10,708,854
At various times thereafter on the expiration of one-year
holding periods................................................ 353,349
----------
11,500,851
==========

Dain Rauscher Wessels, the underwriter of our recent public offering, may,
in its sole discretion and at any time without prior notice, release all or any
portion of the common stock subject to lock-up agreements.

In addition, we may choose to issue and sell additional shares of our common
stock in the public market from time to time through our arrangement with
Ramius Securities and Ramius Capital. However, we have agreed with Dain
Rauscher Wessels not to sell any shares of common stock under the Ramius
arrangement or otherwise, subject to certain exceptions, until May 8, 2001.

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

Certain provisions of our articles of incorporation and bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders. These provisions
could discourage companies from presenting acquisition proposals to us and
could delay, deter or prevent a change of control of us, which could reduce the
market price of our common stock.

23

ITEM 2. PROPERTIES

Our principal administrative, sales, marketing, support and research and
development facilities are located in approximately 100,000 square feet of
space in Bellevue, Washington. This facility is leased to us through July 2006.
In May 2001, we plan to relocate our administrative, sales, marketing and
support personnel to a new location in Bellevue, Washington with approximately
178,000 square feet, pursuant to a lease that expires in 2011. Our research and
development personnel will continue to occupy our current facility in Bellevue,
Washington. We have leased an additional 84,000 square feet in Bellevue,
Washington pursuant to a lease that expires in 2013 that will serve as
expansion space in our new facilities. We currently lease other domestic sales
and support offices in California, Colorado, Georgia, Illinois, Indiana,
Massachusetts, Minnesota, New Jersey, New York, Oregon, Pennsylvania and Texas.
We maintain international offices in Australia, Canada, France, Germany, Hong
Kong, Japan, Malaysia, New Zealand, Singapore and the United Kingdom.

ITEM 3. LEGAL PROCEEDINGS

As of the date of this report, we are not a party to any litigation.

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

No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 2000.

24

PART II

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

Market Information

Our common stock began trading under the symbol ONXS on the Nasdaq National
Market on February 12, 1999 at an initial public offering price of $6.50 per
share. The table below lists the high and low closing prices per share of our
common stock for each quarterly period during the past two years as reported on
the Nasdaq National Market, as adjusted to reflect the 2-for-1 split of our
common stock effected on March 1, 2000.

Price Range
of Common
Stock
-------------
High Low
------ ------

Year Ended December 31, 1999
First Quarter (beginning February 12, 1999)................. $22.32 $ 8.63
Second Quarter.............................................. 17.25 8.38
Third Quarter............................................... 11.13 6.63
Fourth Quarter.............................................. 20.00 7.82

Year Ended December 31, 2000
First Quarter............................................... $42.63 $15.94
Second Quarter.............................................. 31.00 17.00
Third Quarter............................................... 28.13 16.50
Fourth Quarter.............................................. 22.19 9.00

Holders

As of February 12, 2001, there were approximately 456 holders of record of
our common stock. This does not include the number of persons whose stock is in
nominee or "street name" accounts through brokers.

Dividends

We have never paid cash dividends on our common stock. We currently intend
to retain any future earnings to fund the development and growth of our
business and therefore do not anticipate paying any cash dividends in the
foreseeable future. In addition, the terms of our credit facility prohibit us
from paying any cash dividends.

Recent Sales of Unregistered Securities

On October 1, 2000, in connection with the acquisition of Market Solutions,
we issued 162,712 shares of our common stock. This transaction was exempt from
the registration requirements of the Securities Act of 1933, as amended, or
Securities Act, under Regulation S promulgated under the Securities Act on the
basis that the transaction was completed outside the United States.

On November 17, 2000, we issued 343,100 shares of our common stock for an
aggregate purchase purchase price of $5.0 million to William B. Elmore, a
member of our Board of Directors. This transaction was exempt from the
registration requirements of the Securities Act under Section 4(2) of the
Securities Act and Regulation D promulgated thereunder on the basis that Mr.
Elmore is an accredited investor and that the transaction did not involve a
public offering.

25

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and related notes
included in this report, as well as the section of this report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Historical results are not necessarily indicative of future
results.

Year Ended December 31,
------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- ------- --------
(In thousands, except per share data)

Consolidated Statement of
Operations Data:
Revenues:
License.......................... $6,797 $13,191 $22,811 $38,122 $ 75,910
Support and service.............. 2,848 6,246 12,299 22,452 45,613
------ ------- ------- ------- --------
Total revenues................. 9,645 19,437 35,110 60,574 121,523
Cost of revenues:
License.......................... 52 250 1,127 2,243 3,520
Acquisition-related
amortization--technology........ -- -- 83 500 820
Support and service.............. 2,062 5,022 7,927 11,466 23,662
------ ------- ------- ------- --------
Total cost of revenues......... 2,114 5,272 9,137 14,209 28,002
------ ------- ------- ------- --------
Gross margin....................... 7,531 14,165 25,973 46,365 93,521
Operating expenses:
Sales and marketing.............. 3,187 11,026 19,656 29,941 59,421
Research and development......... 1,170 4,729 8,855 10,545 21,109
General and administrative....... 1,109 2,156 4,136 5,966 11,256
Acquisition-related charges and
amortization--other
intangibles..................... -- -- 26 1,064 4,332
------ ------- ------- ------- --------
Total operating expenses....... 5,466 17,911 32,673 47,516 96,118
------ ------- ------- ------- --------
Income (loss) from operations...... 2,065 (3,746) (6,700) (1,151) (2,597)
Interest income, net............... 118 314 61 1,224 788
Equity investment loss............. -- -- -- -- (500)
------ ------- ------- ------- --------
Income (loss) before income taxes.. 2,183 (3,432) (6,639) 73 (2,309)
Income tax provision (benefit)..... 789 (888) 340 517 404
Minority interest in loss of
consolidated subsidiary........... -- -- -- -- (216)
------ ------- ------- ------- --------
Net income (loss).................. $1,394 $(2,544) $(6,979) $ (444) $ (2,497)
====== ======= ======= ======= ========
Basic and diluted net loss per
share(1).......................... $ (0.30) $ (0.01) $ (0.07)
Shares used in computation of basic
and diluted
net loss per share(1)............. 23,642 31,216 34,922

December 31,
------------------------------------------
1996 1997 1998 1999 2000
------ ------- ------- ------- --------
(In thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents.......... $1,356 $ 3,512 $ 1,853 $ 3,691 $ 11,492
Working capital.................... 4,288 9,307 3,861 30,147 27,466
Total assets....................... 8,004 15,952 22,490 73,180 111,534
Long-term obligations, net of
current portion................... 356 155 4,486 133 428
Redeemable convertible preferred
stock............................. 3,202 12,070 13,285 -- --
Shareholders' equity (deficit)..... 1,878 (1,552) (7,749) 51,838 68,300

- --------
(1) See Notes 1 and 10 of Notes to Consolidated Financial Statements for an
explanation of the method used to calculate basic and diluted net loss per
share. The 1998 and 1999 amounts are calculated on a pro forma basis.

26

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

Overview

Onyx is a leading provider of enterprise-wide, customer-centric e-business
solutions designed to promote strategic business improvement and revenue growth
by enhancing the way businesses market, sell and service their products. Using
the Internet in combination with traditional forms of interaction, including
phone, mail, fax and email, our solution helps enterprises to more effectively
acquire, manage and maintain customer, partner and other relationships. We
designed our solution for companies that want to merge new e-business processes
with traditional business processes to enhance their customer-facing operations
such as marketing, sales, customer service and technical support. Our solution
uses a single data model across all customer interactions, resulting in a
single repository for all marketing, sales and service information. We designed
our solution from inception to be fully integrated across all customer-facing
departments and interaction media. Our solution is designed to be easy to use,
widely accessible, rapidly deployable, scalable, flexible, customizable and
reliable, resulting in a low total cost of ownership and rapid return on
investment.

History of Operations

Onyx was founded in February 1994. We commercially released version 1.0 of
our flagship product, Onyx Customer Center, in December 1994. In our first
three years of operation, we focused primarily on research and development
activities, recruiting personnel, purchasing operating assets, marketing our
products, building a direct sales force and expanding our service business. Our
revenues totaled $2.2 million in 1995 and $9.6 million in 1996. In mid-1996, we
substantially expanded our operations to capitalize on our opportunity within
the rapidly emerging CRM market. We decided, at the potential expense of
profitability, to accelerate our investments in research and development,
marketing, domestic and international sales channels, professional services and
our general and administrative infrastructure. We believe these investments
have been critical to our growth. Our revenues grew to $19.4 million in 1997,
$35.1 million in 1998 and $60.6 million in 1999. Nevertheless, these
investments have also significantly increased our operating expenses,
contributing to the net losses that we incurred in each fiscal quarter from the
first quarter of 1997 through the second quarter of 1999. After achieving
profitability in the third and fourth quarters of 1999, we decided to again
accelerate our investments in research and development, marketing, domestic and
international sales channels, professional services and our general and
administrative infrastructure to further capitalize on our opportunity within
the CRM market. Our revenues grew to $121.5 million in 2000. Excluding
acquisition-related amortization and equity investment losses, after tax net
income in 2000 totaled $2.5 million. Including these charges, we incurred a net
loss in 2000 totaling $2.5 million. We anticipate that our operating expenses
will increase substantially in dollar amount for the foreseeable future as we
expand our product development, sales and marketing and professional services
staff and, as a result, we may incur operating losses in future quarters.

Source of Revenues and Revenue Recognition Policy

We generate revenues from sales of software licenses and services. We
receive software license revenues from licensing our products directly to end
users and ASPs and indirectly through VARs. To a lesser extent, we receive
software license revenues from third-party products that we distribute. We
receive service revenues from sales of post-contract support, consulting and
training services that we perform for customers that license our products
either directly from us or indirectly through VARs.

Revenues from software license agreements are recognized upon delivery of
software if persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to the undelivered elements of the
arrangement. 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 before market introduction.
Elements included in multiple element

27

arrangements could consist of software products, maintenance (which includes
customer support services and upgrades), or consulting services. If a
nonstandard acceptance period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period. Our
agreements with our customers and VARs do not contain product return rights.

We recognize revenues from customer support services ratably over the term
of the contract, typically one year. We derive consulting revenues primarily
from implementation services performed on a time-and-materials basis under
separate service arrangements related to the installation of our software
products. We recognize revenues from consulting and training services as these
services are performed. If a transaction includes both license and service
elements, we recognize license fee revenue on shipment of the software,
provided services do not include significant customization or modification of
the base product, and the payment terms for licenses are not subject to
acceptance criteria impacted by the services. In cases where license fee
payments are contingent on the acceptance of services, we defer recognition of
revenues from both the license and the service elements until the acceptance
criteria are met.

Acquisitions of Versametrix, Market Solutions, CSN Computer Consulting and
RevenueLab

In August 1999, we acquired Versametrix, a privately held developer of a
comprehensive, browser-based personalization framework and an Internet-based
business intelligence solution. In exchange for all the outstanding shares of
Versametrix, we issued $1.6 million (192,386 shares) of common stock and
assumed $62,000 of Versametrix's debt, which was immediately liquidated. As a
result of the acquisition, we capitalized $100,000 of recent royalty advances
to Versametrix and accounted for them as part of the purchase price. Including
direct costs of the acquisition, the total purchase price was $1.8 million. We
accounted for the transaction using the purchase method, and, accordingly, the
results of Versametrix's operations have been included in our consolidated
financial statements from the date of acquisition. We recorded a charge to
income of $390,000, pursuant to an allocation of the purchase price by an
independent appraiser, as a write-off of acquired research and development. We
recorded capitalized technology and other intangible assets of $1.5 million,
which will be amortized on a straight-line basis over a three- to five-year
period following the acquisition. This represents the expected life of the
intangible assets that we acquired.

In October 1999, we acquired Market Solutions, a corporation formed under
the laws of England. Market Solutions, a privately held company established in
1989, was a provider of Internet-based CRM systems in the United Kingdom. We
paid $5.0 million in cash and issued $1.0 million (132,048 shares) of common
stock at closing in exchange for all the outstanding capital stock of Market
Solutions. We also issued an additional $3.6 million (162,712 shares) of common
stock on October 1, 2000 and are obligated to issue an additional $4.32 million
of common stock on October 1, 2001. These shares of Onyx common stock will be
valued based on the trading prices of Onyx common stock on the Nasdaq National
Market on the three trading days immediately prior to issuance. The issuance of
these shares will dilute our current shareholders' ownership interest in Onyx.
The total purchase price, including direct costs associated with the
acquisition, was $15.3 million. We accounted for the transaction using the
purchase method, and, accordingly, the results of Market Solutions' operations
have been included in our consolidated financial statements from the date of
acquisition. We recorded capitalized technology and other intangible assets of
$18.6 million, which will be amortized on a straight-line basis over a two and
one-half to five-year period following the acquisition. This represents the
expected life of the intangible assets that we acquired.

In February 2000, we acquired CSN Computer Consulting, or CSN, a privately
held e-business consulting, training and technology development company
headquartered in Germany. The purchase price consisted of $2.3 million in cash
and $2.3 million (69,398 shares) of common stock in exchange for all the
outstanding capital stock of CSN. We paid approximately $1.2 million in cash at
closing and an additional $1.1 million in cash in August 2000. The transaction
was accounted for using the purchase method, and, accordingly, the results of
CSN's operations have been included in our consolidated financial statements
from the date of acquisition. We recorded goodwill and other intangible assets
of $5.4 million, which will be amortized on a

28

straight-line basis over a five-year period following the acquisition. This
represents the expected life of the intangible assets that we acquired.

On January 5, 2001, we acquired RevenueLab, a privately held consulting
company based in Stamford, Connecticut. RevenueLab builds and implements go-to-
market strategy and revenue acceleration programs for emerging and established
companies and brings an experienced team of professionals which are expected to
complement our current technology and consulting branches. In connection with
the acquisition, we paid $313,000 in cash, issued $1.7 million (185,463 shares)
of our common stock and granted stock options to purchase 635,382 shares of
common stock valued at $4.0 million at closing. We are also obligated to pay an
additional $1.0 million in either cash or common stock, at our election, at any
time between March 3, 2001 and April 10, 2001. If we pay the additional $1.0
million in common stock, the issuance will dilute our current shareholders'
ownership interest in Onyx. We will record $1.9 million for the value allocated
to deferred stock compensation, which represents the excess of the fair value
over the exercise price for the options assumed by Onyx. The acquisition,
including $400,000 of acquisition-related costs, was valued at approximately
$7.4 million. The net purchase price, adjusted for deferred stock compensation,
was approximately $5.5 million. The value of the deferred compensation will be
amortized over the remaining stock options' vesting periods of 4.5 years using
a graded vesting approach. We will account for the transaction using the
purchase method, and, accordingly, the results of RevenueLab's operations will
be included in our consolidated financial statements from the date of
acquisition. We currently estimate the purchase price allocation to include
$838,000 for the fair value of net assets acquired plus $4.7 million for
goodwill and other intangibles, which will be amortized over their estimated
useful lives of five years on a straight-line basis. Allocation of the purchase
price will be determined in the first quarter of 2001.

Japanese Joint Venture

In September 2000, we entered into a joint venture with Softbank Investment
Corporation and Prime Systems Corporation to create Onyx Software Co., Ltd., or
Onyx Japan, a Japanese corporation, for the purpose of distributing our
technology and product offerings in Japan. In October 2000, we made an initial
contribution of $4.3 million in exchange for 58% of the outstanding common
stock and the joint venture partners invested $3.1 million for the remaining
42% of the common stock of Onyx Japan. We have a controlling interest in Onyx
Japan; 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.

Results of Operations

We believe that period-to-period comparisons of our operating results may
not be a meaningful basis to predict our future performance. You should
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by early-stage companies, particularly companies in new
and rapidly evolving markets. However, we may not be able to successfully
address these risks and difficulties. In addition, although we have experienced
significant revenue growth recently, and achieved profitability in the third
and fourth quarters of 1999, this revenue growth may not continue, and we may
not maintain profitability in the future. Our future operating results will
depend on many factors, including

. market acceptance of our products;

. our ability to compete in the highly competitive e-business systems
market;

. continued purchases by our existing customers, including additional
license and maintenance revenues;

. our ability to successfully expand our international operations;

. our ability to expand our sales and support infrastructure;

. our ability to develop, introduce and market new products on a timely
basis;

29

. our ability to enable our products to operate on multiple platforms;

. variability in the mix of our license versus service revenues, the mix
of our direct versus indirect license revenues and the mix of services
that we perform versus those performed by third-party service providers;

. the cost and financial accounting effects of any acquisitions of
companies or complementary technologies that we may complete;

. the loss of any key technical, sales, customer support or management
personnel and the timing of any new hires;

. the timing of customer orders, which can be affected by customer
ordering and budgeting cycles or by customer order deferrals in
anticipation of new products or product enhancements introduced by us or
our competitors; and

. general economic conditions, which may affect our customers' capital
investment levels in management information systems.

The following table presents financial data for the years indicated as a
percentage of total revenues:

Year Ended
December 31,
---------------------
1998 1999 2000
----- ----- -----

Consolidated Statement of Operations Data:
Revenues:
License.............................................. 65.0% 62.9% 62.5%
Support and service.................................. 35.0 37.1 37.5
----- ----- -----
Total revenues..................................... 100.0 100.0 100.0
----- ----- -----
Cost of revenues:
License.............................................. 3.2 3.7 2.9
Acquisition-related amortization--technology......... 0.2 0.8 0.7
Support and service.................................. 22.6 18.9 19.4
----- ----- -----
Total cost of revenues............................. 26.0 23.4 23.0
----- ----- -----
Gross margin........................................... 74.0 76.6 77.0
Operating expenses:
Sales and marketing.................................. 56.0 49.5 48.9
Research and development............................. 25.2 17.4 17.4
General and administrative........................... 11.8 9.8 9.3
Acquisition-related charges and amortization--other
intangibles......................................... 0.1 1.8 3.5
----- ----- -----
Total operating expenses........................... 93.1 78.5 79.1
----- ----- -----
Loss from operations................................... (19.1) (1.9) (2.1)
Interest income, net................................... 0.2 2.0 0.6
Equity investment loss................................. -- -- (0.4)
----- ----- -----
Income (loss) before income taxes...................... (18.9) 0.1 (1.9)
Income tax provision................................... 1.0 0.8 0.3
Minority interest in loss of consolidated subsidiary... -- -- (0.2)
----- ----- -----
Net loss............................................... (19.9)% (0.7)% (2.0)%
===== ===== =====

30

Revenues

Total revenues, which consist of software license and service revenues,
increased from $35.1 million in 1998 to $60.6 million in 1999, an increase of
73%, and to $121.5 million in 2000, an increase of 101%. No single customer
accounted for more than 10% of our revenues in any of these periods.

License fee revenues increased from $22.8 million in 1998 to $38.1 million
in 1999, an increase of 67%, and to $75.9 million in 2000, an increase of 99%.
The increases in license fee revenues reflect increased market acceptance of
our existing products, continued enhancement of these products and increased
breadth of our product offerings. The increases also were attributable to
increased follow-on sales to existing customers, sales of our products to new
industry segments and increased sales as a result of the expansion of our
direct and indirect channels of distribution and our marketing organization.

Support and service revenues increased from $12.3 million in 1998 to $22.5
million in 1999, an increase of 83%, and to $45.6 million in 2000, an increase
of 103%. The increases in support and service revenues reflect increases in our
software application sales and the overall growth of our installed base of
customers during these periods. Service revenues represented 35% of our total
revenues in 1998, 37% in 1999 and 38% in 2000. We expect the proportion of
service revenues to total revenues to fluctuate in the future, depending in
part on our customers' direct use of third-party consulting and implementation
service providers and the ongoing renewals of customer support contracts.

Revenues outside of North America increased from $5.2 million in 1998 to
$11.2 million in 1999, and to $32.8 million in 2000. The increases in
international revenues over these periods resulted from our investments in
direct and indirect sales channels, primarily in Europe, Australia, Singapore
and Latin America, including the acquisitions of Market Solutions in the United
Kingdom and CSN Computer Consulting in Germany. Revenues from indirect sales
channels increased from $1.3 million in 1998 to $1.9 million in 1999, and to
$12.1 million in 2000. The increases in our indirect revenues resulted
primarily from the increased number of VARs we added domestically and
internationally over the periods.

We do not believe that we can sustain the historical percentage growth rates
of license and service revenues as our revenue base increases.

Cost of Revenues

Cost of license revenues

Cost of license revenues consists of license fees for third-party software,
product media, product duplication and manuals. Cost of license revenues
increased from $1.1 million in 1998 to $2.2 million in 1999, an increase of
99%, and to $3.5 million in 2000, an increase of 57%. Cost of license revenues
as a percentage of related license revenues was 5% in 1998, 6% in 1999 and 5%
in 2000. The increases in dollar amount in cost of license revenues resulted
primarily from increases in license revenues.

Acquisition-related amortization--technology

Acquisition-related amortization--technology represents the amortization of
capitalized technology associated with our acquisitions of EnCyc in 1998 and
Versametrix and Market Solutions in 1999. Acquisition-related amortization--
technology increased from $83,000 in 1998 to $500,000 in 1999, an increase of
502%, and to $820,000 in 2000, an increase of 64%. The increase in 1999
resulted primarily from the acquisitions of Versametrix and Market Solutions in
the second half of 1999. The increase in 2000 resulted primarily from a full-
year's amortization of purchased technology associated with the acquisitions of
Versametrix and Market Solutions.

Cost of support and service revenues

Cost of support and service revenues consists of personnel and third-party
service provider costs related to consulting services, customer support and
training. Cost of support and service revenues increased from $7.9 million in
1998 to $11.5 million in 1999, an increase of 45%, and to $23.7 million in
2000, an increase of

31

106%. The increases in dollar amount resulted primarily from hiring and
training consulting, customer support and training personnel to support our
growing customer base. Consulting, customer support and training employees
increased from 61 as of December 31, 1998 to 117 as of December 31, 1999, and
to 205 as of December 31, 2000. Cost of support and service revenues as a
percentage of related support and service revenues was 64% in 1998, 51% in 1999
and 52% in 2000. The cost of services as a percentage of support and service
revenues may vary between periods primarily for two reasons:

. the mix of services we provide (consulting, customer support, training),
which have different cost structures, and

. the resources we use to deliver these services (internal versus third
parties).

The decrease in cost of support and service revenues as a percentage of related
support and service revenues from 1998 to the percentages in 1999 and 2000
reflects primarily a lower percentage use of third-party service providers,
which contribute significantly lower margins than internal resources, and
increased customer support revenues, which contribute higher margins than the
other services.

Costs and Expenses

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 increased from $19.7 million in 1998 to $29.9 million in
1999, an increase of 52%, and to $59.4 million in 2000, an increase of 98%. The
increases in dollar amount reflect the expansion of our worldwide sales and
marketing organization, which required significant personnel-related
expenditures to recruit and hire sales managers, sales representatives, sales
engineers and marketing professionals. Sales and marketing employees increased
from 114 as of December 31, 1998 to 163 as of December 31, 1999, and to 326 as
of December 31, 2000. The increases in dollar amount are also the result of
increases in sales commissions and bonuses associated with increased revenues
and increases in marketing activities, including advertising, trade shows,
cyber seminars and direct-mail campaigns. Sales and marketing expenses
represented 56% of our total revenues in 1998, 49% in 1999 and 49% in 2000. The
decrease in sales and marketing expenses as a percentage of total revenues from
1998 to the percentages in 1999 and 2000 reflects primarily the more rapid
growth in our revenues compared to the growth of sales and marketing expenses
due to maturing direct and indirect sales channels, as well as increased
service revenues as a percentage of total revenues. We believe that we need to
significantly increase our sales and marketing efforts to expand our market
position and further increase acceptance of our products. Accordingly, we
anticipate that sales and marketing expenses will increase in future periods.

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 increased from $8.9 million in 1998 to $10.5 million
in 1999, an increase of 19%, and to $21.1 million in 2000, an increase of 100%.
The increase from 1998 to 1999 was due primarily to increases in the number of
development personnel, offset in part by decreases in the use of outside
contractors. The increase from 1999 to 2000 was primarily due to an increase in
the use of outside contractors coupled with an increase in the number of
development personnel. Research and development employees increased from 65 as
of December 31, 1998 to 84 as of December 31, 1999, and to 119 as of December
31, 2000. Research and development costs represented 25% of our total revenues
in 1998, 17% in 1999 and 17% in 2000. The decrease in research and development
expenses as a percentage of total revenues from 1998 to the percentages in 1999
and 2000 reflects primarily the more rapid growth in our revenues in these
periods compared to the growth of our research and development expenses. We
believe that we need to significantly increase our research and development
investment to expand our market position and continue to expand our product
line. Accordingly, we anticipate that research and development expenses will
increase in future periods.

32

General and administrative

General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance and administrative personnel and
professional services fees. General and administrative expenses increased from
$4.1 million in 1998 to $6.0 million in 1999, an increase of 44%, and to $11.3
million in 2000, an increase of 89%. The increases were due primarily to the
addition of finance, executive and administrative personnel to support the
growth of our business, along with increases in expenses associated with being
a public company and expanding internationally. General and administrative
employees increased from 31 as of December 31, 1998 to 48 as of December 31,
1999, and to 95 as of December 31, 2000. General and administrative costs
represented 12% of our total revenues in 1998, 10% in 1999 and 9% in 2000. We
believe our general and administrative expenses will continue to increase as we
expand our administrative staff, domestically and internationally, and incur
expenses associated with being a public company, including, but not limited to,
annual and periodic public reporting costs, directors' and officers' liability
insurance, investor relations programs and professional services fees.

Acquisition-related charges and amortization of other intangibles

Acquisition-related charges and amortization consists of in-process research
and development charges and other intangible amortization associated with our
acquisitions of EnCyc, Inc. in 1998, Versametrix and Market Solutions in 1999
and CSN in 2000. Acquisition-related charges and amortization totaled $26,000
in 1998, $1.1 million in 1999 and $4.3 million in 2000. The increase in 1999
resulted primarily from the acquisitions of Versametrix and Market Solutions in
the second half of 1999. The increase in 2000 resulted primarily from a full-
year's amortization of the intangibles associated with the acquisitions of
Versametrix and Market Solutions, along with the acquisition of CSN in February
2000.

Deferred compensation

We recorded deferred compensation of $2.2 million in 1998, representing the
difference between the exercise prices of options granted to acquire shares of
common stock during 1998 and the deemed fair value for financial reporting
purposes of our common stock on the grant dates. We amortized deferred
compensation expense of $583,000 during 1998, $882,000 during 1999 and $490,000
during 2000. Deferred compensation is amortized over the vesting periods of the
options. Amortization of the deferred stock-based compensation balance of
$413,000 at December 31, 2000 will approximate $270,000 in 2001 and $143,000 in
2002.

Interest income, net

Interest income, net consists of earnings on our cash and cash equivalent
and short-term investment balances offset by interest expense associated with
debt obligations. Interest income, net was $61,000 in 1998, $1.2 million in
1999 and $788,000 in 2000. The increase in 1999 reflects the higher cash and
investment base as a result of proceeds we received in February 1999 from our
initial public offering. The decrease in 2000 reflects the lower average cash
and investment balances over the period as a result of cash used for
acquisitions, capital purchases and general corporate purposes.

Equity Investment Loss

During 2000, we recorded a loss of $500,000 from an equity-method investee
representing our share of losses in this company. At December 31, 2000, we have
fully written off our investment in this company.

Income taxes

We recorded an income tax provision of $340,000 in 1998, $517,000 in 1999
and $404,000 in 2000, related primarily to our foreign operations. As of
December 31, 2000, we had net operating loss carryforwards for tax reporting
purposes of approximately $12.4 million, which begin to expire in 2017. In
addition, as of December 31, 2000, we had research and development and foreign
tax credit carryforwards of approximately $1.5 million and $646,000,
respectively. The Internal Revenue Code limits the use in any future period of
net

33

operating loss and credit carryforwards upon the occurrence of certain events,
including a significant change in ownership interests. We have recorded a
valuation allowance of $5.7 million against the deferred tax asset as a result
of uncertainties regarding the realization of the asset balance. Deferred tax
liabilities totaled $3.7 million at December 31, 2000 and are primarily the
result of the temporary differences between the carrying amounts of purchased
technology and other intangible assets associated with the acquisitions of
Market Solutions and CSN Computer Consulting used for financial reporting
purposes and the amounts used for income tax purposes. As of December 31, 2000,
we had net deferred tax liabilities totaling $2.2 million.

Quarterly Results of Operations

The following tables present our unaudited quarterly results of operations
both in dollar amounts and expressed as a percentage of total revenues for 1999
and 2000. The trends discussed in the annual comparisons of operating results
from 1998 to 2000 generally apply to the comparison of operating results for
the eight quarters in 1999 and 2000. Our quarterly operating results have
varied widely in the past, and we expect that they will continue to fluctuate
in the future as a result of a number of factors, many of which are outside our
control.

You should read these tables in conjunction with our Consolidated Financial
Statements and related Notes included elsewhere in this report. We have
prepared this unaudited information on the same basis as the audited
Consolidated Financial Statements. This table includes all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for
a fair presentation of our financial position and operating results for the
quarters presented. You should not draw any conclusions about our future
results from the results of operations for any quarter.

Three Months Ended
-----------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------
(In thousands)

Consolidated Statement
of Operations Data:
Revenues:
License................ $ 7,073 $ 8,243 $ 9,922 $12,884 $14,341 $16,615 $20,403 $24,551
Support and service.... 4,158 5,037 5,821 7,436 8,843 11,020 12,367 13,383
------- ------- ------- ------- ------- ------- ------- -------
Total revenues....... 11,231 13,280 15,743 20,320 23,184 27,635 32,770 37,934
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenues:
License................ 464 531 494 754 660 831 877 1,152
Acquisition-related
amortization--
technology............ 84 84 127 205 205 205 205 205
Support and service.... 2,095 2,517 2,946 3,908 4,547 5,667 6,401 7,047
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues............ 2,643 3,132 3,567 4,867 5,412 6,703 7,483 8,404
------- ------- ------- ------- ------- ------- ------- -------
Gross margin............ 8,588 10,148 12,176 15,453 17,772 20,932 25,287 29,530
Operating expenses:
Sales and marketing.... 6,161 6,676 7,484 9,620 11,492 13,474 15,486 18,969
Research and
development........... 2,528 2,589 2,643 2,785 3,777 4,802 6,150 6,380
General and
administrative........ 1,194 1,423 1,567 1,782 2,161 2,500 3,006 3,589
Acquisition-related
charges and
amortization--other
intangibles........... 25 25 425 589 676 881 1,346 1,429
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 9,908 10,713 12,119 14,776 18,106 21,657 25,988 30,367
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (1,320) (565) 57 677 (334) (725) (701) (837)
Interest income, net.... 114 421 407 282 192 291 181 124
Equity investment loss.. -- -- -- -- (237) (200) (63) --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... (1,206) (144) 464 959 (379) (634) (583) (713)
Income tax provision.... 77 110 128 202 108 104 108 84
Minority interest in
loss of consolidated
subsidiary............. -- -- -- -- -- -- -- ( 216)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $(1,283) $ (254) $ 336 $ 757 $ (487) $ (738) $ (691) $ (581)
======= ======= ======= ======= ======= ======= ======= =======

34

Three Months Ended
-----------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999 2000 2000 2000 2000
--------- -------- --------- -------- --------- -------- --------- --------

Consolidated Statement
of Operations Data:
Revenues:
License................ 63.0% 62.1% 63.0% 63.4% 61.9% 60.1% 62.3% 64.7%
Support and service.... 37.0 37.9 37.0 36.6 38.1 39.9 37.7 35.3
----- ----- ----- ----- ----- ----- ----- -----
Total revenues....... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- -----
Cost of revenues:
License................ 4.1 4.0 3.1 3.7 2.8 3.0 2.7 3.0
Acquisition-related
amortization--
technology............ 0.7 0.6 0.8 1.0 0.9 0.7 0.6 0.5
Support and service.... 18.7 19.0 18.7 19.2 19.6 20.5 19.5 18.6
----- ----- ----- ----- ----- ----- ----- -----
Total cost of
revenues............ 23.5 23.6 22.6 23.9 23.3 24.2 22.8 22.1
----- ----- ----- ----- ----- ----- ----- -----
Gross margin............ 76.5 76.4 77.4 76.1 76.7 75.8 77.2 77.9
Operating expenses:
Sales and marketing.... 54.9 50.3 47.5 47.3 49.6 48.8 47.3 50.0
Research and
development........... 22.5 19.5 16.8 13.8 16.3 17.4 18.8 16.8
General and
administrative........ 10.6 10.7 10.0 8.8 9.3 9.0 9.2 9.5
Acquisition-related
charges and
amortization--other
intangibles........... 0.2 0.2 2.7 2.9 2.9 3.2 4.1 3.8
----- ----- ----- ----- ----- ----- ----- -----
Total operating
expenses............ 88.2 80.7 77.0 72.8 78.1 78.4 79.4 80.1
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations............. (11.7) (4.3) 0.4 3.3 (1.4) (2.6) (2.2) (2.2)
Interest income, net.... 1.0 3.2 2.6 1.4 0.8 1.1 0.6 0.3
Equity investment loss.. -- -- -- -- (1.0) (0.7) (0.2) --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........... (10.7) (1.1) 3.0 4.7 (1.6) (2.2) (1.8) (1.9)
Income tax provision.... 0.7 0.8 0.9 1.0 0.5 0.4 0.3 0.2
Minority interest in
loss of consolidated
subsidiary............. -- -- -- -- -- -- -- (0.6)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....... (11.4)% (1.9)% 2.1% 3.7% (2.1)% (2.6)% (2.1)% (1.5)%
===== ===== ===== ===== ===== ===== ===== =====

Liquidity and Capital Resources

Prior to our initial public offering, we primarily financed our operations
through private placements of our common and preferred stock. To a lesser
extent, we have financed our operations through equipment financing and
traditional financing arrangements. In February 1999, we completed our initial
public offering and issued 7,130,000 shares of common stock at an initial
public offering price of $6.50 per share, as adjusted to reflect the 2-for-1
split of our common stock effected March 1, 2000. We received approximately
$41.9 million in cash proceeds from the offering, net of underwriting
discounts, commissions and other offering costs.

As of December 31, 2000, we had cash and cash equivalents of $11.5 million,
an increase of $7.8 million from cash and cash equivalents held as of December
31, 1999. The increase in cash and cash equivalents from year-end is primarily
the result of a $5.0 million private placement we completed in November 2000
and short-term marketable securities maturing during the 12 months ended
December 31, 2000, which were subsequently reinvested in securities with an
original maturity date of 90 days or less. We have invested our cash in excess
of current operating requirements in a portfolio of investment-grade
securities. Short-term marketable securities totaled $5.5 million at December
31, 2000. The investments have variable and fixed interest rates and maturities
of less than one year. Our working capital at December 31, 2000 was $27.5
million, compared to $30.1 million at December 31, 1999.

We have a $25.0 million working capital revolving line of credit, shared
equally by Silicon Valley Bank and Comerica Bank California, which is secured
by our accounts receivable, property and equipment and intellectual property.
This facility allows us to borrow up to the lesser of 80% of our eligible
accounts receivable or $25.0 million and bears interest at the bank's prime
rate, which was 9.5% as of December 31,

35

2000. The facility expires in August 2001. The agreement under which the line
of credit was established requires us to maintain specified financial ratios.
As of December 31, 2000, we had no outstanding borrowings under the facility;
however, there was approximately $11.0 million in standby letters of credit
outstanding in connection with our facilities, of which $8.3 million represents
a security deposit for tenant improvements and rent associated with our new
corporate headquarters. We were in compliance with all financial covenants of
the facility as of December 31, 2000.

Our operating activities resulted in net cash outflows of $5.1 million in
1998, $2.3 million in 1999 and $421,000 in 2000. The operating cash outflows
were primarily the result of our operating loss and increases in accounts
receivable, prepaid expenses and other assets, partially offset by increases in
accounts payable, accrued liabilities and deferred revenues.

Investing activities provided cash of $264,000 in 1998, due primarily to
proceeds from the maturity of securities offset by cash used to acquire EnCyc
and the purchase of capital equipment. Investing activities used cash of $34.3
million in 1999, primarily for the purchase of short-term and long-term
marketable securities following our initial public offering, the acquisition of
Market Solutions and the purchase of capital equipment. Investing activities
used cash of $2.3 million in 2000, due primarily to the purchase of capital
equipment and our acquisition of CSN offset by the net proceeds from the
maturity of short-term and long-term marketable securities. The significant
increase in capital expenditures in 1999 is the combined result of (a)
leasehold improvement, equipment and furniture costs associated with relocating
our corporate headquarters, which was completed in July 1999; and, to a lesser
extent, (b) our election to purchase new computer hardware and software used in
our operations rather than lease, as we had done historically. The significant
increase in capital expenditures in 2000 is the combined result of (a)
leasehold improvement, equipment and furniture costs associated with expanding
our field office facilities, (b) equipment purchases for new personnel and
replacement equipment returned under existing operating leases, and (c) the
costs of software and services associated with implementing our new ERP system.

Financing activities provided cash of $3.2 million in 1998, due to
borrowings under our credit facilities, partially offset by payments on long-
term obligations. Financing activities provided cash of $38.5 million in 1999
due primarily to the proceeds from our initial public offering in February,
offset in part by payments on our credit facility and capital lease
obligations. Financing activities provided cash of $10.6 million in 2000 due
primarily to the proceeds from a private placement to one of our directors in
November 2000, the purchase of stock through our employee stock purchase plan
and the exercise of stock options and the investment by minority shareholders
in Onyx Japan offset in part by payments on our long-term obligations.

We currently anticipate that we will continue to experience significant
growth in our operating expenses for the foreseeable future as we

. enter new markets for our products and services;

. increase research and development spending;

. increase sales and marketing activities;

. develop new distribution channels;

. expand our headquarters and field office facilities and infrastructure;

. expand our senior management team;

. improve our operational and financial systems; and

. broaden our professional service capabilities.

These operating expenses will consume a material amount of our cash
resources. We may also use a portion of our cash resources to acquire
complementary technologies or businesses; however, we currently have no
commitments or agreements and are not involved in any negotiations with respect
to any transactions of this nature.

36

On January 4, 2001, we entered into an equity financing arrangement with
Ramius Securities, LLC, or Ramius Securities, and Ramius Capital Group, LLC, or
Ramius Capital, under which we may from time to time in the next two years
elect to have Ramius Securities sell a limited number of shares of our common
stock on a best-efforts basis or to have Ramius Capital purchase those shares
if the selling efforts are unsuccessful. The obligations of Ramius Securities
and Ramius Capital under this arrangement are subject to a number of conditions
and limitations, and the amount of common stock that we may sell depends on the
daily trading volumes of our common stock on the Nasdaq National Market. As a
result, we may be unable to sell our common stock under this facility in the
amount and at the times we want. In addition, the terms of the equity financing
arrangement have not been reviewed or approved by the National Association of
Securities Dealers, or NASD. NASD review is pending and no securities will be
offered under the arrangement unless and until NASD approval is obtained. Any
sales under the facility will be made under our shelf registration statement on
Form S-3, filed with the SEC in November 2000. In connection with the financing
arrangements, we issued Ramius Securities a warrant to purchase 24,024 shares
of our common stock at $12.49 per share. This warrant is fully exercisable and
expires on January 4, 2003. The facility does not preclude us from issuing
shares in other transactions should market conditions make those transactions
advantageous.

On February 12, 2001, we completed a firm underwritten public offering of
2.5 million shares of our common stock at a price of $13.50 per share from our
$100.0 million shelf registration statement filed in November 2000. We estimate
the net proceeds from the offering to be approximately $31.3 million after
deducting the estimated costs associated with the offering. In addition, we
granted Dain Rauscher Wessels, the sole underwriter for the offering, an option
to purchase up to 375,000 shares of our common stock to cover over-allotments,
if any. We intend to use the net proceeds of the offering for design and
construction of tenant improvements in our new corporate headquarters,
expansion of our field office facilities, additional working capital and other
general corporate purposes, as well as the possible acquisition of or
investment in complementary businesses, products and technologies.

We believe that our existing cash and cash equivalents, investments,
available bank borrowings and our arrangement with Ramius Capital and Ramius
Securities will be sufficient to meet our capital and requirements for at least
the next twelve months. However, we may seek additional funds before that time
through public or private equity financing or from other sources to fund our
operations and pursue our growth strategy. Except for the arrangement with
Ramius Securities and Ramius Capital, we have no commitment for additional
financing, and we may experience difficulty in obtaining additional financing
on favorable terms, if at all. Any financing we obtain may contain covenants
that restrict our freedom to operate our business or may have rights,
preferences or privileges senior to our common stock and may dilute our current
shareholders' ownership interest in Onyx. Any common stock that we issue under
the arrangement with Ramius Securities and Ramius Capital, or otherwise, will
dilute our current shareholders' ownership interest in Onyx.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, became effective for us
beginning January 1, 2001 and is not expected to have a material impact on our
consolidated financial statements upon adoption.

37

ITEM 7A. 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 the majority of our investments are short-
term. We do not have any derivative instruments. The fair value of our
investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due mainly to
the short-term nature of the major portion of our investment portfolio, which
is summarized in Note 4 to our consolidated financial statements. All of the
potential changes noted above are based on sensitivity analysis performed on
our balances as of December 31, 2000.

Foreign Currency Risk

The majority of our sales and expenses are currently denominated in U.S.
dollars. As a result, we have not experienced significant foreign exchange
gains and losses. While we conducted some transactions in foreign currencies
during 2000 and expect to continue to do so in the future, we do not anticipate
that foreign exchange gains or losses will be material to Onyx. Although we
have not engaged in foreign currency hedging to date, we may do so in the
future.

38

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Onyx Software Corporation

We have audited the accompanying consolidated balance sheets of Onyx
Software Corporation as of December 31, 1999 and 2000, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Onyx Software
Corporation at December 31, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.

ERNST & YOUNG LLP

Seattle, Washington
January 29, 2001, except for paragraph 4 of Note 14,
as to which the date is February 12, 2001

39

ONYX SOFTWARE CORPORATION

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

December 31,
-----------------
1999 2000
------- --------
ASSETS
------

Current assets:
Cash and cash equivalents................................. $ 3,691 $ 11,492
Securities available-for-sale............................. 19,804 5,522
Accounts receivable, less allowances of $1,154 in 1999 and
$1,732 in 2000........................................... 22,987 43,629
Prepaid expense and other................................. 2,570 4,533
------- --------
Total current assets........................................ 49,052 65,176
Property and equipment, net................................. 8,628 20,848
Purchased technology, net................................... 3,071 1,958
Intangibles, net............................................ 10,683 19,674
Long-term marketable securities............................. 991 --
Other assets................................................ 755 3,878
------- --------
Total assets............................................ $73,180 $111,534
======= ========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable.......................................... $ 1,906 $ 6,792
Salary and benefits payable............................... 2,557 5,778
Accrued liabilities....................................... 2,673 4,739
Income taxes payable...................................... 435 808
Current portion of long-term obligations.................. 306 242
Deferred revenue.......................................... 11,028 19,351
------- --------
Total current liabilities................................... 18,905 37,710
Long-term obligations, net of current portion............... 133 428
Deferred tax liability...................................... 2,304 2,201
Minority interest in joint venture.......................... -- 2,895
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value:
Authorized shares--20,000,000
Designated shares--none ................................ -- --
Common stock, $0.01 par value:
Authorized shares--80,000,000
Issued and outstanding shares--35,329,864 in 1999 and
37,597,670 in 2000..................................... 61,166 75,416
Common stock issuable in acquisition...................... -- 4,320
Notes receivable from officers for common stock........... (212) (157)
Deferred stock-based compensation......................... (903) (413)
Accumulated deficit....................................... (8,065) (10,562)
Accumulated other comprehensive loss...................... (148) (304)
------- --------
Total shareholders' equity.............................. 51,838 68,300
------- --------
Total liabilities and shareholders' equity.............. $73,180 $111,534
======= ========

See accompanying notes.

40

ONYX SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

Year Ended December 31,
--------------------------
1998 1999 2000
------- ------- --------

Revenues:
License.......................................... $22,811 $38,122 $ 75,910
Support and service.............................. 12,299 22,452 45,613
------- ------- --------
Total revenues................................. 35,110 60,574 121,523

Cost of revenues:
License.......................................... 1,127 2,243 3,520
Acquisition-related amortization--technology..... 83 500 820
Support and service.............................. 7,927 11,466 23,662
------- ------- --------
Total cost of revenues......................... 9,137 14,209 28,002
------- ------- --------
Gross margin....................................... 25,973 46,365 93,521
Operating expenses:
Sales and marketing.............................. 19,656 29,941 59,421
Research and development......................... 8,855 10,545 21,109
General and administrative....................... 4,136 5,966 11,256
Acquisition-related charges and amortization--
other intangibles............................... 26 1,064 4,332
------- ------- --------
Total operating expenses....................... 32,673 47,516 96,118
------- ------- --------
Loss from operations............................... (6,700) (1,151) (2,597)
Interest income, net............................... 61 1,224 788
Equity investment loss............................. -- -- (500)
------- ------- --------
Income (loss) before income taxes.................. (6,639) 73 (2,309)
Income tax provision............................... 340 517 404
Minority interest in loss of consolidated
subsidiary........................................ -- -- (216)
------- ------- --------
Net loss........................................... (6,979) (444) (2,497)
Preferred stock accretion.......................... (1,215) (1,442) --
------- ------- --------
Net loss to common shareholders.................... $(8,194) $(1,886) $ (2,497)
======= ======= ========

Net loss per share:
Basic and diluted................................ $ (0.49) $ (0.06) $ (0.07)
Pro forma basic and diluted...................... $ (0.30) $ (0.01) NA
Shares used in calculation of net loss per share:
Basic and diluted................................ 16,574 30,400 34,922
Pro forma basic and diluted...................... 23,642 31,216 NA

See accompanying notes.

41

ONYX SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share data)

Note
Common Receivable Accumulated Total
Common Stock Stock from Deferred Other Shareholders'
------------------ Issuable in Officers for Stock-Based Accumulated Comprehensive Equity
Shares Amount Acquisition Common Stock Compensation Deficit Loss (Deficit)
---------- ------- ----------- ------------ ------------ ----------- ------------- -------------

Balance at January 1,
1998.................. 16,275,752 $ (694) $ -- $ -- $ (215) $ (642) $ (1) $(1,552)
Exercise of stock
options, net of
shareholder loans.... 2,962,696 248 -- (212) -- -- -- 36
Stock options
exchanged for
services............. -- 9 -- -- -- -- -- 9
Deferred stock
compensation......... -- 2,153 -- -- (2,153) -- -- --
Amortization of
deferred stock
Compensation......... -- -- -- -- 583 -- -- 583
Issuance of common
stock and options in
connection with
acquisition.......... 466,666 1,411 -- -- -- -- -- 1,411
Preferred stock
accretion............ -- (1,215) -- -- -- -- -- (1,215)
Comprehensive loss:
Cumulative translation
loss................. -- -- -- -- -- -- (42)
Net loss.............. -- -- -- -- -- (6,979) --
Total comprehensive
loss.................. (7,021)
---------- ------- ------ ----- ------ -------- ----- -------
Balance at December 31,
1998.................. 19,705,114 1,912 -- (212) (1,785) (7,621) (43) (7,749)
Proceeds from initial
public offering, net
of offering costs of
$4,472............... 7,130,000 41,873 -- -- -- -- -- 41,873
Preferred stock
accretion............ -- (1,442) -- -- -- -- -- (1,442)
Conversion of
preferred stock...... 7,067,850 14,727 -- -- -- -- -- 14,727
Amortization of
deferred stock
compensation......... -- -- -- -- 882 -- -- 882
Exercise of stock
options.............. 950,206 415 -- -- -- -- -- 415
Stock-based
compensation......... 27,462 158 -- -- -- -- -- 158
Issuance of common
stock under ESPP..... 124,798 969 -- -- -- -- -- 969
Common stock issued
and to be issued in
connection with
acquisitions (Note
2)................... 324,434 2,554 -- -- -- -- -- 2,554
Comprehensive loss:
Cumulative translation
loss................. -- -- -- -- -- -- (46)
Unrealized gains on
marketable
securities........... -- -- -- -- -- -- (59)
Net loss.............. -- -- -- -- -- (444) --
Total comprehensive
loss.................. (549)
---------- ------- ------ ----- ------ -------- ----- -------
Balance at December 31,
1999.................. 35,329,864 61,166 -- (212) (903) (8,065) (148) 51,838
Amortization of
deferred stock
compensation......... -- -- -- -- 490 -- -- 490
Shareholder loan
repayment............ -- -- -- 55 -- -- -- 55
Stock-based
compensation......... -- 57 -- -- -- -- -- 57
Exercise of stock
options.............. 1,522,059 1,405 -- -- -- -- -- 1,405
Issuance of common
stock under ESPP..... 170,537 1,927 -- -- -- -- -- 1,927
Common stock issued
and to be issued in
connection with
acquisitions (Note
2)................... 232,110 5,861 4,320 -- -- -- -- 10,181
Issuance of common
stock in connection
with private
placement (Note 9)... 343,100 5,000 -- -- -- -- -- 5,000
Comprehensive loss:
Cumulative translation
loss................. -- -- -- -- -- -- (188)
Unrealized gains on
marketable
securities........... -- -- -- -- -- -- 32
Net loss.............. -- -- -- -- -- (2,497) --
Total comprehensive
loss.................. (2,653)
---------- ------- ------ ----- ------ -------- ----- -------
Balance at December 31,
2000.................. 37,597,670 $75,416 $4,320 $(157) $ (413) $(10,562) $(304) $68,300
========== ======= ====== ===== ====== ======== ===== =======

See accompanying notes.

42

ONYX SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Year Ended December 31
---------------------------
1998 1999 2000
------- -------- --------

OPERATING ACTIVITIES
Net loss to common shareholders.................. $(8,194) $ (1,886) $ (2,497)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Preferred stock accretion........................ 1,215 1,442 --
In-process research and development.............. -- 390 --
Depreciation and amortization.................... 1,042 3,054 9,918
Accretion of premium (discounts) on investments.. (9) 132 51
Deferred income taxes............................ -- (134) (603)
Noncash stock-based compensation expense......... 592 921 547
Minority interest in loss of consolidated
subsidiary...................................... -- -- (216)
Write-down of equity investment.................. -- -- 500
Changes in operating assets and liabilities:
Accounts receivable............................. (5,350) (9,225) (20,610)
Prepaid expenses and other assets............... (1,473) (1,234) (5,492)
Accounts payable and accrued liabilities........ 1,987 597 9,323
Deferred revenue................................ 3,861 3,401 8,323
Income taxes.................................... 1,185 221 335
------- -------- --------
Net cash used in operating activities............ (5,144) (2,321) (421)

INVESTING ACTIVITIES
Purchases of securities.......................... -- (31,916) (7,007)
Proceeds from maturity of securities............. 2,073 10,989 22,229
Acquisition of EnCyc in 1998, Versametrix and
Market Solutions in 1999, and CSN in 2000,
net of cash acquired............................ (750) (5,162) (2,127)
Purchase of technology........................... (85) -- --
Purchases of property and equipment.............. (974) (8,236) (15,414)
------- -------- --------
Net cash provided by (used in) investing
activities...................................... 264 (34,325) (2,319)

FINANCING ACTIVITIES
Net proceeds from initial public offering........ -- 41,873 --
Net proceeds from private placement.............. -- -- 5,000
Proceeds from exercise of stock options.......... 36 415 1,405
Proceeds from shares issued through employee
stock purchase plan............................. -- 969 1,927
Proceeds from line of credit..................... 3,963 -- --
Proceeds from repayment of shareholder notes..... -- -- 55
Payments on capital lease obligations............ (540) (221) (193)
Payments on long-term debt....................... (237) (4,554) (746)
Proceeds from minority shareholders in Japanese
joint venture................................... -- -- 3,111
------- -------- --------
Net cash provided by financing activities........ 3,222 38,482 10,559
Effect of exchange rate changes on cash.......... (1) 2 (18)
------- -------- --------
Net increase (decrease) in cash and cash
equivalents..................................... (1,659) 1,838 7,801
Cash and cash equivalents at beginning of year... 3,512 1,853 3,691
------- -------- --------
Cash and cash equivalents at end of year......... $ 1,853 $ 3,691 $ 11,492
======= ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Interest paid.................................... $ 77 $ 88 $ 209
Income taxes paid (refunded), net................ (846) 430 695
Fixed assets financed through capital lease
obligations..................................... 317 -- 610
Technology purchased through long-term debt...... 1,544 -- 818
Issuance of common stock to employees in
connection with 1998 bonus...................... -- 119 --
Issuance of common stock and stock options in
connection with acquisitions.................... 1,411 2,554 5,861
Conversion of preferred stock to common stock.... -- 14,727 --

See accompanying notes.

43

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of the Company

Onyx Software and subsidiaries (Company) is a leading provider of
enterprise-wide, customer-centric e-business solutions designed to promote
strategic business improvement and revenue growth by enhancing the way
businesses market, sell and service their products. Using the Internet in
combination with traditional forms of interaction, including phone, mail, fax
and email, the Company's solution helps enterprises to more effectively
acquire, manage and retain customer, partner and other relationships. The
Company designed its solution for companies that want to merge new e-business
processes with traditional business processes to enhance their customer-facing
operations such as marketing, sales, customer service and technical support.
The Company's solution uses a single data model across all customer
interactions, resulting in a single repository for all marketing, sales and
service information. The Company was incorporated in the state of Washington on
February 23, 1994 and maintains its headquarters in Bellevue, Washington.

Principles of Consolidation

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

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles 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, intangibles, and tax liabilities.

Revenue Recognition

The Company recognizes revenue in accordance with accounting standards for
software companies including Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended by SOP 98-4, SOP 98-9, and related
interpretations including Technical Practice Aids.

The Company generates revenues through two sources: (1) software license
revenues and (2) service revenues. Software license revenues are generated from
licensing the rights to use the Company's products directly to end-users and
ASPs and indirectly through sublicense fees from VARs and, to a lesser extent,
through third-party products the Company distributes. Service revenues are
generated from sales of customer support services, consulting services and
training services performed for customers that license the Company's products.

Revenues from software license agreements are recognized upon delivery of
software if persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to the undelivered elements of the
arrangement. 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 before market introduction.
Elements included in multiple element arrangements could consist of software
products, maintenance (which includes customer support services and upgrades),
or consulting services. If a nonstandard acceptance period is required,
revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. The Company's agreements with its
customers, ASPs and VARs do not contain product return rights.

44

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Revenues from customer support services are recognized ratably over the term
of the contract, typically one year. Consulting revenues are primarily related
to implementation services performed on a time-and-materials basis under
separate service arrangements related to the installation of the Company's
software products. Revenues from consulting and training services are
recognized as services are performed. If a transaction includes both license
and service elements, license fee revenues are recognized on shipment of the
software, provided services do not include significant customization or
modification of the base product, and the payment terms for licenses are not
subject to acceptance criteria impacted by the services. In cases where license
fee payments are contingent on the acceptance of services, the Company defers
recognition of revenues from both the license and the service elements until
the acceptance criteria are met.

Cash Equivalents, Securities Available-for-Sale and Long-term Marketable
Securities

The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash
equivalents. The Company's cash equivalents consist of banker's acceptances
with a maturity of three months or less and money market funds. Securities
available-for-sale generally consist of highly liquid debt securities which
mature within one year of the balance sheet date. Long-term marketable
securities generally consist of highly liquid debt securities with remaining
maturities in excess of one year.

Fair Values of Financial Instruments

At December 31, 2000, the Company has the following financial instruments:
cash and cash equivalents, securities available-for-sale, accounts receivable,
accounts payable, accrued liabilities and capital lease obligations. The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities approximates their fair value based on the
liquidity of these financial instruments or based on their short-term nature.
Securities available-for-sale are carried at fair value with unrealized gains
and losses, net of related tax effects, reported within accumulated other
comprehensive income. Realized gains and losses on available-for-sale
securities are computed using the specific identification method. The carrying
value of capital lease obligations approximates fair value based on the market
interest rates available to the Company for debt of similar risk and
maturities.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the related assets (or over the lease term if it
is shorter for leasehold improvements), which range from two to seven years.
Leasehold improvements are amortized over the shorter of the lease term or the
estimated useful life.

Purchased Technology and Intangibles

Purchased technology represents software source code and software licenses
acquired from third parties. Amortization of purchased technology is provided
on a product-by-product basis over the estimated economic life of the software,
generally two to five years, using the straight-line method. Unamortized
capitalized costs determined to be in excess of the net realizable value of a
product are expensed at the date of such determination.

Intangibles represent the excess of the purchase price over the fair value
of identifiable tangible and intangible assets acquired and are amortized using
the straight-line method over their estimated lives of two to five years. The
carrying value of goodwill is reviewed periodically. In the event that the sum
of expected undiscounted future cash flows is less than the recorded book
value, the carrying value will be reduced to its fair value.

45

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Research and Development Costs

Research and development costs, which consist primarily of software
development costs, are expensed as incurred. Financial accounting standards
provide for the capitalization of certain software development costs after
technological feasibility of the software is established. Under the Company's
current practice of developing new products and enhancements, the technological
feasibility of the underlying software is not established until the development
of a working model. To date, the period between achieving technological
feasibility and the general availability of such software has been short;
therefore, software development costs qualifying for capitalization have been
immaterial.

Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is dispersed across many different geographic areas
throughout North America, Europe, Asia Pacific and Latin America and consists
of companies in a variety of industries. During 1998, 1999 and 2000, no single
customer accounted for 10% or more of total revenues. As of December 31, 2000,
one customer accounted for approximately 20% of accounts receivable, including
$1.2 million in deferred revenues. The receivable represents one transaction
for perpetual-use licenses purchased by the customer for use in their hosting
business and multiple transactions sold through the customer to end users as
part of a reseller agreement. Based on the financial condition of the customer,
the Company does not believe there is a material credit risk associated with
the remaining balance. The Company does not require collateral or other
security to support credit sales, but provides an allowance for bad debts based
on historical experience and specifically identified risks.

Foreign Currency Translation

The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the exchange rate in effect on the balance sheet date. Revenues and expenses
are translated at the average monthly rates of exchange prevailing throughout
the year. The translation adjustment resulting from this process is shown
within accumulated other comprehensive income (loss) as a component of
shareholders' equity. Gains and losses on foreign currency transactions are
included in the consolidated statement of operations as incurred. To date,
gains and losses on foreign currency transactions have not been significant.

Income Taxes

The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amounts
expected to be realized.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB No. 25), and related
interpretations, in accounting for employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
Under APB No. 25, compensation expense related to the Company's employee stock
options is measured based on the intrinsic value of the stock option. SFAS No.
123 requires companies that continue to follow APB No. 25 to provide pro forma
disclosure of the impact

46

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of applying the fair value method of SFAS No. 123. The Company recognizes
compensation expense for options granted to non-employees in accordance with
the provisions of SFAS No. 123 and the Emerging Issues Task Force consensus
Issue 96-18, Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services,
which require using a Black-Scholes option pricing model and remeasuring such
stock options to the current fair market value until the performance date has
been reached.

Deferred stock-based compensation consists of amounts recorded when the
exercise price of an option or the sales price of restricted stock was lower
than the subsequently determined deemed fair value for financial reporting
purposes. Deferred stock-based compensation is amortized over the vesting
period of the underlying options using a graded vesting approach.

Advertising

Advertising costs are expensed as the related promotional materials are
released. Advertising expense was $2.1 million, $4.1 million and $8.2 million
during the years ended December 31, 1998, 1999 and 2000, respectively.

Earnings Per Share and Pro Forma Earnings Per Share

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

Pro forma earnings per share is computed by dividing net income (loss) by
the weighted average number of common shares outstanding and the weighted
average redeemable convertible preferred stock outstanding as if such shares
were converted into common stock at the time of issuance.

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) which
the Company currently reports are foreign currency translation adjustments and
unrealized gains (losses) on marketable securities.

Business Segments

SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, establishes standards for reporting information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Information related to segment disclosures is contained in Note 13.

Recent Accounting Pronouncements

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, or SAB 101. SAB 101 summarizes certain of
the SEC's views in applying generally accepted accounting principles to revenue
recognition in financial statements. In October 2000, the SEC issued further
guidance with respect to adoption of specific issues addressed by SAB 101. The
adoption of SAB 101 did not have a material effect on the Company's
consolidated financial position or results of operations.

47

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, became effective for the
Company beginning January 1, 2001. SFAS No. 133 is not expected to have a
material impact on the Company's consolidated financial statements upon
adoption in the first quarter of 2001.

Reclassifications

Certain prior year amounts have been reclassified to conform with the
current year presentation. Such reclassifications had no impact on the results
of operations or shareholders' equity for any year presented.

2. ACQUISITIONS AND JOINT VENTURE

Versametrix

On August 2, 1999, the Company acquired Versametrix, a privately held
developer of a comprehensive, browser-based personalization framework and a
Internet-based business intelligence solution. In exchange for all the
outstanding shares of Versametrix, the Company issued 192,386 shares of common
stock valued at $1.6 million and assumed $62,000 of Versametrix's debt, which
was immediately liquidated. As a result of the acquisition, $100,000 of recent
royalty advances to Versametrix was capitalized and accounted for as part of
the purchase price.

Including direct costs of the acquisition, the total purchase price was $1.8
million. The transaction was accounted for using the purchase method of
accounting, and, accordingly, the results of Versametrix's operations have been
included in the consolidated financial statements from the date of acquisition.
The Company recorded capitalized technology and other intangible assets of $1.9
million, which are being amortized on a straight-line basis over their expected
lives of three to five years.

Market Solutions

On October 1, 1999, the Company acquired Market Solutions Limited, a
corporation formed under the laws of England. Pursuant to the terms of the
original sale and purchase agreement, at closing the Company paid $5.0 million
in cash and issued 132,048 shares of common stock valued at $1.0 million in
exchange for all the outstanding capital stock of Market Solutions. The Company
also agreed to issue up to an additional $3.6 million in common stock on
October 1, 2000 and up to an additional $4.32 million in common stock on
October 1, 2001, depending on Market Solutions' attainment of certain revenue
and profitability targets in each of the first two years following the
acquisition (the Earnout Payments). The transaction was accounted for using the
purchase method of accounting, and, accordingly, the results of Market
Solutions' operations have been included in the consolidated financial
statements from the date of acquisition.

In July 2000, the Company's management team elected to amend the sale and
purchase agreement to better align the financial incentives of the U.K.
management team with the strategic and financial objectives of the Company as a
whole. As a result, on July 7, 2000, the Company and the shareholders of Market
Solutions agreed to remove the revenue and profitability conditions to the
Earnout Payments. The Company issued 162,712 shares valued at $3.6 million on
October 1, 2000 in satisfaction of the first installment of the Earnout
Payments. The Company will make the final payment on October 1, 2001,
aggregating $4.32 million of common stock. As the amount is only payable in
common stock, the obligation is recorded within Shareholders' Equity. The
number of shares of the Company's common stock to be issued in satisfaction of
the final payment will be determined based on the average of the closing prices
of the Company's common stock

48

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

on each of the three trading days prior to issuance. If the obligation had been
satisfied at December 31, 2000, the Company would have issued 444,980 shares of
its common stock is satisfaction of the remaining Earnout. The additional
consideration has been accounted for as additional purchase price related to
goodwill and is being amortized over the remaining expected useful life.

CSN Computer Consulting

On February 22, 2000, the Company acquired CSN Computer Consulting (CSN), a
privately held e-business consulting, training and technology development
company headquartered in Germany. The purchase price consisted of approximately
$2.3 million in cash and approximately $2.3 million (69,398 shares) of common
stock in exchange for all the outstanding capital stock of CSN. Approximately
$1.2 million in cash was paid at closing and $1.1 million was paid in August
2000. The transaction was accounted for using the purchase method of
accounting, and, accordingly, the results of CSN's operations have been
included in the Company's consolidated financial statements from the date of
acquisition.

A summary of the purchase price for the acquisitions is as follows:

Market
Versametrix Solutions CSN
----------- --------- ------
(In thousands)

Common stock................................... $1,554 $ 8,920 $2,261
Cash paid to shareholders...................... -- 5,000 2,261
Cash paid to liquidate notes payable........... 62 -- --
Capitalization of royalty advances............. 100 -- --
Accrued direct acquisition costs............... 130 1,400 478
------ ------- ------
$1,846 $15,320 $5,000
====== ======= ======

The purchase price was allocated as follows:

Market
Versametrix Solutions CSN
----------- --------- ------
(In thousands)

Assets acquired................................ $ 7 $ 1,030 $ 506
Liabilities assumed............................ (25) (1,885) (411)
In-process research and development............ 390 -- --
Purchased technology........................... 798 655 --
Assembled workforce............................ 240 2,342 454
Customer contracts............................. -- 4,175 658
Goodwill....................................... 436 11,442 4,293
Deferred tax liability......................... -- (2,439) (500)
------ ------- ------
$1,846 $15,320 $5,000
====== ======= ======

To determine the value of the developed technology, the expected future cash
flows of the existing technology products were discounted, taking into account
risks related to the characteristics and applications of each product, existing
and future markets, and assessments of the life cycle stage of each product.
Based on this analysis, the existing technology that had reached technological
feasibility was capitalized. Amounts allocated to in-process research and
development were immediately expensed in the period of acquisition because
technological feasibility was not established and no alternative commercial use
was identified. Amounts attributable to purchased technology, goodwill and
other intangibles will be amortized over their estimated useful life of two and
one-half to five years on a straight-line basis.

49

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The unaudited pro forma combined historical results of operations, as if
CSN Computer Consulting had been acquired on January 1, 1999, are as follows:

Year Ended December 31,
------------------------------------------
1999 2000
-------------------- ---------------------
Actual Pro Forma Actual Pro Forma
------- ----------- -------- -----------
(Unaudited) (Unaudited)
(In thousands, except per share data)

Revenues........................ $60,574 $63,223 $121,523 $121,727
Net loss to common
shareholders................... (1,886) (3,856) (2,497) (2,752)
Net loss per share (basic and
diluted)....................... $ (0.06) $ (0.13) $ (0.07) $ (0.08)

The pro forma information does not purport to be indicative of the results
that would have been attained had these events occurred at the beginning of
the period presented and is not necessarily indicative of future results.

Japanese Joint Venture

In September 2000, the Company entered into a joint venture with Softbank
Investment Corporation and Prime Systems Corporation to create Onyx Software
Co., Ltd. (Onyx Japan), a Japanese corporation, for the purpose of
distributing Onyx'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 and the joint venture partners invested
$3.1 million for the remaining 42% of the common stock of Onyx Japan. The
Company has a controlling interest in Onyx Japan; therefore, 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.

3. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Ending accumulated balances for each item in accumulated other
comprehensive income (loss) follows:

December
31,
------------
1999 2000
----- -----
(In
thousands)

Unrealized currency loss...................................... $ (89) $(277)
Unrealized loss on marketable securities...................... (59) (27)
----- -----
Total accumulated other comprehensive loss.................. $(148) $(304)
===== =====

50

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. INVESTMENTS

Investments at December 31, 1999 and 2000 are summarized below:

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)

Balance at December 31, 1999:
Commercial paper.................... $ 5,100 $ -- $ (4) $ 5,096
Certificates of deposit............. 7,999 -- (20) 7,979
Corporate debt securities........... 7,755 -- (35) 7,720
------- ---- ---- -------
$20,854 $ -- $(59) $20,795
======= ==== ==== =======
Balance at December 31, 2000:
Certificates of deposit............. $ 4,017 $ 7 $ -- 4,024
Corporate debt securities........... 1,532 -- (34) 1,498
------- ---- ---- -------
$ 5,549 $ 7 $(34) $ 5,522
======= ==== ==== =======

At December 31, 1999, investments with maturity dates of 90 days or less
totaled $12.3 million, investments with maturity dates ranging from 91 days to
one year totaled $7.5 million, and investments with maturity dates ranging from
one to three years totaled $991,000. At December 31, 2000, investments with
maturity dates of 90 days or less totaled $3.5 million, investments with
maturity dates ranging from 91 days to one year totaled $2.0 million.

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

December 31,
----------------
1999 2000
------- -------
(In thousands)

Computer and office equipment.............................. $ 5,852 $12,206
Purchased software......................................... 1,353 3,783
Furniture and fixtures..................................... 1,828 4,117
Leasehold improvements..................................... 2,026 6,955
------- -------
11,059 27,061
Less accumulated depreciation and amortization............. (2,431) (6,213)
------- -------
$ 8,628 $20,848
======= =======

In December 2000, the Company acquired $610,000 of equipment under a capital
lease. Included in property and equipment are assets acquired under capital
lease obligations with an original cost of approximately $563,000 and $1.1
million as of December 31, 1999 and 2000, respectively. Accumulated
amortization on the leased assets was approximately $359,000 and $530,000 as of
December 31, 1999 and 2000, respectively.

6. LINE OF CREDIT

In November 2000, the Company entered into a loan and security agreement
with Silicon Valley Bank and Comerica Bank, which contains a $25.0 million
working capital revolving line of credit that is secured by the Company's
accounts receivable, property and equipment, and intellectual property. This
facility allows the

51

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company to borrow up to the lesser of 80% of its eligible accounts receivable
or $25.0 million and bears interest at the bank's prime rate, which was 9.5% as
of December 31, 2000. The facility expires in August 2001. The agreement under
which the line of credit was established requires the Company to maintain
specified financial ratios. As of December 31, 2000, the Company had no
outstanding borrowings under the working capital facility; however, there was
approximately $11.0 million in standby letters of credit outstanding in
connection with its facilities, of which $8.3 million represents a security
deposit for tenant improvements and rent associated with the new corporate
headquarters. The Company was in compliance with all financial covenants of the
credit facility as of December 31, 2000.

7. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES

Leases

The Company leases its facilities under noncancelable operating lease
agreements that expire on various dates through March 2013. The Company leases
certain equipment under noncancelable capital and operating leases that expire
on various dates through May 2004.

Minimum future lease payments under noncancelable capital and operating
leases for the periods ended December 31 pursuant to leases outstanding as of
December 31, 2000 are summarized as follows:

Capital Operating
Leases Leases
------- ---------
(In thousands)

Year ending December 31:
2001..................................................... $ 246 $ 11,637
2002..................................................... 186 12,440
2003..................................................... 186 12,109
2004..................................................... 93 12,353
2005..................................................... -- 11,829
Thereafter............................................... -- 62,544
----- --------
711 $122,912
========
Less amount representing interest.......................... (41)
-----
Present value of minimum capital lease obligations......... 670
Less current portion....................................... (242)
-----
Capital lease obligations, less current portion............ $ 428
=====

Rental expense was approximately $2.3 million, $3.7 million and $6.4 million
in 1998, 1999 and 2000, respectively.

Third-Party License Agreements

The Company has entered into various agreements that allow the Company to
incorporate licensed technology into its products or that allow the Company the
right to sell separately the licensed technology. The Company incurs royalty
fees under these agreements that are based on a predetermined fee per license
sold. Royalty costs incurred under these agreements are recognized as products
are licensed and are included in cost of license revenues. These amounts
totaled $900,000, $2.1 million and $1.9 million in 1998, 1999 and 2000. As of
December 31, 2000, future commitments under these arrangements totaled
$600,000.

52

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK

In March 1996, the Company completed a $3.0 million private placement of
4,348,164 shares of Series A Convertible and Redeemable Preferred Stock (Series
A) at $0.69 per share. Net proceeds from the financing amounted to $2,977,000.
In March 1997, the Company completed an $8.0 million private placement of
2,519,686 shares of Series B Convertible and Redeemable Preferred Stock (Series
B) at $3.18 per share. Net proceeds from the financing amounted to $7,945,000.
In December 1998, the Board of Directors authorized a 200,000 share increase in
the number of shares of common stock issuable upon conversion of the Series B,
effectively increasing the conversion ratio from one-to-one to 1.079-to-one.
The fair value of the 200,000 share increase in the number of shares of common
stock issuable upon a conversion of the Series B was accounted for as a deemed
dividend at $6.50 per share based on the price of stock issued in the initial
public offering, and has been reflected within preferred stock accretion in the
statement of operations. The Company never declared any Series A or Series B
cash dividends. Each share of Series A and Series B converted into common stock
upon the closing of the initial public offering.

9. SHAREHOLDERS' EQUITY

Initial Public Offering

On February 12, 1999, the Company completed an initial public offering of
7,130,000 shares of common stock, including 930,000 shares pursuant to the
underwriters' exercise of their overallotment option, as adjusted to reflect
the 2-for-1 split of the common stock effected March 1, 2000. The offered
shares generated net proceeds to the Company of approximately $41.9 million.
Concurrent with the offering, all shares of the Company's redeemable
convertible preferred stock automatically converted into 7,067,850 shares of
common stock.

Private Placement with Board Member

On November 17, 2000, the Company completed a private placement of $5
million of common stock (343,100 shares) with William B. Elmore, a director, at
a purchase price of $14.573 per share. The purchase price was determined using
the average of the high and low trading price of the Company's stock on the
third, fourth and fifth day prior to closing, which did not differ materially
from the fair market value of the Company's common stock on the date of
issuance.

Shareholder Rights Plan

On October 22, 1999, the Company's Board of Directors adopted a Shareholder
Rights Plan (the Rights Plan) in which preferred stock purchase rights (Rights)
were distributed as a dividend at the rate of one Right for each share of
Common Stock held as of the close of business on November 9, 1999. The Company
adopted the plan to guard against partial tender offers and other abusive
tactics that might be used in an attempt to gain control of the Company without
paying all shareholders a fair price for their shares. The Rights Plan, which
expires on November 9, 2009, will not prevent takeovers, but it is designed to
deter coercive takeover tactics and to encourage anyone attempting to acquire
the Company to first negotiate with the board.

Each Right will entitle each shareholder to buy one one-hundredth of a newly
issued share of Series A Participating Cumulative Preferred Stock of the
Company at an exercise price of $60.00 per one one-hundredth of a preferred
share. The Rights will be exercisable only if a person or group, other than an
exempted person, makes a tender offer for, or acquires beneficial ownership, of
15% or more of the Company's then outstanding Common Stock.

If any person other than an exempted person becomes the beneficial owner of
15% or more of the Company's outstanding Common Stock, then each Right not
owned by such person or certain related parties

53

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

will entitle its holder to purchase, at the Right's then current exercise
price, shares of the Company's Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a market value equal
to twice the then current exercise price. In addition, if, after a person
becomes the beneficial owner of 15% or more of the Company's outstanding Common
Stock, the Company is acquired in a merger or other business combination
transaction, or sells 50% or more of its assets or earning power to another
person, each Right will entitle its holder to purchase, at the Right's then
current exercise price, shares of Common Stock of such other person having a
market value equal to twice the then current exercise price.

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

Notes Receivable from Officers

In July 1998, certain officers exercised options to purchase 2,600,000
shares of common stock and paid the exercise price by issuing full recourse
promissory notes to the Company totaling $212,000. In March 2000, $55,000 was
repaid by one of the officers. The remaining note, which has been offset
against common stock for financial statement presentation, is due in July 2001
and bears interest at 5.39%, payable annually.

1994 Combined Incentive and Nonqualified Stock Option Plan

Under the terms of the 1994 Combined Incentive and Nonqualified Stock Option
Plan (the 1994 option plan), the Board of Directors may grant incentive and
nonqualified stock options to employees, officers, directors, agents,
consultants, and independent contractors of the Company. There were 10,000,000
shares of common stock reserved under the 1994 option plan. Generally, the
Company grants stock options with exercise prices equal to the fair market
value of the common stock on the date of grant, as determined by the Company's
Board of Directors. Options generally vest over a four and one-half year
period; 25% vest after 18 months, with 12.5% vesting every six months
thereafter. Options generally expire ten years from the date of grant. In
October 1998, the Board of Directors suspended the 1994 option plan and
determined that no further grants shall be made pursuant to the 1994 option
plan (see 1998 Stock Incentive Compensation Plan).

1998 Stock Incentive Compensation Plan

The 1998 Stock Incentive Compensation Plan (the 1998 option plan) provides
for both stock options and restricted stock awards to employees, officers,
directors, agents, advisors, consultants and independent contractors of the
Company. There were 3,000,000 shares of common stock reserved under the 1998
option plan and the plan provides that any options cancelled and returned to
the 1994 option plan shall become available for future grant under the 1998
option plan. The 1998 option plan provides for an annual increase to be added
on the first day of each fiscal year beginning in 2000 equal to the lesser of
(a) 3,351,526 shares, or (b) 5% of the average common shares outstanding used
to calculate fully diluted earnings per share, as reported for the preceding
year. Accordingly, on January 1, 2000, the 1998 option plan pool was increased
by 1,560,800 shares and on January 1, 2001, the 1998 option plan pool was
increased by 1,746,100 shares. Options granted under the 1998 option plan
generally vest and become exercisable over a four-year period; 25% vest after
12 months, with 2.0833% vesting every month thereafter.

54

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Stock Option Activity

A summary of stock option activity follows:

Outstanding Options
--------------------
Weighted
Shares Average
Available Number of Exercise
for Grant Shares Prices
---------- ---------- --------

Balance at January 1, 1998................ 2,062,096 7,662,152 $ 0.16
1998 option plan introduction........... 3,000,000 --
Options granted......................... (2,913,320) 2,913,320 $ 1.77
Options canceled........................ 1,143,716 (1,143,716) $ 0.44
Options exercised....................... -- (2,962,696) $ 0.09
---------- ----------
Balance at December 31, 1998
(exercisable--1,022,566)................. 3,292,492 6,469,060 $ 0.86
Options granted......................... (3,325,768) 3,325,768 $ 7.80
Options canceled........................ 997,054 (997,054) $ 2.11
Options exercised....................... -- (950,206) $ 0.44
---------- ----------
Outstanding at December 31, 1999
(exercisable--1,550,096)................. 963,778 7,847,568 $ 3.69
1998 option plan increase............... 1,560,800 --
Options granted......................... (3,084,441) 3,084,441 $23.69
Options canceled........................ 965,192 (965,192) $ 7.44
Options exercised....................... -- (1,522,059) $ 0.92
---------- ----------
Outstanding at December 31, 2000
(exercisable--1,824,444)................. 405,329 8,444,758 $11.07
========== ==========

The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 2000:

Outstanding Exercisable
------------------------------------------- --------------------------
Weighted Average
Remaining
Range of Number of Weighted Average Contractual Life Number of Weighted Average
Exercise Prices Options Exercise Prices (Years) Options Exercise Prices
--------------- --------- ---------------- ---------------- --------- ----------------

$ 0.06 - $ 0.35 1,670,661 $ 0.19 5.60 1,004,122 $ 0.16
$ 0.60 - $ 2.50 1,044,250 1.69 7.47 332,830 1.60
$ 4.50 - $ 6.72 1,643,636 6.31 8.39 94,378 5.10
$ 7.67 - $10.14 780,768 8.37 7.89 116,690 9.26
$10.87 - $16.09 801,764 13.93 8.74 59,472 12.32
$17.84 - $23.10 1,052,402 21.17 9.22 103,567 23.07
$23.91 - $38.09 1,451,277 28.30 9.19 113,385 27.08
--------- ---------
$ 0.06 - $38.09 8,444,758 $11.07 7.95 1,824,444 $ 4.63
========= =========

1998 Employee Stock Purchase Plan

In December 1998, the Board of Directors and shareholders approved the 1998
Employee Stock Purchase Plan (ESPP), which was implemented upon the
effectiveness of the initial public offering in February 1999. The ESPP permits
eligible employees of the Company and its subsidiaries to purchase common stock
through payroll deductions of up to 10% of their compensation. Under the ESPP,
no employee may purchase common stock worth more than $25,000 in any calendar
year, valued as of the first day of each offering period. In addition, owners
of 5% or more of the Company's or a subsidiary's common stock may not
participate in the ESPP. The Company authorized the issuance under the ESPP of
a total of 1,000,000 shares of common stock, plus an automatic annual increase,
to be added on the first day of the fiscal year beginning in 2000, equal to the

55

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

lesser of (a) 400,000 shares, (b) 1.2% of the average common shares outstanding
as used to calculate fully diluted earnings per share as reported in the Annual
Report for the preceding year, or (c) a lesser amount determined by the Board
of Directors. Accordingly, on January 1, 2000, the ESPP pool was increased by
374,592 shares and on January 1, 2001, the ESPP pool was increased by 400,000
shares. Any shares from increases in previous years that are not actually
issued shall be added to the aggregate number of shares available for issuance
under the ESPP.

The ESPP provides for six-month offering periods. The first offering period
commenced on the effectiveness of the initial public offering in February 1999
and ended June 30, 1999. Subsequent offering periods begin on each January 1
and July 1. The price of the common stock purchased under the ESPP will be the
lesser of 85% of the fair market value on the first day of an offering period
and 85% of the fair market value on the last day of an offering period, except
that the purchase price for the first offering period was equal to the lesser
of 100% of the initial public offering price of the common stock and 85% of the
fair market value on June 30, 1999. The ESPP does not have a fixed expiration
date, but the Company's Board of Directors may terminate it at any time.

During the year ended December 31, 1999 and 2000, 124,798 shares and 170,537
shares of common stock were purchased under the ESPP, respectively. At December
31, 2000, the Company had a total of 1,079,257 shares of common stock reserved
for future issuance under its ESPP.

Pro Forma Disclosure Under SFAS No. 123

Under APB 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 recognized. Deferred compensation expense of
$2,153,000 was recorded during 1998 for those situations where the exercise
price of an option was lower than the deemed fair value for financial reporting
purposes of the underlying common stock. No deferred compensation expense was
recorded in 1999 or 2000. The deferred compensation is being amortized over the
vesting period of the underlying options. Amortization of the deferred stock-
based compensation balance of $413,000 at December 31, 2000 will approximate
$270,000 in 2001 and $143,000 in 2002.

Had the stock compensation expense for the Company's stock option plan and
employee stock purchase plan been determined under SFAS No. 123 using the
multiple-option approach, the Company's net loss would have been adjusted to
these pro forma amounts:

December 31,
--------------------------
1998 1999 2000
------- ------- --------
(In thousands, except
per share data)

Net loss to common shareholders:
As reported................................... $(8,194) $(1,886) $ (2,497)
SFAS No. 123 pro forma........................ $(8,626) $(6,372) $(25,339)
Net loss per share:
As reported................................... $ (0.49) $ (0.06) $ (0.07)
SFAS No. 123 pro forma........................ $ (0.52) $ (0.21) $ (0.73)

56

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model for periods after the Company's initial
public offering and the minimum value option pricing model for periods prior to
the initial public offering. Subsequent to the Company's initial public
offering, the volatility of the Company's stock was based on actual prices
subsequent to the initial month of trading. The following weighted average
assumptions were utilized in arriving at the fair value of each option grant:

December 31,
-----------------------
1998 1999 2000
------- ------- -------

Expected dividend yield.............................. 0.0% 0.0% 0.0%
Risk-free interest rate.............................. 5.0% 6.2% 5.1%
Volatility........................................... NA 89% 92%
Expected life (years)................................ 5 years 4 years 3 years

For purposes of the pro forma disclosures, the estimated weighted average
fair value of the options granted, estimated to be $0.58, $6.14 and $17.74 at
December 31, 1998, 1999 and 2000, respectively, is amortized to expense over
the options' vesting period.

The fair value of employees' stock purchase rights under the ESPP at
December 31, 1999 and 2000 was estimated using the Black-Scholes model with the
same assumptions as the table above except that the expected life is six
months.

Common Shares Reserved for Future Issuance

The Company has reserved shares of common stock as of December 31, 2000 as
follows:

Stock options.................................................... 8,850,087
Employee Stock Purchase Plan..................................... 1,079,257
---------
9,929,344
=========

57

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. EARNINGS (LOSS) PER SHARE

The following represents the calculations for earnings (loss) per share:

Year Ended December 31,
-------------------------
1998 1999 2000
------- ------- -------
(In thousands, except
per share data)

Net loss (A).................................... $(6,979) $ (444) $(2,497)
Preferred stock accretion....................... (1,215) (1,442) --
------- ------- -------
Loss available to common shareholders (B)....... $(8,194) $(1,886) $(2,497)
======= ======= =======
Weighted average number of common shares
(1)(C)......................................... 16,574 30,400 34,922
Effect of dilutive securities:
Stock options............................... ** ** **
Redeemable convertible preferred stock...... ** **
------- ------- -------
Adjusted weighted average shares and assumed
conversions (D)................................ 16,574 30,400 34,922
=======
Pro forma adjustment for redeemable convertible
preferred stock................................ 7,068 816
------- -------
Pro forma weighted average shares (E)........... 23,642 31,216
======= =======
Earnings (loss) per share:
Basic (B)/(C)................................. $ (0.49) $ (0.06) $ (0.07)
Diluted (B)/(D)............................... $ (0.49) $ (0.06) $ (0.07)
Pro forma basic and diluted (A)/(E)........... $ (0.30) $ (0.01) NA

- --------
(1) For purposes of determining the weighted average number of common shares
outstanding, shares of restricted common stock issued through the July 1998
exercise of stock options in exchange for promissory notes to the Company
are only considered in the calculation of diluted earnings per share. The
number of restricted shares during the years ended December 31, 1998 and
1999 was 2,600,000 and during the year ended December 31, 2000 was
1,600,000.

** Excluded from the computation of diluted earnings per share given the
effects are antidilutive. Outstanding stock options and restricted stock of
9,069,060, 10,447,568 and 10,044,758 at December 31, 1998, 1999 and 2000,
respectively, were excluded from the computation of diluted earnings per
share because their effect was antidilutive (see Note 9 for additional
stock option information).

58

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

11. INCOME TAXES

Income (loss) before taxes consists of the following:

Year Ended December
31,
-----------------------
1998 1999 2000
------- ----- -------
(In thousands)

U.S................................................. $(7,495) $ 564 $(1,145)
Foreign............................................. 856 (491) (1,164)
------- ----- -------
$(6,639) $ 73 $(2,309)
======= ===== =======

The provision for income taxes consists of the following:

Year Ended December
31,
----------------------
1998 1999 2000
------- ----- ------
(In thousands)

Current:
Federal.......................................... $ -- $ 40 $ 20
State and local.................................. -- 15 16
Foreign.......................................... 340 596 987
------- ----- ------
Total current income taxes..................... 340 651 1,023
Deferred--foreign.................................. -- (134) (619)
------- ----- ------
Income tax provision............................... $ 340 $ 517 $ 404
======= ===== ======

The effective rate differs from the U.S. federal statutory rate as follows:

Year Ended December
31,
----------------------
1998 1999 2000
------- ----- ------
(In thousands)

Income tax expense (benefit) at statutory rate of
34%............................................... $(2,257) $ 25 $ (785)
State taxes, net of federal benefit................ -- 10 11
Losses producing no current tax benefit............ 2,597 482 1,178
------- ----- ------
Income tax provision............................... $ 340 $ 517 $ 404
======= ===== ======

At December 31, 2000, the Company had a domestic net operating loss,
research and development and foreign tax credit carryforwards of $12.4 million,
$1.5 million and $646,000, respectively, which begin to expire in 2017.
Utilization of these carryforwards depends on the recognition of future taxable
income. The Company's ability to utilize net operating loss carryforwards may
be limited in the event that a change in ownership, as defined in the Internal
Revenue Code, occurs in the future. To the extent that any single-year loss is
not utilized to the full amount of the limitation, such unused loss is carried
forward to subsequent years until the earlier of its utilization or the
expiration of the relevant carryforward period. To the extent that net
operating losses, when realized, relate to stock option deductions of
approximately $8.9 million, the resulting benefits will be credited to
shareholders' equity.

59

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:

December 31,
----------------
1999 2000
------- -------
(In thousands)

Deferred tax assets:
Book reserves in excess of tax.......................... $ 454 $ 874
Foreign tax credit carryforward......................... 337 646
Research and development credit carryforward............ 675 1,507
Net operating loss carryforward......................... 1,762 4,216
------- -------
Total gross deferred tax assets........................... 3,228 7,243
Less valuation allowance.................................. (2,420) (5,735)
------- -------
808 1,508
Deferred tax liabilities:
Deductible basis in fixed assets........................ (73) (1,000)
Purchased technology and other intangibles.............. (3,039) (2,709)
------- -------
(3,112) (3,709)
------- -------
Net deferred tax liabilities.............................. $(2,304) $(2,201)
======= =======

Since the Company's utilization of these deferred tax assets is dependent on
future profits, which are not assured, a valuation allowance equal to the net
deferred tax assets has been provided. The valuation allowance for deferred tax
assets decreased by $96,000 during 1999 and increased $3.3 million during 2000.

12. EMPLOYEE BENEFIT PLAN

The Company maintains a profit-sharing retirement plan for eligible
employees under the provisions of Internal Revenue Code Section 401(k).
Participants may defer up to 15% of their annual compensation on a pretax
basis, subject to maximum limits on contributions prescribed by law.
Contributions by the Company are at the discretion of the Board of Directors.
In 2000, the Company recorded $325,000 in employer matching contribution
expenses. Prior to 2000, no employer contributions were made.

60

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

13. INTERNATIONAL OPERATIONS

The Company reports operating results based on geographic areas. A summary
of key financial data by segment is as follows:

North Rest of
America World Total
------- ------- --------
(In thousands)

Year ended December 31, 2000:
Revenues.......................................... $88,769 $32,754 $121,523
Operating loss.................................... 10,232 (12,829) (2,597)
Interest, net..................................... 789 (1) 788
Depreciation and amortization..................... 5,313 4,605 9,918
Purchases of property and equipment............... 12,273 3,141 15,414
Long-lived assets................................. 23,240 23,118 46,358
Total assets...................................... 73,375 38,159 111,534
Year ended December 31, 1999:
Revenues.......................................... $49,339 $11,235 $ 60,574
Operating loss.................................... 3,660 (4,811) (1,151)
Interest, net..................................... 1,230 (6) 1,224
Depreciation and amortization..................... 2,386 668 3,054
In-process research and development............... 390 -- 390
Purchases of property and equipment............... 8,095 141 8,236
Long-lived assets................................. 13,814 10,314 24,128
Total assets...................................... 59,990 13,190 73,180
Year ended December 31, 1998:
Revenues.......................................... $29,918 $ 5,192 $ 35,110
Operating loss.................................... (4,044) (2,656) (6,700)
Interest, net..................................... 61 -- 61
Depreciation and amortization..................... 998 44 1,042
Purchases of property and equipment............... 816 158 974
Long-lived assets................................. 5,685 476 6,161
Total assets...................................... 21,254 1,236 22,490

14. SUBSEQUENT EVENTS

Acquisition of RevenueLab

On January 5, 2001, the Company acquired RevenueLab, a privately held
consulting company based in Stamford, Connecticut. RevenueLab builds and
implements go-to-market strategy and revenue acceleration programs for emerging
and established companies. In connection with the acquisition, the Company paid
$313,000 in cash, issued $1.7 million (185,463 shares) of its common stock and
granted options to acquire 635,382 shares of common stock valued at $4.0
million at closing. The Company is also obligated to pay an additional $1.0
million in either cash or common stock at the Company's election at any time
between March 3, 2001 and April 10, 2001. The Company will record $1.9 million
for the value allocated to deferred stock compensation, which represents the
excess of the fair value over the exercise price for the options assumed by
Onyx. The acquisition, including $400,000 of acquisition-related costs, was
valued at approximately $7.4 million. The net purchase price, adjusted for
deferred stock compensation, was approximately $5.5 million. The value of the
deferred compensation will be amortized over the remaining stock options'
vesting periods of 4.5 years using a graded vesting approach. The Company will
account for the transaction using the purchase method of

61

ONYX SOFTWARE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

accounting, and, accordingly, the results of RevenueLab's operations will be
included in its consolidated financial statements from the date of acquisition.
The Company currently estimates the purchase price allocation to include
$838,000 for the fair value of net assets acquired plus $4.7 million for
goodwill and other intangibles, which will be amortized over their estimated
useful lives of five years on a straight-line basis. Allocation of the purchase
price will be determined in the first quarter of 2001.

Equity Financing Arrangement

On January 4, 2001, the Company entered into an equity financing arrangement
with Ramius Securities, LLC, or Ramius Securities, and Ramius Capital Group,
LLC, or Ramius Capital, under which the Company may from time to time in the
next two years elect to have Ramius Securities sell a limited number of shares
of its common stock on a best-efforts basis or to have Ramius Capital purchase
those shares if the selling efforts are unsuccessful. The obligations of Ramius
Securities and Ramius Capital under this arrangement are subject to a number of
conditions, and limitations and the amount of common stock that the Company may
sell depends on the daily trading volumes of its common stock. Sales under the
facility will be made under the Company's $100 million shelf registration
statement on Form S-3, filed with the SEC in November 2000. In connection with
the financing arrangement, the Company issued Ramius Securities a warrant to
purchase 24,024 shares of its common stock at $12.49 per share. This warrant is
fully exercisable and expires on January 4, 2003. In connection with the
facility, the Company is also obligated to pay Thomas Weisel Partners a fee of
$1.5 million. The value of the warrants issued and the $1.5 million investment
banking fee will be netted against proceeds drawn under the facility. The
facility does not preclude Onyx from issuing shares in other transactions
should market conditions make those transactions advantageous.

2001 Nonofficer Employee Stock Compensation Plan

In January 2001, the Board of Directors adopted the 2001 Nonofficer Employee
Stock Compensation Plan (the 2001 option plan). The 2001 option plan provides
for both stock options and restricted stock awards to employees, agents,
advisors, consultants and independent contractors of the Company. There were
1,000,000 shares of common stock reserved under the 2001 option plan and the
plan provides that any options cancelled and returned to the option plan shall
become available for future grant under the option plan. Options granted under
the 2001 option plan generally vest and become exercisable over a four year
period; 25% vest after 12 months, with 2.0833% vesting each month thereafter.

Firm Underwritten Offering

On February 12, 2001, the Company completed a firm underwritten offering of
2,500,000 shares of its common stock at a price of $13.50 per share from its
$100.0 million shelf registration. Onyx estimates the net proceeds to be
$31,275,000 after deducting the estimated costs associated with the offering.
In addition, Onyx has granted Dain Rauscher Wessels, the sole underwriter for
the offering, an option to purchase up to 375,000 shares of its common stock to
cover over-allotments, if any. The Company intends to use the net proceeds for
design and construction of tenant improvements in its new corporate
headquarters, expansion of its field office facilities, additional working
capital and other general corporate purposes, as well as the possible
acquisition of or investment in complementary businesses, products and
technologies.

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

Not applicable.

62

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item is included in our proxy statement for
our 2001 annual meeting of shareholders and is incorporated by reference. The
information appears in the proxy statement under the headings "Election of
Directors" and "Executive Officers Who Are Not Directors." We will file the
proxy statement within 120 days of December 31, 2000.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is included in our proxy statement for
our 2001 annual meeting of shareholders and is incorporated by reference. The
information appears in the proxy statement under the heading "Executive
Compensation." We will file the proxy statement within 120 days of December 31,
2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is included in our proxy statement for
our 2001 annual meeting of shareholders and is incorporated by reference. The
information appears in the proxy statement under the heading "Security
Ownership of Certain Beneficial Owners and Management." We will file the proxy
statement within 120 days of December 31, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is included in our proxy statement for
our 2001 annual meeting of shareholders and is incorporated by reference. The
information appears in the proxy statement under the heading "Related
Transactions With Executive Officers, Directors and 5% Shareholders." We will
file the proxy statement within 120 days of December 31, 2000.

63

PART IV

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

(a) Financial Statements and Financial Statement Schedules:

1. Index to Consolidated Financial Statements

Page
----

Report of Ernst & Young LLP, Independent Auditors...................... 39
Consolidated Financial Statements:
Balance Sheets....................................................... 40
Statements of Operations............................................. 41
Statements of Shareholders' Equity................................... 42
Statements of Cash Flows............................................. 43
Notes to Consolidated Financial Statements........................... 44

2. Index to Financial Statement Schedules

Schedule II--Valuation and Qualifying Accounts......................... 68

Schedules not listed above have been omitted because they are not applicable
or are not required or the information required to be set forth in the
schedules is included in the consolidated financial statements or related
notes.

(b) Reports on Form 8-K

On October 23, 2000, we filed a current report on Form 8-K with respect to
our Japanese joint venture. On November 20, 2000, we filed a current report on
Form 8-K with respect to the filing of a shelf registration statement on Form
S-3.

(c) Exhibits

Number Description
------ -----------

2.1 Share Purchase Agreement dated February 22, 2000 among the registrant,
Onyx CSN Computer Consulting GmbH and the shareholders of CSN Computer
Consulting GmbH (exhibit 2.1)(a)

2.2* Sale and Purchase Agreement dated October 1, 1999 among the registrant
and the shareholders of Market Solutions Limited (exhibit 2.1)(b)

2.3 Amendments to Sale and Purchase Agreement dated July 7, 2000, among the
registrant and the shareholders of Market Solutions Limited (exhibit
2.2)(c)

2.4 Unit Purchase Agreement dated January 5, 2001 among the registrant,
RevenueLab, LLC and the members of RevenueLab, LLC (exhibit 10.1)(d)

3.1 Restated Articles of Incorporation of the registrant

3.2 Amended and Restated Bylaws of the registrant

4.1 Rights Agreement dated October 25, 1999 between the registrant and
ChaseMellon Shareholder Services, L.L.C. (exhibit 2.1)(f)

10.1 Lease Agreement dated June 26, 1998 between WRC Sunset North LLC and
the registrant (exhibit 10.2)(e)

10.2 Amended and Restated Investors' Rights Agreement dated December 14,
1998 among the registrant, Foundation Capital, L.P., Foundation Capital
Entrepreneurs Fund, L.L.C., TCV II, VOF, Technology Crossover Ventures
II, L.P., TCV II (Q), L.P., TCV II Strategic Partners, L.P., Technology
Crossover Ventures II, C.V., Hillman/Dover Limited Partnership, Brent
Frei, Brian Janssen, Todd Stevenson, Mary Forler, Ronald Frei, Glenda
Frei, Barbara Stevenson, Leon Stevenson, Michael Racine, Mary Winifred
Racine, Bettie Ruzicka, Larry L. Ruzicka, Colleen Chmelik, James
Chmelik, J. Michael Ellis and Barbara S. Ellis (exhibit 10.1)(e)

64

Number Description
------ -----------

10.3 Form of Indemnification Agreement between the registrant and each
director and officer of the registrant (exhibit 10.12)(e)

10.4 Amended and Restated 1994 Stock Option Plan (exhibit 10.7)(e)

10.5 1998 Stock Incentive Compensation Plan as amended and restated July 1,
2000 (exhibit 10.2)(g)

10.6 2001 Nonofficer Employee Stock Compensation Plan (exhibit 10.1)(h)

10.7 1998 Employee Stock Purchase Plan

10.8 Office Building Lease dated June 6, 2000 between the registrant and
Bellevue Hines Development, L.L.C. and First Amendment to Lease dated
June 20, 2000 (exhibit 10.1)(g)

10.9 Second Amendment to Lease dated August 6, 2000 between the registrant
and Bellevue Hines Development, L.L.C. (exhibit 10.8)(h)

10.10* Joint Venture Agreement dated September 14, 2000 between the registrant
and Prime Systems Corporation (exhibit 10.1)(i)

10.11 Loan and Security Agreement dated November 8, 2000 among the
registrant, Silicon Valley Bank and Comerica Bank California (exhibit
10.6)(h)

10.13 Intellectual Property Security Agreement dated November 8, 2000 between
the registrant and Silicon Valley Bank (exhibit 10.7)(h)

10.14 Common Stock Purchase Agreement dated November 20, 2000 among the
registrant, Elmore Family Investments and Elmore Living Trust (exhibit
10.5)(h)

10.15 Common Stock Underwriting Agreement dated January 4, 2001 between
Ramius Capital Group, LLC and the registrant (exhibit 1.1)(j)

10.16 Stand-By Purchase Agreement dated January 4, 2001 between Ramius
Capital Group, LLC and the registrant (exhibit 10.1)(j)

10.17 Registration Rights Agreement dated January 5, 2001 between the
registrant and Odyssey Strategic Partners, LLC (exhibit 10.2)(d)

10.18 Employment Agreement dated January 5, 2001 between the registrant and
Kevin Corcoran (exhibit 10.2)(h)

10.19 Stock Option Agreement dated January 5, 2001 between the registrant and
Kevin Corcoran (exhibit 10.3)(h)

10.20 Stock Option Agreement dated January 5, 2001 between the registrant and
Kevin Corcoran (exhibit 10.4)(h)

10.21 Employment Agreement dated January 30, 2001 between the registrant and
Leslie Rechan (exhibit 10.1)(k)

10.22 Stock Option Agreement dated January 30, 2001 between the registrant
and Leslie Rechan (exhibit 10.2)(k)

21.1 Subsidiaries of the registrant (exhibit 21.1)(h)

23.1 Consent of Ernst & Young LLP, Independent Auditors

- --------
* Confidential treatment has been requested for portions of this document.

(a) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed March 9, 2000.

(b) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed October 15, 1999.

(c) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed July 17, 2000.

(d) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed January 10, 2001.

65

(e) Incorporated by reference to the designated exhibit to the Registration
Statement on Form S-1 (No. 333-68559) filed by the registrant on December
8, 1998, as amended.

(f) Incorporated by reference to the designated exhibit to the registrant's
registration statement on Form 8-A (No. 0-25361) filed October 28, 1999.

(g) Incorporated by reference to the designated exhibit to the registrant's
Quarterly Report on Form 10-Q (No. 0-25361) for the quarter ended June 30,
2000.

(h) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.

(i) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed October 23, 2000.

(j) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed January 9, 2001.

(k) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.

66

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the city of
Bellevue, state of Washington, on March 5, 2001.

ONYX SOFTWARE CORPORATION

/s/ Brent R. Frei
By: _________________________________
Brent R. Frei,
Chief Executive Officer

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

Signature Title Date
--------- ----- ----

/s/ Brent R. Frei Chief Executive Officer and March 5, 2001
_________________________________ Chairman of the Board
Brent R. Frei (Principal Executive
Officer)

/s/ Amy E. Kelleran Interim Chief Financial March 5, 2001
_________________________________ Officer and Assistant
Amy E. Kelleran Secretary (Principal
Financial and Accounting
Officer)

/s/ H. Raymond Bingham Director March 5, 2001
_________________________________
H. Raymond Bingham

/s/ William B. Elmore Director March 5, 2001
_________________________________
William B. Elmore

/s/ Paul G. Koontz Director March 5, 2001
_________________________________
Paul G. Koontz

/s/ Lee D. Roberts Director March 5, 2001
_________________________________
Lee D. Roberts

/s/ Daniel R. Santell Director March 5, 2001
_________________________________
Daniel R. Santell

67

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

ONYX SOFTWARE CORPORATION
December 31, 2000
(In thousands)

Column A Column B Column C Column D Column E
-------- ---------- -------------------- ------------ -------------
Additions
--------------------
Charged to
Charged Other
Balance at to Costs Accounts -- Deduction --
Beginning and Balance at
Description of Period Expenses Describe(1) Describe(2) End of Period
----------- ---------- -------- ----------- ------------ -------------

Year ended December 31,
1998 Deducted from
asset accounts:
Allowance for doubtful
accounts............. $ 553 $ 854 $ -- $ (871) $ 536
Year ended December 31,
1999 Deducted from
asset accounts:
Allowance for doubtful
accounts............. 536 938 471 (791) 1,154
Year ended December 31,
2000 Deducted from
asset accounts:
Allowance for doubtful
accounts............. 1,154 2,350 200 (1,972) 1,732

- --------
(1) In 1999, amounts charged against revenues for estimated sales returns
including non-like kind exchanges totaled $301 and the allowance for
doubtful accounts assumed in acquisition of Market Solutions totaled $170.
In 2000, amounts charged against revenues for estimated sales returns
including non-like kind exchanges totaled $200.

(2) Uncollectible accounts written off, net of recoveries.

68

INDEX TO EXHIBITS

(c) Exhibits

Number Description
------ -----------

2.1 Share Purchase Agreement dated February 22, 2000 among the registrant,
Onyx CSN Computer Consulting GmbH and the shareholders of CSN Computer
Consulting GmbH (exhibit 2.1)(a)

2.2* Sale and Purchase Agreement dated October 1, 1999 among the registrant
and the shareholders of Market Solutions Limited (exhibit 2.1)(b)

2.3 Amendments to Sale and Purchase Agreement dated July 7, 2000, among the
registrant and the shareholders of Market Solutions Limited (exhibit
2.2)(c)

2.4 Unit Purchase Agreement dated January 5, 2001 among the registrant,
RevenueLab, LLC and the members of RevenueLab, LLC (exhibit 10.1)(d)

3.1 Restated Articles of Incorporation of the registrant

3.2 Amended and Restated Bylaws of the registrant

4.1 Rights Agreement dated October 25, 1999 between the registrant and
ChaseMellon Shareholder Services, L.L.C. (exhibit 2.1)(f)

10.1 Lease Agreement dated June 26, 1998 between WRC Sunset North LLC and
the registrant (exhibit 10.2)(e)

10.2 Amended and Restated Investors' Rights Agreement dated December 14,
1998 among the registrant, Foundation Capital, L.P., Foundation Capital
Entrepreneurs Fund, L.L.C., TCV II, VOF, Technology Crossover Ventures
II, L.P., TCV II (Q), L.P., TCV II Strategic Partners, L.P., Technology
Crossover Ventures II, C.V., Hillman/Dover Limited Partnership, Brent
Frei, Brian Janssen, Todd Stevenson, Mary Forler, Ronald Frei, Glenda
Frei, Barbara Stevenson, Leon Stevenson, Michael Racine, Mary Winifred
Racine, Bettie Ruzicka, Larry L. Ruzicka, Colleen Chmelik, James
Chmelik, J. Michael Ellis and Barbara S. Ellis (exhibit 10.1)(e)

10.3 Form of Indemnification Agreement between the registrant and each
director and officer of the registrant (exhibit 10.12)(e)

10.4 Amended and Restated 1994 Stock Option Plan (exhibit 10.7)(e)

10.5 1998 Stock Incentive Compensation Plan as amended and restated July 1,
2000 (exhibit 10.2)(g)

10.6 2001 Nonofficer Employee Stock Compensation Plan (exhibit 10.1)(h)

10.7 1998 Employee Stock Purchase Plan

10.8 Office Building Lease dated June 6, 2000 between the registrant and
Bellevue Hines Development, L.L.C. and First Amendment to Lease dated
June 20, 2000 (exhibit 10.1)(g)

10.9 Second Amendment to Lease dated August 6, 2000 between the registrant
and Bellevue Hines Development, L.L.C. (exhibit 10.8)(h)

10.10* Joint Venture Agreement dated September 14, 2000 between the registrant
and Prime Systems Corporation (exhibit 10.1)(i)

10.11 Loan and Security Agreement dated November 8, 2000 among the
registrant, Silicon Valley Bank and Comerica Bank California (exhibit
10.6)(h)

10.13 Intellectual Property Security Agreement dated November 8, 2000 between
the registrant and Silicon Valley Bank (exhibit 10.7)(h)

10.14 Common Stock Purchase Agreement dated November 20, 2000 among the
registrant, Elmore Family Investments and Elmore Living Trust (exhibit
10.5)(h)

10.15 Common Stock Underwriting Agreement dated January 4, 2001 between
Ramius Capital Group, LLC and the registrant (exhibit 1.1)(j)

Number Description
------ -----------

10.16 Stand-By Purchase Agreement dated January 4, 2001 between Ramius
Capital Group, LLC and the registrant (exhibit 10.1)(j)

10.17 Registration Rights Agreement dated January 5, 2001 between the
registrant and Odyssey Strategic Partners, LLC (exhibit 10.2)(d)

10.18 Employment Agreement dated January 5, 2001 between the registrant and
Kevin Corcoran (exhibit 10.2)(h)

10.19 Stock Option Agreement dated January 5, 2001 between the registrant and
Kevin Corcoran (exhibit 10.3)(h)

10.20 Stock Option Agreement dated January 5, 2001 between the registrant and
Kevin Corcoran (exhibit 10.4)(h)

10.21 Employment Agreement dated January 30, 2001 between the registrant and
Leslie Rechan (exhibit 10.1)(k)

10.22 Stock Option Agreement dated January 30, 2001 between the registrant
and Leslie Rechan (exhibit 10.2)(k)

21.1 Subsidiaries of the registrant (exhibit 21.1)(h)

23.1 Consent of Ernst & Young LLP, Independent Auditors

- --------
* Confidential treatment has been requested for portions of this document.

(a) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed March 9, 2000.

(b) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed October 15, 1999.

(c) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed July 17, 2000.

(d) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed January 10, 2001.

(e) Incorporated by reference to the designated exhibit to the Registration
Statement on Form S-1 (No. 333-68559) filed by the registrant on December
8, 1998, as amended.

(f) Incorporated by reference to the designated exhibit to the registrant's
registration statement on Form 8-A (No. 0-25361) filed October 28, 1999.

(g) Incorporated by reference to the designated exhibit to the registrant's
Quarterly Report on Form 10-Q (No. 0-25361) for the quarter ended June 30,
2000.

(h) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.

(i) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed October 23, 2000.

(j) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed January 9, 2001.

(k) Incorporated by reference to the designated exhibit to the registrant's
Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.