##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




---

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE


SECURITIES EXCHANGE ACT OF 1934


|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
	2001                                              
|  
|or
|  
|o  |  | 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



---

Onyx Software Corporation

(Exact Name of Registrant as Specified in its
Charter)


|                                                                          |  |                                                
|------------------------------------------------------------------------- |  | -----------------------------------------------
|Washington(State or Other Jurisdiction
	of Incorporation or Organization) |  | 91-1629814(I.R.S. Employer
	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)




---

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




---

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 þ          No o

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.     o

The aggregate market value of the voting and
nonvoting stock held by nonaffiliates of the registrant at
February 8, 2002 was approximately $193,464,000.

The number of shares of the registrants
common stock outstanding at February 8, 2002 was 50,328,399.

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 2002, which definitive proxy statement shall be filed
with the Securities Exchange Commission within 120 days
after the end of the fiscal year to which this report relates.



---






---

TABLE OF CONTENTS



|                                                 |                                                                                               |                                                 |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I                                          
|                                                 | ITEM 1. BUSINESS                                                                             
|                                                 | ITEM 2. PROPERTIES                                                                           
|                                                 | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                         
|                                                 | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS            
|                                                 | ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|                                                 | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                 | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                 | ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                             
|                                                 |                                                                                               | CONSOLIDATED BALANCE SHEETS                    
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS          
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
|                                                 |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|ONYX SOFTWARE CORPORATION                       
|                                                 |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                                                 | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                        
|                                                 | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                  
|                                                 | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                         
|                                                 | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                    
|SIGNATURES                                      
|POWER OF ATTORNEY                               
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
|EXHIBIT 10.11                                   
|EXHIBIT 21.1                                    
|EXHIBIT 23.1                                    



---



##### Table of Contents



ONYX SOFTWARE CORPORATION

FORM 10-K

For the Year Ended December 31,
2001


INDEX

|           |  |                                                                                        |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                        |    | Page
|           |  |                                                                                        |    |     
|PART I    
|Item 1.    |  | Business                                                                               |    |      | 2  | 
|Item 2.    |  | Properties                                                                             |    |      | 27 | 
|Item 3.    |  | Legal Proceedings                                                                      |    |      | 27 | 
|Item 4.    |  | Submission of Matters to a Vote of Security
	Holders                                   |    |      | 28 | 
|PART II   
|Item 5.    |  | Market for the Registrants Common Equity
	and Related Shareholder Matters             |    |      | 29 | 
|Item 6.    |  | Selected Consolidated Financial Data                                                   |    |      | 30 | 
|Item 7.    |  | Managements Discussion and Analysis of
	Financial Condition and Results of Operations |    |      | 31 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosure About
	Market Risk                             |    |      | 48 | 
|Item 8.    |  | Consolidated Financial Statements and
	Supplementary Data                              |    |      | 49 | 
|Item 9.    |  | Changes in and Disagreements With Accountants on
	Accounting and Financial Disclosure  |    |      | 78 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                     |    |      | 78 | 
|Item 11.   |  | Executive Compensation                                                                 |    |      | 78 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
	and Management                        |    |      | 78 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                         |    |      | 78 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules, and
	Reports on Form 8-K                      |    |      | 78 | 
|Signatures |  |                                                                                        | 81 |     

1



---



##### Table of Contents






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 in this report include, without limitation:



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

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

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




ITEM
1.     BUSINESS

Overview

Onyx Software Corporation is a leading provider
of enterprise-wide customer relationship management, or CRM,
solutions designed to promote strategic business improvement and
revenue growth by enhancing the way businesses market, sell and
service their products. We focus on our customers success
as the prime criterion for how we judge our own success. Using
the Internet in combination with traditional forms of
interaction, including phone, mail, fax and e-mail, our solution
helps enterprises to more effectively acquire, manage and
maintain customer, partner and other relationships. We market
our solution to companies that want to merge new, online
business processes with traditional business processes to
enhance their customer-facing operations, such as marketing,
sales, customer service and technical support. Our solution is
Internet-based, which means companies can take advantage of
lower costs and faster deployment associated with accessing CRM
software with a simple browser. Our solution uses a single data
model across all customer interactions, resulting in a single
repository for all marketing, sales and service information. It
is 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, which results 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

2



---



##### Table of Contents



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 vertical service providers, or VSPs. Our Internet-based
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 98005-4091. 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 CRM software systems to automate their
customer-facing departments. The market for CRM systems,
however, has changed substantially in the last several 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.
Moreover, the significant customization that some of these
applications require creates inconsistencies in deployments
across the installed base, thereby limiting the ability of third
parties to develop integrated technologies for these products.
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, or ERP,
vendors have also entered the CRM market with their own
technology or 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 Web-enabled solutions in their operations; that is, they
want to use the Internet as a means of conducting business.
Traditional businesses are responding to this desire by
deploying Internet- and e-mail-based interaction systems for
their customer-facing departments. To address these new demands,
an increasing number of vendors are entering the CRM market with
Web-based systems designed to automate Internet- and
e-mail-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
e-mail-based communication, rather than more traditional forms
of communication, such as phone, mail, fax or personal
interaction. We believe that companies adopting these new
applications face a significant integration challenge to get a
comprehensive view of their business relationships. They are
required to integrate data from multiple departmental
applications, and to integrate data collected from the Internet
or e-mail with separate data collected by phone, mail, fax or in
person. The appropriate deployment of CRM technologies to manage
multiple revenue streams is also a challenge. Onyx has developed
a Web-enabled solution that spans all customer-facing
departments.

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 CRM solution that automates and integrates
Internet, e-mail and traditional interactions across all
customer-facing departments.

Our solution is designed for companies that are
combining e-business communications with traditional business,
regardless of whether they started as an e-business or a
traditional business. We believe that our

3



---



##### Table of Contents



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

We believe that organizations will achieve
competitive advantage by aligning their brand, strategy,
processes and technology to deliver extraordinary customer
experiences. 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
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,
greater efficiencies, higher customer loyalty, stronger
partnerships and superior financial performance for our
customers.

Our solution provides the following key
advantages:



|                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Strategic Business Improvement |  | Our solution is designed to increase both the
	effectiveness and the efficiency of how our customers market and
	sell their products and service their customers and partners.
	Each of our customers has specific business objectives for their
	CRM operating environment, such as increased revenues, increased
	customer loyalty or increased margins. We tailor our
	implementations and create appropriate operating metrics to help
	our customers achieve their goals and deliver extraordinary
	customer experiences.                                                                                          
|                              
|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.
|                              
|Business Integration           |  | Our solution enables companies to integrate their
	Internet-based 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.                                                                                                                                                                                                                                                                                                                                                                                                     
|                              
|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 users
	choice awards for leading ease of use.                                                                                                                                                                                                                                                                             

4



---



##### Table of Contents





|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Return on Investment        |  | The total cost of deploying a CRM solution
	includes more than the cost of the software. Our solution is
	designed to provide rapid and significant results at a
	reasonable total expense. As a result, we believe our solution
	offers higher overall return on investment and faster payback
	than other CRM solutions. Our design philosophy takes the entire
	cost of ownership into account, including training, integration
	with other systems, upgrades and maintenance, hardware and other
	necessary support.                                             
|                           
|Scalability and Flexibility |  | We designed our software so that it can scale up
	and down to serve the needs of large and small businesses.
	Studies sponsored by us and run in scalability labs showed our
	solutions ability to scale to 40,000 simultaneous users in
	a real-world testing environment. In large companies, a CRM
	solution needs to be able to scale down as well so that it can
	handle the needs of smaller divisions or other smaller groups
	within a large enterprise. Our software is flexible, scalable
	and widely deployable across a wide spectrum of business sizes.
|                           
|Internet Architecture       |  | We have developed our software using an 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 would be possible with traditional client-server
	architectures.                                                                                                                  

Strategy

Our objective is to be the leading provider of
enterprise-wide CRM solutions for large- and mid-sized
organizations. Our strategy to achieve this goal includes the
following key elements:



|                                                |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|----------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exploit Demand for Integrated CRM
	Applications |  | We offer companies a single platform for
	automating both Internet-based and traditional types of customer
	interactions. As traditional businesses go online and
	e-businesses add traditional infrastructure to support growing
	customer bases, it becomes more important to integrate these two
	channels of interaction.                                                                                                                                                                                                                                                                                                                                               
|                                               
|Provide Rapidly Deployable Solutions            |  | We designed our solution to be quickly and
	efficiently adopted, installed and deployed in mid- to
	large-sized organizations. We believe the length of time it
	takes to deploy traditional CRM solutions 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 VSP Delivery Model                       |  | We have a strong presence in the emerging VSP
	market. VSPs typically configure specialized versions of our
	products for potential customers in specific market segments and
	host 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                                                                                                                                                                                                                                                                                  

5



---



##### Table of Contents



|                                                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                 |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                
|Leverage Web Services                            |  | We have already started and will continue to
	leverage the emerging capabilities of Web services technology.
	As companies increasingly partner with each other across various
	geographies, disparate systems and multiple channels,
	interoperability between all of these elements is key to
	delivering satisfying customer experiences. Web services
	technology enhances interoperability through the use of industry
	standards that enjoy widespread acceptance. By using Web
	services technology, businesses, departments or applications can
	be integrated quickly and cost-effectively, regardless of the
	underlying platform.
|                                                
|Maintain Industry-Leading Customer
	Satisfaction |  | We plan to maintain industry-leading customer
	satisfaction through high-quality products, superior
	implementation and responsive customer service and support. In
	2001, among competitors whose products are deemed appropriate
	for the enterprise marketplace, we were the highest-ranked CRM
	vendor in customer satisfaction based on research performed by
	AMR and CRMGuru.com. We plan to extend our customer satisfaction
	lead by developing and implementing best practices in CRM within
	our own company, as well as for our customers.                                                                                      
|                                                
|Expand Strategic Partnerships                    |  | We are actively adding key distribution,
	integration and technology partners. We believe that expanding
	the quality of our partnerships will provide us with increased
	access to various geographic markets and potential customers.                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                
|Expand Internationally                           |  | Our products are currently installed and
	operational in more than 25 countries. We plan to expand
	our global operations by investing in our sales channels in
	major international markets.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                
|Increase Vertical Market Penetration             |  | We plan to design and deliver industry-specific
	functionality as part of our software to better meet the
	requirements of specific vertical markets. We believe
	industry-specific capabilities will give us an advantage over
	competitors who sell more generic applications. We are initially
	focusing on the financial services, healthcare and high
	technology industries.                                                                                                                                                                                                                                                          
|                                                
|Offer Go-to-Market Strategy
	Consulting          |  | We believe our customers must clearly understand
	their customer relationship management strategies to effectively
	implement a CRM solution. We provide sales and marketing
	strategy consulting to complement our software solutions. As a
	result, we believe our ability to provide go-to-market and
	sales-effectiveness consulting gives us an advantage over
	competitors who do not offer these services.                                                                                                                                                                                                                           

Products and Services

Our CRM 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.

6



---



##### Table of Contents





| |         
| | --------
| | Products

We offer a comprehensive CRM solution consisting
of a 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
platform also enables a high degree of flexibility in tailoring
our product to meet an individual companys specific
business needs.

The Onyx e-Business Engineis 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 Frameworkenables 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 Technologymanages 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 execution, e-mail 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,
	e-mail support, Internet-based lead capture, Internet-based
	support, partner management and other Internet-based and
	non-Internet-based customer management processes.
|
| |  | The e-Business Data Centeris 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 Frameworkconsists 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 Portalis a personalizable Internet-based
interface designed for use by our customers 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 Portalis 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 Portalis 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, 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.

7



---



##### Table of Contents



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, Inso, Scribe Software and Sybase into some of our
products. This software is licensed to us pursuant to original
equipment manufacturer, or OEM, 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, data conversion,
	installation and project management. We work closely with our
	customers to identify their individual 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 e-mail 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 Consulting |  | Through our Strategic Services division, we
	provide sales and marketing strategy services in advance of
	implementing our software. This division can also provide
	go-to-market and strategic account management training,
	coaching, skills assessment and compensation strategy services.
	Much of this training is supported by tools in our software
	systems.                                                                                                                                 

We typically price our consulting services based
on the time spent and resources used or, in certain instances,
fix the price for discrete portions of an engagement. 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 strategic
services either on a fixed-project basis or on 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 implementation projects with Accenture, Avanade
(an Accenture/ Microsoft partnership), Crowe-Chizek,
Deloitte & Touche, DMR Consulting, Encompys, IBM Global
Services, KPMG, Metavante, Philips Business Communications and
TietoEnator. We frequently participate in joint sales and
marketing efforts with our systems integrators.

8



---



##### Table of Contents





| |                
| | ---------------
| | Onyx Technology



| |                            
| | ---------------------------
| | Internet-based Architecture

The Onyx Internet Architecture is built 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.



| |                          
| | -------------------------
| | 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
COM, CORBA or Web Services. 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.



| |                          
| | -------------------------
| | Enterprise Class Platform

We believe that 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 specific 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
up to meet the needs of even the largest and most demanding
organizations. Onyx has benchmarked its application suite at
over 40,000 concurrent users simulating 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 and the emerging .NET architectures, 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 Microsoft .NET Enterprise Servers platform. We plan 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. The release of a new product version
designed to operate on the Oracle/ Unix platform is currently
expected to be made generally available in mid-2002. 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. This approach will
allow us to introduce new product features simultaneously across
the various operating systems and relational database engines
that we choose to support.

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

9



---



##### Table of Contents



a balance between configurability, performance
and administration. The logical tiers are presentation services,
or user interfaces, business logic services, or business rules,
and data services, or data storage and retrieval. 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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Presentation 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.                                                                                                                                                                                                                                                                                                                                               

Integration With Other Enterprise
Applications.Through our e-Business
Integration Framework, Onyx supports integration at all tiers of
the n-tier architecture: presentation services, business logic
services and data services. This enables our software and other
third-party applications to integrate at the optimal interface
point, which provides a high degree of flexibility. 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 add to or modify 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 standard technologies, it can integrate
with applications running on disparate platforms, such as a
J2EE-based application server.

10



---



##### Table of Contents



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 867 customers
through December 31, 2001. The following is a
representative list of our current customers who purchased more
than $300,000 in software licenses from January 1, 2000 to
December 31, 2001.

Technology

Adexa


Agile Software


ANSYS


AvantGo


BrassRing Systems


Captaris


Commerce One


Crowe Chizek


eShare


eSoft


Factiva


FactSet Research Systems


I-many


Internet Security Systems


Interwoven


Intraspect Software


Mercator Software


Netegrity


Niku


Ontrack Data International


OTG Software


Primus


Resonate


SeeBeyond


Selkirk Financial Technologies


Softbank Commerce


The Sutherland Group


TietoEnator


Timberline Software


Worldport


W-Technologies


Financial Services


Broad Financial Services


Charities Aid Foundation


Credit Suisse Financial Services


DBS Bank


Dreyfus


Friends Ivory & Sime Trust Link


Lease Plan Australia


NYCE


RHB Bank Berhad


SAFECO Life & Investments


State Street Global Advisors


Strong Capital Management


Suncorp Metway


Health Care & Insurance

Dentegra Group


IMS Health


Ingenix


LIMRA International


Medical Defence Union


The Regence Group


SwissLife


UPMC Health Plan


Utilities

Calor Gas


ENMAX


Mirant


Wisconsin Public Service


Manufacturing

CoreExpress


Fluke Networks


Foster Wheeler


Kent Electronics


PerkinElmer Life Sciences


Ryland Group


Telecommunications


Application Service Providers & Vertical
Service Providers


Cervalis


Encompys


Eschelon Telecom


NetTest


Interliant


Metavante


NTL Group


Promon IP


Singapore Cable Vision


SingNet


Sonera Juxto


Telstra


TriZettoGroup


Other

Airborne Express


Australian Business Limited


Bedford, Freeman & Worth


Canter Group


EF Education


Equity Office Properties


Institute of Chartered Accountants


Intelligroup


Jones Knowledge


Reed Exhibition


Robert Half International


Softek


Suricata


Top Producer Systems


Zones


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, Singapore
and the United Kingdom, and VARs in North America, Asia,
Australia, Europe and Latin America. As of December 31,
2001, we employed 130 people in sales and marketing. We
support our field sales force with inside sales representatives
and sales engineers.

11



---



##### Table of Contents



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
VSPs, which host our software to customers within a specific
vertical industry 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. VSPs 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, such as IBM Global Services. 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, presenting at
industry conferences and tradeshows, 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 sales cycle is lengthy
and variable, typically ranging between three and
12 months, although it varies substantially from customer
to customer, and, in the past, some sales cycles have lasted
substantially longer. In 2001, we experienced longer sales
cycles than we had historically experienced. We expect to
continue to experience longer sales cycles in 2002.

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 localizing 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 resell the products to end users, subject to Onyxs
standard licensing terms. The VARs do not have a right to return
the product, regardless of their ability to resell the product
to an end user. In addition, our revenues from the sale of our
products to VARs are independent of the VARs 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 VSPs
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, 2001, we employed 98
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 work closely with
sales, marketing and professional services members, and with
customers and prospective customers to better understand market
needs and requirements. 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.

12



---



##### Table of Contents



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 have registered
copyrights in the United States for Onyx Enterprise
Portal and Onyx Customer Center.

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 fail
to adequately protect these marks, which would have a negative
impact on the value of these rights and our use of them in our
business.

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

13



---



##### Table of Contents



our commitment to providing high-quality
solutions that yield a rapid return on investment and a low
total cost of ownership.


The dominant competitor in our industry is Siebel
Systems, Inc., which holds a significantly greater percentage of
the CRM market than we do. We face competition in the e-business
systems market primarily from



| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | front-office software application vendors, such
	as Pivotal Corporation and Siebel Systems, Inc.,                
|
| |  | large enterprise software vendors, such as Amdocs
	Limited, Oracle Corporation, SAP AG and PeopleSoft, Inc.,
	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
Communications, Inc., E.piphany and Broadvision, Inc. Further,
as we develop new products, including new product versions, we
may begin competing with companies with whom we have not
previously competed.

Employees

As of December 31, 2001, we had
449 employees, including 98 people in research and
development, 130 people in sales and marketing,
160 people in consulting, customer support and training and
61 people in general and administrative services. These
numbers exclude independent contractors and other temporary
employees. During 2001, we reduced our workforce by more than
300 employees as part of our restructuring. The significant
headcount change greatly contributed to a reduced cost
structure. While we believe that the significant changes in
headcount will have a net positive impact on our results of
operations, we cannot be certain that the benefits of the
restructuring will outweigh the negative impact of such a
significant amount of turnover and loss of experienced
personnel. 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. If our operating results fall below the expectations of
securities analysts and investors, it could result in a decrease
in our stock price. Some of the factors that could affect the
amount and timing of our revenues and related expenses and cause
our operating results to fluctuate include:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general economic conditions, which may affect our
	customers capital investment levels in management
	information systems;                                                                                  
|
| |  | rate of market acceptance of our CRM solution;                                                                                                                                                               
|
| |  | budget and spending decisions by our customers;                                                                                                                                                              
|
| |  | customers decisions to defer orders or
	implementations, particularly large orders or implementations,
	from one quarter to the next, or to proceed with
	smaller-than-forecasted orders or implementations;
|
| |  | level of purchases by our existing customers,
	including additional license and maintenance revenues;                                                                                                        
|
| |  | our ability to enable our products to operate on
	multiple platforms;                                                                                                                                        
|
| |  | our ability to compete in the highly competitive
	CRM market;                                                                                                                                                
|
| |  | the loss of any key technical, sales, customer
	support or management personnel and the timing of any new hires;                                                                                             

14



---



##### Table of Contents





| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to develop, introduce and market new
	products and product versions on a timely basis;                                                                                                                       
|
| |  | 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;
|
| |  | our ability to successfully expand our
	operations, and the amount and timing of expenditures related to
	this expansion; and                                                                                            
|
| |  | the cost and financial accounting effects of any
	acquisitions of companies or complementary technologies that we
	may complete.                                                                                         

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 because:



| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our sales cycles are lengthy and variable,
	typically ranging between three and twelve 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;                                                                             
|
| |  | the amount of unfulfilled orders for our products
	at the beginning of a quarter is small because our products are
	typically shipped shortly after orders are received; and                                                                                                                                               
|
| |  | delay of new product releases can result in a
	customers decision to delay execution of a contract or,
	for contracts that include the new release as an element of the
	contract, will result in deferral of revenue recognition until
	such release.                                                                    

Even though our 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.

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

Our revenue growth and potential for
profitability depend on the overall demand for CRM software and
services. Because our sales are primarily to corporate
customers, we are also impacted by general economic and business
conditions. A softening of demand for computer software caused
by the weakened economy, both domestic and international, has
affected our sales and may continue to result in decreased
revenues and growth rates. As a result of the economic downturn,
we have also experienced and may continue to experience
difficulties in collecting outstanding receivables from our
customers. In addition, the terrorist attacks on the United
States in 2001, and the armed conflict that has followed, have
added or exacerbated economic, political and other
uncertainties, which could adversely affect our sales and thus
our revenue growth.

Our management team uses our proprietary software
to identify, track and forecast future revenues, backlog and
trends in our business. Our sales force monitors the status of
all proposals, such as the date when they estimate that a
transaction will close and the potential dollar amount of such
sale. We aggregate these estimates regularly in order to
generate a sales pipeline and then evaluate the pipeline at
various times to look for trends in our business. While this
pipeline analysis provides us with visibility about our
potential customers and the associated revenues for budgeting
and planning purposes, these pipeline estimates may not
consistently correlate to revenues in a particular quarter or
over a longer period of time. The slowdown in the domestic and
international economies, as well as the effects of terrorist
activity and armed conflict, may continue to cause customer
purchasing decisions to be delayed, reduced in amount or
cancelled, which could

15



---



##### Table of Contents



reduce the rate of conversion of the pipeline
into contracts during a particular period of time. In
particular, as a result of the economic slowdown, we believe
that a number of our potential customers may delay or cancel
their purchase of our software, consulting services or customer
support services or may elect to develop their own CRM solution
or solutions. A variation in the pipeline or in the conversion
of the pipeline into contracts could adversely affect our
business and operating results. In addition, because a
substantial portion of our sales are completed at the end of the
quarter, and often in the last weeks or days of a quarter, we
may be unable to adjust our cost structure in response to a
variation in the conversion of the pipeline into contracts in a
timely manner, which could adversely affect our business and
operating results.


We have been named as a defendant in
securities class actions and other litigation, and have received
other claims, that could result in substantial costs and divert
managements attention and resources.

We, and several of our officers and directors,
have been named as defendants in a series of related lawsuits
filed in United States District Court for the Western District
of Washington on behalf of purchasers of publicly traded Onyx
common stock during various time periods ranging from
January 10, 2001 to August 10, 2001. The complaints in
these lawsuits allege that we violated SEC Rule 10b-5
promulgated under the Securities Exchange Act of 1934, as
amended, or Exchange Act, and seek certification of a class
action for purchasers of Onyx common stock during the named
class periods. In addition, a shareholder to which we issued
shares in the first quarter of 2001 has claimed that we made
certain misrepresentations and omissions and otherwise violated
the securities laws. None of the complaints or claims specifies
the amount of damages to be claimed.

Onyx and two of its directors have also been
named as defendants in a lawsuit filed in the United States
District Court for the Southern District of New York on behalf
of purchasers through December 6, 2000 of Onyx common stock
sold under the February 12, 1999 registration statement and
prospectus for our initial public offering. The complaint
alleges that Onyx and the individual defendants violated the
Securities Act of 1933, as amended, or Securities Act, by
failing to disclose excessive commissions allegedly obtained by
our underwriters pursuant to a secret arrangement whereby the
underwriters allocated initial public offering shares to certain
investors in exchange for the excessive commissions. The
complaint also asserts claims against the underwriters under the
Securities Act and the Exchange Act in connection with the
allegedly undisclosed commissions.

Onyxs directors and some of its officers
have been named as defendants in a shareholder derivative
lawsuit filed in the Superior Court of Washington in and for
King County. The complaint alleges that the individual
defendants breached their fiduciary duty and their duty of care
to Onyx by allegedly failing to supervise Onyxs public
statements and public filings with the SEC. The complaint
alleges that, as a result of these breaches, misinformation
about Onyxs financial condition was disseminated into the
marketplace and filed with the SEC. The complaint asserts that
these actions have exposed Onyx to harmful and costly securities
litigation which could potentially result in an award of damages
against Onyx.

Onyx intends to vigorously defend itself and,
where applicable, its officers and directors, against these
lawsuits and claims, and believes it has several meritorious
defenses and, in certain instances, counterclaims. If we are not
successful in our defense of these claims, however, we could be
forced to make significant payments to the plaintiffs and their
lawyers and such payments, if not covered by our insurance
carriers, could harm our financial condition, operating results
and cash flows. Even if these claims are not successful, the
litigation could result in substantial costs to Onyx and could
divert managements time and attention away from business
operations. The uncertainty associated with substantial
unresolved litigation may also impair our relationships with
existing customers and our ability to obtain new customers.

If we do not retain our key employees and
management team, and integrate our new senior management
personnel, 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

16



---



##### Table of Contents



management personnel 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.


In 2001, we replaced several members of our
senior management team. To be fully integrated into our company,
these new senior personnel must spend a significant amount of
time learning our business model and management system, in
addition to performing their regular duties. Accordingly, until
these individuals have become familiar with our business model
and systems, their integration may result in some disruption to
our ongoing operations. Our Senior Vice President of the
Americas announced in early 2002 that he will resign effective
in April 2002. We have begun a search for his replacement. We
may face difficulty in this search due to the intense
competition for qualified employees. Once hired, the new
executive will face the same challenge of integrating into our
company, and be subject to the same risk of unsuccessful
integration.

The market price of our common stock has
fluctuated substantially since our initial public offering in
February 1999. Consequently, potential employees may perceive
our equity incentives such as stock options as less attractive
and current employees whose options are no longer priced below
market value may choose not to remain employed by us. In that
case, our ability to attract or retain employees will be
adversely affected.

Our Chief Marketing Officer has transitioned
roles to lead our Strategic Services division; another Onyx
executive has succeeded him as the Vice President of Marketing.
This transition may cause some short-term disruption to our
marketing activities in particular and our ongoing operations in
general.

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

During 2001, our service revenues represented a
higher percentage of our total revenues than in past periods,
which negatively impacted our gross margins. To the extent that
this trend continues, our gross margins will continue to suffer.
Support and service revenues represented 37% of our total
revenues in 1999 and 38% of our total revenues in 2000. Due
largely to the decrease in license revenues in 2001, support and
service revenues represented 61% of our total revenues in 2001.
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 a further decrease in license
revenues, as we experienced in 2001, could have a detrimental
effect on our overall gross margins and thus on our operating
results. Our service revenues are subject to a number of risks.
First, we subcontract some of our consulting, customer support
and training services to third-party service providers.
Third-party contract 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. In addition, service revenues depend in part on
ongoing renewals of support contracts by our customers, some of
which may not renew their support contracts. We believe that the
renewal rates of our support contracts declined during 2001 at
least in part as a result of the economic downturn, and we
cannot offer any assurance that these rates will increase or
that they will not continue to decline. Finally, service
revenues as a percentage of total revenues could decline further
if customers select third-party service providers to install and
service our products more frequently than they have in the past.
If 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.

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 have experienced and expect in
the future to experience significant seasonality in the amount
of our software license revenues. In

17



---



##### Table of Contents



fiscal years before 2001, we recognized more
license revenues in our fourth quarter than in each of the first
three quarters of the fiscal year and experienced lower license
revenues in the 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. Our fourth
quarter 2001 license revenues were, however, lower than the
license revenues we achieved in the first and second quarters,
and were only slightly higher than the license revenues we
achieved in the third quarter. We believe that this deviation
from our historical experience reflects recessionary economic
conditions, and that in this economic environment the approval
process for capital spending budgets in the new calendar year
will be lengthy. This may result in a delay in the customer
procurement process throughout the first half of 2002, which
would cause our seasonal sales to continue to vary from the
normal pattern. We expect to experience again in future periods
the seasonal patterns described above, starting in the second
half of 2002.


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 harm sales of our solution;
|
| |  | the need to implement our sales, marketing and
	after-sales service initiatives, both domestically and
	internationally;                                                    
|
| |  | the need to execute our product development
	activities;                                                                                                                    
|
| |  | dependence on a limited number of key technical,
	customer support, sales and managerial personnel; and                                                                     
|
| |  | the risk that our management will be unable to
	effectively manage growth or any acquisition we may undertake.                                                              

The evolving nature of the CRM 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 through the
second quarter of 1999, and from the first quarter of 2000
through the fourth quarter of 2001. As of December 31,
2001, we had an accumulated deficit of $108.3 million. Our
accumulated deficit and financial condition have caused some of
our potential customers to question our viability, which we
believe has in turn hampered our ability to sell some of our
products. In the near-term, we believe our costs and operating
expenses, excluding restructuring-related charges, will continue
to decrease to a level that is closer to our expected revenues
while allowing us to continue to invest in accordance with our
strategic priorities. We may not, however, realize cost savings
from these restructuring initiatives in future periods. In
addition, we may be unable to achieve cost savings without
adversely affecting our business and operating results. We may
continue to experience losses and negative cash flows in the
near term, even if sales of our products and services continue
to grow.

In particular, if we are unable to successfully
sublease or terminate our excess facilities, particularly in
Bellevue, Washington, we will incur continued substantial
facilities costs for which we will receive no

18



---



##### Table of Contents



economic benefit. If, in the alternative, we
negotiate a termination of any of these facilities, we may incur
significant costs associated with the termination, some of which
may be paid in the form of our equity securities. We accrued a
restructuring charge for these excess facilities in 2001. We
based our estimate of what these costs would be on current
comparable rates for leases in the applicable markets and
estimated termination fees. If facilities operating lease rental
rates continue to decrease in these markets, if it takes longer
than expected to find a suitable tenant to sublease these
facilities, or if other estimates and assumptions change, the
actual loss could exceed the estimate.


We may need to significantly increase our sales
and marketing, product development and professional services
efforts to expand our market position and further increase
acceptance of our products. We may not be able to increase our
revenues sufficiently to keep pace with these growing
expenditures, if at all, and, as a result, may be unable to
achieve or maintain profitability in the future.

Our workforce reduction and financial
performance may place additional strain on our resources and may
harm the morale and performance of our personnel and our ability
to hire new personnel.

In connection with our effort to streamline our
operations, reduce costs and bring our staffing and structure in
line with our revenue base, in 2001 we restructured our
organization and reduced our workforce by more than 300
employees. There have been and may continue to be substantial
costs associated with the workforce reduction related to
severance and other employee-related costs, as well as material
charges for reduction of excess facilities, and our
restructuring plan may yield unanticipated consequences, such as
attrition beyond our planned reduction in workforce. This
workforce reduction has placed significant strain on our
administrative, operational and financial resources and has
resulted in increased responsibilities for each of our
management personnel. As a result, our ability to respond to
unexpected challenges may be impaired and we may be unable to
take advantage of new opportunities. In addition, many of the
employees who were terminated possessed specific knowledge or
expertise, and that knowledge or expertise may prove to have
been important to our operations. In that case, their absence
may create significant difficulties. Further, the reduction in
workforce may reduce employee morale and may create concern
among potential and existing employees about job security at
Onyx, which may lead to difficulty in hiring and increased
turnover in our current workforce, and divert managements
attention. In addition, this headcount reduction may subject us
to the risk of litigation, which could result in substantial
costs to Onyx and could divert managements time and
attention away from business operations.

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

Our solution targets the CRM market. This market
is intensely competitive, fragmented, rapidly changing and
significantly affected by new product introductions. We face
competition in the CRM 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 CRM systems.
The dominant competitor in our industry is Siebel Systems, Inc.,
which holds a significantly greater percentage of the CRM market
than we do. Other companies with which we compete include, but
are not limited to, Amdocs Limited, BroadVision, Inc.,
E.piphany, Inc., Kana Communications, Inc., Oracle Corporation,
PeopleSoft, Inc., Pivotal Corporation and SAP AG.

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. 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
significantly greater financial, technical, marketing and other
resources than we do. Furthermore, a number of our competitors
have recently been acquired by other large technology companies,
which enhances their resources. We believe that there will be
further consolidation among our competitors. 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

19



---



##### Table of Contents



offerings more quickly than we can. In addition,
our competitors may form strategic relationships with each other
and with other companies in attempts to compete more
successfully against us. These relationships may take the form
of strategic investments, joint marketing agreements, licenses
or other contractual arrangements, any of which may increase our
competitors ability, relative to ours, to address customer
needs with their software and service offerings and that may
enable them to rapidly increase their market share.


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

Our future 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 and limit the
expansion of our business.

We currently have a loan and security agreement
with Silicon Valley Bank, or SVB, which allows us to borrow up
to the lesser of (a) 75% of our eligible accounts
receivable based on a borrowing base calculation, or (b)
$15.0 million. At the time of this filing, no additional
amounts are available under the line of credit based on the
level of our borrowing base and our outstanding letters of
credit. In addition, on January 31, 2002, we pledged
$5.0 million in cash to secure the amount by which our
standby letters of credit exceeded our borrowing base.

If we are unable to maintain compliance with the
financial covenants in our loan and security agreement in the
future, or if SVB decides to restrict our cash deposits, our
liquidity will be further limited and our business, financial
condition and operating results could be harmed.

We believe that the proceeds from our recent
public offering and our existing cash and cash equivalents 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. 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 require
us to issue securities that have rights, preferences or
privileges senior to our common stock and may dilute your
ownership interest in Onyx.

Because many potential customers are unaware
of the benefits of CRM systems, our solution may not achieve
significant market acceptance.

The market for CRM systems is still emerging, and
continued growth in demand for and acceptance of CRM systems
remains uncertain. Even if the market for CRM systems grows,
businesses may purchase our competitors solutions or
develop their own. We believe that many of our potential
customers are not fully aware of the benefits of CRM systems and
that, as a result, CRM systems may never achieve significant
market acceptance. We have spent, and will continue to spend,
considerable resources educating potential customers not only
about our solution but also about CRM systems in general. Even
with these educational efforts, however, market acceptance of
our solution may not increase. We will not succeed unless we can
educate our target market about the benefits of CRM systems and
the cost-effectiveness, ease of use and other benefits of our
solution.

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

We rely on one product family for the success of
our business. License revenues from the Onyx product family have
historically accounted for nearly all of our license revenues.
We expect product license revenues from the Onyx 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 product family, such as competition or
technological change, could dramatically affect our operating
results. If we are unable to successfully deploy current
versions of the Onyx product family and to develop, introduce
and establish customer acceptance of new and enhanced versions
of the Onyx product family, our business will fail.

20



---



##### Table of Contents



In June 2001, we released version 3.0 of Onyx
Employee Portal, the Web-based version of our flagship product.
This release represented a major software architecture change to
this product. In the event that prospects or customers do not
embrace this new product version or are unable to successfully
deploy this product, our business will fail.

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, our primary market has historically been
to customers that have developed or are willing to develop their
enterprise computing systems around these platforms, which
limits our potential sales. In December 2000, we announced the
platform release of a new product version designed to operate on
the Oracle/ Unix platform. Due to the complexity of the
development of this new product version, we have delayed the
expected date of general availability until the second quarter
of 2002. We cannot offer any assurance, however, as to whether
such general release will occur by this expected date, if at
all. If and when this new product version becomes generally
available, we cannot predict the degree to which it will achieve
market acceptance or the extent to which it will perform as our
customers expect. If our new product version contains defects or
errors, or otherwise does not run as expected, its market
acceptance may be delayed or limited, and our reputation may be
damaged. Further, if our new product version does not achieve
general market acceptance, our revenue growth will be limited.
We believe that our ability to effectively expand our business
into large enterprises depends on the successful release and
market acceptance of our new product version. If we are unable
to expand into large enterprises, the growth of our business and
our revenue will be limited. Moreover, enabling our products to
run on multiple platforms could lengthen the development cycle,
thus delaying the release date of future product versions or new
products, which could further restrict our revenue growth.

If we are unable to compete effectively in the
Internet-based solutions market, demand for our solution may be
limited.

Our products communicate through public and
private networks over the Internet. The success of our solution
may depend, in part, on our ability to develop products that
compete effectively in the Internet-based market. We are
uncertain of the extent to which businesses will use the
Internet as a means of communication and commerce and whether a
significant market will develop for Internet-based CRM systems.
The use of the Internet is evolving rapidly, and many companies
are developing products 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 may emerge as
alternatives to our existing ones, or to any future
Internet-based or electronic commerce products and product
features we may introduce.

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 and distribution of our products. If
these critical issues are not favorably resolved, our
Internet-related solution may not achieve market acceptance.

Privacy and security concerns, particularly
related to the use of our software on the Internet, may limit
the effectiveness of and reduce the demand for our
solution.

The effectiveness of our solution relies on the
storage and use of customer data collected from various sources,
including information derived from customer registrations,
billings, purchase transactions and surveys. The collection and
use of such data by our customers for customer profiling may
raise privacy and security concerns. Our customers generally
have implemented security measures to protect customer data from
disclosure or interception by third parties. However, the
security measures may not be effective against all potential
security threats. If a well-publicized breach of customer data
security were to occur, our solution may be perceived as less
desirable, which could limit our revenue growth.

21



---



##### Table of Contents



In addition, due to privacy concerns, some
Internet commentators, consumer advocates and governmental or
legislative bodies have suggested legislation to limit the use
of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the
use of customer profiling data. If major countries or regions
adopt legislation or other restrictions on the use of customer
profiling data, our solution would be less useful to customers,
and our sales could decrease.

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

To date, we have sold our solution primarily
through our direct sales force. As a result, our future revenue
growth will depend in large part on recruiting, training and
retaining direct sales personnel and expanding our indirect
distribution channels. These indirect channels include VARs,
VSPs, 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, VSPs, OEM partners and systems integrators and
consultants. Moreover, during 2001 we reduced and restructured
our sales organization in an attempt to reduce expenses and
increase efficiency relative to the market demand. These
restructuring efforts and future efforts to expand our sales
force may not prove successful. If one or more of these
initiatives is unsuccessful, our ability to retain top sales
personnel may be affected, which could reduce our sales or limit
our sales growth.

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

The implementation of our products involves a
significant commitment of resources by prospective customers.
Our customers frequently deploy our products to large numbers of
sales, marketing and customer service personnel. The end-users
may not accept our products. Our products are also used with a
number of third-party software applications and programming
tools. This use may present significant technical challenges,
particularly as large numbers of personnel attempt to use our
product concurrently. If an implementation is not successful, we
may be required to deliver additional consulting services in
order to remedy the problem. If our customers have difficulty
deploying our software or for any other reason are not satisfied
with our software, our future operating results and financial
condition may be harmed.

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

The CRM market 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 CRM 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, including in
2001 the Oracle/ Unix version of our product, and may be unable
to introduce enhancements or new products successfully or in a
timely manner in the future. If we delay release of our products
and product enhancements, or if they fail to achieve market
acceptance when released, it could harm our reputation and our
ability to attract and retain customers, and our revenues may
decline. In addition, customers may defer or forego purchases of
our products if we, or our competitors or major technology
vendors introduce or announce new products or product
enhancements.

22



---



##### Table of Contents



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 may be delayed as a result of our recent
operating expense reduction measures and general economic
conditions. If we do expand internationally, it will require
significant management attention and financial resources to
successfully translate and localize our software products to
various languages and to develop direct and indirect
international sales and support channels. Even if we
successfully translate our software and develop new channels, we
may not be able to maintain or increase international market
demand for our solution. We, or our VARs or VSPs, may be unable
to sustain or increase international revenues from licenses or
from consulting and customer support. In addition, our
international sales are subject to the risks inherent in
international business activities, including



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

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

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

We rely on our existing relationships with a
number of key partners, including consulting firms, system
integrators, VARs, VSPs and third-party technology vendors, that
are important to worldwide sales and marketing of our solution.
We expect an increasing percentage of our revenues to be derived
from sales that arise out of our relationships with these key
partners. In addition, to be successful and to more effectively
sell our products to larger customers, we must develop
successful new relationships with prestigious key partners. 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, and to
develop relationships with new partners, many of these existing
and potential key partners have similar, and often more
established, relationships with our competitors. These existing
and potential partners, many of which have significantly greater
resources than we have, may in the future market software
products that compete with our 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 existing and potential key partners;      
|
| |  | our existing and potential key partners endorse a
	product or technology other than our solution;                        
|
| |  | we are unable to adequately train a sufficient
	number of key partners; or                                               
|
| |  | our existing and potential key partners do not
	have or do not devote the resources necessary to implement our
	solution.

23



---



##### Table of Contents



If our relationships with vertical 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 vertical service providers, or VSPs, that market
and sell our CRM systems. If these VSPs do not successfully
market our products, our operating results will be materially
harmed. Because our relationships with VSPs are relatively new,
we cannot predict the degree to which the VSPs will succeed in
marketing and selling our solution. In addition, because the
VSP model for selling software is relatively new and
unproven in the CRM industry, we cannot predict the degree
to which our potential customers will accept this delivery
model. If the VSPs fail to deliver and support our solution,
end-users could decide not to subscribe, or cease subscribing,
for our solution. The VSPs typically offer our solution in
combination with other products and services, some of which may
compete with our solution.

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 a
CRM 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 three and twelve 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. When economic conditions
weaken, sales cycles for software products tend to lengthen, and
as a result, we experienced longer sales cycles than usual in
2001. We expect to continue to experience longer sales cycles
than usual in 2002. 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.

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

We incorporate into our products software that is
licensed to us by third-party software developers, including
Cognos, Inso, Scribe Software and Sybase. 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
solution 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.

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

24



---



##### Table of Contents



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 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 or
limited 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. Our customers are particularly
sensitive to such defects and errors because of the importance
of our solution to the day-to-day operation of their businesses.
We have had to delay commercial release of past versions of our
products until software problems were corrected, and in some
cases have provided product updates to correct errors in
released products. Our new products or releases, including any
new or limited Oracle/Unix version of our product that may be
generally released, 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.

Integration of past or future acquisitions may
be difficult and disruptive.

We have completed several corporate acquisitions
in the last few years. In the future, we may acquire additional
complementary companies or technologies. Managing these
acquisitions has entailed, and may in the future entail,
numerous operational and financial risks and strains, including



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | difficulty and cost in combining the operations
	and personnel of acquired businesses with our operations and
	personnel;                                                             
|
| |  | disruption of our ongoing business and diversion
	of managements time and attention to integrating or
	completing the development or commercialization of any acquired
	technologies;

25



---



##### Table of Contents





| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | impairment of relationships with key customers of
	acquired businesses due to changes in management and ownership
	of the acquired businesses; and
|
| |  | inability to retain key employees of any acquired
	businesses.                                                                                    

If we do not successfully integrate any
acquisition, our business will suffer.

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

As of December 31, 2001, our officers,
directors and affiliated entities together beneficially owned
approximately 13.9% 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.

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

Since our initial public offering in February
1999, the price of our common stock has been volatile,
particularly in the last year. Our common stock reached a high
of $44.00 per share on March 6, 2000 and traded as low as
$1.49 per share on October 1, 2001. 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 and may expose us to
class action securities litigation which, even if unsuccessful,
would be costly to defend and distracting to management.

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

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

26



---



##### Table of Contents



future for shares of our common stock. For
example, certain provisions of our articles of incorporation or
bylaws




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

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

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

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




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. We
currently have under lease an additional 261,000 square feet of
space in Bellevue, Washington, pursuant to leases that expire in
2011 and 2013. As we do not plan to occupy these additional
facilities in Bellevue, Washington, an estimated loss associated
with the facilities is included in the restructuring charge we
recorded in 2001. We are actively seeking ways to mitigate our
excess facility costs, including an active sublease program. We
currently lease other domestic sales and support offices in
California, Colorado, Florida, Georgia, Illinois, Massachusetts,
Minnesota, New Jersey, New York, Pennsylvania and Texas. We
maintain international offices in Australia, Canada, France,
Germany, Hong Kong, Japan, Malaysia, Singapore and the United
Kingdom.




ITEM 3.     LEGAL
PROCEEDINGS

Onyx and several of its officers and directors
have been named as defendants in a series of related lawsuits
filed in the United States District Court for the Western
District of Washington on behalf of purchasers of publicly
traded Onyx common stock during various time periods ranging
from January 10, 2001 to August 10, 2001. The
complaints in these lawsuits allege that we violated SEC
Rule 10b-5 promulgated under the Exchange Act, and seek
certification of a class action for purchasers of Onyx common
stock during the named class periods. In addition, a shareholder
to whom Onyx issued shares in the first quarter of 2001

27



---



##### Table of Contents



has claimed that we made certain
misrepresentations and omissions and otherwise violated the
securities laws. None of the complaints or claims specifies the
amount of damages to be claimed.


Onyx and two of our directors have been named as
defendants in a lawsuit filed in the United States District
Court for the Southern District of New York on behalf of
purchasers through December 6, 2000 of Onyx common stock
sold under the February 12, 1999 registration statement and
prospectus for Onyxs initial public offering. The
complaint alleges that Onyx and the individual defendants
violated the Securities Act by failing to disclose excessive
commissions allegedly obtained by Onyxs underwriters
pursuant to a secret arrangement whereby the underwriters
allocated initial public offering shares to certain investors in
exchange for the excessive commissions. The complaint also
asserts claims against the underwriters under the Securities Act
and the Exchange Act in connection with the allegedly
undisclosed commissions.

Onyxs directors and some of its officers
have been named as defendants in a recently initiated
shareholder derivative lawsuit filed in the Superior Court of
Washington in and for King County. The complaint alleges that
the individual defendants breached their fiduciary duty and
their duty of care to Onyx by allegedly failing to supervise
Onyxs public statements and public filings with the SEC.
The complaint alleges that, as a result of these breaches,
misinformation about Onyxs financial condition was
disseminated into the marketplace and filed with the SEC. The
complaint asserts that these actions have exposed Onyx to
harmful and costly securities litigation, which could
potentially result in an award of damages against Onyx.

In October 2001, Thomas Weisel Partners LLC filed
a lawsuit against Onyx in the United States District Court for
the Northern District of California, San Francisco division.
This lawsuit arises out of Onyxs engagement of Thomas
Weisel for services in connection with the signing of an equity
financing arrangement with Ramius Securities and Ramius Capital.
Thomas Weisel alleges in its pleadings that a payment of
$1.5 million became due under the engagement letter upon
the signing of the arrangement. Onyx has not made the payment
because the underwriting terms of its equity facility with
Ramius were not approved by the NASD. Among other claims, the
lawsuit alleges breach of contract and seeks payment of the
$1.5 million fee plus unspecified monetary damages.

We dispute the allegations of wrongdoing in these
complaints and intend to vigorously defend ourselves and, where
applicable, our officers and directors against these lawsuits
and claims, and believe we have several meritorious defenses
and, in certain instances, counterclaims. Depending on the
amount and the timing, an unfavorable resolution of some or all
of these matters could materially affect our business, future
results of operations, financial position or cash flows in a
particular period.

In addition, Onyx is involved in additional
litigation in the ordinary course of its business, none of which
we believe will have a material adverse effect on our company.




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

No matters were submitted to a vote of security
holders during the quarter ended December 31, 2001.

28



---



##### Table of Contents






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, 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  | 
|Year Ended December 31, 2001 |  |                |       |     |  |   |       | 
|First Quarter                |  | $              | 16.50 |     |  | $ | 6.50  | 
|Second Quarter               |  |                | 8.00  |     |  |   | 2.25  | 
|Third Quarter                |  |                | 7.41  |     |  |   | 1.85  | 
|Fourth Quarter               |  |                | 4.28  |     |  |   | 1.75  | 

Holders

As of February 8, 2002, there were
approximately 475 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, 2001, in connection with the
acquisition of Market Solutions, we issued 2,234,483 shares of
our common stock. This transaction was exempt from the
registration requirements of the Securities Act under
Regulation S promulgated under the Securities Act, on the
basis that the transaction was completed outside the United
States.

29



---



##### Table of Contents






ITEM 6.     SELECTED
CONSOLIDATED FINANCIAL DATA

The following selected financial data have been
derived from Onyxs consolidated financial statements, and
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,              
|                                                                       |                                                                                    |                                      
|                                                                       |                                                                                    | 1997                                  |        | 1998   |        | 1999 |        | 2000   |        | 2001
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |     
|                                                                       |                                                                                    |                                      
|                                                                       |                                                                                    | (In thousands, except per share data)
|Consolidated Statement of Operations
	Data:                            |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|Revenues:                                                              |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|                                                                       | License                                                                            |                                       | $      | 13,191 |        |      | $      | 22,811 |        |      | $      | 38,122 |        |   | $      | 73,701 |         |   | $       | 37,584 |        
|                                                                       | Support and service                                                                |                                       |        | 6,246  |        |      |        | 12,299 |        |      |        | 22,452 |        |   |        | 45,608 |         |   |         | 59,577 |        
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|                                                                       |                                                                                    | Total revenues                        |        |        | 19,437 |      |        |        | 35,110 |      |        |        | 60,574 |   |        |        | 119,309 |   |         |        | 97,161  | 
|Cost of revenues:                                                      |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|                                                                       | License                                                                            |                                       |        | 250    |        |      |        | 1,127  |        |      |        | 2,243  |        |   |        | 3,520  |         |   |         | 2,006  |        
|                                                                       | Amortization of acquired technology                                                |                                       |        |       |        |      |        | 83     |        |      |        | 500    |        |   |        | 820    |         |   |         | 751    |        
|                                                                       | Support and service                                                                |                                       |        | 5,022  |        |      |        | 7,808  |        |      |        | 11,270 |        |   |        | 23,552 |         |   |         | 33,123 |        
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|                                                                       |                                                                                    | Total cost of revenues                |        |        | 5,272  |      |        |        | 9,018  |      |        |        | 14,013 |   |        |        | 27,892  |   |         |        | 35,880  | 
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|Gross margin                                                           |                                                                                    |                                       | 14,165 |        |        |      | 26,092 |        |        |      | 46,561 |        |        |   | 91,417 |        |         |   | 61,281  |       
|Operating expenses:                                                    |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|                                                                       | Sales and marketing                                                                |                                       |        | 11,026 |        |      |        | 19,418 |        |      |        | 29,614 |        |   |        | 59,182 |         |   |         | 53,254 |        
|                                                                       | Research and development                                                           |                                       |        | 4,729  |        |      |        | 8,782  |        |      |        | 10,432 |        |   |        | 21,046 |         |   |         | 21,968 |        
|                                                                       | General and administrative                                                         |                                       |        | 2,156  |        |      |        | 3,983  |        |      |        | 5,720  |        |   |        | 11,120 |         |   |         | 14,623 |        
|                                                                       | Restructuring and other related charges                                            |                                       |        |       |        |      |        |       |        |      |        |       |        |   |        |       |         |   |         | 51,806 |        
|                                                                       | Amortization and impairment of goodwill and other
	acquisition-related intangibles |                                       |        |       |        |      |        | 26     |        |      |        | 1,064  |        |   |        | 4,332  |         |   |         | 13,695 |        
|                                                                       | Amortization of stock-based compensation                                           |                                       |        |       |        |      |        | 583    |        |      |        | 882    |        |   |        | 548    |         |   |         | 904    |        
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|                                                                       |                                                                                    | Total operating expenses              |        |        | 17,911 |      |        |        | 32,792 |      |        |        | 47,712 |   |        |        | 96,228  |   |         |        | 156,250 | 
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|Loss from operations                                                   |                                                                                    |                                       | (3,746 | )      |        |      | (6,700 | )      |        |      | (1,151 | )      |        |   | (4,811 | )      |         |   | (94,969 | )     
|Interest income, net                                                   |                                                                                    |                                       | 314    |        |        |      | 61     |        |        |      | 1,224  |        |        |   | 788    |        |         |   | 377     |       
|Investment losses and impairment                                       |                                                                                    |                                       |       |        |        |      |       |        |        |      |       |        |        |   | (500   | )      |         |   | (2,500  | )     
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|Income (loss) before income taxes                                      |                                                                                    |                                       | (3,432 | )      |        |      | (6,639 | )      |        |      | 73     |        |        |   | (4,523 | )      |         |   | (97,092 | )     
|Income tax provision (benefit)                                         |                                                                                    |                                       | (888   | )      |        |      | 340    |        |        |      | 517    |        |        |   | 404    |        |         |   | (294    | )     
|Minority interest in loss of consolidated
	subsidiary                  |                                                                                    |                                       |       |        |        |      |       |        |        |      |       |        |        |   | (216   | )      |         |   | (1,283  | )     
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|Net loss                                                               |                                                                                    | $                                     | (2,544 | )      |        | $    | (6,979 | )      |        | $    | (444   | )      |        | $ | (4,711 | )      |         | $ | (95,515 | )     
|                                                                       |                                                                                    |                                       |        |        |        |      |        |        |        |      |        |        |        |   |        |        |         |   |         |       
|Basic and diluted net loss per share(1)                                |                                                                                    | $                                     | (0.11  | )      |        | $    | (0.30  | )      |        | $    | (0.01  | )      |        | $ | (0.13  | )      |         | $ | (2.37   | )     
|Shares used in calculation of basic and diluted
	net loss per share(1) |                                                                                    |                                       | 22,524 |        |        |      | 23,642 |        |        |      | 31,216 |        |        |   | 34,922 |        |         |   | 40,368  |       

30



---



##### Table of Contents



|                                            |  |                |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |        |  
|------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------- |  |  | - | ------ | -
|                                            |  |               
|                                            |  | December 31,  
|                                            |  |               
|                                            |  | 1997           |        | 1998 |  | 1999 |        | 2000 |  | 2001
|                                            |  |                |        |      |  |      |        |      |  |     
|                                            |  |               
|                                            |  | (In thousands)
|Consolidated Balance Sheet Data:            |  |                |        |      |  |      |        |      |  |      |        |  |  |   |         |  |  |   |        |  
|Cash and cash equivalents                   |  | $              | 3,512  |      |  | $    | 1,853  |      |  | $    | 3,691  |  |  | $ | 11,492  |  |  | $ | 15,868 |  
|Working capital (deficiency)                |  |                | 9,307  |      |  |      | 3,861  |      |  |      | 30,147 |  |  |   | 25,252  |  |  |   | (4,869 | )
|Total assets                                |  |                | 15,952 |      |  |      | 22,490 |      |  |      | 73,180 |  |  |   | 109,040 |  |  |   | 64,511 |  
|Long-term obligations, less current portion |  |                | 155    |      |  |      | 4,486  |      |  |      | 133    |  |  |   | 428     |  |  |   | 10,178 |  
|Redeemable convertible preferred stock      |  |                | 12,070 |      |  |      | 13,285 |      |  |      |       |  |  |   |        |  |  |   |       |  
|Shareholders equity (deficit)              |  |                | (1,552 | )    |  |      | (7,749 | )    |  |      | 51,838 |  |  |   | 66,086  |  |  |   | 8,135  |  



---



|    |                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Notes 1 and 13 of Notes to Consolidated
	Financial Statements for an explanation of the method used to
	calculate basic and diluted net loss per share. The 1997, 1998
	and 1999 amounts are calculated on a pro forma basis.






|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
	FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Onyx is a leading provider of enterprise-wide CRM
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
e-mail, our solution helps enterprises to more effectively
acquire, manage and maintain customer, partner and other
relationships. We market our solution to 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. It is 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. In 2000, our revenues grew to
$119.3 million and we incurred a net loss totaling
$4.7 million. In 2001, we had revenues of
$97.2 million and incurred a net loss of
$95.5 million, including restructuring and impairment
charges totaling $62.1 million. We implemented a
restructuring plan during 2001 to bring our staffing and
structure in line with our revenue base.

31



---



##### Table of Contents



It is particularly difficult to predict the
timing or amount of our license revenues, which have comprised
the majority of our total revenues, because:



| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our sales cycles are lengthy and variable,
	typically ranging between three and twelve 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;                                                                             
|
| |  | the amount of unfulfilled orders for our products
	at the beginning of a quarter is small because our products are
	typically shipped shortly after orders are received; and                                                                                                                                               
|
| |  | delay of new product releases can result in a
	customers decision to delay execution of a contract or,
	for contracts that include the new release as an element of the
	contract, will result in deferral of revenue recognition until
	such release.                                                                    

Even though our 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. During 2001, we saw a shift in
the buying behavior of our targeted new and existing customer
base as a result of economic conditions leading to a delay of
our customers capital spending initiatives, which we
believe was the primary reason we experienced a significant
license revenue shortfall relative to our original 2001
operating plan. In addition, our revenues for the third and
fourth quarters of 2001 were adversely affected by the
September 11, 2001 terrorist attacks on the United States,
which led to further delays in capital spending initiatives of
our prospects and installed base.

In this economic environment, we continue to
believe it will be difficult to predict our license revenue as
capital spending initiatives of our targeted new and existing
customer base are delayed. Due to the uncertainty of near-term
sales growth, we determined that Onyxs infrastructure,
which had resulted in 97% revenue growth in the prior year,
was no longer sustainable. In April 2001, we began our
restructuring efforts to reduce headcount, reduce infrastructure
and eliminate excess and duplicate facilities to re-align our
organization toward profitable growth. Further reductions were
enacted in the third and fourth quarters of 2001.

We continue to align costs and expenses to our
expected revenues and review our restructuring efforts. In the
near-term, we believe our costs and operating expenses,
excluding restructuring-related charges, will continue to
decrease to a level that is closer to our expected revenues
while allowing us to continue to invest in accordance with our
strategic priorities. However, we may be unable to achieve these
expense reductions without adversely affecting our business and
operating results. We may continue to experience losses and
negative cash flows in the near term, even if sales of our
products and services continue to grow.

Critical
Accounting Policies and Estimates

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

32



---



##### Table of Contents



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




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Recognition.Revenue recognition rules for software companies are very
	complex. We follow very specific and detailed guidelines in
	measuring revenue; however, certain judgments affect the
	application of our revenue policy. Revenue results are difficult
	to predict, and any shortfall in revenue or delay in recognizing
	revenue could cause our operating results to vary significantly
	from quarter to quarter and could result in future operating
	losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |   | We recognize revenue in accordance with
	accounting standards for software companies including Statement
	of Position 97-2, Software Revenue Recognition
	(SOP 97-2), as amended by SOP 98-4, SOP 98-9, and
	related interpretations including Technical Practice Aids.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |   | Onyx generates revenues through two sources:
	(a) software license revenues and (b) service
	revenues. Software license revenues are generated from licensing
	the rights to use our products directly to end-users and VSPs
	and indirectly through VARs and, to a lesser extent, through
	third-party products we distribute. Service revenues are
	generated from sales of customer support services (maintenance
	contracts), consulting services and training services performed
	for customers that license our products.                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |   | License revenues are recognized when a
	noncancellable license agreement is in force as evidenced by a
	signed contract, the product has been shipped, the license fee
	is fixed or determinable, and collectibility is reasonably
	assured.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |   | In software arrangements that include rights to
	multiple software products and/or services, we allocate the
	total arrangement fee among each of the deliverables using the
	residual method, under which revenue is allocated to undelivered
	elements based on vendor-specific objective evidence of fair
	value of such undelivered elements and the residual amounts of
	revenue are allocated to delivered elements. Elements included
	in multiple element arrangements could consist of software
	products, maintenance (which includes customer support services
	and unspecified upgrades), or consulting services.
	Vendor-specific objective evidence is based on the price charged
	when an element is sold separately or, in the case of an element
	not yet sold separately, the price established by authorized
	management, if it is probable that the price, once established,
	will not change before market introduction.
|
| |   | Standard terms for license agreements call for
	payment within 90 days. Probability of collection is based
	upon the assessment of the customers financial condition
	through the review of their current financial statements or
	credit reports. For follow-on sales to existing customers, prior
	payment history is also used to evaluate probability of
	collection. Revenues from distribution agreements with VARs are
	recognized upon the earlier of receipt of cash from the VAR or
	identification of an end-user. In the latter case, probability
	of collection is evaluated based upon the credit worthiness of
	the VAR. Our agreements with customers, VSPs and VARs do not
	contain product return rights.                                                                                                                                                                                                                 
|
| |   | 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
	or, in certain situations, on a fixed-fee basis, under separate
	service arrangements. Implementation services are periodically
	performed under fixed-fee arrangements and in such cases,
	consulting revenues are recognized on a percentage-of-completion
	basis. Revenues from consulting and training services are
	recognized as services are performed. Standard terms for renewal
	of customer support contracts, consulting services and training
	services call for payment within 30 days.                                                                                                                                                                                                     
|
| |   | Fees from licenses sold together with consulting
	services are generally recognized upon shipment of the software,
	provided that the above criteria are met, payment of the license
	fees are not dependent upon the performance of the services, and
	the consulting services are not essential to the functionality
	of the licensed software. If the services are essential to the
	functionality of the software, or payment of the license fees
	are dependent upon the performance of the services, both the
	software license and consulting fees are recognized under the
	percentage of completion method of contract accounting.                                                                                                                                                                                                                                                                                                  

33



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | If the fee is not fixed or determinable, revenue
	is recognized as payments become due from the customer. If a
	nonstandard acceptance period is required, revenues are
	recognized upon the earlier of customer acceptance or the
	expiration of the acceptance period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Bad Debts.A
	considerable amount of judgment is required when we assess the
	ultimate realization of receivables, including assessing the
	probability of collection and the current credit-worthiness of
	each customer. We have recorded significant changes in our bad
	debt reserves in recent periods due to the rapid downturn in the
	economy, and in the technology sector in particular, and we may
	record additional changes in the future.                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Restructuring.During 2001, we recorded significant accruals in connection with
	our restructuring program. These accruals include estimates
	pertaining to employee separation costs and the settlements of
	contractual obligations related to excess leased facilities and
	other contracts. Although we do not currently anticipate
	significant changes, the actual costs may differ from these
	estimates, particularly the costs surrounding the excess leased
	facilities. If we are unable to negotiate affordable termination
	fees, if rental rates continue to decrease in the markets we are
	located, or if it takes us longer than expected to find a
	suitable sublease tenant, the actual costs could exceed our
	estimates.                                                                                                          
|
| |  | Impairment of Intangible
	Assets.We periodically evaluate
	acquired businesses for potential impairment indicators. Our
	judgments regarding the existence of impairment indicators are
	based on legal factors, market conditions and operational
	performance of our acquired businesses. Future events could
	cause us to conclude that impairment indicators exist and that
	goodwill and other intangible assets associated with our
	acquired businesses are impaired. Beginning in 2002, the
	methodology for assessing potential impairments of intangibles
	will change based on new accounting rules issued by the
	Financial Accounting Standards Board, or FASB, and related
	practice implementation guidance. Any resulting impairment loss
	could have a material adverse impact on our financial condition
	and results of operations.
|
| |  | Contingencies and
	Litigation.We are subject to
	proceedings, lawsuits and other claims related to class action
	lawsuits and other matters. We are required to assess the
	likelihood of any adverse judgments or outcomes to these matters
	as well as potential ranges of probable losses. A determination
	of the amount of loss accrual required, if any, for these
	contingencies are made after careful analysis of each individual
	issue. The required accruals may change in the future due to new
	developments in each matter or changes in approach such as a
	change in settlement strategy in dealing with these matters.                                                                                                                                                                                                              



| |                                  
| | ---------------------------------
| | Investment Losses and
	Impairment

During 1999 and 2000, we invested in a small
number of private companies. One of these investments was
accounted for using the equity method of accounting due to our
ability to exercise significant influence, but not control, over
the investee and losses were recorded to the extent of our
investment. The remaining private equity investments are
accounted for on a cost basis due to the fact that we do not
have the ability to exercise significant influence over the
investee and our ownership interest is less than 20%. Under the
cost method of accounting, investments in private companies are
carried at cost and are adjusted only for other-than-temporary
declines in fair value, distributions of earnings and additional
investments. We periodically evaluate whether the declines in
fair value of our investments are other-than-temporary. This
evaluation consists of a review of qualitative and quantitative
factors by members of senior management, including a review of
the investees financial condition, results of operations,
operating trends and other financial ratios. We further consider
the implied value from any recent rounds of financing completed
by the investee, as well as market prices of comparable public
companies. We generally require our private investees to deliver
monthly, quarterly and annual financial statements to assist in
reviewing relevant financial data and to assist in determining
whether such data may indicate other-than-temporary declines in
fair value below our accounting basis. We generally consider a
decline to be an other-than-temporary impairment if the
estimated value is less than our accounting basis for two
consecutive quarters, absent evidence to the contrary.

34



---



##### Table of Contents





| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | 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 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 as a
write-off of acquired research and development. We recorded
capitalized technology and other intangible assets of
$1.5 million at the date of acquisition, which was being
amortized on a straight-line basis over a three- to five-year
period. As a result of our restructuring plans, the negative
trends in the marketplace, and the negative trends within the
software market sector, we performed a future cash flow analysis
and determined that the discounted cash flows for this business
unit were inadequate to support the remaining carrying value of
the related intangible assets and recorded a $605,000 impairment
write down during 2001. Impairment losses associated with the
intangible assets are included in amortization and impairment of
goodwill and other acquisition-related intangibles in the
consolidated statements of operations.

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 $4.32 million
(2,234,483 shares) of common stock on October 1, 2001.
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 are being
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 at the date of acquisition, which was being
amortized on a straight-line basis over a five-year period,
representing the expected life of the intangible assets that we
acquired. As a result of our restructuring plans, the negative
trends in the marketplace, and the negative trends within the
software market sector, we performed a future cash flow analysis
and determined that the discounted cash flows for this business
unit were inadequate to support the remaining carrying value of
the related intangible assets, and recorded a $3.3 million
impairment write-down during 2001. Impairment losses associated
with the intangible assets are included in amortization and
impairment of goodwill and other acquisition-related intangibles
in the consolidated statements of operations.

In January 2001, we acquired RevenueLab, a
privately held consulting company based in Stamford,
Connecticut. In connection with the acquisition, we paid
$1.3 million in cash, issued $1.7 million
(185,463 shares) of common stock and granted options to
acquire 635,382 shares of common stock valued at $4.0 million.
We recorded $1.9 million for the value allocated to
deferred stock compensation, representing the excess of the fair
value of the underlying common stock over the exercise price for
the options assumed by Onyx. The total consideration, including
$400,000 of acquisition-related costs, was valued at
approximately $7.4 million. The purchase price, adjusted
for deferred stock compensation, was approximately
$5.5 million and was being amortized on a straight-line
basis over a five-year period, representing the expected life of
the

35



---



##### Table of Contents



intangible assets that we acquired. The value of
the deferred compensation is being amortized over the remaining
stock options vesting periods of 4.5 years using a
graded vesting approach, adjusted for any terminated employees.
The transaction was accounted for using the purchase method of
accounting, and, accordingly, the results of RevenueLabs
operations have been included in our consolidated financial
statements from the date of acquisition. As a result of our
restructuring plans, the negative trends in the marketplace, and
the negative trends within the software market sector, we
performed a future cash flow analysis and determined that the
discounted cash flows for this business unit were inadequate to
support the remaining carrying value of the related intangible
assets, and recorded a $3.9 million impairment write-down
during 2001. Impairment losses associated with the intangible
assets are included in amortization and impairment of goodwill
and other acquisition-related intangibles in the consolidated
statements of operations.




| |           
| | ----------
| | Onyx Japan

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.

Under the terms of the joint venture agreement,
Prime Systems may at any time after September 14, 2001,
sell its shares after 90 days notice to us. We have a
right of first refusal to purchase any of Prime Systems
shares that are offered for resale at the same price for which
those shares are being offered to a third party. Further, either
Onyx or Prime Systems may terminate the joint venture agreement
at its discretion if Onyx Japan does not complete an initial
public offering on or before July 31, 2003. If Prime
Systems exercises its right of termination for this reason, Onyx
has the right, at its election, to either (a) buy Prime
Systems shares at the current fair market value as
determined by appraisal or (b) force a liquidation of Onyx
Japan.

We have entered into a distribution agreement
with Onyx Japan, which was approved by the minority
shareholders, that provides for a fee to us based on license and
maintenance revenues in Japan. During 2000 and 2001, fees
charged under this agreement were $145,000 and
$1.3 million, respectively. The intercompany fees are
eliminated in consolidation; however, Onyx allocates 42% of the
fees to the minority shareholders.

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. We may not be able to
successfully address these risks and difficulties. Our future
operating results will depend on many factors, including:



| |   |                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general economic conditions, which may affect our
	customers capital investment levels in management
	information systems;                                                                                  
|
| |  | rate of market acceptance of our CRM solution;                                                                                                                                                               
|
| |  | budget and spending decisions by our customers;                                                                                                                                                              
|
| |  | customers decisions to defer orders or
	implementations, particularly large orders or implementations,
	from one quarter to the next, or to proceed with
	smaller-than-forecasted orders or implementations;
|
| |  | level of purchases by our existing customers,
	including additional license and maintenance revenues;                                                                                                        
|
| |  | our ability to enable our products to operate on
	multiple platforms;                                                                                                                                        

36



---



##### Table of Contents





| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to compete in the highly competitive
	CRM market;                                                                                                                                                            
|
| |  | the loss of any key technical, sales, customer
	support or management personnel and the timing of any new hires;                                                                                                         
|
| |  | our ability to develop, introduce and market new
	products and product versions on a timely basis;                                                                                                                       
|
| |  | 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;
|
| |  | our ability to successfully expand our
	operations, and the amount and timing of expenditures related to
	this expansion; and                                                                                            
|
| |  | the cost and financial accounting effects of any
	acquisitions of companies or complementary technologies that we
	may complete.                                                                                         

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

|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |      |       | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------ | ---- | ---- | ----- | ---- | ---- | ---- | ----- |  | ----- | ---- | ----- | 
|                                                      |                                                                                    |                         
|                                                      |                                                                                    | Year Ended December 31, 
|                                                      |                                                                                    |                         
|                                                      |                                                                                    | 1999                     |      | 2000 |       | 2001
|                                                      |                                                                                    |                          |      |      |       |     
|Consolidated Statement of Operations
	Data:           |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|Revenues:                                             |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|                                                      | License                                                                            |                          |      | 62.9 | %     |      |      | 61.8 | %     |  |       | 38.7 | %    
|                                                      | Support and service                                                                |                          |      | 37.1 |       |      |      | 38.2 |       |  |       | 61.3 |      
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|                                                      |                                                                                    | Total revenues           |      |      | 100.0 |      |      |      | 100.0 |  |       |      | 100.0 | 
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|Cost of revenues:                                     |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|                                                      | License                                                                            |                          |      | 3.7  |       |      |      | 3.0  |       |  |       | 2.1  |      
|                                                      | Amortization of acquired technology                                                |                          |      | 0.8  |       |      |      | 0.7  |       |  |       | 0.8  |      
|                                                      | Support and service                                                                |                          |      | 18.6 |       |      |      | 19.7 |       |  |       | 34.1 |      
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|                                                      |                                                                                    | Total cost of revenues   |      |      | 23.1  |      |      |      | 23.4  |  |       |      | 37.0  | 
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|Gross margin                                          |                                                                                    |                          | 76.9 |      |       |      | 76.6 |      |       |  | 63.0  |     
|Operating expenses:                                   |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|                                                      | Sales and marketing                                                                |                          |      | 48.9 |       |      |      | 49.6 |       |  |       | 54.8 |      
|                                                      | Research and development                                                           |                          |      | 17.2 |       |      |      | 17.6 |       |  |       | 22.6 |      
|                                                      | General and administrative                                                         |                          |      | 9.4  |       |      |      | 9.3  |       |  |       | 15.1 |      
|                                                      | Restructuring and other related charges                                            |                          |      |     |       |      |      |     |       |  |       | 53.3 |      
|                                                      | Amortization and impairment of goodwill and other
	acquisition-related intangibles |                          |      | 1.8  |       |      |      | 3.6  |       |  |       | 14.1 |      
|                                                      | Amortization of stock-based compensation                                           |                          |      | 1.5  |       |      |      | 0.5  |       |  |       | 0.9  |      
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|                                                      |                                                                                    | Total operating expenses |      |      | 78.8  |      |      |      | 80.6  |  |       |      | 160.8 | 
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|Loss from operations                                  |                                                                                    |                          | (1.9 | )    |       |      | (4.0 | )    |       |  | (97.8 | )   
|Interest income, net                                  |                                                                                    |                          | 2.0  |      |       |      | 0.7  |      |       |  | 0.4   |     
|Investment losses and impairment                      |                                                                                    |                          |     |      |       |      | (0.4 | )    |       |  | (2.5  | )   
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|Income (loss) before income taxes                     |                                                                                    |                          | 0.1  |      |       |      | (3.7 | )    |       |  | (99.9 | )   
|Income tax provision (benefit)                        |                                                                                    |                          | 0.8  |      |       |      | 0.4  |      |       |  | (0.3  | )   
|Minority interest in loss of consolidated
	subsidiary |                                                                                    |                          |     |      |       |      | (0.2 | )    |       |  | (1.3  | )   
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     
|Net loss                                              |                                                                                    |                          | (0.7 | )%   |       |      | (3.9 | )%   |       |  | (98.3 | )%  
|                                                      |                                                                                    |                          |      |      |       |      |      |      |       |  |       |     

37



---



##### Table of Contents





| |         
| | --------
| | Revenues

Total revenues, which consist of software license
and service revenues, increased from $60.6 million in 1999
to $119.3 million in 2000, an increase of 97%, and
decreased to $97.2 million in 2001, a decrease of 19%. No
single customer accounted for more than 10% of our revenues in
any of these periods.

License fee revenues increased from
$38.1 million in 1999 to $73.7 million in 2000, an
increase of 93%, and decreased to $37.6 million in 2001, a
decrease of 49%. The increase in license fee revenues from 1999
to 2000 reflected the increased market acceptance of our
existing products, continued enhancement of these products and
increased breadth of our product offerings. The increase also
was attributable to increased follow-on sales to existing
customers, sales of our products to new industry segments,
increased sales as a result of the expansion of our direct and
indirect channels of distribution and our marketing organization
and overall growth in the CRM market during this period. We
believe the decrease in license revenues from 2000 to 2001 was
primarily due to a shift in the buying behavior of our targeted
new and existing customer base as a result of economic
conditions as well as the September 11, 2001 terrorist
attacks on the United States and subsequent hostilities. Both
factors led to a delay of our prospective and existing
customers capital-spending initiatives.

Support and service revenues increased from
$22.5 million in 1999 to $45.6 million in 2000, an
increase of 103%, and increased to $59.6 million in 2001,
an increase of 31%. Of the increase from 1999 to 2000,
$13.0 million was due to increased consulting and training
services and $10.1 million was due to increased maintenance
and support revenues. Of the increase from 2000 to 2001,
$9.9 million was due to increased consulting and training
services and $4.1 million was due to increased maintenance
and support revenues. Service revenues represented 37% of our
total revenues in 1999, 38% in 2000 and 61% in 2001. We expect
our support and service revenues to decrease in absolute dollars
in 2002 primarily because of our strategic decision to provide
more opportunities for our partners to engage with our
customers, and due to the reduction in demand for our consulting
services resulting from the decrease in our license revenues in
recent quarters. In addition, we may experience a decline in
maintenance revenues as customers elect not to renew annual
maintenance contracts, primarily due to specific economic
circumstances facing each of our customers and fewer new
licenses sold in 2001. We expect the proportion of support and
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, the
degree to which we provide opportunities for our partners to
engage with our customers and the ongoing renewals of customer
support contracts, as well as our overall sales of software
licenses to new and existing customers.

Revenues outside of North America increased from
$11.2 million in 1999 to $31.6 million in 2000, and
decreased to $29.1 million in 2001. The increase in
revenues outside of North America from 1999 to 2000 resulted
from our investments in direct and indirect sales channels,
primarily in Europe, Japan, Australia, Singapore and Latin
America, including the acquisitions of Market Solutions in the
United Kingdom and CSN Computer Consulting in Germany. The
decrease in revenues outside of North America from 2000 to 2001
resulted from lower license revenues in these regions. Revenues
from indirect sales channels increased from $1.9 million in
1999 to $11.1 million in 2000, and decreased to
$5.2 million in 2001. The increase in our indirect revenues
from 1999 to 2000 primarily resulted from the increased number
of VARs we added domestically and internationally over the
period. We believe the decrease in license revenues from 2000 to
2001, both outside of North America and from indirect channels,
was primarily due to a shift in the buying behavior of our
targeted new and existing customer base as a result of economic
conditions, leading to a delay of their capital-spending
initiatives.

Included in license revenues for the year ended
December 31, 2001 is a sale to Softbank Commerce for
approximately $572,000 for software licenses that will be
internally deployed to support customer and business partner
relations. Softbank Commerce is a related party to Softbank
Investments Corporation, an entity who owns 14% of Onyx Japan.

38



---



##### Table of Contents





| |                 
| | ----------------
| | 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
$2.2 million in 1999 to $3.5 million in 2000, an
increase of 57%, and decreased to $2.0 million in 2001, a
decrease of 43%. Cost of license revenues as a percentage of
related license revenues was 6% in 1999, 5% in 2000 and 5% in
2001. The changes in dollar amount during these periods in cost
of license revenues was primarily due to changes in license
revenues.



| |                                     
| | ------------------------------------
| | Amortization of acquired
	technology

Amortization of acquired technology represents
the amortization of capitalized technology associated with our
acquisitions of EnCyc in 1998 and Versametrix and Market
Solutions in 1999. Amortization of acquired technology increased
from $500,000 in 1999 to $820,000 in 2000, an increase of 64%,
and decreased to $751,000 in 2001, a decrease of 8%. The
increase in 2000 was primarily due to a full-years
amortization of purchased technology associated with the
acquisitions of Versametrix and Market Solutions. During the
third quarter of 2001, the carrying value of the acquired
technology asset associated with Versametrix was determined to
be impaired and the remaining balance totaling $222,000 was
charged to operating expense and included in amortization and
impairment of goodwill and other acquisition-related intangibles
in the statement of operations. As a result of this impairment,
amortization of acquired technology should decrease in future
periods.



| |                                      
| | -------------------------------------
| | 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 $11.3 million
in 1999 to $23.6 million in 2000, an increase of 109%, and
to $33.1 million in 2001, an increase of 41%. The increases
in dollar amount resulted primarily from hiring and training
consulting, customer support and training personnel to support
our growing customer base. Although our professional services
headcount had declined at the end of 2001 compared to the end of
the prior year as a result of our restructuring efforts, the
average number of service personnel over the course of 2001 was
higher than in 2000. The increase in 2001 was also the result of
an increase in the use of third-party service providers, which
have a higher cost structure than our internal resources.

Cost of support and service revenues as a
percentage of related support and service revenues was 50% in
1999, 52% in 2000 and 56% in 2001. The increase in cost of
service revenues as a percentage of related service revenues
from 2000 to 2001 primarily reflects a higher proportion of
service revenues from consulting and training services, which
have a higher direct cost structure and therefore contribute
lower margins than our customer support services, coupled with a
higher percentage use of third-party service providers in our
consulting engagements, which contribute significantly lower
margins than internal resources. The cost of services as a
percentage of service revenues may vary between periods
primarily for two reasons: (1) the mix of services we
provide (consulting, customer support, training), which have
different direct cost structures, and (2) the resources we
use to deliver these services (internal versus third parties).



| |                   
| | ------------------
| | 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 $29.6 million in 1999 to
$59.2 million in 2000, an increase of 100%, and decreased
to $53.3 million in 2001, a decrease of 10%. The increase
in dollar amount from 1999 to 2000 was primarily due to 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. The increase in dollar
amount from 1999 to 2000 is also

39



---



##### Table of Contents



due to 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. The decrease in dollar amount from
2000 to 2001 was primarily due to restructuring activities and
reductions in sales and marketing headcounts, along with a
decrease in sales commissions and bonuses.


Sales and marketing expenses represented 49% of
our total revenues in 1999, 50% in 2000 and 55% in 2001. The
increase in sales and marketing expenses as a percentage of
total revenues reflects the more rapid growth of sales and
marketing expenses in each period compared to the growth of
revenues, particularly in 2001 where we experienced an
unexpected shortfall in license revenues.

We initiated reductions in our distribution
infrastructure to re-align our organization toward profitable
growth and incurred a restructuring charge of $51.8 million
in 2001 as a result of the restructuring. We expect our sales
and marketing expenses to decrease in absolute dollars in 2002
relative to 2001 as we gain the full benefit of our
restructuring efforts and invest in resource levels that more
closely align with the expected demand of our products. As we
gain visibility into our long-term sales growth opportunity, we
believe that we may need to significantly increase our sales and
marketing efforts to expand our market position and further
increase acceptance of our products.



| |                         
| | ------------------------
| | 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 $10.4 million in
1999 to $21.0 million in 2000, an increase of 102%, and to
$22.0 million in 2001, an increase of 4%. 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. The increase from 2000 to 2001 was
primarily due to an increase in the use of outside contractors.
Research and development costs represented 17% of our total
revenues in 1999, 18% in 2000 and 23% in 2001. The increase in
research and development expenses as a percentage of total
revenues reflects the more rapid growth in research and
development expenses in these periods compared to the growth of
revenues, particularly in 2001 where we experienced an
unexpected shortfall in license revenues.

Although research and development expenses were
affected by the restructuring, those development projects that
we believe to be most strategic to our long-term growth were not
affected. We believe our research and development investments
are essential to our strategic priorities. As we gain visibility
into our long-term sales growth opportunity, we believe that we
may need to increase our research and development investment in
absolute dollars to expand our market position and continue to
expand our product line.



| |                           
| | --------------------------
| | General and administrative

General and administrative expenses consist
primarily of salaries, benefits and related costs for our
executive, finance, human resource and administrative personnel,
professional services fees and allowances for bad debt. General
and administrative expenses increased from $5.7 million in
1999 to $11.1 million in 2000, an increase of 94%, and to
$14.6 million in 2001, an increase of 32%. The increase
from 1999 to 2000 was 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.

The increase in general and administrative
expense in 2001 was primarily due to the hiring of senior
executive personnel and employing a higher average number of
general and administrative personnel over the course of 2001
compared to 2000, coupled with an increase in professional fees.

General and administrative costs represented 9%
of our total revenues in 1999, 9% in 2000 and 15% in 2001. The
increase in general and administrative expenses as a percentage
of total revenues from 2000 to 2001 reflects the more rapid
growth of general and administrative expenses in this period,
particularly in the areas of executive recruitment and bad debt
as a percentage of revenue, compared to the growth of revenues
where we experienced an unexpected shortfall.

40



---



##### Table of Contents



In 2001, we added key executive personnel we
believe to be critical to our near-term and long-term growth
strategies. The expenses related to adding these personnel will
offset, in large part, our reduction in other general and
administrative expense areas enacted as part of our
restructuring plan. As we gain visibility into our long-term
sales growth opportunity, we believe our general and
administrative expenses may increase as we expand our
administrative staff, domestically and internationally, and
incur additional professional services fees.



| |                                         
| | ----------------------------------------
| | Restructuring and other related
	charges

Restructuring and other related charges of
$51.8 million in 2001 represent our efforts to reduce our
overall cost structure. Employee separation costs, which include
severance, related taxes, outplacement and other benefits,
totaled $3.7 million during 2001, relating to the
termination of more than 300 employees. All functional
areas were affected by the reductions.

Excess facilities charges in 2001 were estimated
at $32.0 million. These costs are the result of our
decision to reduce or exit certain domestic and international
facilities. The estimated facilities costs are based on current
comparable rates for leases in the respective markets or
estimated termination fees. The market for office space is
currently weak. We have had preliminary discussions with the
landlord of the excess Bellevue, Washington facilities regarding
a potential termination of the lease associated with these
facilities. If we are able to negotiate a termination of these
facilities, we may incur significant costs associated with the
termination, some of which may be paid in the form of our equity
securities. If we are unsuccessful in negotiating affordable
termination fees on certain facilities, if facilities operating
lease rental rates continue to decrease in these markets, if it
takes longer than expected to find a suitable tenant to sublease
these facilities, or if other estimates and assumptions change,
the actual loss could exceed this estimate. We will continue to
revise our restructuring charges as more definitive information
becomes available. Future cash outlays are anticipated through
at least September 2005 unless estimates and assumptions change
or we are able to negotiate our exit of these leases at an
earlier date. Assets disposed of or removed from operations
consisted primarily of leasehold improvements, computer
equipment, office equipment, furniture and fixtures. The
estimated cost for fixed asset impairments was
$14.7 million. Other restructuring-related costs, including
cancellation fees for certain sales and marketing activities,
professional fees and the write-down of other assets, totaled
$1.4 million.

For the year ended December 31, 2001,
restructuring charges were $51.8 million, of which
$15.2 million related to asset impairments and other
non-cash charges and $11.3 million has been paid out in
cash. At December 31, 2001, $25.3 million in
restructuring liabilities remain, of which $15.4 million is
current and $9.9 million is long-term.

The components of the charges recorded for the
year ended December 31, 2001, are as follows:

|                          |  |                |        |                |  |              |         |   |  |   |        | 
|------------------------- |  | -------------- | ------ | -------------- |  | ------------ | ------- | - |  | - | ------ | 
|                          |  | Charge for     |        |                |  |             
|                          |  | the year ended |        | Cash           |  | Balance at  
|                          |  | December 31,   |        | payments       |  | December 31,
|                          |  | 2001           |        | and write-offs |  | 2001        
|                          |  |                |        |                |  |             
|                          |  |               
|                          |  | (In thousands)
|Excess facilities         |  | $              | 31,948 |                |  | $            | (7,653  | ) |  | $ | 24,295 | 
|Employee separation costs |  |                | 3,724  |                |  |              | (3,474  | ) |  |   | 250    | 
|Asset impairments         |  |                | 14,747 |                |  |              | (14,747 | ) |  |   |       | 
|Other                     |  |                | 1,387  |                |  |              | (618    | ) |  |   | 769    | 
|                          |  |                |        |                |  |              |         |   |  |   |        | 
|Total                     |  | $              | 51,806 |                |  | $            | (26,492 | ) |  | $ | 25,314 | 
|                          |  |                |        |                |  |              |         |   |  |   |        | 

We are continuing to align our operations and
review our restructuring efforts. In the near-term, we believe
our costs and operating expenses, excluding
restructuring-related charges, will decrease modestly. Expenses
will increase when and if revenues increase. However, we may be
unable to achieve these expense reductions without adversely
affecting our business and operating results. We may continue to
experience losses and negative cash flows in the near term, even
if sales of our products and services continue to grow.

41



---



##### Table of Contents





| |                                                                                   
| | ----------------------------------------------------------------------------------
| | Amortization and impairment of goodwill and
	other acquisition-related intangibles

Amortization and impairment of acquired
intangibles consists of intangible amortization associated with
our acquisitions of EnCyc in 1998, Versametrix and Market
Solutions in 1999, CSN Computer Consulting in 2000 and
RevenueLab in 2001. Amortization and impairment of acquired
intangibles totaled $1.1 million in 1999, $4.3 million
in 2000 and $13.7 million in 2001. The increase in 2000
primarily resulted 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. The increase in 2001 primarily resulted from an impairment
write-down during the third and fourth quarters of 2001 totaling
$7.8 million relating to the intangibles of CSN,
Versametrix, and RevenueLab. The impairments were determined
after both qualitative and quantitative analysis, which
indicated that the discounted future cash flows from these
business units did not support the remaining carrying value of
goodwill and other intangibles recorded from these acquisitions.



| |                                   
| | ----------------------------------
| | Deferred stock-based
	compensation

We recorded deferred stock-based compensation of
$2.2 million in 1998, representing the difference between
the exercise prices of options granted to acquire shares of
common stock during 1997 and 1998, prior to our initial public
offering, and the deemed fair value for financial reporting
purposes of our common stock on the grant dates. We recorded an
additional $1.8 million in deferred compensation in
connection with the options granted to new employees in
conjunction with the acquisition of RevenueLab in January 2001.
Deferred compensation is amortized over the vesting periods of
the options. We amortized stock-based compensation expense of
$882,000 in 1999, $548,000 in 2000 and $904,000 in 2001.
Approximately $540,000 of deferred compensation that was
recorded in January 2001 in connection with options granted to
employees of RevenueLab was reversed during 2001 upon the
employees termination. Amortization of the deferred
stock-based compensation balance of $809,000 at
December 31, 2001 will approximate $480,000 in 2002,
$200,000 in 2003, $100,000 in 2004 and $29,000 in 2005.



| |                     
| | --------------------
| | Interest Income, Net

Interest income, net consists of earnings on our
cash and cash equivalent and short-term investment balances,
offset by interest expense and bank fees associated with debt
obligations and credit facilities. Interest income, net was
$1.2 million in 1999, $788,000 in 2000 and $377,000 in
2001. The decreases in interest income, net over these periods
is the result of a lower average cash and investment base
coupled with lower interest rates in each consecutive period.



| |                                  
| | ---------------------------------
| | Investment Losses and
	Impairment

During 2000, we recorded a loss of $500,000 from
an equity-method investee, which represents our share of losses
and equal to our total investment in this company. During 2001,
we recorded impairment losses totaling $2.5 million
relating to other-than-temporary declines in three of our
cost-basis equity investments, based on a review of qualitative
and quantitative factors surrounding the financial condition of
the investees. These impairment losses were recorded to reflect
each investment at its estimated fair value. At
December 31, 2001, the remaining carrying value of private
equity investments totaled $500,000 and is included in other
assets in the consolidated balance sheets.



| |             
| | ------------
| | Income Taxes

We recorded an income tax provision of $517,000
in 1999 and $404,000 in 2000, and a benefit of $294,000 in 2001.
Our income tax provision (benefit) recorded in all periods is
the net result of income taxes in connection with our foreign
operations, offset by the deferred tax benefit recorded as we
amortize the intangibles associated with our international
acquisitions of Market Solutions and CSN Computer Consulting. We
made a minimal provision for federal and state income taxes in
these periods.

At December 31, 2001, we had net deferred
tax assets aggregating $36.5 million for which we have recorded
a full valuation allowance for the entire amount as a result of
uncertainties regarding the realization of the asset balance.
Additionally, at December 31, 2001, we had deferred tax
liabilities of $1.2 million, which

42



---



##### Table of Contents



represented the tax effects of certain
intangibles recorded as a part of the purchase of Market
Solutions. This deferred tax liability will be amortized into
operating results in future periods, together with the related
intangibles.




| |                                                      
| | -----------------------------------------------------
| | Minority Interest in Loss of Consolidated
	Subsidiary

Softbank Investments Corporation and Prime
Systems Corporation together own 42% of Onyx Japan, our Japanese
joint venture. We have a controlling interest and, therefore,
Onyx Japan has been included in our consolidated financial
statements. The minority shareholders interest in Onyx
Japans earnings or losses is accounted for in the
statement of operations each period. In 2000, the minority
shareholders interest in Onyx Japans losses totaled
$216,000. In 2001, the minority shareholders interest in
Onyx Japans losses totaled $1.3 million. At
December 31, 2001, the minority shareholders
remaining interest in the joint venture totaled
$1.6 million. Any future losses of Onyx Japan will be
shared by the minority shareholders to the extent of their
interest in the joint venture.

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 2000 and 2001.
The trends discussed in the annual comparisons of operating
results from 1999 to 2001 generally apply to the comparison of
operating results for each of the quarters in 2000 and 2001. 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

43



---



##### Table of Contents



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, |        | September 30, |        | December 31, |        | March 31, |        | June 30, |        | September 30, |        | December 31,
|                                                                       |                                                                         | 2000                                  |        | 2000     |        | 2000          |        | 2000         |        | 2001      |        | 2001     |        | 2001          |        | 2001        
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |             
|                                                                       |                                                                         |                                      
|                                                                       |                                                                         | (In thousands, except per share data)
|Consolidated Statement of
	Operations Data:                            |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Revenues:                                                              |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                                       | License                                                                 |                                       | $      | 14,341   |        |               | $      | 16,615       |        |           | $      | 20,403   |        |               | $      | 22,342       |        |   | $       | 12,988 |        |   | $       | 11,779 |        |   | $       | 6,263  |        |   | $       | 6,554  |       
|                                                                       | Support and service                                                     |                                       |        | 8,843    |        |               |        | 11,020       |        |           |        | 12,367   |        |               |        | 13,378       |        |   |         | 15,327 |        |   |         | 17,118 |        |   |         | 14,455 |        |   |         | 12,677 |       
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                                       |                                                                         | Total revenues                        |        |          | 23,184 |               |        |              | 27,635 |           |        |          | 32,770 |               |        |              | 35,720 |   |         |        | 28,315 |   |         |        | 28,897 |   |         |        | 20,718 |   |         |        | 19,231 | 
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Cost of revenues:                                                      |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                                       | License                                                                 |                                       |        | 660      |        |               |        | 831          |        |           |        | 877      |        |               |        | 1,152        |        |   |         | 900    |        |   |         | 588    |        |   |         | 169    |        |   |         | 349    |       
|                                                                       | Amortization of acquired technology                                     |                                       |        | 205      |        |               |        | 205          |        |           |        | 205      |        |               |        | 205          |        |   |         | 204    |        |   |         | 204    |        |   |         | 205    |        |   |         | 138    |       
|                                                                       | Support and service                                                     |                                       |        | 4,514    |        |               |        | 5,634        |        |           |        | 6,377    |        |               |        | 7,027        |        |   |         | 9,674  |        |   |         | 9,704  |        |   |         | 7,819  |        |   |         | 5,926  |       
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                                       |                                                                         | Total cost of revenues                |        |          | 5,379  |               |        |              | 6,670  |           |        |          | 7,459  |               |        |              | 8,384  |   |         |        | 10,778 |   |         |        | 10,496 |   |         |        | 8,193  |   |         |        | 6,413  | 
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Gross margin                                                           |                                                                         |                                       | 17,805 |          |        |               | 20,965 |              |        |           | 25,311 |          |        |               | 27,336 |              |        |   | 17,537  |        |        |   | 18,401  |        |        |   | 12,525  |        |        |   | 12,818  |       
|Operating expenses:                                                    |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                                       | Sales and marketing                                                     |                                       |        | 11,380   |        |               |        | 13,421       |        |           |        | 15,446   |        |               |        | 18,935       |        |   |         | 19,188 |        |   |         | 16,196 |        |   |         | 11,224 |        |   |         | 6,646  |       
|                                                                       | Research and development                                                |                                       |        | 3,758    |        |               |        | 4,784        |        |           |        | 6,136    |        |               |        | 6,368        |        |   |         | 7,229  |        |   |         | 5,844  |        |   |         | 4,902  |        |   |         | 3,993  |       
|                                                                       | General and administrative                                              |                                       |        | 2,119    |        |               |        | 2,458        |        |           |        | 2,979    |        |               |        | 3,564        |        |   |         | 4,007  |        |   |         | 4,658  |        |   |         | 3,455  |        |   |         | 2,503  |       
|                                                                       | Restructuring and other related charges                                 |                                       |        |         |        |               |        |             |        |           |        |         |        |               |        |             |        |   |         |       |        |   |         | 3,589  |        |   |         | 40,075 |        |   |         | 8,142  |       
|                                                                       | Amortization and impairment of goodwill and other
	acquired intangibles |                                       |        | 676      |        |               |        | 881          |        |           |        | 1,346    |        |               |        | 1,429        |        |   |         | 1,623  |        |   |         | 1,623  |        |   |         | 8,830  |        |   |         | 1,619  |       
|                                                                       | Amortization of stock-based compensation                                |                                       |        | 206      |        |               |        | 146          |        |           |        | 105      |        |               |        | 91           |        |   |         | 310    |        |   |         | 226    |        |   |         | 164    |        |   |         | 204    |       
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|                                                                       |                                                                         | Total operating expenses              |        |          | 18,139 |               |        |              | 21,690 |           |        |          | 26,012 |               |        |              | 30,387 |   |         |        | 32,357 |   |         |        | 32,136 |   |         |        | 68,650 |   |         |        | 23,107 | 
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Loss from operations                                                   |                                                                         |                                       | (334   | )        |        |               | (725   | )            |        |           | (701   | )        |        |               | (3,051 | )            |        |   | (14,820 | )      |        |   | (13,735 | )      |        |   | (56,125 | )      |        |   | (10,289 | )     
|Interest income, net                                                   |                                                                         |                                       | 192    |          |        |               | 291    |              |        |           | 181    |          |        |               | 124    |              |        |   | 232     |        |        |   | 125     |        |        |   | 48      |        |        |   | (28     | )     
|Investment losses and impairment                                       |                                                                         |                                       | (237   | )        |        |               | (200   | )            |        |           | (63    | )        |        |               |       |              |        |   | (1,500  | )      |        |   | (500    | )      |        |   | (500    | )      |        |   |        |       
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Loss before income taxes                                               |                                                                         |                                       | (379   | )        |        |               | (634   | )            |        |           | (583   | )        |        |               | (2,927 | )            |        |   | (16,088 | )      |        |   | (14,110 | )      |        |   | (56,577 | )      |        |   | (10,317 | )     
|Income tax provision (benefit)                                         |                                                                         |                                       | 108    |          |        |               | 104    |              |        |           | 108    |          |        |               | 84     |              |        |   | (94     | )      |        |   | (8      | )      |        |   | (279    | )      |        |   | 87      |       
|Minority interest in loss of consolidated
	subsidiary                  |                                                                         |                                       |       |          |        |               |       |              |        |           |       |          |        |               | (216   | )            |        |   | (254    | )      |        |   | (414    | )      |        |   | (349    | )      |        |   | (266    | )     
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Net loss                                                               |                                                                         | $                                     | (487   | )        |        | $             | (738   | )            |        | $         | (691   | )        |        | $             | (2,795 | )            |        | $ | (15,740 | )      |        | $ | (13,688 | )      |        | $ | (55,949 | )      |        | $ | (10,138 | )     
|                                                                       |                                                                         |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |         |        |        |   |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share(1)(2)                             |                                                                         | $                                     | (0.01  | )        |        | $             | (0.02  | )            |        | $         | (0.02  | )        |        | $             | (0.08  | )            |        | $ | (0.42   | )      |        | $ | (0.35   | )      |        | $ | (1.37   | )      |        | $ | (0.23   | )     
|Shares used in calculation of basic and diluted
	net loss per share(1) |                                                                         |                                       | 34,256 |          |        |               | 34,720 |              |        |           | 35,084 |          |        |               | 35,628 |              |        |   | 37,821  |        |        |   | 39,213  |        |        |   | 40,987  |        |        |   | 43,387  |       



---



|    |                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Notes 1 and 13 of Notes to
	Consolidated Financial Statements for an explanation of the
	method used to calculate basic and diluted net loss per share.                                                                              
|   
|(2) | The sum of the quarterly per share amounts may
	not equal per share amounts reported for year-to-date periods.
	This is due to changes in the number of weighted-average shares
	outstanding and the effects of rounding for each period.

44



---



##### Table of Contents



|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |      |       | 
|----------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------ | ---- | -------- | ----- | ------------- | ---- | ------------ | ----- | --------- | ---- | -------- | ----- | ------------- | ---- | ------------ | ----- |  | ----- | ---- | ----- |  | ----- | ---- | ----- |  | ------ | ----- | ----- |  | ----- | ---- | ----- | 
|                                                      |                                                                         |                         
|                                                      |                                                                         | Three Months Ended      
|                                                      |                                                                         |                         
|                                                      |                                                                         | March 31,                |      | June 30, |       | September 30, |      | December 31, |       | March 31, |      | June 30, |       | September 30, |      | December 31,
|                                                      |                                                                         | 2000                     |      | 2000     |       | 2000          |      | 2000         |       | 2001      |      | 2001     |       | 2001          |      | 2001        
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |             
|Consolidated Statement of Operations
	Data:           |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|Revenues:                                             |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|                                                      | License                                                                 |                          |      | 61.9     | %     |               |      | 60.1         | %     |           |      | 62.3     | %     |               |      | 62.5         | %     |  |       | 45.9 | %     |  |       | 40.8 | %     |  |        | 30.2  | %     |  |       | 34.1 | %    
|                                                      | Support and service                                                     |                          |      | 38.1     |       |               |      | 39.9         |       |           |      | 37.7     |       |               |      | 37.5         |       |  |       | 54.1 |       |  |       | 59.2 |       |  |        | 69.8  |       |  |       | 65.9 |      
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|                                                      |                                                                         | Total revenues           |      |          | 100.0 |               |      |              | 100.0 |           |      |          | 100.0 |               |      |              | 100.0 |  |       |      | 100.0 |  |       |      | 100.0 |  |        |       | 100.0 |  |       |      | 100.0 | 
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|Cost of revenues:                                     |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|                                                      | License                                                                 |                          |      | 2.8      |       |               |      | 3.0          |       |           |      | 2.7      |       |               |      | 3.2          |       |  |       | 3.2  |       |  |       | 2.0  |       |  |        | 0.8   |       |  |       | 1.8  |      
|                                                      | Amortization of acquired technology                                     |                          |      | 0.9      |       |               |      | 0.7          |       |           |      | 0.6      |       |               |      | 0.6          |       |  |       | 0.7  |       |  |       | 0.7  |       |  |        | 1.0   |       |  |       | 0.7  |      
|                                                      | Support and service                                                     |                          |      | 19.5     |       |               |      | 20.4         |       |           |      | 19.5     |       |               |      | 19.7         |       |  |       | 34.2 |       |  |       | 33.6 |       |  |        | 37.7  |       |  |       | 30.8 |      
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|                                                      |                                                                         | Total cost of revenues   |      |          | 23.2  |               |      |              | 24.1  |           |      |          | 22.8  |               |      |              | 23.5  |  |       |      | 38.1  |  |       |      | 36.3  |  |        |       | 39.5  |  |       |      | 33.3  | 
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|Gross margin                                          |                                                                         |                          | 76.8 |          |       |               | 75.9 |              |       |           | 77.2 |          |       |               | 76.5 |              |       |  | 61.9  |      |       |  | 63.7  |      |       |  | 60.5   |       |       |  | 66.7  |     
|Operating expenses:                                   |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|                                                      | Sales and marketing                                                     |                          |      | 49.1     |       |               |      | 48.6         |       |           |      | 47.1     |       |               |      | 53.0         |       |  |       | 67.8 |       |  |       | 56.0 |       |  |        | 54.2  |       |  |       | 34.6 |      
|                                                      | Research and development                                                |                          |      | 16.2     |       |               |      | 17.3         |       |           |      | 18.7     |       |               |      | 17.8         |       |  |       | 25.5 |       |  |       | 20.2 |       |  |        | 23.7  |       |  |       | 20.8 |      
|                                                      | General and administrative                                              |                          |      | 9.1      |       |               |      | 8.9          |       |           |      | 9.1      |       |               |      | 10.0         |       |  |       | 14.2 |       |  |       | 16.1 |       |  |        | 16.7  |       |  |       | 13.0 |      
|                                                      | Restructuring and other related charges                                 |                          |      |         |       |               |      |             |       |           |      |         |       |               |      |             |       |  |       |     |       |  |       | 12.4 |       |  |        | 193.4 |       |  |       | 42.3 |      
|                                                      | Amortization and impairment of goodwill and other
	acquired intangibles |                          |      | 2.9      |       |               |      | 3.2          |       |           |      | 4.1      |       |               |      | 4.0          |       |  |       | 5.7  |       |  |       | 5.6  |       |  |        | 42.6  |       |  |       | 8.4  |      
|                                                      | Amortization of stock-based compensation                                |                          |      | 0.9      |       |               |      | 0.5          |       |           |      | 0.4      |       |               |      | 0.2          |       |  |       | 1.0  |       |  |       | 0.9  |       |  |        | 0.8   |       |  |       | 1.1  |      
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|                                                      |                                                                         | Total operating expenses |      |          | 78.2  |               |      |              | 78.5  |           |      |          | 79.4  |               |      |              | 85.0  |  |       |      | 114.2 |  |       |      | 111.2 |  |        |       | 331.4 |  |       |      | 120.2 | 
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|Loss from operations                                  |                                                                         |                          | (1.4 | )        |       |               | (2.6 | )            |       |           | (2.2 | )        |       |               | (8.5 | )            |       |  | (52.3 | )    |       |  | (47.5 | )    |       |  | (270.9 | )     |       |  | (53.5 | )   
|Interest income, net                                  |                                                                         |                          | 0.8  |          |       |               | 1.1  |              |       |           | 0.6  |          |       |               | 0.3  |              |       |  | 0.8   |      |       |  | 0.4   |      |       |  | 0.2    |       |       |  | (0.1  | )   
|Investment losses and impairment                      |                                                                         |                          | (1.0 | )        |       |               | (0.7 | )            |       |           | (0.2 | )        |       |               |     |              |       |  | (5.3  | )    |       |  | (1.7  | )    |       |  | (2.4   | )     |       |  | 0.0   |     
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|Loss before income taxes                              |                                                                         |                          | (1.6 | )        |       |               | (2.2 | )            |       |           | (1.8 | )        |       |               | (8.2 | )            |       |  | (56.8 | )    |       |  | (48.8 | )    |       |  | (273.1 | )     |       |  | (53.6 | )   
|Income tax provision (benefit)                        |                                                                         |                          | 0.5  |          |       |               | 0.4  |              |       |           | 0.3  |          |       |               | 0.2  |              |       |  | (0.3  | )    |       |  | (0.0  | )    |       |  | (1.3   | )     |       |  | 0.5   |     
|Minority interest in loss of consolidated
	subsidiary |                                                                         |                          |     |          |       |               |     |              |       |           |     |          |       |               | (0.6 | )            |       |  | (0.9  | )    |       |  | (1.4  | )    |       |  | (1.7   | )     |       |  | (1.4  | )   
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     
|Net loss                                              |                                                                         |                          | (2.1 | )%       |       |               | (2.6 | )%           |       |           | (2.1 | )%       |       |               | (7.8 | )%           |       |  | (55.6 | )%   |       |  | (47.4 | )%   |       |  | (270.1 | )%    |       |  | (52.7 | )%  
|                                                      |                                                                         |                          |      |          |       |               |      |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |       |      |       |  |        |       |       |  |       |     

Liquidity and Capital Resources

As of December 31, 2001, we had cash and
cash equivalents of $15.9 million, an increase of
$4.4 million from cash and cash equivalents held as of
December 31, 2000. We invest our cash in excess of current
operating requirements in a portfolio of investment-grade
securities. We did not hold any short-term marketable securities
as of December 31, 2001; short-term marketable securities
held at December 31, 2000 totaled $5.5 million. We had
a working capital deficit of $4.9 million at
December 31, 2001 compared to working capital of
$25.3 million at December 31, 2000.

As of December 31, 2001, our principal
obligations consisted of restructuring-related liabilities
totaling $25.3 million, of which $15.4 million is
expected to be paid within the next 12 months, accrued
liabilities of $3.3 million, trade payables of
$2.8 million and salaries and benefits payable of
$1.8 million. The majority of the restructuring-related
liabilities relate to excess facilities in domestic and
international markets, the most significant portion of which
relates to our additional facilities in Bellevue, Washington,
which we currently do not plan to occupy. The majority of our
accounts payable, salaries and benefits payable and accrued
liabilities at December 31, 2001 will be settled during the
first three months of 2002 and will result in a corresponding

45



---



##### Table of Contents



decline in the amount of cash and cash
equivalents, offset by liabilities associated with activity in
the first quarter of 2002. Off-balance sheet liabilities as of
December 31, 2001 primarily consisted of operating leases
associated with facilities in Bellevue, Washington and our
domestic and international field office facilities.


The following are our contractual commitments
associated with our operational restructuring and lease
obligations:

|                                        |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |         | 
|--------------------------------------- | ------------------------------- | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ------ | ---------- |  | ----- | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------- | ------- | 
|                                        |                                 | 2002           |        | 2003   |  | 2004 |        | 2005   |  | 2006 |        | Thereafter |  | Total
|                                        |                                 |                |        |        |  |      |        |        |  |      |        |            |  |      
|                                        |                                 |               
|                                        |                                 | (In thousands)
|Restructuring-related commitments:      |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |        
|                                        | Leases                          |                | $      | 14,361 |  |      | $      | 7,181  |  |      | $      | 1,611      |  |       | $      | 986    |  |   | $      | 152    |  |   | $      |       |  |   | $       | 24,291  | 
|                                        | Other                           |                |        | 1,023  |  |      |        |       |  |      |        |           |  |       |        |       |  |   |        |       |  |   |        |       |  |   |         | 1,023   | 
|                                        |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |        
|Total restructuring-related commitments |                                 |                | 15,384 |        |  |      | 7,181  |        |  |      | 1,611  |            |  |       | 986    |        |  |   | 152    |        |  |   |       |        |  |   | 25,314  |        
|                                        |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |        
|Other commitments:                      |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |        
|                                        | Operating leases(1)             |                |        | 3,511  |  |      |        | 10,374 |  |      |        | 14,157     |  |       |        | 13,305 |  |   |        | 11,582 |  |   |        | 56,796 |  |   |         | 109,725 | 
|                                        | Capital leases                  |                |        | 186    |  |      |        | 186    |  |      |        | 71         |  |       |        |       |  |   |        |       |  |   |        |       |  |   |         | 443     | 
|                                        | Third-party royalty commitments |                |        | 710    |  |      |        | 140    |  |      |        |           |  |       |        |       |  |   |        |       |  |   |        |       |  |   |         | 850     | 
|                                        |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |        
|Total other commitments                 |                                 |                | 4,407  |        |  |      | 10,700 |        |  |      | 14,228 |            |  |       | 13,305 |        |  |   | 11,582 |        |  |   | 56,796 |        |  |   | 111,018 |        
|                                        |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |        
|Total commitments                       |                                 | $              | 19,791 |        |  | $    | 17,881 |        |  | $    | 15,839 |            |  | $     | 14,291 |        |  | $ | 11,733 |        |  | $ | 56,796 |        |  | $ | 136,331 |        
|                                        |                                 |                |        |        |  |      |        |        |  |      |        |            |  |       |        |        |  |   |        |        |  |   |        |        |  |   |         |        



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | To the extent minimum lease payments associated
	with excess facilities are included in our restructuring-related
	commitments, they have been excluded from other operating lease
	commitments.

As of December 31, 2001, we had a
$15.0 million working capital revolving line of credit with
Silicon Valley Bank, or SVB. We had no outstanding borrowings
under the working capital facility; however, there was
approximately $10.1 million in standby letters of credit
outstanding in connection with the leases of equipment and our
facilities, of which $6.6 million represents a security
deposit for rent associated with additional facilities in
Bellevue, Washington. If our borrowing base falls below
outstanding standby letters of credit issued by SVB on our
behalf, SVB may require us to cash secure the amount by which
our standby letters of credit exceed the borrowing base. On
January 31, 2002, we pledged $5.0 million in cash to
secure the amount by which our standby letters of credit
exceeded the borrowing base.

On February 14, 2002, we entered into a new
loan and security agreement with SVB, which replaces our then
existing credit facility with them. The facility allows us to
borrow up to the lesser of (a) 75% of our eligible accounts
receivable based on a borrowing base calculation, or (b)
$15.0 million, and bears interest at SVBs prime rate
plus 1.5%, subject to a minimum rate of 6.0%. The credit
facility is secured by our accounts receivable, property and
equipment and intellectual property. Additionally, we must
maintain at least $7.0 million in unrestricted deposit
accounts with SVB. The loan and security agreement with SVB
requires us to maintain certain financial covenants based on a
monthly tangible net worth calculation. Also, similar to the
prior credit facility, to the extent the borrowing base falls
below outstanding letters of credit, SVB may require us to cash
secure the excess. The facility expires on December 31,
2002. Based on the outstanding standby letters of credit, no
additional amounts are currently available under the new credit
facility.

Our operating activities resulted in net cash
outflows of $2.3 million in 1999, $421,000 in 2000 and
$21.3 million in 2001. The operating cash outflows in 1999
and 2000 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. Our operating cash
outflows in 2001 were primarily the result of our operating loss
adjusted for non-cash amortization and impairment charges,
decreases in accounts payable and accrued liabilities, decreases
in deferred revenues and increases in prepaid expenses and other
assets, offset in part by cash provided by collections on
accounts receivable.

46



---



##### Table of Contents



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, primarily due 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. Investing activities used cash of
$7.2 million in 2001, primarily for funding leasehold
improvements and purchasing capital equipment associated with
our new Bellevue, Washington facility, which we do not plan to
occupy, coupled with cash used to acquire RevenueLab, offset in
part by the net proceeds from the maturity of short-term
marketable securities.

Financing activities provided cash of
$38.5 million in 1999 primarily due to the proceeds from
our initial public offering in February 1999, offset in part by
payments on our credit facility and capital lease obligations.
Financing activities provided cash of $10.6 million in 2000
primarily due 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.
Financing activities provided cash of $33.6 million in 2001
primarily due to the proceeds from our public offering of common
stock in February 2001 and proceeds from the exercise of stock
options and the purchase of stock through our employee stock
purchase plan, offset in part by payments on our long-term
obligations.

Our near-term restructuring costs and excess
facilities, along with our ongoing operations, may consume a
material amount of our cash resources. It is also possible that
we will use a portion of our cash resources to acquire
complementary technologies or businesses; however, we currently
have no commitments or agreements with respect to any
transactions of this nature.

In February 2002, we completed a firm
underwritten offering of 6,325,000 shares of our common stock at
a purchase price to the public of $3.50 per share from our
$100.0 million shelf registration, including 600,000 shares
issued pursuant to the exercise of the over-allotment option
granted to Wells Fargo Securities, LLC, the sole underwriter for
the offering. We estimate the net proceeds to be
$20.5 million after deducting the estimated costs
associated with the offering. We intend to use the net proceeds
for additional working capital and other general corporate
purposes, as well as the possible acquisition of or investment
in complementary businesses, products and technologies. We may
also use a portion of the net proceeds to pay obligations
arising in connection with the potential termination of the
lease of our excess facilities.

We believe that our existing cash and cash
equivalents 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. 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.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141,
Business Combinationsand SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate
from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and
certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and
written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. We will apply SFAS
No. 142 beginning in the first quarter of 2002. Application
of the non-amortization provisions of SFAS No. 142 is
expected to result in an increase in operating results of
$800,000 per quarter in 2002. We will reclassify an assembled
workforce intangible asset with an unamortized balance of
$1.2 million (along with a deferred tax liability of
$400,000) to goodwill at the date of adoption. This will result
in approximately $8.2 million of goodwill and
$3.0 million of other

47



---



##### Table of Contents



intangibles commencing on January 1, 2002.
We will test goodwill for impairment using the two-step approach
prescribed in SFAS No. 142. The first step is a screen for
potential impairment, while the second step measures the amount
of the impairment, if any. We expect to perform the first of the
required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002 in the first
quarter of 2002. Any impairment charge resulting from these
transitional impairment tests will be reflected as the
cumulative effect of a change in accounting principle in the
first quarter of 2002. We have not yet determined what the
effect of these tests will be on our earnings and financial
position.


The FASB also recently issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, applicable to financial statements issued for fiscal
years beginning after December 15, 2001. The FASBs
new rules on asset impairment supersede SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and portions of
Accounting Principles Bulletin Opinion 30, Reporting the
Results of Operations. SFAS No. 144 provides a single
accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as
of the measurement date, as presently required. We do not expect
the provisions of SFAS No. 144 to have a significant effect
on our financial position or operating results.




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 primarily due to the short-term
nature of the major portion of our investment portfolio, which
is summarized in Note 8 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, 2001.

Foreign Currency Risk

In 2001, international revenues accounted for 30%
of consolidated revenues compared to 26% in 2000. International
revenues, as well as most of the related expenses incurred, are
denominated in the functional currencies of the corresponding
country. Results of operations from our foreign subsidiaries are
exposed to foreign currency exchange rate fluctuations as the
financial results of these subsidiaries are translated into U.S.
dollars upon consolidation. As exchange rates vary, revenues and
other operating results, when translated, may differ materially
from expectations. The effect of foreign exchange transaction
gains and losses were not material to Onyx during the years
ended December 31, 1999, 2000 or 2001.

At December 31, 2001, we were also exposed
to foreign currency risk related to the current assets and
current liabilities of our foreign subsidiaries, in particular,
our consolidated joint venture denominated in Yen. Cumulative
unrealized translation losses related to the consolidation of
our Japan entity amounted to $850,000, or approximately 64% of
total unrealized translation losses included in
shareholders equity at December 31, 2001.

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

48



---



##### Table of Contents






ITEM
8.     CONSOLIDATED FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                   |  |      |    | 
|-------------------------------------------------- |  | ---- | -- | 
|                                                   |  | Page
|                                                   |  |     
|Report of Ernst & Young LLP, Independent
	Auditors |  |      | 50 | 
|Consolidated Balance Sheets                        |  |      | 51 | 
|Consolidated Statements of Operations              |  |      | 52 | 
|Consolidated Statements of Shareholders
	Equity   |  |      | 53 | 
|Consolidated Statements of Cash Flows              |  |      | 54 | 
|Notes to Consolidated Financial Statements         |  |      | 55 | 

49



---



##### Table of Contents



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, 2000 and 2001, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2001. 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, 2000 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2001 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, 2002, except for Note 18,


as to which the date is
February 14, 2002


50



---



##### Table of Contents



ONYX SOFTWARE CORPORATION






CONSOLIDATED BALANCE SHEETS


|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |          |   |         |        | 
|------------------------------------------------------------------ | -------------------------------------------------------------------------- | ------------------------------ | -------------------------------------------------------------------------- | ------------------------------------------ | - | ------ | ------- | -------- | - | ------- | ------ | 
|                                                                   |                                                                            |                               
|                                                                   |                                                                            | December 31,                  
|                                                                   |                                                                            |                               
|                                                                   |                                                                            | 2000                           |                                                                            | 2001                                      
|                                                                   |                                                                            |                                |                                                                            |                                           
|                                                                   |                                                                            |                               
|                                                                   |                                                                            | (In thousands, except         
|                                                                   |                                                                            | share and per share data)     
|ASSETS                                                            
|Current assets:                                                    |                                                                            |                                |                                                                            |                                            |   |        |         |         
|                                                                   | Cash and cash equivalents                                                  |                                | $                                                                          | 11,492                                     |   |        | $       | 15,868   |  
|                                                                   | Short-term investments                                                     |                                |                                                                            | 5,522                                      |   |        |         |         |  
|                                                                   | Accounts receivable, less allowances of $1,732 in
	2000 and $2,079 in 2001 |                                |                                                                            | 41,135                                     |   |        |         | 20,029   |  
|                                                                   | Prepaid expenses and other                                                 |                                |                                                                            | 4,533                                      |   |        |         | 2,596    |  
|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |         
|Total current assets                                               |                                                                            |                                | 62,682                                                                     |                                            |   |        | 38,493  |         
|Property and equipment, net                                        |                                                                            |                                | 20,848                                                                     |                                            |   |        | 12,884  |         
|Purchased technology, net                                          |                                                                            |                                | 1,958                                                                      |                                            |   |        | 751     |         
|Intangibles, net                                                   |                                                                            |                                | 19,674                                                                     |                                            |   |        | 10,863  |         
|Other assets                                                       |                                                                            |                                | 3,878                                                                      |                                            |   |        | 1,520   |         
|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |         
|                                                                   |                                                                            |                                |                                                                            | Total assets                               |   | $      | 109,040 |          |   | $       | 64,511 | 
|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |         
|LIABILITIES AND SHAREHOLDERS
	EQUITY                             
|Current liabilities:                                               |                                                                            |                                |                                                                            |                                            |   |        |         |         
|                                                                   | Accounts payable                                                           |                                | $                                                                          | 6,792                                      |   |        | $       | 2,826    |  
|                                                                   | Salary and benefits payable                                                |                                |                                                                            | 5,778                                      |   |        |         | 1,833    |  
|                                                                   | Accrued liabilities                                                        |                                |                                                                            | 4,691                                      |   |        |         | 3,260    |  
|                                                                   | Income taxes payable                                                       |                                |                                                                            | 808                                        |   |        |         | 695      |  
|                                                                   | Current portion of capital-lease obligations                               |                                |                                                                            | 242                                        |   |        |         | 173      |  
|                                                                   | Current portion of restructuring-related
	liabilities                      |                                |                                                                            |                                           |   |        |         | 15,384   |  
|                                                                   | Deferred revenue                                                           |                                |                                                                            | 19,119                                     |   |        |         | 19,191   |  
|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |         
|Total current liabilities                                          |                                                                            |                                | 37,430                                                                     |                                            |   |        | 43,362  |         
|Capital-lease obligations, less current portion                    |                                                                            |                                | 428                                                                        |                                            |   |        | 248     |         
|Long-term restructuring-related liabilities, less
	current portion |                                                                            |                                |                                                                           |                                            |   |        | 9,930   |         
|Deferred tax liabilities                                           |                                                                            |                                | 2,201                                                                      |                                            |   |        | 1,223   |         
|Minority interest in joint venture                                 |                                                                            |                                | 2,895                                                                      |                                            |   |        | 1,613   |         
|Commitments and contingencies                                      |                                                                            |                                |                                                                            |                                            |   |        |         |         
|Shareholders equity:                                              |                                                                            |                                |                                                                            |                                            |   |        |         |         
|                                                                   | Preferred stock, $0.01 par value:                                          |                                |                                                                            |                                            |   |        |         |          |  
|                                                                   |                                                                            | Authorized shares  20,000,000 |                                                                            |                                            |   |        |         |          |   |        
|                                                                   |                                                                            |                                | Issued and outstanding shares  none                                       |                                            |   |       |         |          |   |        |       
|                                                                   | Common stock, $0.01 par value:                                             |                                |                                                                            |                                            |   |        |         |          |  
|                                                                   |                                                                            | Authorized shares  80,000,000 |                                                                            |                                            |   |        |         |          |   |        
|                                                                   |                                                                            |                                | Issued and outstanding shares 
	37,597,670 in 2000 and 43,949,874 in 2001 |                                            |   | 75,416 |         |          |   | 118,557 |       
|                                                                   | Common stock issuable in acquisition                                       |                                |                                                                            | 4,320                                      |   |        |         |         |  
|                                                                   | Note receivable from officer for common stock                              |                                |                                                                            | (157                                       | ) |        |         |         |  
|                                                                   | Deferred stock-based compensation                                          |                                |                                                                            | (413                                       | ) |        |         | (809     | )
|                                                                   | Accumulated deficit                                                        |                                |                                                                            | (12,776                                    | ) |        |         | (108,291 | )
|                                                                   | Accumulated other comprehensive loss                                       |                                |                                                                            | (304                                       | ) |        |         | (1,322   | )
|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |         
|                                                                   |                                                                            |                                |                                                                            | Total shareholders equity                 |   |        | 66,086  |          |   |         | 8,135  | 
|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |         
|                                                                   |                                                                            |                                |                                                                            | Total liabilities and shareholders equity |   | $      | 109,040 |          |   | $       | 64,511 | 
|                                                                   |                                                                            |                                |                                                                            |                                            |   |        |         |         

See accompanying notes.

51



---



##### Table of Contents



ONYX SOFTWARE CORPORATION






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |        |         | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------- | - | ------- | ------ | ------- | 
|                                                      |                                                                                    |                                      
|                                                      |                                                                                    | Year Ended December 31,              
|                                                      |                                                                                    |                                      
|                                                      |                                                                                    | 1999                                  |        | 2000   |        | 2001
|                                                      |                                                                                    |                                       |        |        |        |     
|                                                      |                                                                                    |                                      
|                                                      |                                                                                    | (In thousands, except per share data)
|Revenues:                                             |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      | License                                                                            |                                       | $      | 38,122 |        |      | $      | 73,701 |         |   | $       | 37,584 |        
|                                                      | Support and service                                                                |                                       |        | 22,452 |        |      |        | 45,608 |         |   |         | 59,577 |        
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      |                                                                                    | Total revenues                        |        |        | 60,574 |      |        |        | 119,309 |   |         |        | 97,161  | 
|Cost of revenues:                                     |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      | License                                                                            |                                       |        | 2,243  |        |      |        | 3,520  |         |   |         | 2,006  |        
|                                                      | Amortization of acquired technology                                                |                                       |        | 500    |        |      |        | 820    |         |   |         | 751    |        
|                                                      | Support and service                                                                |                                       |        | 11,270 |        |      |        | 23,552 |         |   |         | 33,123 |        
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      |                                                                                    | Total cost of revenues                |        |        | 14,013 |      |        |        | 27,892  |   |         |        | 35,880  | 
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|Gross margin                                          |                                                                                    |                                       | 46,561 |        |        |      | 91,417 |        |         |   | 61,281  |       
|Operating expenses:                                   |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      | Sales and marketing                                                                |                                       |        | 29,614 |        |      |        | 59,182 |         |   |         | 53,254 |        
|                                                      | Research and development                                                           |                                       |        | 10,432 |        |      |        | 21,046 |         |   |         | 21,968 |        
|                                                      | General and administrative                                                         |                                       |        | 5,720  |        |      |        | 11,120 |         |   |         | 14,623 |        
|                                                      | Restructuring and other related charges                                            |                                       |        |       |        |      |        |       |         |   |         | 51,806 |        
|                                                      | Amortization and impairment of goodwill and other
	acquisition-related intangibles |                                       |        | 1,064  |        |      |        | 4,332  |         |   |         | 13,695 |        
|                                                      | Amortization of stock-based compensation                                           |                                       |        | 882    |        |      |        | 548    |         |   |         | 904    |        
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      |                                                                                    | Total operating expenses              |        |        | 47,712 |      |        |        | 96,228  |   |         |        | 156,250 | 
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|Loss from operations                                  |                                                                                    |                                       | (1,151 | )      |        |      | (4,811 | )      |         |   | (94,969 | )     
|Interest income, net                                  |                                                                                    |                                       | 1,224  |        |        |      | 788    |        |         |   | 377     |       
|Investment losses and impairment                      |                                                                                    |                                       |       |        |        |      | (500   | )      |         |   | (2,500  | )     
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|Income (loss) before income taxes                     |                                                                                    |                                       | 73     |        |        |      | (4,523 | )      |         |   | (97,092 | )     
|Income tax provision (benefit)                        |                                                                                    |                                       | 517    |        |        |      | 404    |        |         |   | (294    | )     
|Minority interest in loss of consolidated
	subsidiary |                                                                                    |                                       |       |        |        |      | (216   | )      |         |   | (1,283  | )     
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|Net loss                                              |                                                                                    |                                       | (444   | )      |        |      | (4,711 | )      |         |   | (95,515 | )     
|Preferred stock accretion                             |                                                                                    |                                       | (1,442 | )      |        |      |       |        |         |   |        |       
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|Net loss applicable to common shareholders            |                                                                                    | $                                     | (1,886 | )      |        | $    | (4,711 | )      |         | $ | (95,515 | )     
|                                                      |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|Net loss per share:                                   |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      | Basic and diluted                                                                  |                                       | $      | (0.06  | )      |      | $      | (0.13  | )       |   | $       | (2.37  | )      
|                                                      | Pro forma basic and diluted                                                        |                                       | $      | (0.01  | )      |      |        | NA     |         |   |         | NA     |        
|Shares used in calculation of net loss per share:     |                                                                                    |                                       |        |        |        |      |        |        |         |   |         |       
|                                                      | Basic and diluted                                                                  |                                       |        | 30,400 |        |      |        | 34,922 |         |   |         | 40,368 |        
|                                                      | Pro forma basic and diluted                                                        |                                       |        | 31,216 |        |      |        | NA     |         |   |         | NA     |        

See accompanying notes.

52



---



##### Table of Contents



ONYX SOFTWARE CORPORATION






CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

|                              |                                                                                     |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        |         |   | 
|----------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | ----------- | - | ----------- | ------- | ----------- | - | ------------ | ----- | ------------- | - | ------------- | ---- | --------- | - | - | ------ | ------ | - | - | -------- | - | ------- | - | ------ | - | ------ | - | ------ | ------- | - | 
|                              |                                                                                     |                                           |            |             |   |             |         | Note        |   |              |       |               |   |               |      |          
|                              |                                                                                     |                                           |            |             |   |             |         | Receivable  |   |              |       |               |   |               |      |          
|                              |                                                                                     |                                           |            | Common      |   | from        |         |             |   |              |       | Accumulated   |   | Total        
|                              |                                                                                     | Common Stock                              |            | Stock       |   | Officer for |         | Deferred    |   |              |       | Other         |   | Shareholders
|                              |                                                                                     |                                           |            | Issuable in |   | Common      |         | Stock-Based |   | Accumulated  |       | Comprehensive |   | Equity       
|                              |                                                                                     | Shares                                    |            | Amount      |   | Acquisition |         | Stock       |   | Compensation |       | Deficit       |   | Loss          |      | (Deficit)
|                              |                                                                                     |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |          
|                              |                                                                                     |                                          
|                              |                                                                                     | (In thousands, except share data)        
|Balance at January 1, 1999.   |                                                                                     |                                           | 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-based 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               |                                           |            | 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-based 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               |                                           |            | 232,110     |   |             |         | 5,861       |   |              |       | 4,320         |   |               |      |          |   |   |        |       |   |   |          |  |         |   |        |  |        |   |        | 10,181  |  
|                              | Issuance of common stock in connection with
	private placement                      |                                           |            | 343,100     |   |             |         | 5,000       |   |              |       |              |   |               |      |          |   |   |        |       |   |   |          |  |         |   |        |  |        |   |        | 5,000   |  
|                              | Comprehensive loss:                                                                 |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        |         |  
|                              |                                                                                     | Cumulative translation loss               |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |        |        |  |   |          |   |        |   |        |   | (188   | ) |        |         |   | 
|                              |                                                                                     | Unrealized gains on marketable securities |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |        |        |  |   |          |   |        |   |        |   | 32     |   |        |         |   | 
|                              |                                                                                     | Net loss                                  |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |        |        |  |   |          |   | (4,711  | ) |        |   |       |   |        |         |   | 
|                              | Total comprehensive loss                                                            |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        | (4,867  | )
|                              |                                                                                     |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        |        
|Balance at December 31, 2000. |                                                                                     |                                           | 37,597,670 |             |   |             | 75,416  |             |   |              | 4,320 |               |   |               | (157 | )         |   |   | (413   | )      |   |   | (12,776  | ) |         |   | (304   | ) |        |   | 66,086 |        
|                              | Common stock issued in connection with
	acquisitions                                |                                           |            | 2,419,946   |   |             |         | 9,979       |   |              |       | (4,320        | ) |               |      |          |   |   |        | (1,840 | ) |   |          |  |         |   |        |  |        |   |        | 3,819   |  
|                              | Amortization of deferred stock compensation                                         |                                           |            |            |   |             |         |            |   |              |       |              |   |               |      |          |   |   |        | 904    |   |   |          |  |         |   |        |  |        |   |        | 904     |  
|                              | Reversal of deferred stock-based compensation
	associated with terminated employees |                                           |            |            |   |             |         | (540        | ) |              |       |              |   |               |      |          |   |   |        | 540    |   |   |          |  |         |   |        |  |        |   |        |        |  
|                              | Shareholder loan repayment                                                          |                                           |            |            |   |             |         |            |   |              |       |              |   |               |      | 157       |   |   |        |       |   |   |          |  |         |   |        |  |        |   |        | 157     |  
|                              | Exercise of stock options                                                           |                                           |            | 1,194,720   |   |             |         | 912         |   |              |       |              |   |               |      |          |   |   |        |       |   |   |          |  |         |   |        |  |        |   |        | 912     |  
|                              | Issuance of common stock under ESPP                                                 |                                           |            | 237,538     |   |             |         | 1,265       |   |              |       |              |   |               |      |          |   |   |        |       |   |   |          |  |         |   |        |  |        |   |        | 1,265   |  
|                              | Proceeds from public offering, net of offering
	costs of $2,225.                    |                                           |            | 2,500,000   |   |             |         | 31,525      |   |              |       |              |   |               |      |          |   |   |        |       |   |   |          |  |         |   |        |  |        |   |        | 31,525  |  
|                              | Comprehensive loss:                                                                 |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        |         |  
|                              |                                                                                     | Cumulative translation loss               |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |        |        |  |   |          |   |        |   |        |   | (1,045 | ) |        |         |   | 
|                              |                                                                                     | Unrealized gains on marketable securities |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |        |        |  |   |          |   |        |   |        |   | 27     |   |        |         |   | 
|                              |                                                                                     | Net loss                                  |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |        |        |  |   |          |   | (95,515 | ) |        |   |       |   |        |         |   | 
|                              | Total comprehensive loss                                                            |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        | (96,533 | )
|                              |                                                                                     |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        |        
|Balance at December 31, 2001. |                                                                                     |                                           | 43,949,874 |             |   | $           | 118,557 |             |   | $            |      |               |   | $             |     |           |   | $ | (809   | )      |   | $ | (108,291 | ) |         | $ | (1,322 | ) |        | $ | 8,135  |        
|                              |                                                                                     |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |        |        |   |   |          |   |         |   |        |   |        |   |        |        

See accompanying notes.

53



---



##### Table of Contents



ONYX SOFTWARE CORPORATION






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                   |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |         |        |        |  
|---------------------------------- | ------------------------------------------------------------------------------------------ | ----------------------------------------------------- | ---------------------------------------- | ------- | ----- | ------ | - | ------- | ----- | ------- | - | ------- | ------ | ------ | -
|                                   |                                                                                            |                                                      
|                                   |                                                                                            | Year Ended December 31,                              
|                                   |                                                                                            |                                                      
|                                   |                                                                                            | 1999                                                  |                                          | 2000    |       | 2001  
|                                   |                                                                                            |                                                       |                                          |         |       |       
|                                   |                                                                                            |                                                      
|                                   |                                                                                            | (In thousands)                                       
|OPERATING ACTIVITIES               |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Net loss applicable to common shareholders                                                 |                                                       | $                                        | (1,886  | )     |        | $ | (4,711  | )     |         | $ | (95,515 | )     
|                                   | Adjustments to reconcile net loss to net cash
	provided by (used in) operating activities: |                                                       |                                          |         |       |        |   |         |       |         |   |         |       
|                                   |                                                                                            | Preferred stock accretion                             |                                          |         | 1,442 |        |   |         |      |         |   |         |       |       
|                                   |                                                                                            | In-process research and development                   |                                          |         | 390   |        |   |         |      |         |   |         |       |       
|                                   |                                                                                            | Depreciation and amortization                         |                                          |         | 3,054 |        |   |         | 9,918 |         |   |         | 12,917 |       
|                                   |                                                                                            | Accretion of premium on investments                   |                                          |         | 132   |        |   |         | 51    |         |   |         | 5      |       
|                                   |                                                                                            | Deferred income taxes                                 |                                          |         | (134  | )      |   |         | (603  | )       |   |         | (978   | )     
|                                   |                                                                                            | Noncash stock-based compensation expense              |                                          |         | 921   |        |   |         | 547   |         |   |         | 904    |       
|                                   |                                                                                            | Impairment on intangible assets                       |                                          |         |      |        |   |         |      |         |   |         | 7,812  |       
|                                   |                                                                                            | Impairment on property and equipment                  |                                          |         |      |        |   |         |      |         |   |         | 13,821 |       
|                                   |                                                                                            | Minority interest in loss of consolidated
	subsidiary |                                          |         |      |        |   |         | (216  | )       |   |         | (1,283 | )     
|                                   |                                                                                            | Investment losses and impairment                      |                                          |         |      |        |   |         | 500   |         |   |         | 2,500  |       
|                                   |                                                                                            | Changes in operating assets and liabilities:          |                                          |         |       |        |   |         |       |         |   |         |        |       
|                                   |                                                                                            |                                                       | Accounts receivable                      |         |       | (9,225 | ) |         |       | (18,116 | ) |         |        | 20,916 |  
|                                   |                                                                                            |                                                       | Prepaid expenses and other assets        |         |       | (1,234 | ) |         |       | (5,492  | ) |         |        | 1,754  |  
|                                   |                                                                                            |                                                       | Accounts payable and accrued liabilities |         |       | 597    |   |         |       | 9,275   |   |         |        | (9,244 | )
|                                   |                                                                                            |                                                       | Restructuring-related liabilities        |         |       |       |   |         |       |        |   |         |        | 25,314 |  
|                                   |                                                                                            |                                                       | Deferred revenue                         |         |       | 3,401  |   |         |       | 8,091   |   |         |        | (135   | )
|                                   |                                                                                            |                                                       | Income taxes                             |         |       | 221    |   |         |       | 335     |   |         |        | (113   | )
|                                   |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Net cash used in operating activities                                                      |                                                       |                                          | (2,321  | )     |        |   | (421    | )     |         |   | (21,325 | )     
|INVESTING ACTIVITIES               |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Purchases of securities                                                                    |                                                       |                                          | (31,916 | )     |        |   | (7,007  | )     |         |   | (4,900  | )     
|                                   | Proceeds from maturity of securities                                                       |                                                       |                                          | 10,989  |       |        |   | 22,229  |       |         |   | 10,417  |       
|                                   | Acquisitions, net of cash acquired                                                         |                                                       |                                          | (5,162  | )     |        |   | (2,127  | )     |         |   | (869    | )     
|                                   | Purchases of property and equipment                                                        |                                                       |                                          | (8,236  | )     |        |   | (15,414 | )     |         |   | (11,817 | )     
|                                   |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Net cash used in investing activities                                                      |                                                       |                                          | (34,325 | )     |        |   | (2,319  | )     |         |   | (7,169  | )     
|FINANCING ACTIVITIES               |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Net proceeds from sale of common stock                                                     |                                                       |                                          | 41,873  |       |        |   |        |       |         |   | 31,525  |       
|                                   | Net proceeds from private placement                                                        |                                                       |                                          |        |       |        |   | 5,000   |       |         |   |        |       
|                                   | Proceeds from exercise of stock options                                                    |                                                       |                                          | 415     |       |        |   | 1,405   |       |         |   | 912     |       
|                                   | Proceeds from shares issued through employee
	stock purchase plan                          |                                                       |                                          | 969     |       |        |   | 1,927   |       |         |   | 1,265   |       
|                                   | Proceeds from repayment of shareholder notes                                               |                                                       |                                          |        |       |        |   | 55      |       |         |   | 157     |       
|                                   | Payments on capital lease obligations                                                      |                                                       |                                          | (221    | )     |        |   | (193    | )     |         |   | (249    | )     
|                                   | Payments on long-term debt                                                                 |                                                       |                                          | (4,554  | )     |        |   | (746    | )     |         |   |        |       
|                                   | Proceeds from minority shareholders in Japanese
	joint venture                             |                                                       |                                          |        |       |        |   | 3,111   |       |         |   |        |       
|                                   |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Net cash provided by financing activities                                                  |                                                       |                                          | 38,482  |       |        |   | 10,559  |       |         |   | 33,610  |       
|                                   | Effect of exchange rate changes on cash                                                    |                                                       |                                          | 2       |       |        |   | (18     | )     |         |   | (740    | )     
|                                   |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Net increase in cash and cash equivalents                                                  |                                                       |                                          | 1,838   |       |        |   | 7,801   |       |         |   | 4,376   |       
|                                   | Cash and cash equivalents at beginning of year                                             |                                                       |                                          | 1,853   |       |        |   | 3,691   |       |         |   | 11,492  |       
|                                   |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Cash and cash equivalents at end of year                                                   |                                                       | $                                        | 3,691   |       |        | $ | 11,492  |       |         | $ | 15,868  |       
|                                   |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|SUPPLEMENTAL CASH FLOW DISCLOSURES |                                                                                            |                                                       |                                          |         |       |        |   |         |       |         |   |        
|                                   | Interest paid                                                                              |                                                       | $                                        | 88      |       |        | $ | 209     |       |         | $ | 191     |       
|                                   | Income taxes paid, net                                                                     |                                                       |                                          | 430     |       |        |   | 695     |       |         |   | 797     |       
|                                   | Equipment financed through capital lease
	obligations                                      |                                                       |                                          |        |       |        |   | 610     |       |         |   |        |       
|                                   | Technology purchased through long-term debt                                                |                                                       |                                          |        |       |        |   | 818     |       |         |   |        |       
|                                   | Issuance of common stock to employees in
	connection with 1998 bonus                       |                                                       |                                          | 119     |       |        |   |        |       |         |   |        |       
|                                   | Issuance of common stock and stock options in
	connection with acquisitions                |                                                       |                                          | 2,554   |       |        |   | 5,861   |       |         |   | 9,439   |       
|                                   | Conversion of preferred stock to common stock                                              |                                                       |                                          | 14,727  |       |        |   |        |       |         |   |        |       

See accompanying notes.

54



---



##### Table of Contents






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 CRM 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 e-mail, the
Companys solution helps enterprises to more effectively
acquire, manage and retain customer, partner and other
relationships. The Company markets its solution to companies
that want to merge new, online 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 subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.



| |                 
| | ----------------
| | Use of Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States 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, tax liabilities and
restructuring 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: (a) software license revenues and (b) service
revenues. Software license revenues are generated from licensing
the rights to use the Companys products directly to
end-users and VSPs and indirectly through 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.

License revenues are recognized when a
noncancellable license agreement is in force as evidenced by a
signed contract, the product has been shipped, the license fee
is fixed or determinable, and collectibility is reasonably
assured.

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

55



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

sold separately, the price established by
authorized management, if it is probable that the price, once
established, will not change before market introduction.

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

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,
or in certain situations on a fixed-fee basis, under separate
service arrangements. Revenues from consulting and training
services are recognized as services are performed. Standard
terms for renewal of customer support contracts, consulting
services and training services call for payment within
30 days.

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

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



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

The Company considers all highly liquid
investments with a 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, 2001, the Company has the
following financial instruments: cash and cash equivalents,
accounts receivable, accounts payable, salaries and benefits
payable, accrued liabilities, restructuring liabilities and
capital lease obligations. The carrying value of cash and cash
equivalents, accounts receivable, accounts payable, salaries and
benefits payable, and accrued liabilities approximates their
fair value based on the liquidity of these financial instruments
or based on their short-term nature. The carrying value of
capital lease obligations and restructuring-related liabilities
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.

56



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                      
| | -------------------------------------
| | 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.

The Company records impairment losses on goodwill
and other intangible assets when events and circumstances
indicate that such assets might be impaired and the estimated
fair value of the asset is less than its recorded amount.
Conditions that would necessitate an impairment assessment
include material adverse changes in operations, significant
adverse differences in actual results in comparison with initial
valuation forecasts prepared at the time of acquisition, a
decision to abandon acquired products, services or technologies,
or other significant adverse changes that would indicate the
carrying amount of the recorded asset might not be recoverable.



| |                                  
| | ---------------------------------
| | Investment Losses and
	Impairment

During 1999 and 2000, the Company invested in a
small number of private companies. One of these investments was
accounted for using the equity method of accounting due to the
Companys ability to exercise significant influence, but
not control, over the investee and losses were recorded to the
extent of our investment. The remaining private equity
investments are accounted for on a cost basis since the Company
does not have the ability to exercise significant influence over
the investee and the Companys ownership interest is less
than 20%. Under the cost method of accounting, investments in
private companies are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of
earnings and additional investments. The Company periodically
evaluates whether the declines in fair value of its investments
are other-than-temporary. This evaluation consists of a review
of qualitative and quantitative factors by members of senior
management, including a review of the investees financial
condition, results of operations, operating trends and other
financial ratios. The Company further considers the implied
value from any recent rounds of financing completed by the
investee, as well as market prices of comparable public
companies. The Company generally requires its private investees
to deliver monthly, quarterly and annual financial statements to
assist in reviewing relevant financial data and to assist in
determining whether such data may indicate other-than-temporary
declines in fair value below the Companys accounting
basis. The Company generally considers a decline to be an
other-than-temporary impairment if the estimated value is less
than its accounting basis for two consecutive quarters, absent
evidence to the contrary.



| |                                
| | -------------------------------
| | 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.

57



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                  
| | -------------------------------------------------
| | 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. The
Company assesses each customers financial condition
through the review of current financial statements or credit
reports. For existing customers, prior payment history is also
used to evaluate probability of collection and credit
worthiness. During 1999, 2000 and 2001, no single customer
accounted for 10% or more of total revenues. At
December 31, 2000, one customer accounted for approximately
22% of accounts receivable, including $1.2 million in
deferred revenues. At December 31, 2001, no single customer
accounted for more than 10% of accounts receivable. The Company
does not require collateral or other security to support credit
sales, but provides an allowance for bad debts based on
historical experience applied against its aged receivables 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 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 fair value for financial reporting purposes. Deferred
stock-based compensation also includes the intrinsic value of
unvested options assumed

58



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

in acquisitions. 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
$4.1 million, $8.2 million and $7.6 million
during the years ended December 31, 1999, 2000 and 2001,
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 16.



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In June 2001, the FASB issued SFAS No. 141,
Business Combinationsand SFAS No. 142, Goodwill
and Other Intangible Assets. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate
from goodwill. SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and
certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and
written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain
intangibles is more than its fair value. The Company will apply
SFAS No. 142 beginning in the first quarter of 2002.
Application of the non-amortization provisions of SFAS
No. 142 is expected to result in an increase in operating
results of $800,000 per quarter in 2002. The Company will
reclassify an assembled workforce intangible asset with an
unamortized balance of $1.2 million (along with a deferred
tax liability of $400,000) to goodwill at the date of adoption.
This will result in approximately $8.2 million of goodwill
and $3.0 million of other intangibles commencing on
January 1, 2002. The Company will test goodwill for
impairment using the two-step approach prescribed in SFAS
No. 142. The first step is a screen for potential
impairment, while the second step measures the amount of the
impairment, if any. The Company expects to

59



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

perform the first of the required impairment
tests of goodwill and indefinite lived intangible assets as of
January 1, 2002 in the first quarter of 2002. Any
impairment charge resulting from these transitional impairment
tests will be reflected as the cumulative effect of a change in
accounting principle in the first quarter of 2002. The Company
has not yet determined what the effect of these tests will be on
the earnings and financial position of the Company.

The FASB also recently issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, applicable to financial statements issued for fiscal
years beginning after December 15, 2001. The FASBs
new rules on asset impairment supersede SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, and portions of
Accounting Principles Bulletin Opinion 30, Reporting the
Results of Operations. This Standard provides a single
accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to
classify an asset as held-for-sale. Classification as
held-for-sale is an important distinction since such assets are
not depreciated and are stated at the lower of fair value and
carrying amount. This Standard also requires expected future
operating losses from discontinued operations to be displayed in
the period(s) in which the losses are incurred, rather than as
of the measurement date as presently required. The provisions of
this Standard are not expected to have a significant effect on
the Companys financial position or operating results.



| |                  
| | -----------------
| | 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



| |            
| | -----------
| | 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 royalty
advances to Versametrix were capitalized and accounted for as
part of the purchase price.



| |                 
| | ----------------
| | 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. On October 1, 2000, the Company
issued 162,712 shares valued at $3.6 million and on
October 1, 2001, the Company issued 2,234,483 shares valued
at $4.32 million in accordance with the amended sale and
purchase agreement. The additional consideration has been
accounted for as additional purchase price related to goodwill
and is being amortized over the remaining expected useful life.
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.



| |                        
| | -----------------------
| | 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)

60



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of common stock in exchange for all the
outstanding capital stock of CSN, and approximately $400,000 in
acquisition-related costs. 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.



| |           
| | ----------
| | RevenueLab

On January 5, 2001, the Company acquired
RevenueLab, a privately held consulting company based in
Stamford, Connecticut. In connection with the acquisition, the
Company paid $1.3 million 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. The Company recorded $1.9 million for the
value allocated to deferred stock compensation, representing the
excess of the fair value over the exercise price for the options
assumed by Onyx. Total consideration, including $400,000 of
acquisition-related costs, was valued at approximately
$7.4 million. The purchase price, adjusted for deferred
stock compensation, was approximately $5.5 million. The
value of the deferred compensation is being amortized over the
remaining stock options vesting periods of 4.5 years
using a graded vesting approach, adjusted for any terminated
employees. At December 31, 2001, the unamortized deferred
compensation totaled $669,000. The transaction was accounted for
using the purchase method of accounting, and, accordingly, the
results of RevenueLabs operations have been included in
the Companys consolidated financial statements from the
date of acquisition.

The purchase price of each acquisition was
allocated as follows:

|                                    |  |                |       |           |  |     |        |            |  |   |       |   |  |   |       |  
|----------------------------------- |  | -------------- | ----- | --------- |  | --- | ------ | ---------- |  | - | ----- | - |  | - | ----- | -
|                                    |  |                |       | Market    |  |     |        |           
|                                    |  | Versametrix    |       | Solutions |  | CSN |        | RevenueLab
|                                    |  |                |       |           |  |     |        |           
|                                    |  |               
|                                    |  | (In thousands)
|Assets acquired                     |  | $              | 7     |           |  | $   | 1,030  |            |  | $ | 506   |   |  | $ | 1,106 |  
|Liabilities assumed                 |  |                | (25   | )         |  |     | (1,885 | )          |  |   | (411  | ) |  |   | (268  | )
|In-process research and development |  |                | 390   |           |  |     |       |            |  |   |      |   |  |   |      |  
|Purchased technology                |  |                | 798   |           |  |     | 655    |            |  |   |      |   |  |   |      |  
|Goodwill and other intangibles      |  |                | 676   |           |  |     | 17,959 |            |  |   | 5,405 |   |  |   | 4,694 |  
|Deferred tax liability              |  |                |      |           |  |     | (2,439 | )          |  |   | (500  | ) |  |   |      |  
|                                    |  |                |       |           |  |     |        |            |  |   |       |   |  |   |       |  
|                                    |  | $              | 1,846 |           |  | $   | 15,320 |            |  | $ | 5,000 |   |  | $ | 5,532 |  
|                                    |  |                |       |           |  |     |        |            |  |   |       |   |  |   |       |  

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 and other
intangibles are being amortized over their estimated useful life
of two and one-half to five years on a straight-line basis.

As a result of the Companys restructuring
plans, the negative trends in the marketplace, and the negative
trends within the software market sector, the Company performed
a future cash flow analysis as required by SFAS No. 121.
Based on this analysis, the Company determined that the
discounted cash flows for certain business units were inadequate
to support the remaining carrying value of certain goodwill and
intangibles and recorded an impairment write down during the
third and fourth quarters of 2001 totaling $7.8 million
relating to CSN, Versametrix, and RevenueLab. The impairment is
included in amortization and impairment of goodwill and other
acquisition-related intangibles on the consolidated statements
of operations.

61



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Restructuring
and Other Related Charges

On September 30 2001, the Company approved a
restructuring plan to reduce headcount, reduce infrastructure
and eliminate excess and duplicate facilities. During 2001, the
Company recorded approximately $51.8 million in
restructuring and other related charges.

The components of the charges recorded for the
year ended December 31, 2001, are as follows:

|                          |  |                |        |                |  |              |         |   |  |   |        | 
|------------------------- |  | -------------- | ------ | -------------- |  | ------------ | ------- | - |  | - | ------ | 
|                          |  | Charge for     |        |                |  |             
|                          |  | the Year Ended |        |                |  | Balance at  
|                          |  | December 31,   |        | Cash Payments  |  | December 31,
|                          |  | 2001           |        | and Write-offs |  | 2001        
|                          |  |                |        |                |  |             
|                          |  |               
|                          |  | (In thousands)
|Excess facilities         |  | $              | 31,948 |                |  | $            | (7,653  | ) |  | $ | 24,295 | 
|Employee separation costs |  |                | 3,724  |                |  |              | (3,474  | ) |  |   | 250    | 
|Asset impairments         |  |                | 14,747 |                |  |              | (14,747 | ) |  |   |       | 
|Other                     |  |                | 1,387  |                |  |              | (618    | ) |  |   | 769    | 
|                          |  |                |        |                |  |              |         |   |  |   |        | 
|Total                     |  | $              | 51,806 |                |  | $            | (26,492 | ) |  | $ | 25,314 | 
|                          |  |                |        |                |  |              |         |   |  |   |        | 

Employee separation costs, which include
severance, related taxes, outplacement and other benefits, of
approximately $3.7 million related to more than
300 employees terminated during 2001. All functional areas
have been affected by the reductions and the remaining severance
balance totaling $250,000 will be paid in 2002.

Excess facilities charges for the year ended
December 31, 2001 were $31.9 million. These costs are
the result of our decision to reduce or exit certain domestic
and international facilities. The estimated facilities costs are
based on current comparable rates for leases in the respective
markets or estimated termination fees. If we are unsuccessful in
negotiating affordable termination fees on certain facilities,
if facilities operating lease rental rates continue to decrease
in these markets, if it takes longer than expected to find a
suitable tenant to sublease these facilities, or if other
estimates and assumptions change, the actual loss could exceed
this estimate. Future cash outlays are anticipated through
September 2005 unless estimates and assumptions change or we are
able to negotiate to exit the leases at an earlier date. Assets
disposed of or removed from operations and not intended for use
consisted primarily of leasehold improvements, computer
equipment, office equipment, furniture and fixtures. Asset
impairments were $14.7 million for the year ended
December 31, 2001.

For the year ended December 31, 2001,
restructuring charges were $51.8 million, of which
$15.2 million related to asset impairments and other
non-cash charges, $11.3 million was paid out in cash, and
$25.3 million in restructuring liabilities remain at
December 31, 2001.

4.     Investment
Losses and Impairment

During 1999 and 2000, the Company invested
$3.5 million in a small number of private companies. The
carrying value of these investments is included in other assets
on the accompanying consolidated balance sheets and totaled
$3.0 million at December 31, 2000 and $500,000 at
December 31, 2001.

One of these investments was accounted for using
the equity method of accounting due to the Companys
ability to exercise significant influence, but not control, over
the investee. The entire balance of the $500,000 initial
investment in this company was reduced to zero during 2000 as
the Company recorded its proportionate share of the losses in
the investee.

The Company reported impairment losses, which
totaled $2.5 million during the year ended
December 31, 2001, relating to other-than-temporary
declines in three of its cost basis equity investments based upon

62



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

a review of qualitative and quantitative factors
surrounding the financial condition of the investees. These
other than temporary impairment losses were recorded to reflect
each investment at its estimated fair value. No other than
temporary impairment-related losses were incurred in 1999 or
2000.

5.     Onyx
Japan

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
the Companys technology and product offerings in Japan. In
October 2000, the Company made an initial contribution of
$4.3 million in exchange for 58% of the outstanding common
stock 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.

Under the terms of the joint venture agreement,
Prime Systems may at any time after September 14, 2001,
sell its shares after 90 days notice to the Company.
The Company has a right of first refusal to purchase any of
Prime Systems shares that are offered for resale at the
same price for which those shares are being offered to a third
party. Further, either the Company or Prime Systems may
terminate the joint venture agreement at its discretion if Onyx
Japan does not complete an initial public offering on or before
July 31, 2003. If Prime Systems exercises its right of
termination for this reason, the Company has the right, at its
election, to either (a) buy Prime Systems shares at
the current fair market value as determined by an appraiser or
(b) force a liquidation of Onyx Japan.

The Company has entered into a distribution
agreement with Onyx Japan, which was approved by the minority
shareholders, that provides for a fee to the Company based on
license and maintenance revenues in Japan. During 2000 and 2001,
fees charged under this agreement were $145,000 and
$1.3 million, respectively. The intercompany fees are
eliminated in consolidation; however, the Company allocates 42%
of the fees to the minority shareholders.

Included in license revenues for the quarter and
year ended December 31, 2001 is a sale to Softbank Commerce
for approximately $572,000 for software licenses that will be
internally deployed to support customer and business partner
relations. Softbank Commerce is a related party to Softbank
Investments Corporation, an entity who owns 14% of the
Companys Japanese joint venture.

6.     Stock-Based
Compensation

Stock-based compensation includes stock-based
charges resulting from option-related deferred compensation
recorded at the Companys initial public offering and
certain compensation arrangements with third-party consultants,
as well as the portion of acquisition-related consideration
conditioned on the continued tenure of key employees of certain
acquired businesses, which has been classified as compensation
expense rather than as a component of purchase price.

The increase in stock-based compensation during
the year ended December 31, 2001 resulted from the vesting and
corresponding amortization of deferred stock-based compensation
by employees associated with the acquisition of RevenueLab in
January 2001, which had the effect of increasing stock-based
compensation in comparison with the same period in the prior
year.

63



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table shows the amounts of
stock-based compensation that would have been recorded under the
following income statement categories had stock-based
compensation not been separately stated in the consolidated
statements of operations:

|                                  |                                                |                         |     |      |  |      |     |     |  |   |     |     | 
|--------------------------------- | ---------------------------------------------- | ----------------------- | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|                                  |                                                |                        
|                                  |                                                | Year Ended December 31,
|                                  |                                                |                        
|                                  |                                                | 1999                    |     | 2000 |  | 2001
|                                  |                                                |                         |     |      |  |     
|                                  |                                                |                        
|                                  |                                                | (In thousands)         
|Support and service cost of sales |                                                | $                       | 196 |      |  | $    | 110 |     |  | $ | 218 |    
|Sales and marketing               |                                                |                         | 327 |      |  |      | 239 |     |  |   | 575 |    
|Research and development          |                                                |                         | 113 |      |  |      | 63  |     |  |   | 35  |    
|General and administrative        |                                                |                         | 246 |      |  |      | 136 |     |  |   | 76  |    
|                                  |                                                |                         |     |      |  |      |     |     |  |   |     |    
|                                  | Total amortization of stock-based compensation |                         | $   | 882  |  |      | $   | 548 |  |   | $   | 904 | 
|                                  |                                                |                         |     |      |  |      |     |     |  |   |     |    

7.     Accumulated
Other Comprehensive Income (Loss)

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

|                                         |                                            |                |      |      |   |   |        |        |  
|---------------------------------------- | ------------------------------------------ | -------------- | ---- | ---- | - | - | ------ | ------ | -
|                                         |                                            |               
|                                         |                                            | December 31,  
|                                         |                                            |               
|                                         |                                            | 2000           |      | 2001
|                                         |                                            |                |      |     
|                                         |                                            |               
|                                         |                                            | (In thousands)
|Unrealized currency loss                 |                                            | $              | (277 | )    |   | $ | (1,322 | )     
|Unrealized loss on marketable securities |                                            |                | (27  | )    |   |   |       |       
|                                         |                                            |                |      |      |   |   |        |       
|                                         | Total accumulated other comprehensive loss |                | $    | (304 | ) |   | $      | (1,322 | )
|                                         |                                            |                |      |      |   |   |        |       

8.     Investments

At December 31, 2001, all of the
Companys investments were classified as cash equivalents
as the securities were highly liquid with an original maturity
of three months or less at the date of purchase. Investments at
December 31, 2000 are summarized below:

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

64



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

9.     Property and
Equipment

Property and equipment consists of the following:

|                                               |  |                |        |      |  |   |        |  
|---------------------------------------------- |  | -------------- | ------ | ---- |  | - | ------ | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2000           |        | 2001
|                                               |  |                |        |     
|                                               |  |               
|                                               |  | (In thousands)
|Computer and office equipment                  |  | $              | 12,206 |      |  | $ | 10,738 |  
|Purchased software                             |  |                | 3,783  |      |  |   | 4,049  |  
|Furniture and fixtures                         |  |                | 4,117  |      |  |   | 3,567  |  
|Leasehold improvements                         |  |                | 6,955  |      |  |   | 2,992  |  
|                                               |  |                |        |      |  |   |        |  
|                                               |  |                | 27,061 |      |  |   | 21,346 |  
|Less accumulated depreciation and amortization |  |                | (6,213 | )    |  |   | (8,462 | )
|                                               |  |                |        |      |  |   |        |  
|                                               |  | $              | 20,848 |      |  | $ | 12,884 |  
|                                               |  |                |        |      |  |   |        |  

Included in property and equipment are assets
acquired under capital lease obligations with an original cost
of approximately $1.1 million as of December 31, 2000
and $610,000 as of December 31, 2001. Accumulated
amortization on the leased assets was approximately $530,000 as
of December 31, 2000 and $240,000 as of December 31,
2001.

10.     Line of
Credit

In September 2001, the Company entered into a
loan and security agreement with Silicon Valley Bank (SVB),
which contains a $15.0 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 Company to borrow up to the lesser of
(a) 80% of its eligible accounts receivable based on a
borrowing base calculation or (b) $15.0 million and
bears interest at SVBs prime rate, which was 4.75% as of
December 31, 2001, plus 1%. The facility was replaced in
February 2002 (see Note 18). As of December 31,
2001, the Company had no outstanding borrowings under the
working capital facility; however, there was approximately
$10.1 million in standby letters of credit outstanding in
connection with leases of equipment and its facilities, of which
$6.6 million represents a security deposit for rent
associated with additional facilities in Bellevue, Washington.
The Company must periodically submit to SVB a borrowing base
calculation determined by a formula using receivables carried by
its U.S. entity, less certain aged and foreign receivables,
less an additional 20% to determine the eligible borrowing
amount. If the Companys borrowing base falls below
outstanding standby letters of credit issued by SVB on its
behalf, SVB may require the Company to cash secure the amount by
which outstanding standby letters of credit exceed the borrowing
base. Based on borrowing base calculations as of
December 31, 2001, the Company would be unable to borrow
any incremental amounts against its remaining unused line of
credit. No amounts of cash were pledged as security as of
December 31, 2001.

The loan and security agreement with SVB requires
the Company to maintain certain financial covenants. The Company
was not in compliance with these covenants at December 31,
2001; however, SVB has granted a waiver.

11.     Long-Term
Debt and Commitments



| |       
| | ------
| | Leases

The Company leases its facilities under
noncancelable operating lease agreements that expire on various
dates through March 2016. The Company leases certain equipment
under noncancelable capital and operating leases that expire on
various dates through May 2004.

65



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Minimum future lease payments under noncancelable
capital and operating leases for the periods ended
December 31 pursuant to leases outstanding as of
December 31, 2001 are summarized as follows:

|                                                   |            |                |      |           |  |   |         |        | 
|-------------------------------------------------- | ---------- | -------------- | ---- | --------- |  | - | ------- | ------ | 
|                                                   |            | Capital        |      | Operating
|                                                   |            | Leases         |      | Leases   
|                                                   |            |                |      |          
|                                                   |            |               
|                                                   |            | (In thousands)
|Year ending December 31:                           |            |                |      |           |  |   |         |       
|                                                   | 2002       |                | $    | 186       |  |   | $       | 14,661 | 
|                                                   | 2003       |                |      | 186       |  |   |         | 14,470 | 
|                                                   | 2004       |                |      | 71        |  |   |         | 14,157 | 
|                                                   | 2005       |                |      |          |  |   |         | 13,305 | 
|                                                   | 2006       |                |      |          |  |   |         | 11,582 | 
|                                                   | Thereafter |                |      |          |  |   |         | 56,796 | 
|                                                   |            |                |      |           |  |   |         |       
|                                                   |            |                | 443  |           |  | $ | 124,971 |       
|                                                   |            |                |      |           |  |   |         |       
|Less amount representing interest                  |            |                | (22  | )         |  |   |         |       
|                                                   |            |                |      |           |  |   |         |       
|Present value of minimum capital lease obligations |            |                | 421  |           |  |   |         |       
|Less current portion                               |            |                | (173 | )         |  |   |         |       
|                                                   |            |                |      |           |  |   |         |       
|Capital lease obligations, less current portion    |            | $              | 248  |           |  |   |         |       
|                                                   |            |                |      |           |  |   |         |       

Rental expense was approximately
$3.7 million, $6.4 million and $15.1 million in
1999, 2000 and 2001, respectively. Approximately
$7.7 million of the 2001 rental expense was identified as
excess facilities and included in restructuring and other
related charges in the consolidated statements of operations.

As of December 31, 2001, future minimum
rental receipts under subleased facilities is $53,000 in 2002,
$54,000 in 2003, $55,000 in 2004 and $23,000 in 2005.

As a result of the Companys restructuring
efforts in 2001, certain domestic and international facilities
have been exited or reduced. Commitments related to all of the
Companys operating leases are included in the table above.
Approximately $24.3 million in estimated losses associated
with these lease commitments is included in
restructuring-related liabilities in the consolidated balance
sheets as of December 31, 2001, of which $14.4 million
is classified as current and $9.9 million is classified as
long-term. Further information regarding the Companys
restructuring-related charges is included in Note 3.



| |                                
| | -------------------------------
| | 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
$2.1 million, $1.9 million and $1.8 million in
1999, 2000 and 2001. As of December 31, 2001, future
commitments under these royalty arrangements are anticipated to
be approximately $850,000.

66



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     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. 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.



| |                        
| | -----------------------
| | 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 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.



| |                                     
| | ------------------------------------
| | Private Placement with Board
	Member

On November 17, 2000, the Company completed
a private placement of $5.0 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.



| |                           
| | --------------------------
| | 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. The offered shares
generated net proceeds to the Company of approximately
$31.5 million.

67



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                
| | -------------------------------
| | 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 and the remaining $157,000 note was repaid
in June 2001.



| |                                                            
| | -----------------------------------------------------------
| | 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.



| |                                        
| | ---------------------------------------
| | 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 and 2001, the 1998 option
plan pool was increased by 1,560,800 shares and 1,746,100
shares, respectively. On January 1, 2002, the 1998 option
plan pool was increased by 2,018,400 shares. Options granted
under the 1998 option plan generally vest and become exercisable
over a four-year period. Initial option grants are typically
structured with 25% vesting after 12 months, with 2.0833%
vesting every month thereafter; additional option grants are
typically structured with 2.0833% vesting monthly over a
four-year period.



| |                                                  
| | -------------------------------------------------
| | 2001 Nonofficer Employee Stock Compensation
	Plan

The 2001 Nonofficer Employee Stock Compensation
Plan (the NOE plan) provides for both stock options and
restricted stock awards to employees, agents, advisors,
consultants and independent contractors of the Company, but does
not allow for grants to any directors or officers of the
Company. The Board of Directors initially reserved 1,000,000
shares for issuance under the NOE plan in January 2001, and
reserved an additional 2,500,000 shares in April 2001.
Additional shares may be reserved for issuance under the
NOE plan through authorization by the Board of Directors.
Options granted to new employees under the NOE plan
generally vest and become exercisable over a four-year period
with 25% vesting after 12 months and an additional 2.083%
vesting every month thereafter. Options granted to existing
employees under the NOE plan generally vest and become
exercisable over a four-year period with 2.083% vesting every
month.

68



---



##### Table of Contents



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, 1999                                  |                                              |           | 3,292,492 |                     |   |          | 6,469,096 |            |   | $ | 0.86  |      
|                                                            | Options granted                              |           |           | (3,325,768          | ) |          |           | 3,325,768  |   |   | $     | 7.80  | 
|                                                            | Options cancelled                            |           |           | 997,054             |   |          |           | (997,054   | ) |   | $     | 2.11  | 
|                                                            | Options exercised                            |           |           |                    |   |          |           | (950,206   | ) |   | $     | 0.44  | 
|                                                            |                                              |           |           |                     |   |          |           |            |   |   |       |      
|Outstanding at December 31, 1999
	(exercisable  1,550,096) |                                              |           | 963,778   |                     |   |          | 7,847,604 |            |   | $ | 3.69  |      
|                                                            | 1998 option plan increase                    |           |           | 1,560,800           |   |          |           |           |   |   |       |       | 
|                                                            | Options granted                              |           |           | (3,084,441          | ) |          |           | 3,084,441  |   |   | $     | 23.69 | 
|                                                            | Options cancelled                            |           |           | 965,192             |   |          |           | (965,192   | ) |   | $     | 7.44  | 
|                                                            | Options exercised                            |           |           |                    |   |          |           | (1,522,059 | ) |   | $     | 0.92  | 
|                                                            |                                              |           |           |                     |   |          |           |            |   |   |       |      
|Outstanding at December 31, 2000
	(exercisable  1,824,444) |                                              |           | 405,329   |                     |   |          | 8,444,794 |            |   | $ | 11.07 |      
|                                                            | 1998 option plan increase                    |           |           | 1,746,100           |   |          |           |           |   |   |       |       | 
|                                                            | 2001 nonofficer employee stock plan increase |           |           | 3,500,000           |   |          |           |           |   |   |       |       | 
|                                                            | Non plan grant increase                      |           |           | 255,282             |   |          |           |           |   |   |       |       | 
|                                                            | Options granted                              |           |           | (6,834,298          | ) |          |           | 6,834,298  |   |   | $     | 6.27  | 
|                                                            | Options cancelled                            |           |           | 4,106,896           |   |          |           | (4,106,896 | ) |   | $     | 11.94 | 
|                                                            | Options exercised                            |           |           |                    |   |          |           | (1,194,720 | ) |   | $     | 0.74  | 
|                                                            |                                              |           |           |                     |   |          |           |            |   |   |       |      
|Outstanding at December 31, 2001
	(exercisable  2,947,689) |                                              |           | 3,179,309 |                     |   |          | 9,977,476 |            |   | $ | 8.65  |      
|                                                            |                                              |           |           |                     |   |          |           |            |   |   |       |      

The following table summarizes information
concerning currently outstanding and exercisable options at
December 31, 2001:

|                         |  |             |           |                  |  |                  |       |           |  |                  |      |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | ---------------- |  | ---------------- | ----- | --------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           |                  |  |                 
|                         |  | Outstanding |           |                  |  |                 
|                         |  |             |           |                 
|                         |  |             |           | Weighted Average |  | Exercisable     
|                         |  |             |           | Remaining        |  |                 
|                         |  | Number of   |           | Weighted Average |  | Contractual Life |       | Number of |  | Weighted Average
|Range of Exercise Prices |  | Options     |           | Exercise Prices  |  | (Years)          |       | Options   |  | Exercise Prices 
|                         |  |             |           |                  |  |                  |       |           |  |                 
|$ 0.10 - $ 1.25          |  |             | 1,064,471 |                  |  | $                | 0.55  |           |  |                  | 5.32 |  |  |  | 847,037   |  |  | $ | 0.49  | 
|$ 1.75 - $ 3.87          |  |             | 1,593,584 |                  |  |                  | 3.01  |           |  |                  | 8.83 |  |  |  | 194,718   |  |  |   | 2.61  | 
|$ 3.88 - $ 4.09          |  |             | 2,238,101 |                  |  |                  | 4.09  |           |  |                  | 9.32 |  |  |  | 459,501   |  |  |   | 4.09  | 
|$ 4.50 - $ 6.72          |  |             | 1,805,017 |                  |  |                  | 6.21  |           |  |                  | 8.06 |  |  |  | 505,210   |  |  |   | 6.36  | 
|$ 6.92 - $15.88          |  |             | 982,588   |                  |  |                  | 10.32 |           |  |                  | 8.09 |  |  |  | 269,887   |  |  |   | 10.42 | 
|$16.09 - $16.16          |  |             | 809,108   |                  |  |                  | 16.15 |           |  |                  | 9.10 |  |  |  | 28,288    |  |  |   | 16.09 | 
|$16.59 - $23.91          |  |             | 640,322   |                  |  |                  | 21.12 |           |  |                  | 8.31 |  |  |  | 287,915   |  |  |   | 21.47 | 
|$25.04 - $38.09          |  |             | 844,285   |                  |  |                  | 28.11 |           |  |                  | 8.31 |  |  |  | 355,133   |  |  |   | 28.58 | 
|                         |  |             |           |                  |  |                  |       |           |  |                  |      |  |  |  |           |  |  |   |       | 
|$ 0.10 - $38.09          |  |             | 9,977,476 |                  |  |                  | 8.65  |           |  |                  | 8.30 |  |  |  | 2,947,689 |  |  |   | 8.70  | 
|                         |  |             |           |                  |  |                  |       |           |  |                  |      |  |  |  |           |  |  |   |       | 

69



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                   
| | ----------------------------------
| | 1998 Employee Stock Purchase
	Plan

The 1998 Employee Stock Purchase Plan (ESPP)
permits eligible employees of the Company and its subsidiaries
to purchase common stock through payroll deductions of up to 10%
of their compensation. 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 least 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 lower amount determined by the Board of
Directors.

The ESPP provides for six-month offering periods,
beginning on each January 1 and July 1. The price of
the common stock purchased under the ESPP is 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. The ESPP does not have a fixed expiration date, but the
Companys Board of Directors may terminate it at any time.

In April 2001, the board of directors adopted an
amendment to the purchase plan, which was approved by the
shareholders on June 7, 2001. The amended purchase plan
will be implemented by a series of offerings that commence on
January 1 and July 1 of each year and end on the
second December 31 and June 30, respectively,
occurring after such date, each referred to as an amended
offering period; provided, however, that the offering period
that began on January 1, 2001 ended on June 30, 2001.
Each offering period after the amendment will consist of four
consecutive six-month purchase periods; provided, however, that
the offering period that began on January 1, 2001 consisted
of one six-month purchase period.

During the years ended December 31, 1999,
2000 and 2001, 124,798 shares, 170,537 shares and 237,538 shares
of common stock were purchased under the ESPP, respectively. At
December 31, 2001, the Company had a total of 1,241,719
shares of common stock reserved for future issuance under its
ESPP. On January 1, 2002, an additional 400,000 shares
became available for issuance pursuant to the automatic plan
increase.



| |                                         
| | ----------------------------------------
| | 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. In 2001, the Company recorded deferred
compensation expense of $1,840,000 in connection with the
acquisition of RevenueLab, representing the excess of the fair
value of the underlying common stock over the exercise price for
the options assumed by Onyx. Deferred compensation is being
amortized over the vesting period of the underlying options.
Amortization of the deferred stock-based compensation balance of
$809,000 at December 31, 2001 will approximate $480,000 in
2002, $200,000 in 2003, $100,000 in 2004 and $29,000 in 2005.

70



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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:

|                                 |                        |                         |   |        |   |      |   |         |   |  |   |          |  
|-------------------------------- | ---------------------- | ----------------------- | - | ------ | - | ---- | - | ------- | - |  | - | -------- | -
|                                 |                        |                        
|                                 |                        | Year Ended December 31,
|                                 |                        |                        
|                                 |                        | 1999                    |   | 2000   |   | 2001
|                                 |                        |                         |   |        |   |     
|                                 |                        |                        
|                                 |                        | (In thousands, except  
|                                 |                        | per share data)        
|Net loss to common shareholders: |                        |                         |   |        |   |      |   |         |   |  |   |         
|                                 | As reported            |                         | $ | (1,886 | ) |      | $ | (4,711  | ) |  | $ | (95,515  | )
|                                 | SFAS No. 123 pro forma |                         | $ | (6,372 | ) |      | $ | (27,553 | ) |  | $ | (112,389 | )
|Net loss per share:              |                        |                         |   |        |   |      |   |         |   |  |   |         
|                                 | As reported            |                         | $ | (0.06  | ) |      | $ | (0.13   | ) |  | $ | (2.37    | )
|                                 | SFAS No. 123 pro forma |                         | $ | (0.21  | ) |      | $ | (0.79   | ) |  | $ | (2.78    | )

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,
|                        |  |             
|                        |  | 1999         |         | 2000 |  | 2001
|                        |  |              |         |      |  |     
|Expected dividend yield |  |              | 0.0%    |      |  |      | 0.0%    |  |  |  | 0.0%    | 
|Risk-free interest rate |  |              | 6.2%    |      |  |      | 5.1%    |  |  |  | 4.1%    | 
|Volatility              |  |              | 89%     |      |  |      | 92%     |  |  |  | 125%    | 
|Expected life           |  |              | 4 years |      |  |      | 3 years |  |  |  | 3 years | 

For purposes of the pro forma disclosures, the
estimated weighted average fair value of the options granted,
estimated to be $6.14, $17.74 and $4.46 at December 31,
1999, 2000 and 2001, 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, 2000 and 2001
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, 2001 as follows:

|                             |  |  |            | 
|---------------------------- |  |  | ---------- | 
|Stock options                |  |  | 13,156,785 | 
|Employee Stock Purchase Plan |  |  | 1,241,719  | 
|                             |  |  |            | 
|                             |  |  | 14,398,504 | 
|                             |  |  |            | 

71



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Earnings
(Loss) Per Share

The following represents the calculations for net
loss per share:

|                                                                 |                                     |                                        |        |       |   |      |        |       |    |   |         |       |    | 
|---------------------------------------------------------------- | ----------------------------------- | -------------------------------------- | ------ | ----- | - | ---- | ------ | ----- | -- | - | ------- | ----- | -- | 
|                                                                 |                                     |                                       
|                                                                 |                                     | Year Ended December 31,               
|                                                                 |                                     |                                       
|                                                                 |                                     | 1999                                   |        | 2000  |   | 2001
|                                                                 |                                     |                                        |        |       |   |     
|                                                                 |                                     |                                       
|                                                                 |                                     | (In thousands, except                 
|                                                                 |                                     | per share data)                       
|Net loss (A)                                                     |                                     | $                                      | (444   | )     |   | $    | (4,711 | )     |    | $ | (95,515 | )    
|Preferred stock accretion                                        |                                     |                                        | (1,442 | )     |   |      |       |       |    |   |        |      
|                                                                 |                                     |                                        |        |       |   |      |        |       |    |   |         |      
|Net loss applicable to common shareholders (B)                   |                                     | $                                      | (1,886 | )     |   | $    | (4,711 | )     |    | $ | (95,515 | )    
|                                                                 |                                     |                                        |        |       |   |      |        |       |    |   |         |      
|Weighted average number of common shares(1)(C)                   |                                     |                                        | 30,400 |       |   |      | 34,922 |       |    |   | 40,368  |      
|                                                                 | Effect of dilutive securities:      |                                        |        |       |   |      |        |       |    |   |         |       |   
|                                                                 |                                     | Stock options                          |        |       | * |      |        |       | *  |   |         |       | *  | 
|                                                                 |                                     | Redeemable convertible preferred stock |        |       | * |      |        |       | NA |   |         |       | NA | 
|                                                                 |                                     |                                        |        |       |   |      |        |       |    |   |         |      
|Adjusted weighted average shares and assumed
	conversions (D)    |                                     |                                        | 30,400 |       |   |      | 34,922 |       |    |   | 40,368  |      
|                                                                 |                                     |                                        |        |       |   |      |        |       |    |   |         |      
|Pro forma adjustment for redeemable convertible
	preferred stock |                                     |                                        | 816    |       |   |      |        |       |    |   |         |      
|                                                                 |                                     |                                        |        |       |   |      |        |       |    |   |         |      
|Pro forma weighted average shares (E)                            |                                     |                                        | 31,216 |       |   |      |        |       |    |   |         |      
|                                                                 |                                     |                                        |        |       |   |      |        |       |    |   |         |      
|Earnings (loss) per share:                                       |                                     |                                        |        |       |   |      |        |       |    |   |         |      
|                                                                 | Basic (B)/(C)                       |                                        | $      | (0.06 | ) |      | $      | (0.13 | )  |   | $       | (2.37 | ) 
|                                                                 | Diluted (B)/(D)                     |                                        | $      | (0.06 | ) |      | $      | (0.13 | )  |   | $       | (2.37 | ) 
|                                                                 | Pro forma basic and diluted (A)/(E) |                                        | $      | (0.01 | ) |      |        | NA    |    |   |         | 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 year ended December 31, 1999
	was 2,600,000 and during the year ended December 31, 2000
	was 1,600,000. The outstanding promissory note was paid in full
	during the second quarter of 2001 and the related 1,600,000
	shares of common stock were released from restriction.
|   
|*   | The effect of stock options are excluded from the
	computation of diluted earnings per share because the effects
	are antidilutive. Outstanding stock options and restricted stock
	of 10,447,568, 10,044,758 and 9,977,476 at December 31,
	1999, 2000 and 2001, respectively, were excluded from the
	computation of diluted earnings per share because their effect
	was antidilutive (see Note 12 for additional stock option
	information).                                                                                                                                                                                  

14.     Income
Taxes

Income (loss) before taxes consists of the
following:

|        |  |                         |      |      |  |      |        |   |  |   |         |  
|------- |  | ----------------------- | ---- | ---- |  | ---- | ------ | - |  | - | ------- | -
|        |  |                        
|        |  | Year Ended December 31,
|        |  |                        
|        |  | 1999                    |      | 2000 |  | 2001
|        |  |                         |      |      |  |     
|        |  |                        
|        |  | (In thousands)         
|U.S.    |  | $                       | 564  |      |  | $    | (3,359 | ) |  | $ | (93,632 | )
|Foreign |  |                         | (491 | )    |  |      | (1,164 | ) |  |   | (3,460  | )
|        |  |                         |      |      |  |      |        |   |  |   |         |  
|        |  | $                       | 73   |      |  | $    | (4,523 | ) |  | $ | (97,092 | )
|        |  |                         |      |      |  |      |        |   |  |   |         |  

72



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision for income taxes consists of the
following:

|         |                                |                            |   |      |     |      |   |      |       |  |   |      |     | 
|-------- | ------------------------------ | -------------------------- | - | ---- | --- | ---- | - | ---- | ----- |  | - | ---- | --- | 
|         |                                |                           
|         |                                | Year Ended December 31,   
|         |                                |                           
|         |                                | 1999                       |   | 2000 |     | 2001
|         |                                |                            |   |      |     |     
|         |                                |                           
|         |                                | (In thousands)            
|Current: |                                |                            |   |      |     |      |   |      |       |  |   |     
|         | Federal                        |                            | $ | 40   |     |      | $ | 20   |       |  | $ | 0    |    
|         | State and local                |                            |   | 15   |     |      |   | 16   |       |  |   | 15   |    
|         | Foreign                        |                            |   | 596  |     |      |   | 987  |       |  |   | 669  |    
|         |                                |                            |   |      |     |      |   |      |       |  |   |     
|         |                                | Total current income taxes |   |      | 651 |      |   |      | 1,023 |  |   |      | 684 | 
|         | Deferred  foreign             |                            |   | (134 | )   |      |   | (619 | )     |  |   | (978 | )  
|         |                                |                            |   |      |     |      |   |      |       |  |   |     
|         | Income tax provision (benefit) |                            | $ | 517  |     |      | $ | 404  |       |  | $ | (294 | )  
|         |                                |                            |   |      |     |      |   |      |       |  |   |     

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

|                                                       |  |                         |     |      |  |      |        |   |  |   |         |  
|------------------------------------------------------ |  | ----------------------- | --- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                       |  |                        
|                                                       |  | Year Ended December 31,
|                                                       |  |                        
|                                                       |  | 1999                    |     | 2000 |  | 2001
|                                                       |  |                         |     |      |  |     
|                                                       |  |                        
|                                                       |  | (In thousands)         
|Income tax expense (benefit) at statutory
	rate of 34% |  | $                       | 25  |      |  | $    | (1,538 | ) |  | $ | (33,011 | )
|State taxes, net of federal benefit                    |  |                         | 10  |      |  |      | 11     |   |  |   | 10      |  
|Losses producing no current tax benefit                |  |                         | 482 |      |  |      | 1,931  |   |  |   | 32,707  |  
|                                                       |  |                         |     |      |  |      |        |   |  |   |         |  
|Income tax provision                                   |  | $                       | 517 |      |  | $    | 404    |   |  | $ | (294    | )
|                                                       |  |                         |     |      |  |      |        |   |  |   |         |  

At December 31, 2001, the Company had
federal net operating loss, research and development and foreign
tax credit carryforwards of $53.0 million,
$2.3 million, and $935,000, respectively, which begin to
expire in 2018. Additionally, the Company had foreign net
operating loss carryforwards of $4.0 million, which begin
to expire in 2006. 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 $9.6 million, the resulting
benefits will be credited to shareholders equity.

73



---



##### Table of Contents



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,  
|                                |                                                 |               
|                                |                                                 | 2000           |        | 2001  
|                                |                                                 |                |        |       
|                                |                                                 |               
|                                |                                                 | (In thousands)
|Deferred tax assets:            |                                                 |                |        |        |   |   |         |       
|                                | U.S. net operating loss carryforwards           |                | $      | 4,969  |   |   | $       | 18,020 |  
|                                | Foreign net operating loss carryforwards        |                |        |       |   |   |         | 1,360  |  
|                                | Research and development credit carryforwards   |                |        | 1,507  |   |   |         | 2,293  |  
|                                | Foreign tax credit carryforwards                |                |        | 646    |   |   |         | 935    |  
|                                | Restructuring and other accrued liabilities     |                |        | 874    |   |   |         | 9,052  |  
|                                | Book depreciation in excess of tax depreciation |                |        |       |   |   |         | 4,182  |  
|                                | Other                                           |                |        |       |   |   |         | 617    |  
|                                |                                                 |                |        |        |   |   |         |       
|Total gross deferred tax assets |                                                 |                | 7,996  |        |   |   | 36,459  |       
|Less valuation allowance        |                                                 |                | (6,488 | )      |   |   | (36,459 | )     
|                                |                                                 |                |        |        |   |   |         |       
|                                |                                                 |                | 1,508  |        |   |   |        |       
|Deferred tax liabilities:       |                                                 |                |        |        |   |   |         |       
|                                | Tax depreciation in excess of book depreciation |                |        | (1,000 | ) |   |         |       |  
|                                | Purchased technology and other intangibles      |                |        | (2,709 | ) |   |         | (1,223 | )
|                                |                                                 |                |        |        |   |   |         |       
|                                |                                                 |                | (3,709 | )      |   |   | (1,223  | )     
|                                |                                                 |                |        |        |   |   |         |       
|Net deferred tax liabilities    |                                                 | $              | (2,201 | )      |   | $ | (1,223  | )     
|                                |                                                 |                |        |        |   |   |         |       

Since the Companys utilization of these
deferred tax assets depends 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 increased by $4.1 million during 2000 and
increased by $30.0 million during 2001.

15.     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.
Prior to 2000, no employer contributions were made. In 2000 and
2001, the Company recorded $325,000 and $65,000 in employer
matching contribution expenses, respectively.

74



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

16.     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, 2001: |                                                                            |                |   |         |   |       |   |         |   |  |   |        
|                              | Revenues                                                                   |                | $ | 68,018  |   |       | $ | 29,143  |   |  | $ | 97,161  |  
|                              | Operating loss                                                             |                |   | (72,561 | ) |       |   | (22,408 | ) |  |   | (94,969 | )
|                              | Interest income (expense), net                                             |                |   | 397     |   |       |   | (20     | ) |  |   | 377     |  
|                              | Depreciation, amortization and impairment of
	intangibles and fixed assets |                |   | 24,378  |   |       |   | 9,322   |   |  |   | 34,550  |  
|                              | Purchases of property and equipment                                        |                |   | 11,232  |   |       |   | 585     |   |  |   | 11,817  |  
|                              | Long-lived assets                                                          |                |   | 11,975  |   |       |   | 14,043  |   |  |   | 26,018  |  
|                              | Total assets                                                               |                |   | 40,913  |   |       |   | 23,598  |   |  |   | 64,511  |  
|Year ended December 31, 2000: |                                                                            |                |   |         |   |       |   |         |   |  |   |        
|                              | Revenues                                                                   |                | $ | 87,734  |   |       | $ | 31,575  |   |  | $ | 119,309 |  
|                              | Operating income (loss)                                                    |                |   | 9,197   |   |       |   | (14,008 | ) |  |   | (4,811  | )
|                              | Interest income (expense), 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                                                               |                |   | 70,881  |   |       |   | 38,159  |   |  |   | 109,040 |  
|Year ended December 31, 1999: |                                                                            |                |   |         |   |       |   |         |   |  |   |        
|                              | Revenues                                                                   |                | $ | 49,339  |   |       | $ | 11,235  |   |  | $ | 60,574  |  
|                              | Operating income (loss)                                                    |                |   | 3,660   |   |       |   | (4,811  | ) |  |   | (1,151  | )
|                              | Interest income (expense), net                                             |                |   | 1,230   |   |       |   | (6      | ) |  |   | 1,224   |  
|                              | Depreciation and amortization                                              |                |   | 2,386   |   |       |   | 668     |   |  |   | 3,054   |  
|                              | 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  |  

17.     Litigation
and Contingencies

The Company and several of the Companys
officers and directors have been named as defendants in a series
of related lawsuits filed in the United States District Court
for the Western District of Washington on behalf of purchasers
of publicly traded Onyx common stock during various time periods
ranging from January 10, 2001 to August 10, 2001. The
complaints in these lawsuits allege that the Company violated
SEC Rule 10b-5 promulgated under the Securities Exchange
Act of 1934, as amended, or Exchange Act, and seek certification
of a class action for purchasers of Onyx common stock during the
named class periods. In addition, a shareholder to whom the
Company issued shares in the first quarter of 2001 has claimed
that the Company made certain misrepresentations and omissions
and otherwise violated the securities laws. None of the
complaints or claims specifies the amount of damages to be
claimed.

Onyx and two of its directors have also been
named as defendants in a lawsuit filed in the United States
District Court for the Southern District of New York on behalf
of purchasers through December 6, 2000 of

75



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Onyx common stock sold under the
February 12, 1999 registration statement and prospectus for
the Companys initial public offering. The complaint
alleges that Onyx and the individual defendants violated the
Securities Act of 1933, as amended, or Securities Act, by
failing to disclose excessive commissions allegedly obtained by
the Companys underwriters pursuant to a secret arrangement
whereby the underwriters allocated initial public offering
shares to certain investors in exchange for the excessive
commissions. The complaint also asserts claims against the
underwriters under the Securities Act and the Exchange Act in
connection with the allegedly undisclosed commissions.

Onyxs directors and some of its officers
have been named as defendants in a shareholder derivative
lawsuit filed in the Superior Court of Washington in and for
King County. The complaint alleges that the individual
defendants breached their fiduciary duty and their duty of care
to Onyx by allegedly failing to supervise Onyxs public
statements and public filings with the SEC. The complaint
alleges that, as a result of these breaches, misinformation
about Onyxs financial condition was disseminated into the
marketplace and filed with the SEC. The complaint asserts that
these actions have exposed Onyx to harmful and costly securities
litigation, which could potentially result in an award of
damages against Onyx.

In October 2001, Thomas Weisel Partners LLC filed
a lawsuit against the Company in the United States District
Court for the Northern District of California, San Francisco
division. This lawsuit arises out of the Companys
engagement of Thomas Weisel for services in connection with the
signing of the Companys equity financing arrangement with
Ramius Securities and Ramius Capital. Thomas Weisel alleges in
its pleadings that a payment of $1.5 million became due
under the engagement letter upon the signing of the arrangement.
The Company has not made the payment because the underwriting
terms of its equity facility with Ramius were not approved by
the NASD. Among other claims, the lawsuit alleges breach of
contract, and seeks payment of the $1.5 million fee plus
unspecified monetary damages.

The Company disputes the allegations of
wrongdoing in these complaints and intends to vigorously defend
itself and, where applicable, its officers and directors,
against these lawsuits and claims, and believes it has several
meritorious defenses and, in certain instances, counterclaims.
Depending on the amount and the timing, an unfavorable
resolution of some or all of these matters could materially
affect the Companys business, future results of
operations, financial position or cash flows in a particular
period.

In addition, the Company is involved in
additional litigation in the ordinary course of its business,
none of which management believes will have a material adverse
effect on the Company.

18.     Subsequent
Events



| |                           
| | --------------------------
| | Firm Underwritten Offering

In February 2002, the Company completed a firm
underwritten offering of 6,325,000 shares of its common stock at
a purchase price to the public of $3.50 per share from its
$100.0 million shelf registration, including 600,000 shares
issued pursuant to the exercise of the over-allotment option
granted to Wells Fargo Securities, LLC, the sole underwriter for
the offering. The Company estimates the net proceeds to be
$20.5 million after deducting the estimated costs
associated with the offering.



| |                            
| | ---------------------------
| | Loan and Security Agreement

On February 14, 2002, the Company entered
into a new Loan and Security Agreement with Silicon Valley Bank,
which superceded the previous agreement entered into in
September 2001. Under the terms of the new Agreement, the
Company has a $15.0 million working capital revolving line
of credit with SVB, which is secured by accounts receivable,
property and equipment and intellectual property. This facility
allows the Company to borrow up to the lesser of (a) 75% of
eligible accounts receivable or (b) $15.0 million. If
the borrowing base calculation falls below the outstanding
standby letters of credit issued by SVB on Onyxs behalf,
SVB may require Onyx to cash secure the amount by which
outstanding standby letters of credit

76



---



##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

exceed the borrowing base. Any borrowings will
bear interest at SVBs prime rate plus 1.5%; subject to a
minimum rate of 6.0%. Additionally, the facility requires the
Company to maintain at least $7.0 million in unrestricted
deposit accounts with SVB. The agreement requires the Company to
maintain certain financial covenants based on monthly tangible
net worth. The Company is also prohibited from paying dividends.
The new facility expires on December 31, 2002.

77



---



##### Table of Contents








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

Not applicable.






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 2002 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, 2001.






ITEM
11.     EXECUTIVE
COMPENSATION


The information required by this Item is included
in our proxy statement for our 2002 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, 2001.






|         |                                                                       
|-------- | ----------------------------------------------------------------------
|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
        OWNERS AND MANAGEMENT

The information required by this Item is included
in our proxy statement for our 2002 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, 2001.






|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED
        TRANSACTIONS

The information required by this Item is included
in our proxy statement for our 2002 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, 2001.






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 |                                            |      | 50 |   
|Consolidated Financial Statements:                        |                                            |      |    |   
|                                                          | Balance Sheets                             |      |    | 51 | 
|                                                          | Statements of Operations                   |      |    | 52 | 
|                                                          | Statements of Shareholders Equity         |      |    | 53 | 
|                                                          | Statements of Cash Flows                   |      |    | 54 | 
|                                                          | Notes to Consolidated Financial Statements |      |    | 55 | 

2.     Index to
Financial Statement Schedules

|                                                        |  |  |    | 
|------------------------------------------------------- |  |  | -- | 
|                                                        |  | 
|Schedule II  Valuation and
        Qualifying Accounts |  |  | 82 | 

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.

78



---



##### Table of Contents



(b) Reports on Form 8-K

On October 24, 2001, we filed a current
report on Form 8-K regarding our announcement of
preliminary financial results for the third quarter, our
issuance of shares to the former shareholders of Market
Solutions Limited pursuant to our purchase and sales agreement
with them and certain lawsuits that had been filed against us
and our officers and directors.

(c) Exhibits

|       |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------ | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |       | Description
|       |       |            
|       | 3.1   |             |  | Restated Articles of Incorporation of the
	registrant (exhibit 3.1)(j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 3.2   |             |  | Amended and Restated Bylaws of the registrant
	(exhibit 3.2)(g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 4.1   |             |  | Rights Agreement dated October 25, 1999
	between the registrant and ChaseMellon Shareholder Services,
	L.L.C. (exhibit 2.1)(b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10.1  |             |  | Lease Agreement dated June 26, 1998 between
	WRC Sunset North LLC and the registrant (exhibit 10.2)(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 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)(a)
|       | 10.3  |             |  | Form of Indemnification Agreement between the
	registrant and each director and officer of the registrant
	(exhibit 10.12)(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 10.4  |             |  | Amended and Restated 1994 Stock Option Plan
	(exhibit 10.7)(a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10.5  |             |  | 1998 Stock Incentive Compensation Plan as amended
	and restated July 1, 2000 (exhibit 10.2)(c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10.6  |             |  | 2001 Nonofficer Employee Stock Compensation Plan
	as amended and restated April 27, 2001
	(exhibit 10.1)(g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 10.7  |             |  | 1998 Employee Stock Purchase Plan as amended and
	restated April 6, 2001 (exhibit 10.1)(i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 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)(c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 10.9  |             |  | Second Amendment to Lease dated August 6,
	2000 between the registrant and Bellevue Hines Development,
	L.L.C. (exhibit 10.8)(f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       | 10.10 | *           |  | Joint Venture Agreement dated September 14,
	2000 between the registrant and Prime Systems Corporation
	(exhibit 10.1)(d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 10.11 |            |  | Loan and Security Agreement dated
	February 14, 2002 by and between the registrant and Silicon
	Valley Bank                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 10.12 |             |  | Intellectual Property Security Agreement dated
	November 8, 2000 between the registrant and Silicon Valley
	Bank (exhibit 10.7)(f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       | 10.13 |             |  | Employment Agreement dated January 30, 2001
	by and between the registrant and Leslie Rechan
	(exhibit 10.1)(e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 10.14 |             |  | Revised Stock Option Agreement dated
	April 18, 2001 by and between the registrant and Leslie
	Rechan (exhibit 10.9)(g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 10.15 |             |  | Employment Agreement dated March 14, 2001 by
	and between the registrant and Brian C. Henry
	(exhibit 10.1)(h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10.16 |             |  | Stock Option Agreement dated April 4, 2001
	by and between the registrant and Brian C. Henry
	(exhibit 10.3)(h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 10.17 |             |  | Stock Option Agreement dated April 4, 2001
	by and between the registrant and Brian C. Henry
	(exhibit 10.4)(h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

79



---



##### Table of Contents



|       |       |             |  |                                                                                                                               
|------ | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Number |       | Description
|       |       |            
|       | 10.18 |             |  | Revised Stock Option Agreement dated
	April 18, 2001 by and between the registrant and
	Brian C. Henry (exhibit 10.3)(g)      
|       | 10.19 |             |  | Amendment to Employment Agreement dated
	November 14, 2001 by and between the registrant and Leslie
	Rechan (exhibit 10.2)(k) 
|       | 10.20 |             |  | Amendment to Employment Agreement dated
	November 14, 2001 by and between the registrant and
	Brian C. Henry (exhibit 10.2)(k)
|       | 21.1  |            |  | Subsidiaries of the Registrant                                                                                                
|       | 23.1  |            |  | Consent of Ernst & Young LLP, Independent
	Auditors                                                                           



---



|    |  |                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Confidential treatment has been granted for
	portions of this document.                                                                                                  
|   
|   |  | Filed herewith.                                                                                                                                                          
|   
|(a) |  | 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.
|   
|(b) |  | Incorporated by reference to the designated
	exhibit to the registrants registration statement on
	Form 8-A (No. 0-25361) filed October 28, 1999.                       
|   
|(c) |  | 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.              
|   
|(d) |  | Incorporated by reference to the designated
	exhibit to the registrants Current Report on Form 8-K
	(No. 0-25361) filed October 23, 2000.                               
|   
|(e) |  | Incorporated by reference to the designated
	exhibit to the first Current Report on Form 8-K
	(No. 0-25361) filed by the registrant on February 6,
	2001.                
|   
|(f) |  | Incorporated by reference to the designated
	exhibit to the second Current Report on Form 8-K
	(No. 0-25361) filed by the registrant on February 6,
	2001.               
|   
|(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
	March 31, 2001.             
|   
|(h) |  | Incorporated by reference to the designated
	exhibit to the registrants Current Report on Form 8-K
	(No. 0-25361) filed April 12, 2001.                                 
|   
|(i) |  | 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, 2001.              
|   
|(j) |  | Incorporated by reference to the designated
	exhibit to the registrants Quarterly Report on
	Form 10-Q (No. 0-25361) for the quarter ended
	September 30, 2001.         
|   
|(k) |  | Incorporated by reference to the designated
	exhibit to the registrants Current Report on Form 8-K
	(No. 0-25361) filed January 29, 2002.                               

80



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
city of Bellevue, state of Washington, on February 28, 2002.



| |                          
| | -------------------------
| | ONYX SOFTWARE CORPORATION



| |     |                  
| | --- | -----------------
| | By: | /s/ BRENT R. FREI

| |                        
| | -----------------------
| |                        
| | Brent R. Frei          
| | Chief Executive Officer




POWER OF ATTORNEY

Each person whose individual signature appears
below hereby authorizes and appoints Brent R. Frei and
Brian C. Henry, and each of them, with full power of
substitution and resubstitution and full power to act without
the other, as his or her true and lawful attorney-in-fact and
agent to act in his or her name, place and stead and to execute
in the name and on behalf of each person, individually and in
each capacity stated below, and to file, any and all amendments
to this report, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and
perform each and every act and thing, ratifying and confirming
all that said attorneys-in-fact and agents or any of them or
their or his substitute or substitutes may lawfully do or cause
to be done by virtue thereof.

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. FREIBrent R. Frei           |  | Chief Executive Officer and Chairman of the Board
	(Principal Executive Officer)                     |  | February 28, 2002
|/s/ BRIAN C. HENRYBrian C. Henry         |  | Chief Financial Officer and Executive Vice
	President (Principal Financial Officer)                  |  | February 28, 2002
|/s/ AMY E. KELLERANAmy E. Kelleran       |  | Vice President Finance, Corporate Controller and
	Assistant Secretary (Principal Accounting Officer) |  | February 28, 2002
|/s/ H. RAYMOND BINGHAMH. Raymond Bingham |  | Director                                                                                             |  | February 28, 2002
|/s/ TERESA A. DIALTeresa A. Dial         |  | Director                                                                                             |  | February 28, 2002
|/s/ WILLIAM B. ELMOREWilliam B. Elmore   |  | Director                                                                                             |  | February 28, 2002
|/s/ LEE D. ROBERTSLee D. Roberts         |  | Director                                                                                             |  | February 25, 2002
|/s/ DANIEL R. SANTELLDaniel R. Santell   |  | Director                                                                                             |  | February 28, 2002

81



---



##### Table of Contents






SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

ONYX SOFTWARE CORPORATION

December 31, 2001


|                             |                               |                                 |  |            |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |   |       | 
|---------------------------- | ----------------------------- | ------------------------------- |  | ---------- | ----- | ----------- |  | ------------ | ----- | ------------- |  | - | --- |  |  | - | ------ | - |  | - | ----- | 
|                             |                               |                                 |  |            |       |             |  |             
|                             |                               |                                 |  | Column C   |       |             |  |             
|                             |                               | Column B                        |  | Additions  |       | Column D    |  | Column E    
|Column A                     |                               |                                 |  |            |       |             |  |             
|                             |                               |                                 |  |            |       | Charged to  |  |              |       |              
|                             |                               | Balance at                      |  | Charged to |       | Other       |  |              |       |              
|                             |                               | Beginning                       |  | Costs and  |       | Accounts   |  | Deductions  |       | Balance at   
|Description                  |                               | of Period                       |  | Expenses   |       | Describe(1) |  | Describe(2)  |       | End of Period
|                             |                               |                                 |  |            |       |             |  |              |       |              
|                             |                               |                                
|                             |                               | (In thousands)                 
|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 | 
|Year ended December 31, 2001 |                               |                                 |  |            |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |  
|                             | Deducted from asset accounts: |                                 |  |            |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |   |      
|                             |                               | Allowance for doubtful accounts |  | $          | 1,732 |             |  | $            | 2,527 |               |  | $ | 400 |  |  | $ | (2,580 | ) |  | $ | 2,079 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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. In 2001, amounts charged
	against revenue ($200) and deferred revenue ($200) primarily,
	for billed but uncollected maintenance revenues.
|   
|(2) | Uncollectible accounts written off, net of
	recoveries.                                                                                                                                                                                                                                                                                                                                                                                                                                       

82