##### 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,
    2003                                             
|  
|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



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Onyx Software Corporation

(Exact Name of Registrant as Specified in its
Charter)


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

1100  112th Avenue N.E.,
Suite 100, Bellevue, Washington 98004-4504

(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     þ

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

The aggregate market value of the voting and
nonvoting stock held by nonaffiliates of the registrant at
June 30, 2003 was approximately $33,526,862 based upon the
closing sale price on the Nasdaq National Market reported for
such date.

The number of shares of the registrants
common stock outstanding at February 27, 2004 was
13,988,948.

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 2004, which definitive proxy statement shall be filed
with the Securities and Exchange Commission within 120 days
after the end of the fiscal year to which this report relates.



---






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ONYX SOFTWARE CORPORATION

FORM 10-K

For the Year Ended December 31,
2003


INDEX

|              |  |                                                                                                        |    |      |    | 
|------------- |  | ------------------------------------------------------------------------------------------------------ | -- | ---- | -- | 
|              |  |                                                                                                        |    | Page
|              |  |                                                                                                        |    |     
|PART I       
|Item 1.       |  | Business                                                                                               |    |      | 2  | 
|Item 2.       |  | Properties                                                                                             |    |      | 26 | 
|Item 3.       |  | Legal Proceedings                                                                                      |    |      | 26 | 
|Item 4.       |  | Submission of Matters to a
    Vote of Security Holders                                                |    |      | 27 | 
|PART II      
|Item 5.       |  | Market for the
    Registrants Common Equity and Related Shareholder
    Matters                      |    |      | 28 | 
|Item 6.       |  | Selected Consolidated
    Financial Data                                                               |    |      | 29 | 
|Item 7.       |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |    |      | 30 | 
|Item 7A       |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |    |      | 45 | 
|Item 8.       |  | Consolidated Financial
    Statements and Supplementary Data                                           |    |      | 47 | 
|Item 9.       |  | Changes in and Disagreements
    With Accountants on Accounting and Financial Disclosure               |    |      | 81 | 
|Item 9A       |  | Controls and Procedures                                                                                |    |      | 81 | 
|PART III     
|Item 10.      |  | Directors and Executive
    Officers of the Registrant                                                 |    |      | 81 | 
|Item 11.      |  | Executive Compensation                                                                                 |    |      | 81 | 
|Item 12       |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Shareholder
    Matters |    |      | 81 | 
|Item 13.      |  | Certain Relationships and
    Related Transactions                                                     |    |      | 81 | 
|Item 14.      |  | Principal Accountant Fees
    and Services                                                             |    |      | 82 | 
|PART IV      
|Item 15.      |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |    |      | 82 | 
|Signatures    |  |                                                                                                        | 86 |     
|EXHIBIT 10.5 
|EXHIBIT 10.23
|EXHIBIT 10.24
|EXHIBIT 10.35
|EXHIBIT 21.1 
|EXHIBIT 23.1 
|EXHIBIT 23.2 
|EXHIBIT 31.1 
|EXHIBIT 31.2 
|EXHIBIT 32.1 
|EXHIBIT 32.2 



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PART I

Our disclosure and analysis in this report
contain forward-looking statements, which provide our current
expectations or forecasts of future events. Forward-looking
statements 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, allowing for 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 can result in a comparatively
low total cost of ownership and rapid return on investment.

Our integrated product family allows enterprises
to automate the customer lifecycle across the entire enterprise
instead of automating only individual departments. We target
mid- to large-sized organizations and

2



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divisions of Fortune 1000 companies,
marketing and selling our software and services through a direct
sales force as well as through value-added resellers, or VARs,
and partners who embed components of Onyx functionality in
solutions targeted to specific vertical industries, which we
refer to as 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
1100-112th Avenue N.E., Suite 100, Bellevue, Washington
98004-4504. We were incorporated in Washington in 1994. We make
available on our website, free of charge, copies of our annual
report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as soon as
reasonably practicable after filing or furnishing the
information to the SEC. The Internet address for the information
is http://www.onyx.com/investors/sec.asp.

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 many of the
single-department 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.

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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 communication with traditional business. We
believe that our ability to align and integrate strategy with
enabling CRM technologies will provide an enhanced solution for
clients looking to acquire a competitive advantage in their
marketplace.

Advantages of the Onyx Solution

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 solution enables 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 its
    CRM operating environment, such as increased revenues, increased
    customer satisfaction and 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, provide 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.                                                                                                                                                                                                                                                                                                                                                                                                                     

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|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                                                                                                                                                                                     
|                           
|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 57,000 simultaneous users in
    a real-world testing environment. 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. We
    currently have solutions deployed that range from 25 seats
    to 5,000 seats.
|                           
|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.                                                                                                                                                                                       
|                           
|Web Services Components     |  | We have taken advantage of our Internet
    architecture and its Web services components to expose data and
    processes from within our application to make it easier for
    other software applications to access them, even if they are
    written in a different programming language. We believe this
    technology approach, which we call Embedded CRM, allows us to
    address a broader array of industry-specific and user-specific
    needs by diversifying the form our software can take. Our
    software utilizes extensible markup language, or XML, making it
    easy to integrate with other systems.                                 

Strategy

Our objective is to be the leading provider of
enterprise-wide CRM solutions for mid- and large-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. It becomes more important to integrate these two
    channels of interaction as traditional businesses go online and
    e-businesses add traditional infrastructure to support growing
    customer bases.

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|                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 will typically use components of our software
    embedded within their existing vertical solutions or configure
    specialized versions of our products to serve potential
    customers in specific market segments and in many cases, host
    the solution for customers over the Internet with guaranteed
    service-level agreements. This model is well suited for
    companies with limited information technology or capital
    resources, as well as for those companies who need only a subset
    of our technology.                                                                                                                                  
|                                                   
|Leverage Embedded CRM Capabilities                  |  | Our Embedded CRM capabilities allow us to offer
    subsets of CRM functionality, as well as the full suite, and to
    provide more cost-effective, industry-specific delivery options.
    We offer three models to partners: Onyx Embedded CRM as CRM
    components, where we offer our CRM suite as autonomous
    functional components; Onyx Embedded CRM as an application
    framework, where the full Onyx CRM suite and technology
    platform enable the integration of one or more applications to
    create a new application; and Onyx Embedded CRM in an
    application stack, where the full Onyx CRM suite is offered
    as one of a number of hosted offerings.                                              
|                                                   
|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. Our
    position as a leader in customer satisfaction continues to be
    highlighted by third parties such as Gartner Inc. In 2003,
    Gartner research showed Onyx ranked second out of
    12 mid-market focused CRM vendors in overall user
    satisfaction. In related Gartner research, Onyx users rated
    themselves more mature in CRM than those using other CRM
    solutions. Gartner believes CRM user maturity is significant
    because previous Gartner research suggests a strong correlation
    between CRM maturity and profitability.
|                                                   
|Expand Strategic Partnerships                       |  | We are actively adding key distribution,
    integration and technology partners on a worldwide basis. We
    believe that expanding the quality of our partnerships will
    provide us with increased access to various geographic and
    vertical markets and potential customers. We are targeting
    companies which have established customer bases and proven
    expertise in their respective markets. Key to our partnering
    strategy is our Embedded CRM technology, which allows partners
    to embed components of our CRM solution as Web services within
    their own offerings. In addition to traditional VARs,                                                                                              

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|                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                           |  | which might tailor a standard version of the Onyx
    solution for a specific market, Embedded CRM partners select
    specific functional components of our solution and embed them
    into the workflow of their own non-CRM applications. We have
    entered into several Embedded CRM partnerships and have a team
    dedicated to developing and supporting more such partnerships in
    2004.                                                                 
|                                          
|Expand Internationally                     |  | Our products are localized in 11 languages
    and we are compliant with Unicode, an industry-wide standard
    that enables companies to use multi-lingual text in a single
    data base, at all three levels of our architecture. Our products
    are currently installed and operational in more than
    28 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 additional
    industry-specific functionality as part of our software to
    better meet the requirements of specific vertical markets. We
    believe industry-specific capabilities can give us an advantage
    over competitors. We are initially focusing on the financial
    services, healthcare and high-technology industries, as well as
    selected geographies in what we perceive to be the growing
    government market.
|                                          
|Offer Go-to-Market Strategy
    Consulting |  | We believe our customers must clearly understand
    their CRM strategies to effectively implement a CRM solution. We
    provide sales and marketing strategy consulting to complement
    our solution.                                                                                                                                                                                                                                                               

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.

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. We also offer a number of complementary
products that work in combination with the portals. This
Internet technology platform enables our customers to combine
CRM capabilities, content from other enterprise systems and the
Internet to manage all aspects of their customer relationships
through our products core capabilities, as well as through
links to peripheral enterprise-based and Internet-based
applications. The platform also enables a high degree of
flexibility in tailoring our product to meet an individual
customers specific business needs.

The Onyx e-Business Engineis the backbone of our solution, and
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 enterprises 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                                                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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 are designed to enable customers 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, and is
designed 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 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
are designed to enable companies and their partners to share
information regarding prospects, customers, marketing, sales and
service to better serve customers. This product also provides a
strong security model for controlling partner access to customer
information.

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 can be
integrated with commerce platforms, such as IBM Websphere and
Microsoft Commerce Server.

We typically price our core applications on a
per-user basis with varying price points, depending on the
amount of functionality being purchased. There is also a
platform fee that varies depending on the number of users
licensed to use the platform database server. In addition, we
offer several products that complement our core offerings. The
pricing structures for these complementary products vary from
flat fees to server-based pricing to per-user fees, or some
combination of such fees.

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, product installation and configuration, product
    migration, systems integration, data conversion, custom
    development, and project management. Independently, or in
    conjunction with certified partners, we work closely with our
    customers to identify their business needs and tailor the
    solution to these needs in an efficient, cost-effective manner.
|                
|Customer Support |  | We have implemented a comprehensive customer
    support program to assist customers who use, configure, and
    build upon our                                                                                                                                                                                                                                                                                                                                                                            

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|                                 |  |                                                                                                                                                                                                                                                                                                                                               
|-------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |  | products. 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 broad range of classroom and
    on-premise education courses. Classroom-based educational
    courses cover the implementation and administration of our
    products. On-premise education includes client-specific end-user
    training and technical training.                                                                
|                                
|Go-to-Market Strategy Consulting |  | Through our strategic services team, we provide
    sales and marketing strategy services in advance of implementing
    our software. We can also provide go-to-market and strategic
    account management training, coaching and skills assessment
    services. Much of this training is supported by tools in our
    software solutions.

We price our consulting services based on the
time spent and resources used or 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 or fixed-project 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, Fujitsu, IBM
Global Services, Metavante, TietoEnator, and Unisys. We
frequently participate in joint sales and marketing efforts with
our systems integrators.

Onyx
Technology



| |                            
| | ---------------------------
| | Internet-Based Architecture

The Onyx Internet Architecture is built with
Internet technologies designed 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, proprietary 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

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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 up to 57,000 concurrent users
simulating real-world 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 standard Internet
technologies 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.The Onyx portal
applications and application server are currently optimized for
the Microsoft Windows Server platform. The Onyx Enterprise
Database can be deployed on the SQL Server or Oracle database
running on Sun Solaris or IBM AIX. Onyx introduced support for
the Oracle database in June 2002 and offers continued support
for both the SQL server and the Oracle database with the most
recent release of the product line in January 2003. With regard
to multi-platform development, we do not code to the lowest
common denominator in support of multiple platforms; rather, we
maximize code reuse while leveraging vendor-specific language
extensions to optimize for operating systems and relational
database engines.

n-tiered
Architecture.Our software consists of
a relationship-centric, integrated data model surrounded by a
set of configurable business logic and presentation objects.
This architecture uses multiple tiers to deliver a balance
between configurability, performance and administration. The
logical tiers are presentation services, or user interfaces,
business logic services, or business rules, and data services,
or data storage and retrieval. All application tiers can be
deployed on a single server or separated among different
machines, which allows customers to deploy a physical server
topology that aligns with their needs. All tiers can be
customized, and customizations other than changes to the
out-of-the-box open source user interface components 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 to
    graphical user interface administration tools; they can also use
    market-available development tools to extend the application.
    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
    inside or 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

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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 and/or web services. 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.


Store and Forward Synchronization
Architecture.Store and forward
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 the 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
customer-centric, integrated data model. Our customer-centric
design coordinates all data, processes and interactions around
the people and company records that form its center. All
transactions, sales opportunities, service and support incidents
are attributes of the customer. 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.The Onyx Universal Interface
Framework exposes the full breadth of business objects via
either a COM+or SOAP interface, thus enabling multiple
interfaces, including Windows desktop applications, Web
applications and personal digital assistants to access the Onyx
e-Business Engine.

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 Microsoft standard technologies,
it can integrate with applications running on disparate
platforms, such as a J2EE-based application server.

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Customers and Markets

We target mid- to large-sized businesses and
divisions of Fortune 500 companies in a wide variety of
industries. We believe that these enterprises have a strong need
to move quickly and deliver increasing levels of customer
service through both e-business and traditional channels, and
that they are deploying new technologies as a competitive
advantage. We have licensed our products to 991 customers
through December 31, 2003. The following is a
representative list of our current customers who purchased more
than $150,000 in software licenses from January 1, 2002 to
December 31, 2003.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Financial Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                   
|American Express Third Party Distribution
    Australian Central Credit Union
    Boston Private Bank & Trust
    Fisher Investments
    Glenmede Trust
    Mellon Bank
    Nuveen Investments
    Pacific Investment Management Company
    Reuters
    Riggs Bank
    Saxon Mortgage
    State Street Global Advisors
    Strong Financial Corporation
    SunAmerica
    Suncorp MetwayTechnologyClearswift
    Daiwabo Information Systems
    Konica Minolta Business
    Technologies
    Legato
    Suricata |  | Health Care & InsuranceGentiva Health Services
    Haemonetics
    HealthNow, NY
    Kyorin Pharmaceutical Co.
    Nihon Iyakuhin Kougyou
    Regence Group
    UPMC Health Plan
    VHAGovernmentCambridgeshire County Council
    Camelot PLC
    Highland Council
    Knowsley Metropolitan Borough Council
    London Borough of Ealing
    London Borough of Hillingdon
    London Borough of Islington
    London Borough of Lambeth
    Ontario Lottery and Gaming
    Redcar & Cleveland Council
    Worcestershire County Council
    Workcover Corporation |  | Telecommunications & MediaNTL Group
    ONE
    Reed Business Information
    Reed ConstructionData
    Singapore Cable VisionOtherAmway Korea
    Calor Gas
    CCH Australia
    Clean Harbors Environmental Services
    Europ Assistance
    Greene King BBW
    Hafslund ASA
    Medical Staffing Network
    The Andersons
    Turner Sports

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,
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, 2003, we employed 95
people in sales and marketing. We support our field sales force
with market development representatives and sales engineers.

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

We also distribute software through a network of
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.

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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 trade shows, 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 six and eighteen months,
although it varies substantially from customer to customer, and
occasionally sales require substantially more time.

We have a network of VARs which 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, 2003, we employed 77
people in research and development. Our research and development
expenses for 2003 were $11.8 million, as compared to
$14.7 million in 2002 and $22.0 million in 2001. Our
research and development 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.

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;                                                                     

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| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | 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 a global 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 is a registered trademark in the
United States and 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 CRM systems market. This
market is intensely competitive, fragmented, rapidly changing
and significantly affected by new product introductions. We
believe that we compete effectively as a result of our
integrated, relationship-centric, rapidly deployable,
Internet-enabled systems and our commitment to providing
high-quality solutions that yield a rapid return on investment
and a low total cost of ownership.

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 CRM
systems market primarily from



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | front-office software application vendors, such
    as Pivotal Corporation (recently acquired by CDC Software) and
    Siebel Systems, Inc.,
|
| |  | providers of hosted CRM solutions, such as
    Salesforce.com and RightNow Technologies,                                                    
|
| |  | 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.                         

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In addition, because we offer extensive
e-business capabilities, we also face competition from other
software application vendors such as Kana
Communications, Inc. and E.piphany. Microsoft released its
first version of a CRM product targeting small to medium
businesses in 2003. As a result, we have begun to compete with
Microsoft in certain CRM opportunities. 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, 2003, we had 330
employees, including 77 people in research and development,
95 people in sales and marketing, 112 people in consulting,
customer support and training and 46 people in general and
administrative services. These numbers exclude independent
contractors and other temporary employees.

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

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

Our operating results have varied widely in the
past, and we expect that they will continue to fluctuate in the
future. If our operating results fall below the expectations of
investors, it could result in a decrease in our stock price.
Some of the factors that could affect the amount and timing of
our revenue and related expenses and cause our operating results
to fluctuate include:



| |   |                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | general economic conditions, which may affect our
    customers capital investment levels in management
    information systems and the timing of their purchases;                                                                  
|
| |  | rate of market acceptance of our CRM solution;                                                                                                                                                                                       
|
| |  | budget and spending decisions by our prospective
    and existing customers;                                                                                                                                                         
|
| |  | customers and prospects decisions to
    defer orders or implementations, particularly large orders or
    implementations, from one quarter to the next, or to proceed
    with smaller-than-forecasted orders or implementations;
|
| |  | level of purchases by our existing customers,
    including additional license and maintenance revenues;                                                                                                                             
|
| |  | our ability to 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;                                                                                                                  
|
| |  | 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 revenue, the mix of our direct versus indirect license
    revenue and the mix of services that we perform versus those
    performed by third-party service providers;     
|
| |  | our ability to successfully expand our
    operations, and the amount and timing of expenditures related to
    this expansion; and                                                                                                  
|
| |  | the cost and financial accounting effects of any
    acquisitions of companies or complementary technologies that we
    may complete.                                                                                               

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



| |   |                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our sales cycles are lengthy and variable,
    typically ranging between six and eighteen 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 revenue is recognized in the last month
    of a quarter, and often in the last weeks or days of a quarter;                                                                                      
|
| |  | in recent quarters, the contracting process of
    our sales cycle has taken more time than we have historically
    experienced;                                                                                                                                                                                                          
|
| |  | the amount of unfulfilled orders for our products
    at the beginning of a quarter is small because our products are
    typically shipped shortly after orders are received; and                                                                                                                                                         
|
| |  | delay of new product releases can result in a
    customers decision to delay execution of a contract or,
    for contracts that include the new release as an element of the
    contract, will result in deferral of revenue recognition until
    such release.                                                                        

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

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

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

We currently have loan and security agreements
with SVB that allow us to borrow up to the lesser (a) 70%
of eligible domestic and individually approved foreign accounts
receivable and (b) $13.0 million under a domestic line,
plus up to the lesser of (a) 75% of eligible foreign
accounts receivable and (b) $2.0 million under a line
guaranteed by Exim Bank. At the time of this filing, however, no
additional amounts are available under the lines of credit based
on the level of our borrowing base and our outstanding letters
of credit. We were in compliance with the financial covenants of
these facilities as of December 31, 2003, based on an
amendment to the loan agreement on January 12, 2004, which
was retroactively effective as of December 31, 2003. Absent
the amendment, we would have been out of compliance with the
loan agreement as of December 31, 2003. If we are unable to
maintain compliance with our covenants in the future or if SVB
decides to restrict our cash deposits, our liquidity would be
further limited and our business, financial condition and
operating results could be materially harmed.

We previously announced that we had restructured
our lease for our principal business offices to reduce our
excess facilities obligations. The termination of these excess
facilities commitments is contingent upon the following
conditions, among others, being met as of April 30, 2004:
(a) we are current in our payments under the lease and
(b) we have not filed a bankruptcy or other liquidation
petition, or otherwise attempted to reject or contest the lease.
If we are not in compliance with any of these conditions as of
April 30, 2004, our original lease will not terminate and
we will be required to continue making payments on the excess
facilities subject to the original lease. If this were to take
place, our business, financial condition and operating results
would be materially adversely affected.

We believe our future revenue performance will be
comparable to the most recent quarterly periods reported and
that our existing cash and cash equivalents will be sufficient
to meet our capital requirements for

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at least the next 12 months. Accordingly, we
believe that we have sufficient resources to continue as a going
concern through at least December 31, 2004. Should our
revenue results for subsequent quarters fall below the results
we achieved in the fourth quarter of 2003, we would likely take
action to restructure our operations to preserve our cash. Such
actions would primarily consist of reductions in headcount. Due
to the fact that lower cash balances could negatively impact our
sales efforts, we may seek additional funds in the future
through public or private equity financing or from other sources
to fund our operations and pursue our growth strategy. We may
experience difficulty in obtaining funding on favorable terms,
if at all. Any financing we might 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 current
shareholders ownership interest in Onyx.


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 2003. As of December 31,
2003, we had an accumulated deficit of $128.2 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, may
decrease in certain areas as we continue to maintain strict cost
controls. We expect our costs and operating expenses in the
near-term to be at a level that is in line with our expected
revenue. We may not be able to increase our revenue sufficiently
to keep pace with any growth in expenditures, if at all, and, as
a result, may be unable to achieve or maintain profitability in
the future.

Although profitable in the third and fourth
quarters of 2003, Onyx Japan incurred substantial losses in
previous periods. The minority shareholders capital
account balance as of December 31, 2003 was $119,000.
Additional Onyx Japan losses above approximately $283,000 in the
aggregate will be absorbed 100% by Onyx, as compared to 58% in
prior periods, which could impact our ability to achieve
profitability in future periods.

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
revenue and growth rates. When economic conditions weaken, sales
cycles for software products tend to lengthen, and, as a result,
we experienced longer sales cycle in 2001, 2002 and 2003. We
expect to continue to experience longer sales cycles than usual
in the foreseeable future. As a result of the economic downturn,
we have also experienced and may continue to experience
difficulties in collecting outstanding receivables from our
customers.

Our management team uses our software to
identify, track and forecast future revenue, backlog and trends
in our business. Our sales force monitors the status of 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 revenue for budgeting and
planning purposes, these pipeline estimates may not consistently
correlate to revenue in a particular quarter or over a longer
period of time. The slowdown in the domestic and international
economies, as well as the effects of terrorist activity and
actual and threatened armed conflict, may continue to cause
customer purchasing decisions to be delayed, reduced in amount
or cancelled, which could reduce the rate of conversion of the
pipeline into contracts during a particular period of time. 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

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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 also recently experienced a trend of
smaller initial orders by new purchasers of our software. Some
customers are reluctant to make large purchases before they have
had the opportunity to observe how our software performs in
their organization, and have opted instead to make their planned
purchase in stages. Additional purchases, if any, may follow
only if the software performs as expected. We believe that this
trend is a symptom of poor economic conditions, lack of
successful deployments by competitors and increasing averseness
to risk among our customers and potential customers. To the
extent that this trend continues, it will adversely affect our
revenues.


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

During 2001, 2002, 2003, our support and service
revenue represented a higher percentage of our total revenue
than in past periods, which negatively impacted our gross
margins. To the extent that this trend continues, our gross
margins will continue to suffer. Due largely to the decrease in
license revenue in 2001, 2002 and 2003, support and service
revenue represented 62% of our total revenue in 2001, 67% of our
total revenue in 2002 and 79% of our total revenue in 2003. We
anticipate that support and service revenue will continue to
represent a significant percentage of total revenue. Because
support and service revenue has lower gross margins than license
revenue, a continued increase in the percentage of total revenue
represented by support and service revenue or a further decrease
in license revenue, as we experienced in 2001, 2002 and 2003,
could have a detrimental effect on our overall gross margins and
thus on our operating results. Our support and service revenue
is subject to a number of risks. First, we subcontract some of
our consulting, customer support and training services to
third-party service providers. Third-party contract revenue
generally carries even lower gross margins than our service
business overall. As a result, our support and service revenue
and related margins may vary from period to period, depending on
the mix of third-party contract revenues. Second, support and
service revenue depends in part on ongoing renewals of support
contracts by our customers, some of which may not renew their
support contracts. The renewal rates of our support contracts
declined during 2001, 2002 and 2003. We believe this occurred 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, support and
service revenue could decline further if customers select
third-party service providers to install and service our
products more frequently than they have in the past. If support
and service revenue is lower than anticipated, our operating
results could fall below the expectations of investors, which
could result in a decrease in our stock price.

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

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



| |   |                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | no history of sustained profitability;                                                                                                                                            
|
| |  | uncertain growth in the market for, and uncertain
    market acceptance of, our 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;                                                                                                                       

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

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

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, E.piphany, Inc., Kana Communications, Inc.,
Microsoft Corporation, Oracle Corporation,
PeopleSoft, Inc., Pivotal Corporation (recently acquired by
CDC Software), RightNow Technologies, Salesforce.com, 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. In 2002, we experienced an increase in
competitive pressures in our market, which has resulted in
enhanced pricing competition among our competitors. A continued
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, we believe that there may be ongoing consolidation
among our competitors. As a result of consolidation among our
competitors, our competitors may be able to adapt more quickly
to new technologies and customer needs, devote greater resources
to promoting or selling their products and services, initiate
and withstand substantial price competition, take advantage of
acquisition or other strategic opportunities more readily or
develop and expand their product and service offerings more
quickly than we can. In addition, our competitors may form
strategic relationships with each other and with other companies
in attempts to compete more successfully against us. These
relationships may take the form of strategic investments, joint
marketing agreements, licenses or other contractual
arrangements, any of which may increase our competitors
ability, relative to ours, to address customer needs with their
software and service offerings and that may enable them to
rapidly increase their market share.

If we do not retain our key employees and
management team, 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 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. On
January 12, 2004, we announced that Onyxs co-founder
and Chief Executive Officer, Brent Frei, would be transitioning
out of his role and that we would be initiating a search for a
new Chief Executive Officer. It is uncertain what individual, if
any, we may

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be able to attract for this position, what the
financial cost of his or her compensation package will be, and
what effect, if any, a new Chief Executive Officer may have on
our business prospects.


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.

We have been named as a defendant in
securities class actions and other litigation that could result
in substantial costs and divert managements attention and
resources if pending settlements do not receive final court
approval.

We, several of our officers and directors and
Dain Rauscher Wessels 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. The consolidated amended complaint in these lawsuits
alleges that we violated the Securities Act of 1933, or
Securities Act, and the Securities Exchange Act of 1934, or
Exchange Act, and seeks certification of a class action for
purchasers of Onyx common stock in Onyxs February 12,
2001 public offering and on the open market during the period
January 23, 2001 through July 24, 2001. The parties
have executed an agreement to settle the matter on terms that
will not require a payment by any of the defendants, inasmuch as
the settlement consideration will be paid entirely by insurance
proceeds. The court has preliminarily approved the settlement
and has set a final approval hearing for September 9, 2004.
None of the complaints or claims specifies the amount of damages
to be claimed.

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 that could potentially result in an award of damages
against Onyx, and seeks to recover on behalf of Onyx any amounts
the company is required to pay in that litigation. The parties
have executed an agreement to settle the matter on terms that
will not require a payment by any of the defendants, inasmuch as
the settlement consideration will be paid entirely by insurance
proceeds. The settlement agreement will be presented to the
court for approval. The settlements of both the derivative
action and the putative class action described above are
contingent on both settlements receiving final court approval.

Onyx, one of its officers and one of its former
officers 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 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. The parties have agreed in principle to
settle the matter, along with similar lawsuits against more than
300 other issuers. The terms of the settlement, which are in the
process of being definitively documented, would require Onyx and
the other issuers to contribute to the settlement, which is
being funded by a consortium of insurance carriers for the
various issuers, only in the event that their carriers become
insolvent or their insurance coverage is exhausted. We believe
it is unlikely that any such contribution by Onyx will be
required. In the event any of the above settlements do not
receive final court approval, 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,

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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 this unresolved litigation may also
impair our relationships with existing customers and our ability
to obtain new customers.


Our solution may not achieve significant
market acceptance.

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 have not achieved,
and may not achieve, market acceptance. We also believe that
many of our potential customers perceive the implementation of a
CRM system to require a great deal of time, expense and
complexity. This perception has been exacerbated by
well-publicized failures of certain CRM projects of some of our
competitors. This, in turn, has caused some potential customers
to approach purchases of CRM systems with caution or to postpone
their orders or decline to make a purchase altogether. We have
spent, and will continue to spend, considerable resources
educating potential customers not only about our solution but
also about CRM systems in general. Even with these educational
efforts, however, continued 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 revenue from the Onyx product family has
historically accounted for nearly all of our license revenue. We
expect product license revenue from the Onyx product family to
continue to account for a substantial majority of our future
revenue. As a result, factors adversely affecting the pricing of
or demand for the Onyx product family, such as competition or
technological change, could dramatically affect our operating
results. If we are unable to successfully deploy current
versions of the Onyx product family and to develop, introduce
and establish customer acceptance of new and enhanced versions
of the Onyx product family, our business will fail.

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. We announced the general
availability of an Oracle version of Onyx Employee Portal, or
OEP, designed to operate on the Unix platform in June 2002.
Later in 2002, we also introduced an Oracle version of OEP
designed to run on IBM AIX. Subsequent product versions have
been released on these platforms. If these product versions or
new product versions do 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 in part on the successful release and market acceptance
of our new platform versions. 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.

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. These security
measures may not, however, be effective against all

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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.


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, system
integrators and consulting firms. We have experienced and may
continue to experience difficulty in recruiting qualified direct
sales personnel and in establishing third-party relationships
with VARs, VSPs, OEM partners, systems integrators and
consulting firms.

In April 2003, we eliminated two significant
sales positions: Senior Vice President of the Americas and one
of our regional sales management positions in North America. We
do not plan to hire individuals in either of these positions in
the near term. Our sales organization for the Americas has been
realigned and is now headed by an executive who has been with
Onyx since 1995. This executive has past experience managing
Onyxs global sales organization. The restructuring of the
management of our sales organization for the Americas may result
in some disruption in our sales activities in this market and in
turn, 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, who 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 software
concurrently. If an implementation is not successful, we may be
required to deliver additional consulting services free of
charge in order to remedy the problem. If our customers have
difficulty deploying our software or for any other reason are
not satisfied with our software, our operating results and
financial condition may be harmed.

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

The 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 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, 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

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our ability to attract and retain customers, and
our revenue may decline. In addition, customers may defer or
forego purchases of our products if we, our competitors or major
technology vendors introduce or announce new products or product
enhancements.


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

To be successful in the long term, we will need
to expand our international operations. 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.

As noted above, Onyx Japan was profitable in the
third and fourth quarters of 2003; however, Onyx Japan incurred
substantial losses in previous periods. The minority
shareholders capital account balance as of
December 31, 2003 was $119,000. Additional Onyx Japan
losses above approximately $283,000 in the aggregate will be
absorbed 100% by Onyx, as compared to 58% in prior periods.
Additional funding may be required to continue the operation of
the joint venture. Our joint venture partners are not obligated
to participate in any capital call and have indicated that they
do not currently intend to invest additional sums in Onyx Japan.
We are, however, discussing other ways our partners can assist
Onyx Japan. If Onyx Japan incurs losses in future periods and no
additional capital is invested, we may have to further
restructure Onyx Japans operations.

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

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 revenue to be derived
from sales that arise out of our relationships with these 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

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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.

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

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

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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 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.

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



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | 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;                                       
|
| |  | changes in accounting standards that adversely
    affect our revenues and earnings; or  
|
| |  | significant trading activity by shareholders with
    large holdings in our common stock.

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

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

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

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



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | stagger the election of our board members so that
    only one-third of our board is up for reelection at each annual
    meeting;

25



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

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

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

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






|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

Our principal administrative, sales, marketing,
support and research and development facilities are located in
approximately 60,000 square feet of space in Bellevue,
Washington. This facility is leased to us through December 2013.
We currently lease other domestic sales and support offices in
California, Colorado, Georgia, Illinois, Massachusetts, New
Jersey, New York and Texas. We maintain international
offices in Australia, Germany, Hong Kong, Japan, Malaysia,
Singapore and the United Kingdom.






|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

We, several of our officers and directors and
Dain Rauscher Wessels 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. The consolidated amended complaint in these lawsuits
alleges that we violated the Securities Act and the Exchange
Act, and seeks certification of a class action for purchasers of
Onyx common stock in Onyxs February 12, 2001 public
offering and on the open market during the period
January 23, 2001 through July 24, 2001. The parties
have executed an agreement to settle the matter on terms that
will not require a payment by any of the defendants, inasmuch as
the settlement consideration will be paid entirely by insurance
proceeds. The court has preliminarily approved the settlement
and has set a final approval hearing for September 9, 2004.
None of the complaints or claims specifies the amount of damages
to be claimed.

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

26



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##### Table of Contents



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
that could potentially result in an award of damages against
Onyx, and seeks to recover on behalf of Onyx any amounts the
company is required to pay in that litigation. The parties have
executed an agreement to settle the matter on terms that will
not require a payment by any of the defendants, inasmuch as the
settlement consideration will be paid entirely by insurance
proceeds. The settlement agreement will be presented to the
court for approval. The settlements of both the derivative
action and the putative class action described above are
contingent on both settlements receiving final court approval.


Onyx, one of its officers and one of its former
officers 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 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. The parties have agreed in principle to
settle the matter, along with similar lawsuits against more than
300 other issuers. The terms of the settlement, which are in the
process of being definitively documented, would require Onyx and
the other issuers to contribute to the settlement, which is
being funded by a consortium of insurance carriers for the
various issuers, only in the event that their carriers become
insolvent or their insurance coverage is exhausted. We believe
it is unlikely that any such contribution by Onyx will be
required.

In the event any of the above settlements do not
receive final court approval, 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 this
unresolved litigation may also impair our relationships with
existing customers and our ability to obtain new customers.






|        |                                                        
|------- | -------------------------------------------------------
|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, 2003.

27



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##### 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 $26.00 per share (split
adjusted). 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
(split adjusted).

|                             |  |                |       |     |  |   |       | 
|---------------------------- |  | -------------- | ----- | --- |  | - | ----- | 
|                             |  |               
|                             |  | Price Range of
|                             |  | Common Stock  
|                             |  |               
|                             |  | High           |       | Low
|                             |  |                |       |    
|Year Ended December 31, 2002 |  |                |       |     |  |   |       | 
|First Quarter                |  | $              | 20.32 |     |  | $ | 11.16 | 
|Second Quarter               |  |                | 17.04 |     |  |   | 12.60 | 
|Third Quarter                |  |                | 13.72 |     |  |   | 6.96  | 
|Fourth Quarter               |  |                | 8.80  |     |  |   | 5.64  | 
|Year Ended December 31, 2003 |  |                |       |     |  |   |       | 
|First Quarter                |  | $              | 6.00  |     |  | $ | 3.52  | 
|Second Quarter               |  |                | 4.76  |     |  |   | 2.40  | 
|Third Quarter                |  |                | 5.78  |     |  |   | 3.20  | 
|Fourth Quarter               |  |                | 5.54  |     |  |   | 3.32  | 

Holders

As of February 27, 2004, there were
approximately 152 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 with SVB prohibit
us from paying any cash dividends.

28



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##### 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,              
|                                                                             |                                                                                          |                                      
|                                                                             |                                                                                          | 1999                                  |        | 2000   |        | 2001 |        | 2002   |         | 2003
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |     
|                                                                             |                                                                                          |                                      
|                                                                             |                                                                                          | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data:                               |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|Revenue:                                                                     |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|                                                                             | License                                                                                  |                                       | $      | 38,122 |        |      | $      | 73,701 |         |      | $       | 37,584 |         |   | $       | 22,633 |        |   | $      | 12,143 |       
|                                                                             | Support and service                                                                      |                                       |        | 23,380 |        |      |        | 47,566 |         |      |         | 62,116 |         |   |         | 46,751 |        |   |        | 46,230 |       
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|                                                                             |                                                                                          | Total revenues                        |        |        | 61,502 |      |        |        | 121,267 |      |         |        | 99,700  |   |         |        | 69,384 |   |        |        | 58,373 | 
|Cost of revenue:                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|                                                                             | License                                                                                  |                                       |        | 2,243  |        |      |        | 3,520  |         |      |         | 2,006  |         |   |         | 1,140  |        |   |        | 848    |       
|                                                                             | Amortization of acquired technology                                                      |                                       |        | 500    |        |      |        | 820    |         |      |         | 751    |         |   |         | 498    |        |   |        | 255    |       
|                                                                             | Support and service                                                                      |                                       |        | 12,198 |        |      |        | 25,510 |         |      |         | 35,662 |         |   |         | 20,128 |        |   |        | 20,711 |       
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|                                                                             |                                                                                          | Total cost of revenues                |        |        | 14,941 |      |        |        | 29,850  |      |         |        | 38,419  |   |         |        | 21,766 |   |        |        | 21,814 | 
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|Gross margin                                                                 |                                                                                          |                                       | 46,561 |        |        |      | 91,417 |        |         |      | 61,281  |        |         |   | 47,618  |        |        |   | 36,559 |       
|Operating expenses:                                                          |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|                                                                             | Sales and marketing                                                                      |                                       |        | 29,614 |        |      |        | 59,182 |         |      |         | 53,254 |         |   |         | 27,947 |        |   |        | 20,629 |       
|                                                                             | Research and development                                                                 |                                       |        | 10,432 |        |      |        | 21,046 |         |      |         | 21,968 |         |   |         | 14,745 |        |   |        | 11,838 |       
|                                                                             | General and administrative                                                               |                                       |        | 5,720  |        |      |        | 11,120 |         |      |         | 14,623 |         |   |         | 9,449  |        |   |        | 8,205  |       
|                                                                             | Restructuring and other related charges                                                  |                                       |        |       |        |      |        |       |         |      |         | 51,806 |         |   |         | 8,491  |        |   |        | 1,422  |       
|                                                                             | Amortization and impairment of goodwill and other
    acquisition-related intangibles(1) |                                       |        | 1,064  |        |      |        | 4,332  |         |      |         | 13,695 |         |   |         | 836    |        |   |        | 836    |       
|                                                                             | Stock-based compensation                                                                 |                                       |        | 882    |        |      |        | 548    |         |      |         | 904    |         |   |         | 248    |        |   |        | 70     |       
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|                                                                             |                                                                                          | Total operating expenses              |        |        | 47,712 |      |        |        | 96,228  |      |         |        | 156,250 |   |         |        | 61,716 |   |        |        | 43,000 | 
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|Loss from operations                                                         |                                                                                          |                                       | (1,151 | )      |        |      | (4,811 | )      |         |      | (94,969 | )      |         |   | (14,098 | )      |        |   | (6,441 | )     
|Other income (expense), net                                                  |                                                                                          |                                       | 1,224  |        |        |      | 788    |        |         |      | 377     |        |         |   | (119    | )      |        |   | 78     |       
|Change in fair value of outstanding warrants                                 |                                                                                          |                                       |       |        |        |      |       |        |         |      |        |        |         |   |        |        |        |   | 355    |       
|Investment losses and impairment                                             |                                                                                          |                                       |       |        |        |      | (500   | )      |         |      | (2,500  | )      |         |   |        |        |        |   |       |       
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|Income (loss) before income taxes                                            |                                                                                          |                                       | 73     |        |        |      | (4,523 | )      |         |      | (97,092 | )      |         |   | (14,217 | )      |        |   | (6,008 | )     
|Income tax provision (benefit)                                               |                                                                                          |                                       | 517    |        |        |      | 404    |        |         |      | (294    | )      |         |   | 585     |        |        |   | 264    |       
|Minority interest in loss of consolidated
    subsidiary                     |                                                                                          |                                       |       |        |        |      | (216   | )      |         |      | (1,283  | )      |         |   | (1,032  | )      |        |   | (118   | )     
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|Net loss                                                                     |                                                                                          | $                                     | (444   | )      |        | $    | (4,711 | )      |         | $    | (95,515 | )      |         | $ | (13,770 | )      |        | $ | (6,154 | )     
|                                                                             |                                                                                          |                                       |        |        |        |      |        |        |         |      |         |        |         |   |         |        |        |   |        |       
|Basic and diluted net loss per share(2)(3)                                   |                                                                                          | $                                     | (0.06  | )      |        | $    | (0.54  | )      |         | $    | (9.46   | )      |         | $ | (1.10   | )      |        | $ | (0.46  | )     
|Shares used in calculation of basic and diluted
    net loss per share(2)(3) |                                                                                          |                                       | 7,804  |        |        |      | 8,731  |        |         |      | 10,092  |        |         |   | 12,481  |        |        |   | 13,442 |       

29



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|                                            |  |                |        |      |  |      |         |      |  |      |        |   |  |   |        |  |  |   |        | 
|------------------------------------------- |  | -------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ |  |  | - | ------ | 
|                                            |  |               
|                                            |  | December 31,  
|                                            |  |               
|                                            |  | 1999           |        | 2000 |  | 2001 |         | 2002 |  | 2003
|                                            |  |                |        |      |  |      |         |      |  |     
|                                            |  |               
|                                            |  | (In thousands)
|Consolidated Balance Sheet Data:            |  |                |        |      |  |      |         |      |  |      |        |   |  |   |        |  |  |   |        | 
|Cash and cash equivalents                   |  | $              | 3,691  |      |  | $    | 11,492  |      |  | $    | 15,868 |   |  | $ | 17,041 |  |  | $ | 10,127 | 
|Restricted cash                             |  |                |       |      |  |      |        |      |  |      |       |   |  |   | 2,238  |  |  |   | 1,723  | 
|Working capital (deficit)                   |  |                | 30,147 |      |  |      | 25,252  |      |  |      | (4,718 | ) |  |   | 3,706  |  |  |   | 2,315  | 
|Total assets                                |  |                | 73,180 |      |  |      | 109,040 |      |  |      | 64,511 |   |  |   | 54,787 |  |  |   | 41,425 | 
|Long-term obligations, less current portion |  |                | 133    |      |  |      | 428     |      |  |      | 10,178 |   |  |   | 2,677  |  |  |   | 405    | 
|Long-term obligations  warrants            |  |                |       |      |  |      |        |      |  |      |       |   |  |   | 920    |  |  |   | 565    | 
|Shareholders equity                        |  |                | 51,838 |      |  |      | 66,086  |      |  |      | 8,135  |   |  |   | 16,828 |  |  |   | 16,299 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2002, the Company
    adopted the provisions of Statement of Financial Accounting
    Standards No. 142 Goodwill and Other Intangible
    Assets, or SFAS 142. Under SFAS 142, goodwill is
    no longer amortized, beginning January 1, 2002. See
    Notes 1 and 12 of Notes to Consolidated Financial
    Statements for further explanation of the impact of
    SFAS 142.
|   
|(2) | See Notes 1 and 12 of Notes to Consolidated
    Financial Statements for an explanation of the method used to
    calculate basic and diluted net loss per share. The 1999 amounts
    are calculated on a pro forma basis.                                                                                                                                                                          
|   
|(3) | On July 23, 2003, the Companys
    shareholders approved a one-for-four reverse stock split which
    became effective on that date. All share and per share amounts
    in the accompanying consolidated financial statements have been
    adjusted to reflect this reverse stock split.                                                                                                          






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

Overview

Onyx Software Corporation 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. 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 can result in a
comparatively low total cost of ownership and rapid return on
investment.

Overview of the Results for the Year Ended
December 31, 2003

Key financial data points relating to our
performance include:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | Revenue for 2003 of $58.4 million, down 16%
    from 2002 and down 41% from 2001;        
|
| |  | License revenue for 2003 of $12.1 million,
    down 46% from 2002 and down 68% from 2001;
|
| |  | Service revenue for 2003 of $46.2 million,
    down 1% from 2002 and down 26% from 2001; 
|
| |  | Service margins for 2003 of 55%, down from 57% in
    2002 and up from 43% in 2001;      

30



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| |   |                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Total operating expenses for 2003 of
    $43.0 million, down from $61.7 million in 2002 and
    $156.3 million in 2001. Operating expenses, excluding
    acquisition-related amortization, stock compensation and
    restructuring charges, in 2003 of $40.7 million, down from
    $52.1 million in 2002 and $89.8 million in 2001;
|
| |  | Restricted and unrestricted cash balances of
    $11.9 million at December 31, 2003, compared to
    $19.3 million at December 31, 2002;                                                                                                                                                                                              
|
| |  | Days sales outstanding, based on end-of-period
    receivable balances and most recent quarters annualized
    revenues, of 86 days at December 31, 2003, compared to
    76 days at December 31, 2002;                                                                                                                              
|
| |  | Current and long-term restructuring-related
    liabilities of $3.7 million at December 31, 2003,
    compared to $13.7 million at December 31,
    2002; and                                                                                                                                                                         
|
| |  | Deferred revenue of $16.1 million at
    December 31, 2003, compared to $16.3 million at
    December 31, 2002.                                                                                                                                                                                                                       

We believe that continued adverse economic
conditions have affected our ability to generate license revenue
during 2003. Our service revenue, service margins and operating
expense management, however, continued to be steady during this
same time period.

Although recent published reports are signaling
modest improvement in the global economy, we are cautious as to
the speed at which macroeconomic conditions will improve,
particularly as it relates to the information technology and
communications industries, and believe our ability to generate
new license sales will continue to be challenged in the near
term. The majority of our revenue has been generated from
customers in the high-technology, financial services and
healthcare industries. Accordingly, our business is affected by
the economic and business conditions of these industries and the
demand for information technology within these industries.
Macroeconomic conditions were extremely challenging during 2001,
2002 and 2003, and we expect them to continue to impact capital
spending initiatives of our targeted new and existing customer
base in the near term.

As a result of current economic uncertainties, we
will be focused on the following objectives in the near term:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | successful rebuilding of our direct sales force;                                                                                                                                                   
|
| |  | managing our costs to allow our return to
    profitability and allow us to preserve our cash;                                                                                                     
|
| |  | focusing our resources and efforts on the sales
    opportunities with the highest probability of success;                                                                                         
|
| |  | maximizing the value of our partnerships with key
    system integration and technology vendors, particularly as it
    relates to our Embedded CRM initiative and our key vertical
    industries;
|
| |  | aggressive marketing of our recent major product
    releases on the Windows NT/ Microsoft BackOffice and
    Oracle/ Unix platforms; and                                                          
|
| |  | maintaining high customer satisfaction levels.                                                                                                                                                     

We hope that, by focusing our efforts on these
key objectives, we will be able to return to profitability in
challenging economic times and successfully grow our business,
although we cannot offer any assurance regarding when, or
whether, this will occur. We continue to align costs and
expenses to our expected revenues. We may, however, continue to
experience losses and negative cash flows in the near term,
unless sales of our products and services grow.



| |                                               
| | ----------------------------------------------
| | Critical Accounting Policies and
    Estimates

Our discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses,

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and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our critical
accounting policies and estimates, including those related to
revenue recognition, bad debts, intangible assets,
restructuring, and contingencies and litigation. We base our
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.


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



| |                    
| | -------------------
| | Revenue Recognition

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

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

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

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

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

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

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

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as services are performed. Standard terms for
renewal of maintenance arrangements, consulting services and
training services call for payment within 30 days.


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

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



| |                                
| | -------------------------------
| | Allowance for Doubtful Accounts

A considerable amount of judgment is required
when we assess the ultimate realization of receivables,
including assessing the probability of collection and the
current creditworthiness of each customer. Although no expenses
were required in 2002 and we recorded a net benefit in 2003,
significant expenses were recorded to increase our allowance for
doubtful accounts in prior years due to the rapid downturn in
the economy, and in the technology sector in particular, and we
may record additional expenses in the future.



| |                                
| | -------------------------------
| | Impairment of Intangible Assets

We periodically evaluate intangible asset
valuations of businesses we acquired as impairment indicators
arise. Our judgments regarding the existence of impairment
indicators are based on legal factors, market conditions and
operational performance of our acquired businesses. Future
events could cause us to conclude that impairment indicators
exist and that goodwill and other intangible assets associated
with our acquired businesses are impaired.

Restructuring

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

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

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

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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.


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 young technology companies, particularly
companies in 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 and the timing of their purchases;                                                                  
|
| |  | rate of market acceptance of our CRM solution;                                                                                                                                                                                       
|
| |  | budget and spending decisions by our prospective
    and existing customers;                                                                                                                                                         
|
| |  | customers and prospects decisions to
    defer orders or implementations, particularly large orders or
    implementations, from one quarter to the next, or to proceed
    with smaller-than-forecasted orders or implementations;
|
| |  | level of purchases by our existing customers,
    including additional license and maintenance revenues;                                                                                                                             
|
| |  | our ability to 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;                                                                                                                  
|
| |  | 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 revenue, the mix of our direct versus indirect license
    revenue and the mix of services that we perform versus those
    performed by third-party service providers;     
|
| |  | our ability to successfully expand our
    operations, and the amount and timing of expenditures related to
    this expansion; 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,
|                                               |                                     |                        
|                                               |                                     | 2001                    |  | 2002 |       | 2003
|                                               |                                     |                         |  |      |       |     
|Consolidated Statement of Operations
    Data: |                                     |                         |  |      |       |      |  |      |       |  |  |     
|Revenue:                                       |                                     |                         |  |      |       |      |  |      |       |  |  |     
|                                               | License                             |                         |  | 37.7 | %     |      |  | 32.6 | %     |  |  | 20.8 | %    
|                                               | Support and service                 |                         |  | 62.3 |       |      |  | 67.4 |       |  |  | 79.2 |      
|                                               |                                     |                         |  |      |       |      |  |      |       |  |  |     
|                                               |                                     | Total revenue           |  |      | 100.0 |      |  |      | 100.0 |  |  |      | 100.0 | 
|                                               |                                     |                         |  |      |       |      |  |      |       |  |  |     
|Cost of revenue:                               |                                     |                         |  |      |       |      |  |      |       |  |  |     
|                                               | License                             |                         |  | 2.0  |       |      |  | 1.6  |       |  |  | 1.5  |      
|                                               | Amortization of acquired technology |                         |  | 0.8  |       |      |  | 0.7  |       |  |  | 0.4  |      

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|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |      |      | 
|-------------------------------------------------------- | ----------------------------------------------- | ----------------------- | ----- | ---- | ---- | ---- | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                                         |                                                 |                        
|                                                         |                                                 | Year Ended December 31,
|                                                         |                                                 |                        
|                                                         |                                                 | 2001                    |       | 2002 |      | 2003
|                                                         |                                                 |                         |       |      |      |     
|                                                         | Support and service                             |                         |       | 35.8 |      |      |       | 29.0 |      |  |       | 35.5 |     
|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |     
|                                                         |                                                 | Total cost of revenue   |       |      | 38.5 |      |       |      | 31.4 |  |       |      | 37.4 | 
|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |     
|Gross margin                                             |                                                 |                         | 61.5  |      |      |      | 68.6  |      |      |  | 62.6  |     
|Operating expenses:                                      |                                                 |                         |       |      |      |      |       |      |      |  |       |     
|                                                         | Sales and marketing                             |                         |       | 53.4 |      |      |       | 40.3 |      |  |       | 35.3 |     
|                                                         | Research and development                        |                         |       | 22.0 |      |      |       | 21.3 |      |  |       | 20.3 |     
|                                                         | General and administrative                      |                         |       | 14.7 |      |      |       | 13.6 |      |  |       | 14.1 |     
|                                                         | Restructuring and other related charges         |                         |       | 52.0 |      |      |       | 12.2 |      |  |       | 2.4  |     
|                                                         | Amortization of acquisition-related intangibles |                         |       | 13.7 |      |      |       | 1.2  |      |  |       | 1.4  |     
|                                                         | Amortization of stock-based compensation        |                         |       | 0.9  |      |      |       | 0.4  |      |  |       | 0.1  |     
|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |     
|Total operating expenses                                 |                                                 |                         | 156.7 |      |      |      | 88.9  |      |      |  | 73.6  |     
|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |     
|Loss from operations                                     |                                                 |                         | (95.3 | )    |      |      | (20.3 | )    |      |  | (11.0 | )   
|Other income (expense), net                              |                                                 |                         | 0.4   |      |      |      | (0.2  | )    |      |  | 0.1   |     
|Change in fair value of outstanding warrants             |                                                 |                         | 0.0   |      |      |      | 0.0   |      |      |  | 0.6   |     
|Investment losses and impairment                         |                                                 |                         | (2.5  | )    |      |      | 0.0   |      |      |  | 0.0   |     
|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |     
|Loss before income taxes                                 |                                                 |                         | (97.4 | )    |      |      | (20.5 | )    |      |  | (10.3 | )   
|Income tax provision (benefit)                           |                                                 |                         | (0.3  | )    |      |      | 0.8   |      |      |  | 0.5   |     
|Minority interest in loss of consolidated
    subsidiary |                                                 |                         | (1.3  | )    |      |      | (1.5  | )    |      |  | (0.2  | )   
|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |     
|Net loss                                                 |                                                 |                         | (95.8 | )%   |      |      | (19.8 | )%   |      |  | (10.6 | )%  
|                                                         |                                                 |                         |       |      |      |      |       |      |      |  |       |     



| |        
| | -------
| | Revenue

Total revenue, which consists of software license
and service revenue, decreased from $99.7 million in 2001
to $69.4 million in 2002, a decrease of 30%, and decreased
to $58.4 million in 2003, a decrease of 16%. No single
customer accounted for more than 10% of our revenues in any of
these periods.

Our license revenue decreased from
$37.6 million in 2001 to $22.6 million in 2002, a
decrease of 40%, and decreased to $12.1 million in 2003, a
decrease of 46%. We believe the decreases in license revenue
from 2001 to 2002 and from 2002 to 2003 was primarily due to the
progressive weakening of the global economy, which has caused a
delay in the capital-spending initiatives of our prospective and
existing customers, particularly in the middle market.
Macroeconomic conditions were extremely challenging during 2001,
2002 and 2003. We believe that macroeconomic conditions will
continue to be challenging in the near term which may delay
capital spending initiatives of our prospective and existing
customers. Our competitors inconsistency in delivering
successful CRM solutions has also resulted in more cautious
buying behavior of prospective customers.

Support and service revenue decreased from
$62.1 million in 2001 to $46.8 million in 2002, a
decrease of 25%, and decreased to $46.2 million in 2003, a
decrease of 1%. The decrease from 2001 to 2002 was the result of
a decrease in consulting and training services of
$15.4 million, offset by an increase in maintenance and
support revenue of $0.1 million. The decrease from 2002 to
2003 was the result of an increase in consulting and training
services of $1.0 million, offset by a decrease in
maintenance and support revenue of $1.6 million. Service
revenue represented 62% of our total revenue in 2001, 67% in
2002 and 79% in 2003. We expect to see a reduction in absolute
dollars in our support and service revenue in future quarters
due to the reduction in demand for our consulting services
resulting from the decrease in our license revenue in recent
quarters. In addition, we may experience a decline in
maintenance revenue as customers elect not to renew annual
maintenance contracts in part or as a whole, primarily due to
specific economic circumstances facing each of our customers and
fewer new licenses sold in 2003. We expect the proportion of
support and service revenue to

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total revenue to fluctuate in the future,
depending in part on our customers direct use of
third-party consulting and implementation service providers, the
degree to which we provide opportunities for our partners to
engage with our customers and the ongoing renewals of customer
support contracts, as well as our overall sales of software
licenses to new and existing customers.


Revenue outside of North America decreased from
$29.6 million in 2001 to $24.8 million in 2002, and
decreased to $22.9 million in 2003. We believe the decrease
in revenue from 2001 to 2002 and from 2002 to 2003 outside of
North America was primarily due to an adverse shift in the
buying behavior of our targeted new and existing customer base
as a result of economic conditions.

Included in license revenue 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 which owns 14% of Onyx Japan.



| |                
| | ---------------
| | Cost of Revenue



| |                        
| | -----------------------
| | Cost of license revenue

Cost of license revenue consists of license fees
for third-party software, product media, product duplication and
manuals. Cost of license revenue decreased from
$2.0 million in 2001 to $1.1 million in 2002, a
decrease of 43%, and decreased to $848,000 in 2003, a decrease
of 26%. Cost of license revenue as a percentage of related
license revenues was 5% in 2001, 5% in 2002 and 7% in 2003. The
changes in dollar amount during these periods in cost of license
revenue was primarily due to changes in license revenue. The
increase in cost of license revenue as a percentage of related
license revenue in 2003 compared to the prior years was
primarily the result of a higher concentration of license
revenue subject to third-party product royalty costs coupled
with the impact of certain fixed third-party product royalty
agreements which do not vary directly with license revenue.



| |                                    
| | -----------------------------------
| | 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 decreased
from $751,000 in 2001 to $498,000 in 2002, a decrease of 34%,
and decreased to $255,000 in 2003, a decrease of 49%. The
decrease from 2001 to 2002 to 2003 was the result of an
impairment recorded in the third quarter of 2001 relating to the
carrying value of the acquired technology asset associated with
Versametrix, coupled with the completion of the amortization of
acquired technology for Market Solutions in the third quarter of
2002 and the completion of the amortization of acquired
technology for EnCyc in the fourth quarter of 2003. The acquired
technology intangibles were fully amortized as of
December 31, 2003 and as a result, there will be no further
amortization of acquired technology in future periods, unless we
complete additional acquisitions.



| |                                    
| | -----------------------------------
| | Cost of support and service revenue

Cost of support and service revenue consists of
personnel and third-party service provider costs related to
consulting services, customer support and training. Cost of
support and service revenue decreased from $35.7 million in
2001 to $20.1 million in 2002, a decrease of 44%, and
increased to $20.7 million in 2003, an increase of 3%. The
decrease in dollar amount from 2001 to 2002 resulted primarily
from a reduction in consulting personnel during 2001 to more
closely align with our service revenue, as well as a decrease in
the use of third-party service providers, which have a higher
cost structure than our internal resources. The increase in
dollar amount from 2002 to 2003 is due to a higher concentration
of professional service revenue, which has a higher cost
structure and contributes lower margins than support revenue.
Full-time headcount in our professional services organization
was: 205 at the end of 2000, 160 at the end of 2001, 123 at the
end of 2002 and 112 at the end of 2003.

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Cost of support and service revenue as a
percentage of related support and service revenues was 57% in
2001, 43% in 2002 and 45% in 2003. The decrease in cost of
service revenue as a percentage of related service revenue from
2001 to 2002 was due to a higher proportion of maintenance
revenue, which has a lower direct cost structure and therefore
contributes higher margins than our consulting and training
services, coupled with a lower percentage use of third-party
service providers in our consulting engagements, which
historically contributed significantly lower margins than
internal resources. The increase in cost of service revenue as a
percentage of related service revenue from 2002 to 2003
primarily reflects a higher proportion of service revenue from
consulting and training services, which have a higher direct
cost structure and therefore contribute lower margins than our
customer support services. The cost of services as a percentage
of service revenue 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 decreased from $53.3 million in 2001 to
$27.9 million in 2002, a decrease of 48%, and decreased to
$20.6 million in 2003, a decrease of 26%. The decrease in
dollar amount from 2001 to 2002 and from 2002 to 2003 was
primarily due to restructuring activities and reductions in
sales and marketing headcounts, along with a decrease in sales
commissions and bonuses. Full-time headcount in our sales and
marketing organization was: 319 at the end of 2000, 130 at the
end of 2001, 131 at the end of 2002 and 95 at the end of 2003.

Sales and marketing expenses represented 53% of
our total revenue in 2001, 40% in 2002 and 35% in 2003. The
decrease in sales and marketing expenses as a percentage of
total revenue during these periods is primarily the result of
cost cutting initiatives and lower license revenue as a
percentage of total revenue.

We expect our sales and marketing expenses to
remain flat in dollars in 2004 relative to 2003. To fully
realize our long-term sales growth opportunity, we believe that
we may need to significantly increase our sales and marketing
efforts, particularly in support of our vertical and embedded
CRM strategies, 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 decreased from $22.0 million in
2001 to $14.7 million in 2002, a decrease of 33%, and
decreased to $11.8 million in 2003, a decrease of 20%. The
decrease from 2001 to 2002 was primarily due to a decrease in
the use of outside contractors upon the release of our
application on the Oracle platform and our election to retain
full-time employees in lieu of contractors in our restructuring
plan and, to a lesser extent, to a decrease in the number of
development personnel. The decrease from 2002 to 2003 was
primarily due to a decrease in the use of outside contractors,
and to a lesser extent, due to a decrease in the number of
development personnel. Expenses associated with the use of
outside contractors totaled $7.6 million in 2001,
$2.8 million in 2002 and $1.0 million in 2003.
Full-time headcount in our research and development organization
was: 111 at the end of 2000, 98 at the end of 2001, 88 at the
end of 2002 and 77 at the end of 2003. Research and development
costs represented 22% of our total revenue in 2001, 21% in 2002
and 20% in 2003.

Although research and development expenses were
affected by our restructuring efforts, we believe that those
development projects that are most essential to our long-term
growth were least affected. We believe that our research and
development investments are essential to our long-term strategy.
We expect our research and development expenses to remain flat
in dollars in 2004 relative to 2003. To fully realize our
long-term

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sales growth opportunity, we believe that we may
need to increase our research and development investment in
dollars in the future.




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

General and administrative expenses consist
primarily of salaries, benefits and related costs for our
executive, finance, human resource and administrative personnel,
professional services fees and allowances for doubtful accounts.
General and administrative expenses decreased from
$14.6 million in 2001 to $9.4 million in 2002, a
decrease of 35%, and decreased to $8.2 million in 2003, a
decrease of 13%. The decrease in general and administrative
expenses from 2001 to 2002 was primarily due to restructuring
activities and reductions in executive, finance, human resource
and administrative personnel, along with a decrease in
professional fees and allowances for doubtful accounts. The
decrease in general and administrative expenses from 2002 to
2003 was due to reductions in executive and administrative
personnel, along with a decrease in professional services fees
and the benefit from collections of accounts previously believed
to be uncollectible during the first and second quarters of
2003. Full-time headcount in our general and administrative
organization was: 97 at the end of 2000, 61 at the end of 2001,
61 at the end of 2002 and 46 at the end of 2003. General and
administrative costs represented 15% of our total revenue in
2001, 14% in 2002 and 14% in 2003.

Although general and administrative expenses have
been reduced through our restructuring efforts in recent
periods, our general and administrative expenses may increase
slightly in 2004 relative to 2003 as we incur additional
professional services fees related to the satisfaction of new
compliance requirements under the Sarbanes-Oxley Act of 2002 and
incur costs associated with the recruitment and hiring of a new
Chief Executive Officer. We also believe that we may need to
expand our administrative staff, domestically and
internationally, in the future to pursue our long-term sales
growth opportunities.



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

Restructuring and other related charges represent
our efforts to reduce our overall cost structure. In April 2001
and again in September 2001, Onyx approved a restructuring plans
to reduce headcount, reduce infrastructure and eliminate excess
and duplicate facilities. In April 2003, Onyx approved a
restructuring plan to reduce additional headcount. During 2001,
we recorded approximately $51.8 million in restructuring
and other related charges. During 2002, we recorded
approximately $8.5 million in restructuring and other
related charges. During 2003, we recorded approximately
$1.4 million in restructuring and other related charges.

The components of the charges recorded for the
years ended December 31, 2001, 2002 and 2003, are as
follows (in thousands):

|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|------------------------------------------- |  | ---------- | ------- | ------------ |  | ---------- | ---- | ----------- |  | ----- | ------ | ----- |  | - | ------- | - |  | - | ----- | - |  | - | ------- | -
|                                            |  |            |         | Excess       |  | Employee   |      |             |  |       |        |      
|                                            |  | Excess     |         | Facilities  |  | Separation |      | Asset       |  |       |        |      
|                                            |  | Facilities |         | Warrants     |  | Costs      |      | Impairments |  | Other |        | Total
|                                            |  |            |         |              |  |            |      |             |  |       |        |      
|Charge for the Year Ended December 31, 2001 |  | $          | 31,948  |              |  | $          |     |             |  | $     | 3,724  |       |  | $ | 14,747  |   |  | $ | 1,387 |   |  | $ | 51,806  |  
|Cash Payments & Write-offs                  |  |            | (7,653  | )            |  |            |     |             |  |       | (3,474 | )     |  |   | (14,747 | ) |  |   | (618  | ) |  |   | (26,492 | )
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2001                |  |            | 24,295  |              |  |            |     |             |  |       | 250    |       |  |   |        |   |  |   | 769   |   |  |   | 25,314  |  
|Charge for the Year Ended December 31, 2002 |  |            | 4,361   |              |  |            | 920  |             |  |       | 1,266  |       |  |   | 2,204   |   |  |   | (260  | ) |  |   | 8,491   |  
|Cash Payments & Write-offs                  |  |            | (16,522 | )            |  |            |      |             |  |       | (880   | )     |  |   | (2,204  | ) |  |   | (455  | ) |  |   | (20,061 | )
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2002                |  |            | 12,134  |              |  |            | 920  |             |  |       | 636    |       |  |   |        |   |  |   | 54    |   |  |   | 13,744  |  
|Charge for the Year Ended December 31, 2003 |  |            | 444     |              |  |            |      |             |  |       | 769    |       |  |   | 209     |   |  |   |       |   |  |   | 1,422   |  
|Cash Payments & Write-offs                  |  |            | (9,486  | )            |  |            |      |             |  |       | (1,334 | )     |  |   | (209    | ) |  |   | (54   | ) |  |   | (11,083 | )
|Fair Value Adjustment                       |  |            |         |              |  |            | (355 | )           |  |       |       |       |  |   |        |   |  |   |      |   |  |   | (355    | )
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2003                |  | $          | 3,092   |              |  | $          | 565  |             |  | $     | 71     |       |  | $ |        |   |  | $ |      |   |  | $ | 3,728   |  
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  

38



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The excess facility charges recorded in 2001 and
2002 are the result of our decision to reduce our utilization of
certain facilities and to terminate usage of certain domestic
and international facilities altogether. The most significant
portion of the excess facility charges relates to our leases for
262,000 square feet of office space in Bellevue,
Washington, which commenced in April and June of 2001 and were
originally contracted to expire in 2011 and 2013.

The partial lease termination agreement reached
with Bellevue Hines Development, L.L.C., or Hines, in December
2003 reduced our excess facilities in Bellevue, Washington by
approximately 202,000 square feet. Onyx continues to lease
approximately 60,000 square feet at this facility, which
began serving as our new corporate headquarters effective at the
end of January 2003. The new lease for 60,000 square feet
expires in December 2013. The partial lease termination requires
cash outflows of approximately $1.4 million over the
4-month period ending April 2004, which is included in current
restructuring-related liabilities at December 31, 2003. In
addition to cash payments, Onyx issued three five-year warrants
to Hines for the purchase of up to an aggregate of
198,750 shares of Onyx common stock. The warrant value as
of December 31, 2002 was estimated at $920,000 based on
(a) the estimated value of the warrants using the
Black-Scholes model with an expected dividend yield of 0.0%, a
risk-free interest rate of 5.0%, volatility of 85% and an
expected life of five years and (b) the estimated value of
the cash cancellation payments in the event of a change in
control. The warrants are subject to variable accounting and we
are required to mark the warrants to market at each reporting
period. At December 31, 2003, the warrant value was
estimated at $565,000 using similar assumptions to those used at
December 31, 2002, and is included in long-term liabilities.

The accounting for excess facilities is complex
and, as a result, may result in adjustments to our current
restructuring charge. In particular, based on the terms of the
warrants issued in connection with the partial lease termination
of excess facilities in Bellevue, Washington, the warrants are
subject to variable accounting and will be marked to market at
each reporting period. Future cash outlays are anticipated
through July 2006 unless estimates and assumptions change or we
are able to negotiate to exit certain leases at an earlier date.

The current portion of restructuring-related
liabilities totaled $2.8 million at December 31, 2003,
the long-term portion of restructuring-related liabilities
totaled $405,000 at December 31, 2003 and the value of the
warrants issued in connection with the termination of certain
facility lease obligations was $565,000 at December 31,
2003.

We are continuing to align our operations with
our expected revenues and review our restructuring efforts. We
may, however, 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, unless sales of our products and services grow.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | 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 $13.7 million in 2001,
$0.8 million in 2002 and $0.8 million in 2003.
Amortization and impairment of acquired intangibles decreased
from 2001 to 2002, due to the full impairment of the carrying
value of intangibles associated with the acquisitions of CSN,
Versametrix and RevenueLab during the third and fourth quarters
of 2001, coupled with the elimination of goodwill amortization
expense in 2002 as the result of the required adoption of new
accounting pronouncements effective January 1, 2002, as
more fully described in Note 1 to the accompanying
consolidated financial statements.



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

39



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##### Table of Contents



Deferred compensation is amortized over the
vesting periods of the options. We amortized stock-based
compensation expense of $904,000 in 2001, $248,000 in 2002 and
$30,000 in 2003. In 2003, we also recognized $38,000 of stock
compensation expense associated with restricted stock awarded to
a non-employee consultant and $2,000 of stock-based compensation
expense associated with options granted to a non-employee
consultant. Approximately $1.1 million of deferred
compensation that was recorded in January 2001 in connection
with options granted to employees of RevenueLab was reversed
within shareholders equity during 2001, 2002 and 2003 upon
the employees termination. Option-related deferred
compensation recorded at our initial public offering was fully
amortized as of December 31, 2002. The deferred stock-based
compensation balance in connection with the acquisition of
RevenueLab was fully amortized at December 31, 2003.




| |                            
| | ---------------------------
| | Other Income (Expense), Net

Other income (expense), 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. Other income
(expense), net was income of $377,000 in 2001, expense of
$119,000 in 2002 and income of $78,000 in 2003. The decrease in
other income (expense), net from 2001 to 2002 was primarily the
result of an increase in bank fees and equity
transaction-related expenses that were not associated with the
sale of securities recorded during 2002, coupled with lower
interest rates on marketable securities. The increase in other
income (expense), net from 2002 to 2003 was primarily the result
of equity transaction-related expenses which were not associated
with the sale of securities recorded during 2002 which was not
recurring in 2003, coupled with an increase in foreign currency
gains during 2003, offset in part by a decrease in interest
income.



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

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, 2003, 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 benefit of $294,000 in
2001, a provision of $585,000 in 2002 and a provision of
$264,000 in 2003. The benefit recorded in 2001 resulted from the
reduction of the deferred tax liability associated with the
intangibles in connection with our acquisition of CSN, which was
fully impaired during 2001. The significant provision recorded
in 2002 was primarily due to withholding taxes associated with
the settlement of royalties due to our U.S. entity by Onyx
Japan, our Japanese joint venture. Although these withholding
taxes generate foreign tax credits, we have recorded a valuation
allowance for nearly all of the deferred tax asset as a result
of uncertainties regarding the realization of the asset balance.
Our income tax provision or benefit in all periods presented is
primarily the net result of income taxes in connection with our
foreign operations, offset by the deferred tax benefit recorded
as we amortize the intangibles associated with our international
acquisitions. We made only insignificant provisions and recorded
no benefit for federal or state income taxes in 2001, 2002 or
2003 due to our historical operating losses, which resulted in
deferred tax assets. We have recorded a valuation allowance for
all but $362,000 of our deferred tax assets as a result of
uncertainties regarding the realization of the asset balance.



| |                                                         
| | --------------------------------------------------------
| | 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 for each period. In 2001, 2002 and 2003,
the minority shareholders interest in Onyx Japans
losses totaled $1.3 million, $1.0 million and
$118,000. At December 31, 2003, the minority
shareholders remaining interest in Onyx Japan totaled
$119,000. Any future losses of Onyx Japan will be shared by the
minority shareholders to the extent of their interest in the
joint venture. As a

40



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##### Table of Contents



result, additional Onyx Japan losses above
approximately $283,000 in the aggregate will be absorbed 100% by
Onyx, as compared to 58% in prior periods.


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 in 2002 and 2003.
The trends discussed in the annual comparisons of operating
results from 2001 to 2003 generally apply to the comparison of
operating results for each of the quarters in 2002 and 2003. Our
quarterly operating results have varied widely in the past, and
we expect that they will continue to fluctuate in the future as
a result of a number of factors, many of which are outside our
control.

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

|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |       |        | 
|------------------------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ------ | -------- | ------ | ------------- | ------ | ------------ | ------ | --------- | ------ | -------- | ------ | ------------- | ------ | ------------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                                                          |                                                           |                                      
|                                                                          |                                                           | Three Months Ended                   
|                                                                          |                                                           |                                      
|                                                                          |                                                           | March 31,                             |        | June 30, |        | September 30, |        | December 31, |        | March 31, |        | June 30, |        | September 30, |        | December 31,
|                                                                          |                                                           | 2002                                  |        | 2002     |        | 2002          |        | 2002         |        | 2003      |        | 2003     |        | 2003          |        | 2003        
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |             
|                                                                          |                                                           |                                      
|                                                                          |                                                           | (In thousands, except per share data)
|Consolidated Statement of Operations
    Data:                            |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Revenue:                                                                  |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|License                                                                   |                                                           | $                                     | 3,054  |          |        | $             | 6,509  |              |        | $         | 7,265  |          |        | $             | 5,805  |              |        | $ | 2,619  |       |        | $ | 3,122  |       |        | $ | 3,633  |       |        | $ | 2,769  |      
|Support and service                                                       |                                                           |                                       | 11,561 |          |        |               | 12,001 |              |        |           | 11,763 |          |        |               | 11,426 |              |        |   | 11,588 |       |        |   | 12,688 |       |        |   | 11,767 |       |        |   | 10,187 |      
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                                                          |                                                           | Total revenue                         |        |          | 14,615 |               |        |              | 18,510 |           |        |          | 19,028 |               |        |              | 17,231 |   |        |       | 14,207 |   |        |       | 15,810 |   |        |       | 15,400 |   |        |       | 12,956 | 
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Cost of revenue:                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                                                          | License                                                   |                                       |        | 171      |        |               |        | 226          |        |           |        | 270      |        |               |        | 473          |        |   |        | 285   |        |   |        | 197   |        |   |        | 175   |        |   |        | 191   |       
|                                                                          | Amortization of acquired technology                       |                                       |        | 138      |        |               |        | 138          |        |           |        | 138      |        |               |        | 84           |        |   |        | 84    |        |   |        | 84    |        |   |        | 84    |        |   |        | 3     |       
|                                                                          | Support and service                                       |                                       |        | 5,208    |        |               |        | 5,051        |        |           |        | 4,922    |        |               |        | 4,947        |        |   |        | 5,435 |        |   |        | 5,443 |        |   |        | 5,251 |        |   |        | 4,582 |       
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                                                          |                                                           | Total cost of revenue                 |        |          | 5,517  |               |        |              | 5,415  |           |        |          | 5,330  |               |        |              | 5,504  |   |        |       | 5,804  |   |        |       | 5,724  |   |        |       | 5,510  |   |        |       | 4,776  | 
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Gross margin                                                              |                                                           |                                       | 9,098  |          |        |               | 13,095 |              |        |           | 13,698 |          |        |               | 11,727 |              |        |   | 8,403  |       |        |   | 10,086 |       |        |   | 9,890  |       |        |   | 8,180  |      
|Operating expenses:                                                       |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                                                          | Sales and marketing                                       |                                       |        | 5,997    |        |               |        | 7,062        |        |           |        | 7,882    |        |               |        | 7,006        |        |   |        | 6,483 |        |   |        | 5,082 |        |   |        | 4,460 |        |   |        | 4,604 |       
|                                                                          | Research and development                                  |                                       |        | 3,953    |        |               |        | 4,023        |        |           |        | 3,530    |        |               |        | 3,239        |        |   |        | 3,129 |        |   |        | 3,147 |        |   |        | 2,798 |        |   |        | 2,764 |       
|                                                                          | General and administrative                                |                                       |        | 2,539    |        |               |        | 2,437        |        |           |        | 2,382    |        |               |        | 2,091        |        |   |        | 2,253 |        |   |        | 1,842 |        |   |        | 2,158 |        |   |        | 1,952 |       
|                                                                          | Restructuring and other related charges                   |                                       |        | 2,617    |        |               |        | 3,941        |        |           |        | 1,171    |        |               |        | 762          |        |   |        | 340   |        |   |        | 754   |        |   |        | 162   |        |   |        | 166   |       
|                                                                          | Amortization of other acquisition-related
    intangibles |                                       |        | 209      |        |               |        | 209          |        |           |        | 209      |        |               |        | 209          |        |   |        | 209   |        |   |        | 209   |        |   |        | 209   |        |   |        | 209   |       
|                                                                          | Stock-based compensation                                  |                                       |        | 87       |        |               |        | 65           |        |           |        | 51       |        |               |        | 45           |        |   |        | 13    |        |   |        | 15    |        |   |        | 4     |        |   |        | 38    |       
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|                                                                          |                                                           | Total operating expenses              |        |          | 15,402 |               |        |              | 17,737 |           |        |          | 15,225 |               |        |              | 13,352 |   |        |       | 12,427 |   |        |       | 11,049 |   |        |       | 9,791  |   |        |       | 9,733  | 
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Income (loss) from operations                                             |                                                           |                                       | (6,304 | )        |        |               | (4,642 | )            |        |           | (1,527 | )        |        |               | (1,625 | )            |        |   | (4,024 | )     |        |   | (963   | )     |        |   | 99     |       |        |   | (1,553 | )    
|Other income (expense), net                                               |                                                           |                                       | (373   | )        |        |               | 31     |              |        |           | 269    |          |        |               | (46    | )            |        |   | 9      |       |        |   | 111    |       |        |   | (117   | )     |        |   | 75     |      
|Change in fair value of outstanding warrants                              |                                                           |                                       |       |          |        |               |       |              |        |           |       |          |        |               |       |              |        |   | 242    |       |        |   | 15     |       |        |   | (123   | )     |        |   | 221    |      
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Loss before income taxes                                                  |                                                           |                                       | (6,677 | )        |        |               | (4,611 | )            |        |           | (1,258 | )        |        |               | (1,671 | )            |        |   | (3,773 | )     |        |   | (837   | )     |        |   | (141   | )     |        |   | (1,257 | )    
|Income tax provision (benefit)                                            |                                                           |                                       | 14     |          |        |               | 398    |              |        |           | (29    | )        |        |               | 202    |              |        |   | (214   | )     |        |   | 135    |       |        |   | 86     |       |        |   | 257    |      
|Minority interest in income (loss) of
    consolidated subsidiary         |                                                           |                                       | (133   | )        |        |               | (339   | )            |        |           | (345   | )        |        |               | (215   | )            |        |   | (157   | )     |        |   | (75    | )     |        |   | 32     |       |        |   | 82     |      
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Net loss                                                                  |                                                           | $                                     | (6,558 | )        |        | $             | (4,670 | )            |        | $         | (884   | )        |        | $             | (1,658 | )            |        | $ | (3,402 | )     |        | $ | (897   | )     |        | $ | (259   | )     |        | $ | (1,596 | )    
|                                                                          |                                                           |                                       |        |          |        |               |        |              |        |           |        |          |        |               |        |              |        |   |        |       |        |   |        |       |        |   |        |       |        |   |        |      
|Basic and diluted net loss per share(1)(2)                                |                                                           | $                                     | (0.55  | )        |        | $             | (0.37  | )            |        | $         | (0.07  | )        |        | $             | (0.13  | )            |        | $ | (0.27  | )     |        | $ | (0.07  | )     |        | $ | (0.02  | )     |        | $ | (0.11  | )    
|Shares used in calculation of basic and diluted
    net loss per share(1) |                                                           |                                       | 12,030 |          |        |               | 12,605 |              |        |           | 12,641 |          |        |               | 12,642 |              |        |   | 12,698 |       |        |   | 13,238 |       |        |   | 13,902 |       |        |   | 13,914 |      



---



|    |                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | See Notes 1 and 12 of Notes to Consolidated
    Financial Statements for an explanation of the method used to
    calculate basic and diluted net loss per share.

41



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|    |                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |      |       | 
|----------------------------------------------------------------- | --------------------------------------------------------- | ------------------------ | ----- | -------- | ----- | ------------- | ----- | ------------ | ----- | --------- | ---- | -------- | ----- | ------------- | ---- | ------------ | ----- |  | ----- | ---- | ----- |  | ---- | ---- | ----- |  | ---- | ---- | ----- |  | ----- | ---- | ----- | 
|                                                                  |                                                           |                         
|                                                                  |                                                           | Three Months Ended      
|                                                                  |                                                           |                         
|                                                                  |                                                           | March 31,                |       | June 30, |       | September 30, |       | December 31, |       | March 31, |      | June 30, |       | September 30, |      | December 31,
|                                                                  |                                                           | 2002                     |       | 2002     |       | 2002          |       | 2002         |       | 2003      |      | 2003     |       | 2003          |      | 2003        
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |             
|Consolidated Statement of Operations
    Data:                    |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|Revenue:                                                          |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|                                                                  | License                                                   |                          |       | 20.9     | %     |               |       | 35.2         | %     |           |      | 38.2     | %     |               |      | 33.7         | %     |  |       | 18.4 | %     |  |      | 19.7 | %     |  |      | 23.6 | %     |  |       | 21.4 | %    
|                                                                  | Support and service                                       |                          |       | 79.1     |       |               |       | 64.8         |       |           |      | 61.8     |       |               |      | 66.3         |       |  |       | 81.6 |       |  |      | 80.3 |       |  |      | 76.4 |       |  |       | 78.6 |      
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|                                                                  |                                                           | Total revenue            |       |          | 100.0 |               |       |              | 100.0 |           |      |          | 100.0 |               |      |              | 100.0 |  |       |      | 100.0 |  |      |      | 100.0 |  |      |      | 100.0 |  |       |      | 100.0 | 
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|Cost of revenue:                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|                                                                  | License                                                   |                          |       | 1.2      |       |               |       | 1.2          |       |           |      | 1.4      |       |               |      | 2.7          |       |  |       | 2.0  |       |  |      | 1.3  |       |  |      | 1.1  |       |  |       | 1.5  |      
|                                                                  | Amortization of acquired technology                       |                          |       | 0.9      |       |               |       | 0.7          |       |           |      | 0.7      |       |               |      | 0.5          |       |  |       | 0.6  |       |  |      | 0.5  |       |  |      | 0.6  |       |  |       | 0.0  |      
|                                                                  | Support and service                                       |                          |       | 35.6     |       |               |       | 27.3         |       |           |      | 25.9     |       |               |      | 28.7         |       |  |       | 38.3 |       |  |      | 34.4 |       |  |      | 34.1 |       |  |       | 35.4 |      
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|                                                                  |                                                           | Total cost of revenue    |       |          | 37.7  |               |       |              | 29.2  |           |      |          | 28.0  |               |      |              | 31.9  |  |       |      | 40.9  |  |      |      | 36.2  |  |      |      | 35.8  |  |       |      | 36.9  | 
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|Gross margin                                                      |                                                           |                          | 62.3  |          |       |               | 70.8  |              |       |           | 72.0 |          |       |               | 68.1 |              |       |  | 59.1  |      |       |  | 63.8 |      |       |  | 64.2 |      |       |  | 63.1  |     
|Operating expenses:                                               |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|                                                                  | Sales and marketing                                       |                          |       | 41.0     |       |               |       | 38.2         |       |           |      | 41.4     |       |               |      | 40.7         |       |  |       | 45.6 |       |  |      | 32.1 |       |  |      | 29.0 |       |  |       | 35.5 |      
|                                                                  | Research and development                                  |                          |       | 27.1     |       |               |       | 21.7         |       |           |      | 18.6     |       |               |      | 18.8         |       |  |       | 22.0 |       |  |      | 19.9 |       |  |      | 18.2 |       |  |       | 21.3 |      
|                                                                  | General and administrative                                |                          |       | 17.4     |       |               |       | 13.2         |       |           |      | 12.5     |       |               |      | 12.1         |       |  |       | 15.9 |       |  |      | 11.7 |       |  |      | 14.0 |       |  |       | 15.1 |      
|                                                                  | Restructuring and other related charges                   |                          |       | 17.9     |       |               |       | 21.3         |       |           |      | 6.1      |       |               |      | 4.4          |       |  |       | 2.4  |       |  |      | 4.8  |       |  |      | 1.0  |       |  |       | 1.3  |      
|                                                                  | Amortization of other acquisition-related
    intangibles |                          |       | 1.4      |       |               |       | 1.1          |       |           |      | 1.1      |       |               |      | 1.2          |       |  |       | 1.5  |       |  |      | 1.3  |       |  |      | 1.4  |       |  |       | 1.6  |      
|                                                                  | Stock-based compensation                                  |                          |       | 0.6      |       |               |       | 0.4          |       |           |      | 0.3      |       |               |      | 0.3          |       |  |       | 0.1  |       |  |      | 0.1  |       |  |      | 0.0  |       |  |       | 0.3  |      
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|                                                                  |                                                           | Total operating expenses |       |          | 105.4 |               |       |              | 95.9  |           |      |          | 80.0  |               |      |              | 77.5  |  |       |      | 87.5  |  |      |      | 69.9  |  |      |      | 63.6  |  |       |      | 75.1  | 
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|Income (loss) from operations                                     |                                                           |                          | (43.1 | )        |       |               | (25.1 | )            |       |           | (8.0 | )        |       |               | (9.4 | )            |       |  | (28.4 | )    |       |  | (6.1 | )    |       |  | 0.6  |      |       |  | (12.0 | )   
|Other income (expense), net                                       |                                                           |                          | (2.6  | )        |       |               | 0.2   |              |       |           | 1.4  |          |       |               | (0.3 | )            |       |  | 0.1   |      |       |  | 0.7  |      |       |  | (0.7 | )    |       |  | 0.6   |     
|Change in fair value of outstanding warrants                      |                                                           |                          |      |          |       |               |      |              |       |           |     |          |       |               |     |              |       |  | 1.7   |      |       |  | 0.1  |      |       |  | (0.8 | )    |       |  | 1.7   |     
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|Loss before income taxes                                          |                                                           |                          | (45.7 | )        |       |               | (24.9 | )            |       |           | (6.6 | )        |       |               | (9.7 | )            |       |  | (26.6 | )    |       |  | (5.3 | )    |       |  | (0.9 | )    |       |  | (9.7  | )   
|Income tax provision (benefit)                                    |                                                           |                          | 0.1   |          |       |               | 2.2   |              |       |           | (0.2 | )        |       |               | 1.2  |              |       |  | (1.5  | )    |       |  | 0.9  |      |       |  | 0.6  |      |       |  | 2.0   |     
|Minority interest in income (loss) of
    consolidated subsidiary |                                                           |                          | (0.9  | )        |       |               | (1.8  | )            |       |           | (1.8 | )        |       |               | (1.2 | )            |       |  | (1.1  | )    |       |  | (0.5 | )    |       |  | 0.2  |      |       |  | 0.6   |     
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     
|Net loss                                                          |                                                           |                          | (44.9 | )%       |       |               | (25.3 | )%           |       |           | (4.6 | )%       |       |               | (9.7 | )%           |       |  | (24.0 | )%   |       |  | (5.7 | )%   |       |  | (1.7 | )%   |       |  | (12.3 | )%  
|                                                                  |                                                           |                          |       |          |       |               |       |              |       |           |      |          |       |               |      |              |       |  |       |      |       |  |      |      |       |  |      |      |       |  |       |     

Liquidity and Capital Resources

At December 31, 2003, we had unrestricted
cash and cash equivalents of $10.1 million, a decrease of
$6.9 million from unrestricted cash and cash equivalents
held at December 31, 2002. At December 31, 2003, we
also had restricted cash balances totaling $1.7 million, as
compared to $2.2 million at December 31, 2002. We
sometimes 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, 2002 or December 31, 2003.

As of December 31, 2003, our principal
obligations consisted of restructuring-related liabilities
totaling $3.2 million, excluding the value assigned to
warrants, of which $2.8 million is expected to be paid
within the next 12 months, accrued liabilities of
$2.4 million, trade payables of $883,000 and salaries and
benefits payable of $946,000. The majority of the
restructuring-related liabilities relate to excess facilities in
domestic and international markets, the most significant portion
of which relates to the termination agreement signed in December
2002 in connection with excess facilities in Bellevue,
Washington. The majority of our accounts payable, salaries and
benefits payable and accrued liabilities at December 31,
2003 will be settled during the next three months and will
result in a corresponding decline in the amount of cash and cash
equivalents, offset by liabilities associated with activity in
the first quarter of 2004. Off-balance sheet obligations as of
December 31, 2003 primarily consisted of operating leases
associated with facilities in Bellevue, Washington and other
domestic and international field office facilities.

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As of December 31, 2003, our future fixed
commitments are as follows (in thousands):

|                                                 |  |      |       |         |  |         |       |            |  |       |       |  |  |   |        |  |  |   |        | 
|------------------------------------------------ |  | ---- | ----- | ------- |  | ------- | ----- | ---------- |  | ----- | ----- |  |  | - | ------ |  |  | - | ------ | 
|                                                 |  |      |       | 2005 to |  | 2007 to |       |            |  |      
|                                                 |  | 2004 |       | 2006    |  | 2008    |       | Thereafter |  | Total
|                                                 |  |      |       |         |  |         |       |            |  |      
|Operating lease obligations not in restructuring |  | $    | 3,866 |         |  | $       | 5,828 |            |  | $     | 4,665 |  |  | $ | 17,410 |  |  | $ | 31,769 | 
|Operating lease obligations in restructuring     |  |      | 3,154 |         |  |         | 2,349 |            |  |       | 1,795 |  |  |   | 598    |  |  |   | 7,896  | 
|Third-party royalty commitments                  |  |      | 323   |         |  |         |      |            |  |       |      |  |  |   |       |  |  |   | 323    | 
|                                                 |  |      |       |         |  |         |       |            |  |       |       |  |  |   |        |  |  |   |        | 
|Total fixed commitments                          |  | $    | 7,343 |         |  | $       | 8,177 |            |  | $     | 6,460 |  |  | $ | 18,008 |  |  | $ | 39,988 | 
|                                                 |  |      |       |         |  |         |       |            |  |       |       |  |  |   |        |  |  |   |        | 

The amounts reflected in the above table only
include the fixed, non-cancelable portion of our lease
commitments. Any variable operating expenses associated with our
lease commitments are not included in the above table, but have
been included in annual rent expense as disclosed in Note 9
to our consolidated financial statements. In addition, the lease
commitments designated as Operating lease obligations in
restructuring only include the non-cancelable portion of
lease commitments included in the restructuring liability and,
accordingly, have not been reduced by estimated sublease income.
However, as required by EITF Issue No. 88-10, Costs
Associated with Lease Modification or Termination, or
EITF 88-10, we have reduced these lease commitments by
estimated sublease income of $5.7 million and increased
these commitments by estimated operating costs in determining
the total restructuring obligations recorded in the accompanying
balance sheet as of December 31, 2003. Please refer to
Notes 3 and 9 to our consolidated financial statements for
a further discussion of restructuring charges and our lease
commitments and other contingencies, respectively.

Indemnification and warranty provisions contained
within our customer license and service agreements are generally
consistent with those prevalent in our industry. The duration of
our product warranties generally does not exceed 90 days
following delivery of our products. We evaluate estimated losses
for such indemnifications under SFAS 5, Accounting
for Contingencies, as interpreted by FIN 45. We
consider such factors as the degree of probability of an
unfavorable outcome and the ability to make a reasonable
estimate of the amount of loss. We have not incurred significant
obligations under customer indemnification or warranty
provisions historically and do not expect to incur significant
obligations in the future. Accordingly, we do not maintain
accruals for potential customer indemnification or
warranty-related obligations.

In documents dated March 28, 2003 and
May 5, 2003, we amended our Loan and Security Agreement
with Silicon Valley Bank, or SVB, which was originally entered
into in February 2002, and entered into a second Loan and
Security Agreement with SVB that is intended to take advantage
of a loan guarantee by the Export Import Bank of the United
States, or Exim Bank. The loan documents were further amended on
January 12, 2004 to revise the tangible net worth covenant
and the accounts receivable advance rates beginning with the
month ended December 31, 2003. Under the terms of these
agreements, we have a total $15.0 million working capital
revolving line of credit with SVB, which is split between a
$13.0 million domestic facility and a $2.0 million
Exim Bank facility. Both are secured by accounts receivable,
property and equipment and intellectual property. The domestic
facility allows us to borrow up to the lesser of (a) 70% of
eligible domestic and individually approved foreign accounts
receivable and (b) $13.0 million. The Exim Bank
facility allows us to borrow up to the lesser of (a) 75% of
eligible foreign accounts receivable and
(b) $2.0 million. If the borrowing base calculation
falls below the outstanding standby letters of credit issued by
SVB on our behalf, SVB may require us to cash secure the amount
by which outstanding standby letters of credit exceed the
borrowing base. The amount required to be restricted under the
loan agreement was $1.7 million, measured as of
December 31, 2003. Due to the variability in our borrowing
base, we may be subject to restrictions on our cash at various
times throughout the year. Any borrowings will bear interest at
SVBs prime rate, which was 4.0% as of December 31,
2003, plus 1.5%, subject to a minimum rate of 6.0%. The loan
agreements require us to maintain certain financial covenants
based on its adjusted quick ratio and tangible net worth. We
were in compliance with these covenants, as amended, at
December 31, 2003. Absent the amendment, we would have been
out of compliance with the loan agreement as of
December 31, 2003. We are also prohibited under the loan
and security agreements from paying dividends. The facilities
expire in March 2004. Based on the outstanding standby letters
of credit relating to long-term lease obligations totaling
$8.0 million at December 31, 2003, no additional
amounts are currently available under the credit facilities. As

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long as we continue to be in compliance with the
terms of our termination agreement and the surviving lease
agreement with Hines, the outstanding letter of credit with
Hines will be reduced in five equal monthly reductions of
$507,000 ending in May 2004. As of the date of this filing, we
are in the process of renewing our Loan and Security Agreement
with SVB and expect the agreement to be renewed with terms that
are acceptable to us. If, however, we are unable to negotiate a
new agreement with SVB that has terms acceptable to us, we are
unable to maintain compliance with our covenants in the future,
or if SVB decides to restrict our cash deposits, our liquidity
would be further limited and our business, financial condition
and operating results could be materially harmed.


Our operating activities resulted in net cash
outflows of $21.3 million in 2001, $17.2 million in
2002 and $9.7 million in 2003. 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, offset in part by cash provided by increases in
prepaid expenses and other assets and collections on accounts
receivable. Our operating cash outflows in 2002 were primarily
the result of our operating loss adjusted for non-cash
amortization and impairment charges, decreases in
restructuring-related liabilities, decreases in accounts payable
and accrued liabilities, decreases in deferred revenues,
increases in prepaid expenses and other assets, offset in part
by cash provided by collections on accounts receivable. Our
operating cash outflows in 2003 were primarily the result of our
operating loss for the period adjusted for non-cash amortization
and impairment charges, decreases in accounts payable, salaries
and benefits payable and accrued liabilities, decreases in
restructuring-related liabilities, decreases in deferred
revenues, offset in part by cash provided by collections on
accounts receivable, decreases in prepaid expenses and other
assets and increases in income taxes payable. The net cash
outflow of $21.3 million in 2001 includes
$11.3 million in cash paid for restructured items. The net
cash outflow of $17.2 million in 2002 includes
$18.1 million in cash paid for restructured items. The net
cash outflow of $9.7 million in 2003 includes
$10.9 million in cash paid for restructured items.

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, the lease for which
202,000 square feet has been terminated and an amended
lease entered into for the approximate 60,000 square feet
we currently occupy, coupled with cash used to acquire
RevenueLab, offset in part by the net proceeds from the maturity
of short-term marketable securities. Investing activities used
cash of $3.3 million in 2002, primarily due to the
restriction of cash used to secure our outstanding letters of
credit and corporate card program and funding of capital
expenditures associated with our relocation to our new corporate
headquarters in January 2003. Investing activities used cash of
$683,000 in 2003 primarily due to capital expenditures
associated with the relocation of our corporate headquarters in
January 2003 offset by the release of the restriction of cash
used to secure outstanding letters of credit.

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.
Additionally, 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, added
to cash generated from financing activities in 2001. Financing
activities provided cash of $21.2 million in 2002,
primarily due to the proceeds from our public offering of common
stock in February 2002. Additionally, proceeds from the exercise
of stock options and shares issued under our employee stock
purchase plan, offset in part by payments on our long-term
obligations, added to cash generated from financing activities
in 2002. Financing activities provided cash of $3.0 million
in 2003 primarily due to the proceeds from our private offering
of common stock in May 2003 and proceeds from our employee stock
purchase plan and the exercise of stock options, offset in part
by payments on our long-term obligations.

Our near-term restructuring costs related to the
mitigation of our excess facilities liabilities will consume a
material amount of our cash resources. The termination of
approximately 202,000 square feet in Bellevue, Washington
will result in cash outflows of approximately $1.4 million
over the four-month period ending April 2004 and is included in
current restructuring-related liabilities at December 31,
2003. Finally, it is also possible that we will use a portion of
our cash resources to acquire or invest in complementary
business, products or technologies; however, we currently have
no commitments or agreements with respect to any transactions of
this nature.

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We believe our future revenue performance will be
comparable to the most recent quarterly periods reported and
that our existing cash and cash equivalents will be sufficient
to meet our capital requirements for at least the next
12 months. Accordingly, we believe that we have sufficient
resources to continue as a going concern through at least
December 31, 2004. Should our revenue results for
subsequent quarters fall below the results we achieved in the
fourth quarter of 2003, we would likely take action to
restructure our operations to preserve our cash. Such actions
would primarily consist of reductions in headcount. Due to the
fact that lower cash balances could negatively impact our sales
efforts, we may seek additional funds in the future through
public or private equity financing or from other sources to fund
our operations and pursue our growth strategy. We may experience
difficulty in obtaining funding on favorable terms, if at all.
Any financing we might 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 current
shareholders ownership interest in Onyx.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51, or FIN 46. In
general, a variable interest entity is a corporation,
partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the
entity to support its activities. FIN 46 requires certain
variable interest entities to be consolidated by the primary
beneficiary of the entity if the investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. The consolidation requirements of
FIN 46 apply immediately to variable interest entities
created after January 31, 2003. In December 2003, the FASB
issued FIN 46R with respect to variable interest entities
created before January 31, 2003, which among other things,
revised the implementation date to the first fiscal year or
interim period ending after March 15, 2004, with the
exception of Special Purpose Entities. We do not expect the
adoption of FIN 46 to have a material impact on our
financial position or results of operations.

In December 2003, the SEC issued Staff Accounting
Bulletin, or SAB, No. 104, Revenue Recognition,
which revises or rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have a material
effect on our financial position or results of operations.






|         |                                                               
|-------- | --------------------------------------------------------------
|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 all of our investments are short-term in nature and are
classified as cash equivalents as of December 31, 2003. Due
to the short-term nature of these investments, their fair value
would not be significantly impacted by either a 100 basis
point increase or decrease in interest rates. We do not use any
hedging transactions or any financial instruments for trading
purposes and we are not a party to any leveraged derivatives.

Foreign Currency Risk

In 2003, international revenue accounted for 39%
of our consolidated revenues compared to 36% in 2002 and 30% in
2001. International revenue, as well as most of the related
expenses incurred, is 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,

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when translated, may differ materially from
expectations. The effect of foreign exchange transaction gains
and losses were not material to Onyx during 2003 or in the prior
two fiscal years.


At December 31, 2003, we were also exposed
to foreign currency risk related to the assets and liabilities
of our foreign subsidiaries, in particular, our United Kingdom
operation denominated in British pounds and our consolidated
Japanese joint venture denominated in Yen. Cumulative unrealized
translation gains related to the consolidation of Onyx UK,
including the goodwill and other intangible assets resulting
from the acquisition of Market Solutions amounted to
$1.8 million at December 31, 2003. The unrealized gain
in 2003 specifically associated with the goodwill and other
acquisition-related intangibles of Market Solutions amounted to
$1.4 million. Cumulative unrealized translation losses
related to the consolidation of Onyx Japan amounted to $473,000
at December 31, 2003. These unrealized translation gains
and losses combined with the cumulative unrealized translation
gains related to the consolidation of our other foreign
subsidiaries, resulted in net consolidated cumulative unrealized
translation gains of $1.8 million.

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

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|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 8. | CONSOLIDATED FINANCIAL STATEMENTS AND
    SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                           |  |      |    | 
|-------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                           |  | Page
|                                                                           |  |     
|Report of KPMG LLP, Independent Auditors                                   |  |      | 48 | 
|Report of Ernst & Young
    LLP, Independent Auditors                      |  |      | 49 | 
|Consolidated Balance Sheets                                                |  |      | 50 | 
|Consolidated Statements of Operations                                      |  |      | 51 | 
|Consolidated Statements of Shareholders
    Equity and Comprehensive Loss |  |      | 52 | 
|Consolidated Statements of Cash Flows                                      |  |      | 53 | 
|Notes to Consolidated Financial Statements                                 |  |      | 54 | 

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REPORT OF KPMG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Shareholders

Onyx Software Corporation:


We have audited the consolidated balance sheets
of Onyx Software Corporation and subsidiaries as of
December 31, 2002 and 2003 and the related consolidated
statements of operations, shareholders equity and
comprehensive loss, and cash flows for the years then ended. In
connection with our audits of the consolidated financial
statements, we have also audited the related 2002 and 2003
financial statement schedule as listed in the index at
Item 15(a). These consolidated financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements and financial
statement schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Onyx Software Corporation
and subsidiaries as of December 31, 2002 and 2003, and the
results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion,
the related 2002 and 2003 financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

As discussed in Note 1 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill and other intangible assets as of
January 1, 2002.



| |             
| | ------------
| | /s/ KPMG LLP

Seattle, Washington

January 30, 2004


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REPORT OF ERNST & YOUNG
LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders

Onyx Software Corporation


We have audited the accompanying consolidated
statements of operations, shareholders equity and
comprehensive loss, and cash flows for the year ended
December 31, 2001. Our audit also includes the financial
statement schedule listed in the index at Item 15(a). These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit 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 audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated results of operations and cash flows of Onyx
Software Corporation for the year 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.



| |                      
| | ---------------------
| | /s/ Ernst & Young LLP

Seattle, Washington

January 29, 2002


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##### Table of Contents



ONYX SOFTWARE CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |          |         |        | 
|--------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -------- | ------- | ------ | ------ | -------- | ------- | ------ | 
|                                                                      |                                                                             |                                                                                                                  
|                                                                      |                                                                             | December 31,                                                                                                     
|                                                                      |                                                                             |                                                                                                                  
|                                                                      |                                                                             | 2002                                                                                                              |                                            | 2003    
|                                                                      |                                                                             |                                                                                                                   |                                            |         
|                                                                      |                                                                             |                                                                                                                  
|                                                                      |                                                                             | (In thousands, except                                                                                            
|                                                                      |                                                                             | share and per share data)                                                                                        
|ASSETS                                                               
|Current assets:                                                       |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|                                                                      | Cash and cash equivalents                                                   |                                                                                                                   | $                                          | 17,041   |         |        | $      | 10,127   |        
|                                                                      | Restricted cash                                                             |                                                                                                                   |                                            | 2,238    |         |        |        | 1,723    |        
|                                                                      | Accounts receivable, less allowances of $1,039 in
    2002 and $488 in 2003 |                                                                                                                   |                                            | 14,408   |         |        |        | 12,245   |        
|                                                                      | Current deferred tax asset                                                  |                                                                                                                   |                                            | 273      |         |        |        | 362      |        
|                                                                      | Prepaid expenses and other                                                  |                                                                                                                   |                                            | 3,374    |         |        |        | 1,666    |        
|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|Total current assets                                                  |                                                                             |                                                                                                                   | 37,334                                     |          |         |        | 26,123 |         
|Property and equipment, net                                           |                                                                             |                                                                                                                   | 6,474                                      |          |         |        | 4,277  |         
|Purchased technology, net                                             |                                                                             |                                                                                                                   | 253                                        |          |         |        |       |         
|Other intangibles, net                                                |                                                                             |                                                                                                                   | 1,461                                      |          |         |        | 675    |         
|Goodwill, net                                                         |                                                                             |                                                                                                                   | 8,180                                      |          |         |        | 9,508  |         
|Other assets                                                          |                                                                             |                                                                                                                   | 1,085                                      |          |         |        | 842    |         
|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|                                                                      |                                                                             | Total assets                                                                                                      |                                            | $        | 54,787  |        |        | $        | 41,425  |       
|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|                                                                     
|LIABILITIES AND SHAREHOLDERS
    EQUITY                             
|Current liabilities:                                                  |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|                                                                      | Accounts payable                                                            |                                                                                                                   | $                                          | 1,484    |         |        | $      | 883      |        
|                                                                      | Salary and benefits payable                                                 |                                                                                                                   |                                            | 1,675    |         |        |        | 946      |        
|                                                                      | Accrued liabilities                                                         |                                                                                                                   |                                            | 3,147    |         |        |        | 2,373    |        
|                                                                      | Income taxes payable                                                        |                                                                                                                   |                                            | 660      |         |        |        | 770      |        
|                                                                      | Current portion of capital-lease obligations                                |                                                                                                                   |                                            | 180      |         |        |        |         |        
|                                                                      | Current portion of restructuring-related
    liabilities                    |                                                                                                                   |                                            | 10,224   |         |        |        | 2,758    |        
|                                                                      | Deferred revenue                                                            |                                                                                                                   |                                            | 16,258   |         |        |        | 16,078   |        
|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|Total current liabilities                                             |                                                                             |                                                                                                                   | 33,628                                     |          |         |        | 23,808 |         
|Capital-lease obligations, less current portion                       |                                                                             |                                                                                                                   | 77                                         |          |         |        |       |         
|Long-term restructuring-related liabilities, less
    current portion |                                                                             |                                                                                                                   | 2,600                                      |          |         |        | 405    |         
|Long-term restructuring-related
    liabilities  warrants            |                                                                             |                                                                                                                   | 920                                        |          |         |        | 565    |         
|Deferred tax liabilities                                              |                                                                             |                                                                                                                   | 497                                        |          |         |        | 229    |         
|Minority interest in joint venture                                    |                                                                             |                                                                                                                   | 237                                        |          |         |        | 119    |         
|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  12,696,739 in 2002 and
    13,969,503 in 2003 |                                            |          | 139,459 |        |        |          | 142,682 |       
|                                                                      | Deferred stock-based compensation                                           |                                                                                                                   |                                            | (84      | )       |        |        |         |        
|                                                                      | Accumulated deficit                                                         |                                                                                                                   |                                            | (122,061 | )       |        |        | (128,215 | )      
|                                                                      | Accumulated other comprehensive income (loss)                               |                                                                                                                   |                                            | (486     | )       |        |        | 1,832    |        
|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|                                                                      |                                                                             |                                                                                                                   | Total shareholders equity                 |          |         | 16,828 |        |          |         | 16,299 | 
|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |         
|                                                                      |                                                                             |                                                                                                                   | Total liabilities and shareholders equity |          | $       | 54,787 |        |          | $       | 41,425 | 
|                                                                      |                                                                             |                                                                                                                   |                                            |          |         |        |        |         

See accompanying notes to consolidated financial
statements.

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ONYX SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |        |        | 
|-------------------------------------------------------- | --------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                         |                                                           |                                      
|                                                         |                                                           | Year Ended December 31,              
|                                                         |                                                           |                                      
|                                                         |                                                           | 2001                                  |         | 2002   |         | 2003
|                                                         |                                                           |                                       |         |        |         |     
|                                                         |                                                           |                                      
|                                                         |                                                           | (In thousands, except per share data)
|Revenue:                                                 |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         | License                                                   |                                       | $       | 37,584 |         |      | $       | 22,633 |        |   | $      | 12,143 |       
|                                                         | Support and service                                       |                                       |         | 62,116 |         |      |         | 46,751 |        |   |        | 46,230 |       
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         |                                                           | Total revenue                         |         |        | 99,700  |      |         |        | 69,384 |   |        |        | 58,373 | 
|Cost of revenue:                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         | License                                                   |                                       |         | 2,006  |         |      |         | 1,140  |        |   |        | 848    |       
|                                                         | Amortization of acquired technology                       |                                       |         | 751    |         |      |         | 498    |        |   |        | 255    |       
|                                                         | Support and service                                       |                                       |         | 35,662 |         |      |         | 20,128 |        |   |        | 20,711 |       
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         |                                                           | Total cost of revenue                 |         |        | 38,419  |      |         |        | 21,766 |   |        |        | 21,814 | 
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|Gross margin                                             |                                                           |                                       | 61,281  |        |         |      | 47,618  |        |        |   | 36,559 |       
|Operating expenses:                                      |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         | Sales and marketing                                       |                                       |         | 53,254 |         |      |         | 27,947 |        |   |        | 20,629 |       
|                                                         | Research and development                                  |                                       |         | 21,968 |         |      |         | 14,745 |        |   |        | 11,838 |       
|                                                         | General and administrative                                |                                       |         | 14,623 |         |      |         | 9,449  |        |   |        | 8,205  |       
|                                                         | Restructuring and other related charges                   |                                       |         | 51,806 |         |      |         | 8,491  |        |   |        | 1,422  |       
|                                                         | Amortization of other acquisition-related
    intangibles |                                       |         | 13,695 |         |      |         | 836    |        |   |        | 836    |       
|                                                         | Stock-based compensation                                  |                                       |         | 904    |         |      |         | 248    |        |   |        | 70     |       
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         |                                                           | Total operating expenses              |         |        | 156,250 |      |         |        | 61,716 |   |        |        | 43,000 | 
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|Loss from operations                                     |                                                           |                                       | (94,969 | )      |         |      | (14,098 | )      |        |   | (6,441 | )     
|Other income (expense), net                              |                                                           |                                       | 377     |        |         |      | (119    | )      |        |   | 78     |       
|Change in fair value of outstanding warrants             |                                                           |                                       |        |        |         |      |        |        |        |   | 355    |       
|Investment losses and impairment                         |                                                           |                                       | (2,500  | )      |         |      |        |        |        |   |       |       
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|Loss before income taxes                                 |                                                           |                                       | (97,092 | )      |         |      | (14,217 | )      |        |   | (6,008 | )     
|Income tax provision (benefit)                           |                                                           |                                       | (294    | )      |         |      | 585     |        |        |   | 264    |       
|Minority interest in loss of consolidated
    subsidiary |                                                           |                                       | (1,283  | )      |         |      | (1,032  | )      |        |   | (118   | )     
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|Net loss                                                 |                                                           | $                                     | (95,515 | )      |         | $    | (13,770 | )      |        | $ | (6,154 | )     
|                                                         |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|Net loss per share:                                      |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         | Basic and diluted                                         |                                       | $       | (9.46  | )       |      | $       | (1.10  | )      |   | $      | (0.46  | )     
|Shares used in calculation of net loss per share:        |                                                           |                                       |         |        |         |      |         |        |        |   |        |       
|                                                         | Basic and diluted                                         |                                       |         | 10,092 |         |      |         | 12,481 |        |   |        | 13,442 |       

See accompanying notes to consolidated financial
statements.

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ONYX SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY AND

COMPREHENSIVE LOSS


(In thousands, except share data)


|                              |                                                                                        |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        |         |   | 
|----------------------------- | -------------------------------------------------------------------------------------- | ----------------------------------------- | ---------- | ----------- | - | ----------- | ------- | ----------- | - | ------------ | ----- | ------------- | - | ------------- | ---- | --------- | - | - | ---- | ------ | - | - | -------- | - | ------- | - | ------ | - | ------ | - | ------ | ------- | - | 
|                              |                                                                                        |                                           |            |             |   |             |         | Note        |   |              |       |               |   |               |      |          
|                              |                                                                                        |                                           |            |             |   |             |         | Receivable  |   |              |       |               |   |               |      |          
|                              |                                                                                        |                                           |            |             |   |             |         | from        |   |              |       |               |   |               |      |          
|                              |                                                                                        |                                           |            | Common      |   | Officer     |         |             |   |              |       | Accumulated   |   | Total        
|                              |                                                                                        | Common Stock                              |            | Stock       |   | for         |         | Deferred    |   |              |       | Other         |   | Shareholders
|                              |                                                                                        |                                           |            | Issuable in |   | Common      |         | Stock-Based |   | Accumulated  |       | Comprehensive |   | Equity       
|                              |                                                                                        | Shares                                    |            | Amount      |   | Acquisition |         | Stock       |   | Compensation |       | Deficit       |   | Loss          |      | (Deficit)
|                              |                                                                                        |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |          
|Balance at January 1, 2001.   |                                                                                        |                                           | 9,399,417  |             |   | $           | 75,416  |             |   | $            | 4,320 |               |   | $             | (157 | )         |   | $ | (413 | )      |   | $ | (12,776  | ) |         | $ | (304   | ) |        | $ | 66,086 |        
|                              | Common stock issued in connection with
    acquisitions                                |                                           |            | 604,986     |   |             |         | 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                                                              |                                           |            | 298,680     |   |             |         | 912         |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 912     |  
|                              | Issuance of common stock under ESPP                                                    |                                           |            | 59,385      |   |             |         | 1,265       |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 1,265   |  
|                              | Proceeds from public offering, net of offering
    costs of $2,225                     |                                           |            | 625,000     |   |             |         | 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. |                                                                                        |                                           | 10,987,468 |             |   |             | 118,557 |             |   |              |      |               |   |               |     |           |   |   | (809 | )      |   |   | (108,291 | ) |         |   | (1,322 | ) |        |   | 8,135  |        
|                              | Amortization of deferred stock compensation                                            |                                           |            |            |   |             |         |            |   |              |       |              |   |               |      |          |   |   |      | 248    |   |   |          |  |         |   |        |  |        |   |        | 248     |  
|                              | Reversal of deferred stock-based compensation
    associated with terminated employees |                                           |            |            |   |             |         | (477        | ) |              |       |              |   |               |      |          |   |   |      | 477    |   |   |          |  |         |   |        |  |        |   |        |        |  
|                              | Exercise of stock options                                                              |                                           |            | 47,224      |   |             |         | 240         |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 240     |  
|                              | Issuance of common stock under ESPP                                                    |                                           |            | 77,891      |   |             |         | 558         |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 558     |  
|                              | Proceeds from public offering, net of offering
    costs of $1,606                     |                                           |            | 1,581,250   |   |             |         | 20,531      |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 20,531  |  
|                              | Issuance of common stock to vendor for services
    rendered                           |                                           |            | 2,906       |   |             |         | 50          |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 50      |  
|                              | Comprehensive loss:                                                                    |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        |         |  
|                              |                                                                                        | Foreign currency translation gain         |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |      |        |  |   |          |   |        |   |        |   | 836    |   |        |         |   | 
|                              |                                                                                        | Net loss                                  |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |      |        |  |   |          |   | (13,770 | ) |        |   |       |   |        |         |   | 
|                              | Total comprehensive loss                                                               |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        | (12,934 | )
|                              |                                                                                        |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        |        
|Balance at December 31, 2002. |                                                                                        |                                           | 12,696,739 |             |   |             | 139,459 |             |   |              |      |               |   |               |     |           |   |   | (84  | )      |   |   | (122,061 | ) |         |   | (486   | ) |        |   | 16,828 |        
|                              | Amortization of deferred stock compensation                                            |                                           |            |            |   |             |         |            |   |              |       |              |   |               |      |          |   |   |      | 30     |   |   |          |  |         |   |        |  |        |   |        | 30      |  
|                              | Reversal of deferred stock-based compensation
    associated with terminated employees |                                           |            |            |   |             |         | (54         | ) |              |       |              |   |               |      |          |   |   |      | 54     |   |   |          |  |         |   |        |  |        |   |        |        |  
|                              | Exercise of stock options                                                              |                                           |            | 20,643      |   |             |         | 56          |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 56      |  
|                              | Issuance of common stock under ESPP                                                    |                                           |            | 109,340     |   |             |         | 366         |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 366     |  
|                              | Proceeds from private placement, net of offering
    costs of $200                     |                                           |            | 1,135,697   |   |             |         | 2,815       |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 2,815   |  
|                              | Issuance of options to third-party consultant                                          |                                           |            |            |   |             |         | 2           |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 2       |  
|                              | Issuance of common stock to third-party consultant                                     |                                           |            | 7,084       |   |             |         | 38          |   |              |       |              |   |               |      |          |   |   |      |       |   |   |          |  |         |   |        |  |        |   |        | 38      |  
|                              | Comprehensive loss:                                                                    |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        |         |  
|                              |                                                                                        | Foreign currency translation gain         |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |      |        |  |   |          |   |        |   |        |   | 2,318  |   |        |         |   | 
|                              |                                                                                        | Net loss                                  |            |             |  |             |         |             |  |              |       |               |  |               |      |           |  |   |      |        |  |   |          |   | (6,154  | ) |        |   |       |   |        |         |   | 
|                              | Total comprehensive loss                                                               |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        | (3,836  | )
|                              |                                                                                        |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        |        
|Balance at December 31, 2003. |                                                                                        |                                           | 13,969,503 |             |   | $           | 142,682 |             |   | $            |      |               |   | $             |     |           |   | $ |     |        |   | $ | (128,215 | ) |         | $ | 1,832  |   |        | $ | 16,299 |        
|                              |                                                                                        |                                           |            |             |   |             |         |             |   |              |       |               |   |               |      |           |   |   |      |        |   |   |          |   |         |   |        |   |        |   |        |        

See accompanying notes to consolidated financial
statements.

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ONYX SOFTWARE CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                   |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |        |       |        |  
|---------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------- | - | ------ | ----- | ------ | -
|                                   |                                                                                 |                                                         
|                                   |                                                                                 | Year Ended December 31,                                 
|                                   |                                                                                 |                                                         
|                                   |                                                                                 | 2001                                                     |                                          | 2002    |        | 2003  
|                                   |                                                                                 |                                                          |                                          |         |        |       
|                                   |                                                                                 |                                                         
|                                   |                                                                                 | (In thousands)                                          
|OPERATING ACTIVITIES               |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Net loss                                                                        |                                                          | $                                        | (95,515 | )      |        | $ | (13,770 | )      |         | $ | (6,154 | )    
|                                   | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                          |                                          |         |        |        |   |         |        |         |   |        |      
|                                   |                                                                                 | Depreciation and amortization                            |                                          |         | 12,917 |        |   |         | 6,505  |         |   |        | 4,182 |       
|                                   |                                                                                 | Accretion of premium on investments                      |                                          |         | 5      |        |   |         |       |         |   |        |      |       
|                                   |                                                                                 | Deferred income taxes                                    |                                          |         | (1,129 | )      |   |         | (461   | )       |   |        | (357  | )     
|                                   |                                                                                 | Noncash stock-based compensation expense                 |                                          |         | 904    |        |   |         | 248    |         |   |        | 70    |       
|                                   |                                                                                 | Change in fair value of outstanding warrants             |                                          |         |       |        |   |         |       |         |   |        | (355  | )     
|                                   |                                                                                 | Impairment on intangible assets                          |                                          |         | 7,812  |        |   |         |       |         |   |        |      |       
|                                   |                                                                                 | Impairment on property and equipment                     |                                          |         | 13,821 |        |   |         | 2,290  |         |   |        | 284   |       
|                                   |                                                                                 | Minority interest in loss of consolidated
    subsidiary |                                          |         | (1,283 | )      |   |         | (1,032 | )       |   |        | (118  | )     
|                                   |                                                                                 | Investment losses and impairment                         |                                          |         | 2,500  |        |   |         |       |         |   |        |      |       
|                                   |                                                                                 | Changes in operating assets and liabilities:             |                                          |         |        |        |   |         |        |         |   |        |       |       
|                                   |                                                                                 |                                                          | Accounts receivable                      |         |        | 20,916 |   |         |        | 5,887   |   |        |       | 2,594  |  
|                                   |                                                                                 |                                                          | Prepaid expenses and other assets        |         |        | 1,905  |   |         |        | (494    | ) |        |       | 1,951  |  
|                                   |                                                                                 |                                                          | Accounts payable and accrued liabilities |         |        | (9,244 | ) |         |        | (1,812  | ) |        |       | (2,104 | )
|                                   |                                                                                 |                                                          | Restructuring-related liabilities        |         |        | 25,314 |   |         |        | (11,570 | ) |        |       | (9,661 | )
|                                   |                                                                                 |                                                          | Deferred revenue                         |         |        | (135   | ) |         |        | (2,933  | ) |        |       | (180   | )
|                                   |                                                                                 |                                                          | Income taxes                             |         |        | (113   | ) |         |        | (35     | ) |        |       | 110    |  
|                                   |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Net cash used in operating activities                                           |                                                          |                                          | (21,325 | )      |        |   | (17,177 | )      |         |   | (9,738 | )    
|INVESTING ACTIVITIES               |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Purchases of securities                                                         |                                                          |                                          | (4,900  | )      |        |   |        |        |         |   |       |      
|                                   | Proceeds from maturity of securities                                            |                                                          |                                          | 10,417  |        |        |   |        |        |         |   |       |      
|                                   | Acquisitions, net of cash acquired                                              |                                                          |                                          | (869    | )      |        |   |        |        |         |   |       |      
|                                   | Restricted cash                                                                 |                                                          |                                          |        |        |        |   | (2,238  | )      |         |   | 515    |      
|                                   | Proceeds on disposal of equipment                                               |                                                          |                                          |        |        |        |   | 204     |        |         |   |       |      
|                                   | Purchases of property and equipment, net                                        |                                                          |                                          | (11,817 | )      |        |   | (1,255  | )      |         |   | (1,198 | )    
|                                   |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Net cash used in investing activities                                           |                                                          |                                          | (7,169  | )      |        |   | (3,289  | )      |         |   | (683   | )    
|FINANCING ACTIVITIES               |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Net proceeds from sale of common stock                                          |                                                          |                                          | 31,525  |        |        |   | 20,531  |        |         |   |       |      
|                                   | Net proceeds from private placement                                             |                                                          |                                          |        |        |        |   |        |        |         |   | 2,815  |      
|                                   | Proceeds from exercise of stock options                                         |                                                          |                                          | 912     |        |        |   | 240     |        |         |   | 56     |      
|                                   | Proceeds from shares issued through employee
    stock purchase plan            |                                                          |                                          | 1,265   |        |        |   | 558     |        |         |   | 366    |      
|                                   | Proceeds from repayment of shareholder notes                                    |                                                          |                                          | 157     |        |        |   |        |        |         |   |       |      
|                                   | Payments on capital lease obligations                                           |                                                          |                                          | (249    | )      |        |   | (164    | )      |         |   | (257   | )    
|                                   |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Net cash provided by financing activities                                       |                                                          |                                          | 33,610  |        |        |   | 21,165  |        |         |   | 2,980  |      
|                                   | Effect of exchange rate changes on cash                                         |                                                          |                                          | (740    | )      |        |   | 474     |        |         |   | 527    |      
|                                   |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Net increase (decrease) in cash and cash
    equivalents                        |                                                          |                                          | 4,376   |        |        |   | 1,173   |        |         |   | (6,914 | )    
|                                   | Cash and cash equivalents at beginning of year                                  |                                                          |                                          | 11,492  |        |        |   | 15,868  |        |         |   | 17,041 |      
|                                   |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Cash and cash equivalents at end of year                                        |                                                          | $                                        | 15,868  |        |        | $ | 17,041  |        |         | $ | 10,127 |      
|                                   |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|SUPPLEMENTAL CASH FLOW DISCLOSURES |                                                                                 |                                                          |                                          |         |        |        |   |         |        |         |   |       
|                                   | Interest paid                                                                   |                                                          | $                                        | 191     |        |        | $ | 118     |        |         | $ | 139    |      
|                                   | Income taxes paid, net                                                          |                                                          |                                          | 797     |        |        |   | 1,092   |        |         |   | 565    |      
|                                   | Payment of obligation with common stock                                         |                                                          |                                          |        |        |        |   | 50      |        |         |   | 38     |      
|                                   | Issuance of common stock and stock options in
    connection with acquisitions  |                                                          |                                          | 9,439   |        |        |   |        |        |         |   |       |      

See accompanying notes to consolidated financial
statements.

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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 Corporation and subsidiaries
(Company) is a leading provider of enterprise-wide customer
relationship management (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 maintain customer, partner and other
relationships. The Company markets its 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. 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. It is fully integrated across all customer-facing
departments and interaction media. The Companys solution
is designed to be easy to use, widely accessible, rapidly
deployable, scalable, flexible, customizable and reliable, which
can result in a low total cost of ownership and rapid return on
investment. The Company was incorporated in the state of
Washington on February 23, 1994 and maintains its
headquarters in Bellevue, Washington.

Reverse Stock
Split

On July 23, 2003, the Companys
shareholders approved a one-for-four reverse stock split which
became effective on that date. All share and per share amounts
in the accompanying consolidated financial statements have been
adjusted to reflect this reverse stock split.

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 of America requires management to make estimates
and assumptions that affect amounts reported in the financial
statements. Changes in these estimates and assumptions may have
a material impact on the financial statements. The Company has
used estimates in determining certain provisions, including
uncollectible trade accounts receivable, useful lives for
property and equipment, intangibles, tax liabilities and
restructuring liabilities.

Revenue
Recognition

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

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

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

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

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

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

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

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

Cash
Equivalents and Restricted Cash

The Company considers all highly liquid
investments with a remaining maturity of three months or less at
the date of purchase to be cash equivalents. At
December 31, 2002 and 2003, the Companys cash
equivalents consisted of money market funds.

Separately, the Company had $2.2 million and
$1.7 million in restricted cash at December 31, 2002
and 2003, respectively, which was security for its credit line
with Silicon Valley Bank that supports its outstanding letters
of credit and its corporate card program as of December 31,
2002 and security for its credit line as of December 31,
2003.

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Fair Values
of Financial Instruments

At December 31, 2003, the Company had the
following financial instruments: cash and cash equivalents,
accounts receivable, cost method equity instruments, accounts
payable, salaries and benefits payable and accrued liabilities.
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. Refer to the disclosures regarding
Investment Losses and Impairmentin Note 1 for
details of how cost method equity investments are valued.

Property and
Equipment

Property and equipment is stated at cost less
accumulated depreciation and amortization. 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.

Intangible
Assets and Goodwill

The Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible
Assets, in July 2001. SFAS No. 141 requires that
all business combinations be accounted for using the purchase
method, thereby prohibiting the pooling-of-interests method.
SFAS No. 141 also specifies criteria for recognizing
and reporting intangible assets apart from goodwill; however,
assembled workforce must be recognized and reported in 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 are no longer amortized into results of
operations, but instead are 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 their fair value.

The Company adopted the provisions of
SFAS No. 142 as of January 1, 2002. The Company
reclassified an assembled workforce intangible asset with an
unamortized balance of $1.2 million (along with a deferred
tax liability of $387,000) to goodwill on January 1, 2002.
Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are
not amortized, but instead tested for impairment at least
annually in accordance with the provisions of
SFAS No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
SFAS No. 144, Accounting for Impairment or
Disposal of Long-Lived Assets.

In connection with SFAS No. 142s
transitional goodwill impairment evaluation, the Statement
required the Company to perform an assessment of whether there
was an indication that goodwill is impaired as of the date of
adoption. To accomplish this, the Company was required to
identify its reporting units and determine the carrying value of
each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those
reporting units as of January 1, 2002. The Company was
required to determine the fair value of each reporting unit and
compare it to the carrying amount of the reporting unit. To the
extent the carrying amount of a reporting unit exceeded the fair
value of the reporting unit, the Company would be required to
perform the second step of the transitional impairment test, as
this is an indication that the reporting unit goodwill may be
impaired. The second step, which requires a comparison of the
implied fair value of the reporting unit goodwill with the
carrying amount of the reporting unit goodwill, was not required
because the carrying amount of goodwill did not exceed the fair
value of the reporting unit. In the fourth quarters of 2002 and
2003, the Company performed a similar test to that described
above, in connection with its annual impairment test required
under SFAS No. 142 and, again, the implied fair value
of the reporting

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

units exceeded their respective carrying amounts
and the Company was not required to recognize any impairment
loss.

Prior to the adoption of SFAS No. 142,
goodwill was amortized on a straight-line basis over the
expected periods to be benefited, generally three to five years,
and assessed for recoverability by determining whether the
amortization of the goodwill balance over its remaining life
could be recovered through undiscounted future operating cash
flows of the acquired operation. All other intangible assets
were amortized on a straight-line basis from three to five years
..The amount of goodwill and other intangible asset impairment,
if any, was measured based on projected discounted future
operating cash flows.

As required by SFAS No. 142, the
Company has ceased amortization of goodwill effective
January 1, 2002. Prior to January 1, 2002, the Company
amortized goodwill over three to five years using the
straight-line method. Identifiable intangibles are currently
amortized over two to five years using the straight-line method.

Impairment of
Long-Lived Assets

On January 1, 2002, the Company adopted
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which supersedes certain
provisions of Accounting Principles Board (APB) Opinion
No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions, and
supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. In accordance with SFAS No. 144,
long-lived assets, such as property, plant, and equipment, and
purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of
the balance sheet.

Prior to the adoption of SFAS No. 144,
the Company accounted for long-lived assets in accordance with
SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed
of.

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 in 2000. 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. The Company
periodically evaluates whether any 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 considers the implied value
from any recent rounds of financing completed by the investee,
as well as market prices of comparable public companies for
purposes of determining estimated fair value. 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

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

declines in fair value below the Companys
accounting basis. The Company generally considers a decline to
be other-than-temporary 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.

Accounts
Receivable and Concentration of Credit Risk

The Companys customer base is dispersed
across many different geographic areas throughout North America,
Europe, Asia Pacific and Latin America. Accounts receivable are
recorded at the invoiced amount and do not bear interest. The
allowance for doubtful accounts is the Companys best
estimate of the amount of probable credit losses in the
Companys existing accounts receivable. The Company
determines the allowance based on historical write-off
experience by industry and national economic data. The majority
of the Companys customers are in the financial services,
healthcare and high technology industries and are affected by
decreased corporate and consumer spending. The Company reviews
its allowance for doubtful accounts monthly. Past due balances
over 90 days and above a specified amount are reviewed
individually for collectibility. All other balances are reviewed
on a pooled basis. Account balances are charged off against the
allowance after all means of collection have been exhausted and
the potential for recovery is considered remote. The Company
does not have any off-balance-sheet credit exposure related to
its customers.

During 2001, 2002 and 2003, no single customer
accounted for 10% or more of total revenues. At
December 31, 2002 and 2003, 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 doubtful accounts 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. At December 31,
2003, the most significant foreign currency translation
adjustments related to the assets and liabilities of our United
Kingdom operation denominated in British pounds and our
consolidated Japanese joint venture denominated in Yen.
Cumulative unrealized translation gains related to the
consolidation of Onyx UK, including the goodwill and other
intangible assets resulting from the acquisition of Market
Solutions Limited (MSL), amounted to $1.8 million at
December 31, 2003. The unrealized gain in 2003 specifically
associated with the goodwill and other acquisition-related
intangibles of MSL amounted to $1.4 million. Cumulative
unrealized translation losses related to the consolidation of
Onyx Software Co., Ltd. (Onyx Japan) amounted to
$473,000 at December 31, 2003. These unrealized translation
gains and losses, combined with the cumulative unrealized
translation gains related to the consolidation of our other
foreign subsidiaries, resulted in net consolidated cumulative
unrealized translation gains of $1.8 million.

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Gains and losses on foreign currency transactions
are included in the consolidated statement of operations as
incurred. To date, foreign exchange transaction gains and losses
have not been significant.

Income
Taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.

Stock-Based
Compensation

The Company applies the intrinsic-value-based
method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion
No. 25, issued in March 2000, to account for its fixed-plan
stock options. Under this method, compensation expense is
recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. Under APB
Opinion No. 25, because the exercise price of the
Companys employee stock options generally equals the fair
value of the underlying stock on the date of grant, no
compensation expense is generally recognized. 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. Approximately $1.1 million of the deferred
compensation that was recorded in January 2001 in connection
with options granted to employees of RevenueLab was reversed
within shareholders equity during 2001, 2002 and 2003 upon
the employees termination. Option-related deferred
compensation recorded at our initial public offering was fully
amortized as of December 31, 2002. The deferred stock-based
compensation balance in connection with the acquisition of
RevenueLab was fully amortized at December 31, 2003.

SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and
disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As
allowed by SFAS No. 123, the Company has elected to
continue to apply the intrinsic-value-based method of accounting
described above, and has adopted only the disclosure
requirements of SFAS No. 123. The

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

following table illustrates the effect on net
loss if the fair-value-based method had been applied to all
outstanding and unvested awards in each period.

|                                                                                                                 |  |                                       |          |      |  |      |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                 |  |                                      
|                                                                                                                 |  | Year Ended December 31,              
|                                                                                                                 |  |                                      
|                                                                                                                 |  | 2001                                  |          | 2002 |  | 2003
|                                                                                                                 |  |                                       |          |      |  |     
|                                                                                                                 |  |                                      
|                                                                                                                 |  | (In thousands, except per share data)
|Net loss:                                                                                                        |  |                                       |          |      |  |      |         |   |  |   |         |  
|As reported                                                                                                      |  | $                                     | (95,515  | )    |  | $    | (13,770 | ) |  | $ | (6,154  | )
|Add: stock-based employee expense included in
    reported net loss(1)                                           |  |                                       | 904      |      |  |      | 248     |   |  |   | 30      |  
|Deduct: stock-based employee compensation expense
    determined under fair-value-based method for all awards(2) |  |                                       | (16,874  | )    |  |      | (8,935  | ) |  |   | (5,281  | )
|                                                                                                                 |  |                                       |          |      |  |      |         |   |  |   |         |  
|Pro forma                                                                                                        |  | $                                     | (111,485 | )    |  | $    | (22,457 | ) |  | $ | (11,405 | )
|                                                                                                                 |  |                                       |          |      |  |      |         |   |  |   |         |  
|Net loss per share:                                                                                              |  |                                       |          |      |  |      |         |   |  |   |         |  
|As reported                                                                                                      |  | $                                     | (9.46    | )    |  | $    | (1.10   | ) |  | $ | (0.46   | )
|                                                                                                                 |  |                                       |          |      |  |      |         |   |  |   |         |  
|Pro forma                                                                                                        |  | $                                     | (11.05   | )    |  | $    | (1.80   | ) |  | $ | (0.85   | )
|                                                                                                                 |  |                                       |          |      |  |      |         |   |  |   |         |  



---



|    |                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Excludes $38,000 in stock compensation expense
    associated with the restricted stock awarded to a non-employee
    consultant and $2,000 of stock compensation expense associated
    with options granted to a non-employee consultant in 2003.
|   
|(2) | See Note 11 for details of the assumptions
    used to arrive at the fair value of each option grant.                                                                                                                                              

Earnings
(Loss) Per Share

Basic earnings (loss) 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 (loss) per share reflects the potential
dilution of securities by including other common stock
equivalents, including stock options and warrants, in the
weighted average number of common shares outstanding for a
period, if dilutive.

Other
Comprehensive Income

SFAS No. 130, Reporting
Comprehensive Income, establishes standards for reporting
and display of comprehensive income and its components in the
financial statements. The only items of other comprehensive
income (loss) that the Company currently reports are foreign
currency translation adjustments and unrealized gains (losses)
on marketable securities.

Advertising

Advertising costs, which include hired services,
collateral and event-related costs, are expensed as the related
promotional materials are released or activities occur.
Advertising expense was $7.6 million, $3.0 million and
$2.1 million during the years ended December 31, 2001,
2002 and 2003, respectively.

Interest
Expense

Interest expense, which primarily relates to
interest on the Companys outstanding letters of credit and
capital lease obligations, was $191,000, $118,000 and $139,000
during the years ended December 31, 2001, 2002 and 2003,
respectively.

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 15.

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.

Recently
Issued Accounting Pronouncements

In January 2003, the FASB issued
Interpretation No. 46, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51
(FIN 46). In general, a variable interest entity is a
corporation, partnership, trust or any other legal structure
used for business purposes that either (a) does not have
equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for
the entity to support its activities. FIN 46 requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the investors do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. The consolidation requirements of
FIN 46 apply immediately to variable interest entities
created after January 31, 2003. In December 2003, the
FASB issued FIN 46R with respect to variable interest
entities created before January 31, 2003, which among other
things, revised the implementation date to the first fiscal year
or interim period ending after March 15, 2004, with the
exception of Special Purpose Entities. The Company does not
expect the adoption of FIN 46 to have a material impact on
its financial position or results of operations.

In December 2003, the SEC issued Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition,
which revises or rescinds certain sections of SAB No. 101,
Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative
accounting and auditing guidance and SEC rules and regulations.
The changes noted in SAB No. 104 did not have a material
effect on the Companys financial position or results of
operations.



|   |                                                                             
|-- | ----------------------------------------------------------------------------
|2. | Acquisitions, Purchased Technology, Other
    Intangible Assets and Goodwill



| |                 
| | ----------------
| | Market Solutions

On October 1, 1999, the Company acquired
MSL, 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
33,012 shares of common stock valued at $1.0 million
in exchange for all the outstanding capital stock of MSL. On
October 1, 2000, the Company issued 40,678 shares
valued at $3.6 million and on October 1, 2001, the
Company issued 558,621 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. The transaction was
accounted for using the purchase method of accounting, and,
accordingly, the results of MSLs operations have been
included in the 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
(46,366 shares) of its common stock and granted options to
acquire 158,846 shares of common

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.
Approximately $1.1 million of deferred compensation that
was recorded in January 2001 in connection with options granted
to employees of RevenueLab was reversed within
shareholders equity during 2001, 2002 and 2003 upon the
employees termination. The final remaining deferred
stock-based compensation balance recorded in connection with
options granted to employees of RevenueLab was reversed within
shareholders equity during the third quarter of 2003 due
to the departure of the last eligible RevenueLab employee in
August 2003. 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 these acquisitions was
allocated as follows:

|                               |  |                |        |            |  |   |       |  
|------------------------------ |  | -------------- | ------ | ---------- |  | - | ----- | -
|                               |  | MSL            |        | RevenueLab
|                               |  |                |        |           
|                               |  |               
|                               |  | (In thousands)
|Assets acquired                |  | $              | 1,030  |            |  | $ | 1,106 |  
|Liabilities assumed            |  |                | (1,885 | )          |  |   | (268  | )
|Purchased technology           |  |                | 655    |            |  |   |      |  
|Goodwill and other intangibles |  |                | 17,959 |            |  |   | 4,694 |  
|Deferred tax liability         |  |                | (2,439 | )          |  |   |      |  
|                               |  |                |        |            |  |   |       |  
|                               |  | $              | 15,320 |            |  | $ | 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 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 in 2001, the Company
performed a future cash flow analysis as required by
SFAS No. 121, which was in effect for the year ended
December 31, 2001. Based on this analysis, the Company
determined that the 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. The impairment is included in amortization
and impairment of goodwill and other acquisition-related
intangibles on the consolidated statements of operations for the
year ended December 31, 2001.

Prior to 2003, foreign currency translation gains
and losses associated with the revaluation of intangible assets
related to the acquisition of MSL were not material. However,
due to the weakening of the U.S. dollar relative to the
British pound in 2003, the translation adjustment associated
with the acquisition-related intangibles of MSL was significant.
During the fourth quarter of 2003, the Company recorded an
unrealized translation gain associated with the
acquisition-related intangibles of MSL totaling
$1.4 million. At

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2003, the unrealized
translation gain associated with goodwill totaled
$1.3 million and the unrealized translation gain associated
with other intangible assets totaled $49,000.

Purchased technology, intangible assets and
goodwill consisted of the following (in thousands):

|                               |                              |              |        |              |  |   |        |       | 
|------------------------------ | ---------------------------- | ------------ | ------ | ------------ |  | - | ------ | ----- | 
|                               |                              | December 31, |        | December 31,
|                               |                              | 2002         |        | 2003        
|                               |                              |              |        |             
|Purchased technology           |                              | $            | 2,328  |              |  | $ | 2,379  |      
|Less: accumulated amortization |                              |              | (2,075 | )            |  |   | (2,379 | )    
|                               |                              |              |        |              |  |   |        |      
|                               | Purchased technology, net    |              | $      | 253          |  |   | $      | 0     | 
|                               |                              |              |        |              |  |   |        |      
|Other intangible assets        |                              | $            | 4,175  |              |  | $ | 4,498  |      
|Less: accumulated amortization |                              |              | (2,714 | )            |  |   | (3,823 | )    
|                               |                              |              |        |              |  |   |        |      
|                               | Other intangible assets, net |              | $      | 1,461        |  |   | $      | 675   | 
|                               |                              |              |        |              |  |   |        |      
|Goodwill                       |                              | $            | 14,065 |              |  | $ | 16,235 |      
|Less: accumulated amortization |                              |              | (5,885 | )            |  |   | (6,817 | )    
|                               |                              |              |        |              |  |   |        |      
|                               | Goodwill, net                |              | $      | 8,180        |  |   | $      | 9,508 | 
|                               |                              |              |        |              |  |   |        |      

Amortization of acquired technology, goodwill and
other acquisition-related intangibles was $6.6 million in
2001. With the adoption of SFAS No. 142 in 2002,
amortization of acquired technology and other
acquisition-related intangibles was $1.3 million in 2002
and $1.1 million in 2003. Impairment of acquired
intangibles totaled $7.8 million in 2001. There were no
impairments of acquired intangibles recorded in 2002 or 2003.
Expected future amortization expense related to identifiable
intangible assets is $675,000 in 2004.

Summarized below are the effects on net income
and net income per share data, as if the Company had followed
the amortization provisions of SFAS No. 142 for 2001 (in
thousands, except per share data):

|                                          |                                                                      |                                               |   |         |         |  
|----------------------------------------- | -------------------------------------------------------------------- | --------------------------------------------- | - | ------- | ------- | -
|                                          |                                                                      | Year Ended                                   
|                                          |                                                                      | December 31,                                 
|                                          |                                                                      | 2001                                         
|                                          |                                                                      |                                              
|Net loss:                                 |                                                                      |                                               |   |        
|                                          | As reported                                                          |                                               | $ | (95,515 | )      
|                                          | Add: goodwill and assembled workforce
    amortization, net of taxes |                                               |   | 4,864   |        
|                                          |                                                                      |                                               |   |        
|                                          |                                                                      | Adjusted net loss                             |   | $       | (90,651 | )
|                                          |                                                                      |                                               |   |        
|Basic and diluted net loss per
    share: |                                                                      |                                               |   |        
|                                          | As reported                                                          |                                               | $ | (9.46   | )      
|                                          | Add: goodwill and assembled workforce
    amortization, net of taxes |                                               |   | 0.48    |        
|                                          |                                                                      |                                               |   |        
|                                          |                                                                      | Adjusted basic and diluted net loss per share |   | $       | (8.98   | )
|                                          |                                                                      |                                               |   |        



|   |                                            
|-- | -------------------------------------------
|3. | Restructuring and Other Related
    Charges

Restructuring and other related charges represent
the Companys efforts to reduce its overall cost structure.
In April and again in September 2001, the Company approved a
restructuring plan to reduce headcount, reduce infrastructure
and eliminate excess and duplicate facilities. In April 2003,
the Company approved a restructuring plan to reduce additional
headcount. During 2001, 2002, and 2003, the Company recorded
approximately $51.8 million, $8.5 million and
$1.4 million, respectively, in restructuring and other
related charges.

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of the charges recorded for the
years ended December 31, 2001, 2002 and 2003, are as
follows (in thousands):

|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|------------------------------------------- |  | ---------- | ------- | ------------ |  | ---------- | ---- | ----------- |  | ----- | ------ | ----- |  | - | ------- | - |  | - | ----- | - |  | - | ------- | -
|                                            |  |            |         | Excess       |  | Employee   |      |             |  |       |        |      
|                                            |  | Excess     |         | Facilities  |  | Separation |      | Asset       |  |       |        |      
|                                            |  | Facilities |         | Warrants     |  | Costs      |      | Impairments |  | Other |        | Total
|                                            |  |            |         |              |  |            |      |             |  |       |        |      
|Charge for the Year Ended December 31, 2001 |  | $          | 31,948  |              |  | $          |     |             |  | $     | 3,724  |       |  | $ | 14,747  |   |  | $ | 1,387 |   |  | $ | 51,806  |  
|Cash Payments & Write-offs                  |  |            | (7,653  | )            |  |            |     |             |  |       | (3,474 | )     |  |   | (14,747 | ) |  |   | (618  | ) |  |   | (26,492 | )
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2001                |  |            | 24,295  |              |  |            |     |             |  |       | 250    |       |  |   |        |   |  |   | 769   |   |  |   | 25,314  |  
|Charge for the Year Ended December 31, 2002 |  |            | 4,361   |              |  |            | 920  |             |  |       | 1,266  |       |  |   | 2,204   |   |  |   | (260  | ) |  |   | 8,491   |  
|Cash Payments & Write-offs                  |  |            | (16,522 | )            |  |            |      |             |  |       | (880   | )     |  |   | (2,204  | ) |  |   | (455  | ) |  |   | (20,061 | )
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2002                |  |            | 12,134  |              |  |            | 920  |             |  |       | 636    |       |  |   |        |   |  |   | 54    |   |  |   | 13,744  |  
|Charge for the Year Ended December 31, 2003 |  |            | 444     |              |  |            |      |             |  |       | 769    |       |  |   | 209     |   |  |   | 1,422 |   |  |   |         |  
|Cash Payments & Write-offs                  |  |            | (9,486  | )            |  |            |      |             |  |       | (1,334 | )     |  |   | (209    | ) |  |   | (54   | ) |  |   | (11,083 | )
|Fair Value Adjustment                       |  |            |         |              |  |            | (355 | )           |  |       |       |       |  |   |        |   |  |   |      |   |  |   | (355    | )
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  
|Balance at December 31, 2003                |  | $          | 3,092   |              |  | $          | 565  |             |  | $     | 71     |       |  | $ |        |   |  | $ |      |   |  | $ | 3,728   |  
|                                            |  |            |         |              |  |            |      |             |  |       |        |       |  |   |         |   |  |   |       |   |  |   |         |  

The excess facility charges recorded in 2001 and
2002 are the result of the Companys decision to reduce its
utilization of certain facilities and to terminate usage of
certain domestic and international facilities altogether. The
most significant portion of the excess facility charges relates
to its leases for 262,000 square feet of office space in
Bellevue, Washington, which commenced in April and June of 2001
and were originally contracted to expire in 2011 and 2013.

In 2002, the Company made significant progress in
its efforts to mitigate excess facility commitments.
Specifically, in August 2002, the Company executed a sublease
agreement on its 21,000 square foot facility in the United
Kingdom that reduced its obligation on seven of the remaining
14 years on the lease, and in November 2002, the Company
executed a lease termination agreement on its former
100,000-square-foot corporate headquarters facility in Bellevue,
Washington. This lease termination resulted in accelerated cash
outflows of approximately $2.0 million during the fourth
quarter of 2002. The Company paid its monthly lease obligation
of approximately $250,000 associated with this facility in
January 2003, after which the Company relocated its corporate
headquarters and no further obligations remained. The signing of
this agreement, which required the Company to move its corporate
headquarters, resulted in accelerated amortization of leasehold
improvements and furniture, of which approximately
$1.3 million was charged to expense in the fourth quarter
of 2002. An additional $450,000 in accelerated amortization was
charged to expense in January 2003.

The most significant mitigation of the
Companys excess facility commitments was completed in
December 2002 when the Company reached an agreement with the
landlord, Bellevue Hines Development, L.L.C. (Hines), relating
to its 262,000 square feet of office space in Bellevue,
Washington. The partial lease termination reduces the
Companys excess facilities in Bellevue, Washington by
approximately 202,000 square feet. The Company continues to
lease approximately 60,000 square feet at this facility,
which began serving as its new corporate headquarters effective
at the end of January 2003. The new lease for 60,000 square
feet expires in December 2013. The partial lease termination
will require cash outflows of approximately $1.4 million
over the four-month period ending April 2004, which is included
in current restructuring-related liabilities at
December 31, 2003. In addition to cash payments, the
Company issued three five-year warrants to Hines for the
purchase of up to an aggregate of 198,750 shares of the
Companys common stock, including a warrant to purchase
66,250 shares of common stock at an exercise price of
$10.38 per share, a warrant to

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

purchase 66,250 shares of common stock at an
exercise price of $12.11 per share and a warrant to
purchase 66,250 shares of common stock at an exercise price
of $13.84 per share. If the Company either undergoes a
change of control or issues securities with rights and
preferences superior to the Companys common stock within
two years after the warrants were issued, Hines will have the
option of canceling any unexercised warrants and receiving a
cash cancellation payment of $18.40 per share in the case
of the $10.38 warrants, $16.00 per share in the case of the
$12.11 warrants and $13.92 per share in the case of the
$13.84 warrants. These contingent cash payments aggregate
$3.2 million. The Company also entered into a registration
rights agreement with Hines, pursuant to which the Company filed
a registration statement on February 14, 2003 covering the
resale of the shares of the Companys common stock subject
to purchase by Hines under the warrants. The warrant value as of
December 31, 2002 was estimated at $920,000 based on
(a) the estimated value of the warrants using the
Black-Scholes model with an expected dividend yield of 0.0%, a
risk-free interest rate of 5.0%, volatility of 85% and an
expected life of five years and (b) the estimated value of
the cash cancellation payments in the event of a change in
control. The warrants are subject to variable accounting and the
Company is required to mark the warrants to market at each
reporting period. At December 31, 2003, the warrant value
was estimated at $565,000 using similar assumptions to those
used at December 31, 2002, and is included in long-term
liabilities.

The termination of the 202,000 square feet
in Bellevue, Washington is contingent on the following
conditions, among others, being met as of April 30, 2004:
(a) the Company is current in its payments under the lease
and (b) the Company has not filed a bankruptcy or other
liquidation petition, or otherwise attempted to reject or
contest the lease. If the Company is not in compliance with any
of these conditions as of April 30, 2004, the original
lease will not terminate and the Company will be required to
continue making payments on the excess facilities subject to the
original lease. The Company previously issued a letter of credit
to Hines in the amount of approximately $6.6 million to
guarantee its payment obligations to Hines. The letter of credit
is secured by the Companys cash deposits. The letter of
credit will secure its obligations under the original lease and
the amended lease for the 60,000 square feet that the
Company still occupies. The parties agreed to effect eight
monthly reductions in the amount of the letter of credit of
$507,000 which started in October 2003 and will continue through
May 2004 if (i) the conditions precedent described above
are satisfied and (ii) the Company has timely made all of
the payments due under the original lease and the new lease for
the 60,000 square feet that it still occupies. In no event
will the letter of credit be reduced to an amount less than
$2.5 million. The Companys right to reduce the amount
of the letter of credit will be forfeited if, at any time before
May 1, 2004, the Company makes any late payment under the
original lease or the new lease for the 60,000 square feet
that it still occupies, or if there is any default or material
misrepresentation by the Company in any of the warrants or the
registration rights agreement.

The accounting for excess facilities is complex
and, as a result, may result in adjustments to the
Companys current restructuring charge. In particular,
based on the terms of the warrants issued in connection with the
partial lease termination of excess facilities in Bellevue,
Washington, the warrants are subject to variable accounting and
will be marked to market at each reporting period. Future cash
outlays are anticipated through July 2006 unless estimates and
assumptions change or the Company is able to negotiate to exit
certain leases at an earlier date.

The current portion of restructuring-related
liabilities totaled $2.8 million at December 31, 2003,
the long-term portion of restructuring-related liabilities
totaled $405,000 at December 31, 2003 and the value of the
warrants issued in connection with the termination of certain
facility lease obligations was $565,000 at December 31,
2003.

65



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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                 
|-- | --------------------------------
|4. | Investment Losses and Impairment

During 1999 and 2000, the Company invested 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 $500,000 at
December 31, 2002 and 2003.

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 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 2002 or
2003.



|   |           
|-- | ----------
|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, since Onyx Japan did not complete an initial
public offering on or before July 31, 2003, either the
Company or Prime Systems may terminate the joint venture
agreement at its discretion. 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
appraisal 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 2001, 2002 and
2003, fees charged under this agreement were $1.3 million,
$733,000, and $690,000, respectively. The intercompany fees are
eliminated in consolidation; however, the Company allocates 42%
of the fees to the minority shareholders.

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

Although profitable in the third and fourth
quarters of 2003, Onyx Japan incurred substantial losses in
previous periods. The minority shareholders capital
account balance as of December 31, 2003 was $119,000.
Additional Onyx Japan losses above approximately $283,000 in the
aggregate will be absorbed 100% by the Company, as compared to
58% in prior periods.

Restructuring efforts carried out in the second
half of 2002 significantly reduced the operating expenses of
Onyx Japan and increased the probability that Onyx Japan can be
cash flow positive, as evidenced by the profits generated by
Onyx Japan in the third and fourth quarters of 2003.
Nevertheless, additional funding may be required to continue the
operation of the joint venture. If Onyx Japan continues to incur
losses and no additional capital is invested, the Company may
have to further restructure its operations in Japan.

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                         
|-- | ------------------------
|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 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.
It also includes the issuance of common stock and options to
contractors in return for their services.

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,  
|                                  |  |               
|                                  |  | 2001           |     | 2002 |  | 2003
|                                  |  |                |     |      |  |     
|                                  |  |               
|                                  |  | (In thousands)
|Support and service cost of sales |  | $              | 218 |      |  | $    | 142 |  |  | $ | 30 | 
|Sales and marketing               |  |                | 575 |      |  |      | 49  |  |  |   |   | 
|Research and development          |  |                | 35  |      |  |      | 18  |  |  |   |   | 
|General and administrative        |  |                | 76  |      |  |      | 39  |  |  |   | 40 | 
|                                  |  |                |     |      |  |      |     |  |  |   |    | 
|Total stock-based compensation    |  | $              | 904 |      |  | $    | 248 |  |  | $ | 70 | 
|                                  |  |                |     |      |  |      |     |  |  |   |    | 



|   |                       
|-- | ----------------------
|7. | Property and Equipment

Property and equipment consists of the following:

|                                               |  |                |         |      |  |   |        |  
|---------------------------------------------- |  | -------------- | ------- | ---- |  | - | ------ | -
|                                               |  |               
|                                               |  | December 31,  
|                                               |  |               
|                                               |  | 2002           |         | 2003
|                                               |  |                |         |     
|                                               |  |               
|                                               |  | (In thousands)
|Computer and office equipment                  |  | $              | 9,249   |      |  | $ | 5,849  |  
|Purchased software                             |  |                | 3,233   |      |  |   | 3,646  |  
|Furniture and fixtures                         |  |                | 2,424   |      |  |   | 1,465  |  
|Leasehold improvements                         |  |                | 3,492   |      |  |   | 2,994  |  
|                                               |  |                |         |      |  |   |        |  
|                                               |  |                | 18,398  |      |  |   | 13,954 |  
|Less accumulated depreciation and amortization |  |                | (11,924 | )    |  |   | (9,677 | )
|                                               |  |                |         |      |  |   |        |  
|                                               |  | $              | 6,474   |      |  | $ | 4,277  |  
|                                               |  |                |         |      |  |   |        |  

Included in property and equipment at
December 31, 2002 are assets acquired under capital lease
obligations with an original cost of approximately $610,000.
Accumulated amortization on the leased assets was approximately
$454,000 as of December 31, 2002.



|   |               
|-- | --------------
|8. | Line of Credit

In documents dated March 28, 2003 and
May 5, 2003, the Company amended its Loan and Security
Agreement with Silicon Valley Bank (SVB), which was originally
entered into in February 2002, and entered into a second Loan
and Security Agreement with SVB that is intended to take
advantage of a loan guarantee by the Export Import Bank of the
United States (Exim Bank). The loan documents were further
amended on January 12, 2004 to revise the tangible net
worth covenant and the accounts receivable advance rates
beginning with the month ended December 31, 2003. Under the
terms of these agreements, the Company has a total
$15.0 million working capital revolving line of credit with
SVB, which is split between a $13.0 million

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

domestic facility and a $2.0 million Exim
Bank facility. Both are secured by accounts receivable, property
and equipment and intellectual property. The domestic facility
allows the Company to borrow up to the lesser of (a) 70% of
eligible domestic and individually approved foreign accounts
receivable and (b) $13.0 million. The Exim Bank facility
allows the Company to borrow up to the lesser of (a) 75% of
eligible foreign accounts receivable and (b) $2.0 million.
If the borrowing base calculation falls below the outstanding
standby letters of credit issued by SVB on the Companys
behalf, SVB may require the Company to cash secure the amount by
which outstanding standby letters of credit exceed the borrowing
base. The amount required to be restricted under the loan
agreement was $1.7 million, measured as of
December 31, 2003. Due to the variability in the
Companys borrowing base, the Company may be subject to
restrictions on its cash at various times throughout the year.
Any borrowings will bear interest at SVBs prime rate,
which was 4.00% as of December 31, 2003, plus 1.5%, subject
to a minimum rate of 6.0%. The loan agreements require that the
Company maintain certain financial covenants based on its
adjusted quick ratio and tangible net worth. The Company was in
compliance with these covenants, as amended, at
December 31, 2003. Absent the amendment, the Company would
have been out of compliance with the loan agreement as of
December 31, 2003. The Company is also prohibited under the
loan and security agreements from paying dividends. The
facilities expire in March 2004. Based on the outstanding
standby letters of credit relating to long-term lease
obligations totaling $8.0 million at December 31,
2003, no additional amounts are currently available under the
credit facilities.



|   |                               
|-- | ------------------------------
|9. | 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
and furniture under noncancelable operating leases that expire
on various dates through June 2006.

Minimum future lease payments under noncancelable
operating leases for the periods ended December 31 pursuant
to leases outstanding as of December 31, 2003 are
summarized as follows:

|                         |            |                  |        |        | 
|------------------------ | ---------- | ---------------- | ------ | ------ | 
|                         |            | Operating Leases
|                         |            |                 
|                         |            | (In thousands)  
|Year ending December 31: |            |                  |        |       
|                         | 2004       |                  | $      | 7,020  | 
|                         | 2005       |                  |        | 4,469  | 
|                         | 2006       |                  |        | 3,707  | 
|                         | 2007       |                  |        | 3,389  | 
|                         | 2008       |                  |        | 3,071  | 
|                         | Thereafter |                  |        | 18,009 | 
|                         |            |                  |        |       
|                         |            | $                | 39,665 |       
|                         |            |                  |        |       

Rental expense was approximately
$15.1 million, $19.0 million and $6.1 million in
2001, 2002 and 2003, respectively. Approximately
$7.7 million, $14.3 million and $432,000 of the 2001,
2002 and 2003 rental expense was identified as excess
facilities and included in restructuring and other related
charges in the consolidated statements of operations.

As a result of the Companys restructuring
efforts in 2001, 2002 and 2003, 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. Excluding the value of
warrants issued in connection with a partial lease termination,
approximately $3.2 million in estimated losses associated
with these lease commitments is

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

included in restructuring-related liabilities in
the consolidated balance sheet as of December 31, 2003, of
which $2.8 million is classified as current and $405,000 is
classified as long-term. Further information regarding the
Companys restructuring-related charges is included in
Note 3.

As of December 31, 2003, future minimum
rental receipts under subleased facilities is:

|                         |            |                  |       |       | 
|------------------------ | ---------- | ---------------- | ----- | ----- | 
|                         |            | Operating Leases
|                         |            |                 
|                         |            | (In thousands)  
|Year ending December 31: |            |                  |       |      
|                         | 2004       |                  | $     | 1,353 | 
|                         | 2005       |                  |       | 1,085 | 
|                         | 2006       |                  |       | 898   | 
|                         | 2007       |                  |       | 898   | 
|                         | 2008       |                  |       | 898   | 
|                         | Thereafter |                  |       | 598   | 
|                         |            |                  |       |      
|                         |            | $                | 5,730 |      
|                         |            |                  |       |      



| |                                   
| | ----------------------------------
| | 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
$1.8 million, $1.1 million and $748,000 in 2001, 2002
and 2003. As of December 31, 2003, future minimum
commitments under these royalty arrangements are anticipated to
be approximately $323,000.



|    |           
|--- | ----------
|10. | Guarantees

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



|    |                     
|--- | --------------------
|11. | Shareholders Equity



| |                        
| | -----------------------
| | 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,

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



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

In February 2001, the Company completed a firm
underwritten offering of 625,000 shares of its common stock
at a price of $54.00 per share from its $100.0 million
shelf registration. The offered shares generated net proceeds to
the Company of approximately $31.5 million.

In February 2002, the Company completed a public
offering of 1,581,250 shares of its common stock at a
purchase price to the public of $14.00 per share from its
$100.0 million shelf registration statement, including
150,000 shares issued pursuant to the exercise of the
over-allotment option granted to Wells Fargo Securities, LLC,
the sole underwriter for the offering. The proceeds to the
Company totaled $20.5 million after deducting the costs of
the offering.



| |                 
| | ----------------
| | Private Offering

In May 2003, the Company completed a private
offering of 1,038,475 shares of its common stock at a
purchase price of $2.60 per share with an existing
institutional investor and 97,222 shares of its common
stock at a purchase price of $3.22 per share with certain
officers and directors of the Company. The proceeds to the
Company totaled approximately $2.8 million after deducting
the costs of the offering. In connection with the private
offering the Company granted anti-dilution rights to the
existing institutional investor whereby the Company would issue
warrants to purchase common stock if additional shares of common
stock had been sold at a price less than $2.60 per share
before November 19, 2003. The Company did not sell any
additional shares of common stock before November 19, 2003,
and as such, no additional shares were issued pursuant to the
anti-dilution provisions of the private offering.



| |                                   
| | ----------------------------------
| | Increase in Authorized
    Capital

On July 23, 2003, the Companys
shareholders approved an amendment to the Companys
restated articles of incorporation increasing the number of
authorized shares of the Companys stock after the reverse
stock split from 25,000,000 (including 20,000,000 shares of
common stock and 5,000,000 shares of preferred stock) to
100,000,000 shares (including 80,000,000 shares of
common stock and 20,000,000 shares of preferred stock).



| |                                   
| | ----------------------------------
| | Notes Receivable from
    Officers

In July 1998, certain officers exercised options
to purchase 650,000 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.

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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                          
| | -------------------------
| | Warrants for Common Stock

As part of a lease termination agreement, the
Company agreed to issue three five-year warrants to Hines, the
landlord of its Bellevue, Washington facility, for the purchase
of up to an aggregate of 198,750 shares of the
Companys common stock, including a warrant to purchase
66,250 shares of common stock at an exercise price of
$10.38 per share, a warrant to purchase 66,250 shares
of common stock at an exercise price of $12.11 per share
and a warrant to purchase 66,250 shares of common stock at
an exercise price of $13.84 per share. If the Company
either undergoes a change of control or issues securities with
rights and preferences superior to the Companys common
stock within two years after the warrants are issued, Hines will
have the option of canceling any unexercised warrants and
receiving a cash cancellation payment of $18.40 per share
in the case of the $10.38 warrants, $16.00 per share in the
case of the $12.11 warrants and $13.904 per share in the
case of the $13.84 warrants, which, in the aggregate, totals
$3.2 million. The Company agreed to enter into a
registration rights agreement with Hines, pursuant to which the
Company filed a registration statement on February 14, 2003
covering the resale of the shares of the Companys common
stock subject to purchase by Hines under the warrants. The
warrant value as of December 31, 2002 was estimated at
$920,000 based on (a) the estimated value of the warrants
using the Black-Scholes model with an expected dividend yield of
0.0%, a risk-free interest rate of 5.0%, volatility of 85% and
an expected life of five years and (b) the estimated value
of the cash cancellation payments in the event of a change in
control. The warrants are subject to variable accounting and we
are required to mark the warrants to market at each reporting
period. At December 31, 2003, the warrant value was
estimated at $565,000 using similar assumptions to those used at
December 31, 2002, and is included in long-term liabilities.



| |                                                               
| | --------------------------------------------------------------
| | 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
2,500,000 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 750,000 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) 837,882 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, 2001, 2002 and 2003, the 1998
option plan pool was increased by 436,525 shares,
504,600 shares and 624,139, respectively. On
January 1, 2004, the 1998 option plan pool was increased by
672,100 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.

71



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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                     
| | ----------------------------------------------------
| | 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
250,000 shares for issuance under the NOE plan in January
2001, and reserved an additional 625,000 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.

Stock Option
Activity

A summary of stock option activity follows:

|                                                               |                                              |           |           |                     |   |          |           |            |   |   |       |       | 
|-------------------------------------------------------------- | -------------------------------------------- | --------- | --------- | ------------------- | - | -------- | --------- | ---------- | - | - | ----- | ----- | 
|                                                               |                                              |           |           |                    
|                                                               |                                              |           |           | Outstanding Options
|                                                               |                                              |           |           |                    
|                                                               |                                              |           |           |                     |   | Weighted
|                                                               |                                              | Shares    |           |                     |   | Average 
|                                                               |                                              | Available |           | Number of           |   | Exercise
|                                                               |                                              | for Grant |           | Shares              |   | Prices  
|                                                               |                                              |           |           |                     |   |         
|Outstanding at December 31, 2000
    (exercisable  456,111)   |                                              |           | 101,332   |                     |   |          | 2,111,199 |            |   | $ | 44.28 |      
|                                                               | 1998 option plan increase                    |           |           | 436,525             |   |          |           |           |   |   |       |       | 
|                                                               | 2001 nonofficer employee stock plan increase |           |           | 875,000             |   |          |           |           |   |   |       |       | 
|                                                               | Non plan grant increase                      |           |           | 63,821              |   |          |           |           |   |   |       |       | 
|                                                               | Options granted                              |           |           | (1,708,575          | ) |          |           | 1,708,575  |   |   | $     | 25.08 | 
|                                                               | Options cancelled                            |           |           | 1,026,724           |   |          |           | (1,026,724 | ) |   | $     | 47.76 | 
|                                                               | Options exercised                            |           |           |                    |   |          |           | (298,680   | ) |   | $     | 2.96  | 
|                                                               |                                              |           |           |                     |   |          |           |            |   |   |       |      
|Outstanding at December 31, 2001
    (exercisable  736,922)   |                                              |           | 794,827   |                     |   |          | 2,494,370 |            |   | $ | 34.60 |      
|                                                               |                                              |           |           |                     |   |          |           |            |   |   |       |      
|                                                               | 1998 option plan increase                    |           |           | 504,600             |   |          |           |           |   |   |       |       | 
|                                                               | Options granted                              |           |           | (772,505            | ) |          |           | 772,505    |   |   | $     | 14.84 | 
|                                                               | Options cancelled                            |           |           | 762,978             |   |          |           | (762,978   | ) |   | $     | 37.08 | 
|                                                               | Options exercised                            |           |           |                    |   |          |           | (47,224    | ) |   | $     | 4.64  | 
|                                                               |                                              |           |           |                     |   |          |           |            |   |   |       |      
|Outstanding at December 31, 2002
    (exercisable  1,249,105) |                                              |           | 1,289,900 |                     |   |          | 2,456,673 |            |   | $ | 28.20 |      
|                                                               |                                              |           |           |                     |   |          |           |            |   |   |       |      
|                                                               | 1998 option plan increase                    |           |           | 624,139             |   |          |           |           |   |   |       |       | 
|                                                               | Options granted                              |           |           | (1,691,405          | ) |          |           | 1,691,405  |   |   | $     | 4.34  | 
|                                                               | Options cancelled                            |           |           | 885,227             |   |          |           | (885,227   | ) |   | $     | 27.65 | 
|                                                               | Options exercised                            |           |           |                    |   |          |           | (20,643    | ) |   | $     | 2.72  | 
|                                                               |                                              |           |           |                     |   |          |           |            |   |   |       |      
|Outstanding at December 31, 2003
    (exercisable  1,517,796) |                                              |           | 1,107,861 |                     |   |          | 3,242,208 |            |   | $ | 16.09 |      
|                                                               |                                              |           |           |                     |   |          |           |            |   |   |       |      

72



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##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information
concerning currently outstanding and exercisable options at
December 31, 2003:

|                         |  |             |           |                  |  |                  |       |           |  |                  |      |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | ---------------- |  | ---------------- | ----- | --------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           |                  |  |                 
|                         |  | Outstanding |           |                  |  |                 
|                         |  |             |           |                 
|                         |  |             |           | Weighted Average |  | Exercisable     
|                         |  |             |           | Remaining        |  |                 
|                         |  | Number of   |           | Weighted Average |  | Contractual Life |       | Number of |  | Weighted Average
|Range of Exercise Prices |  | Option      |           | Exercise Prices  |  | (Years)          |       | Options   |  | Exercise Prices 
|                         |  |             |           |                  |  |                  |       |           |  |                 
|$ 0.40 - $  3.00         |  |             | 137,110   |                  |  | $                | 0.99  |           |  |                  | 3.09 |  |  |  | 135,859   |  |  | $ | 0.98  | 
|$ 3.28 - $  4.16         |  |             | 741,258   |                  |  |                  | 4.14  |           |  |                  | 9.40 |  |  |  | 117,117   |  |  |   | 4.16  | 
|$ 4.25 - $  4.48         |  |             | 717,644   |                  |  |                  | 4.48  |           |  |                  | 9.07 |  |  |  | 160,574   |  |  |   | 4.48  | 
|$ 4.72 - $ 12.12         |  |             | 364,331   |                  |  |                  | 9.33  |           |  |                  | 6.95 |  |  |  | 234,874   |  |  |   | 9.51  | 
|$12.13 - $ 15.96         |  |             | 456,030   |                  |  |                  | 14.82 |           |  |                  | 7.95 |  |  |  | 198,238   |  |  |   | 15.06 | 
|$16.20 - $ 24.28         |  |             | 378,354   |                  |  |                  | 16.70 |           |  |                  | 7.16 |  |  |  | 277,995   |  |  |   | 16.68 | 
|$26.00 - $152.38         |  |             | 447,481   |                  |  |                  | 65.41 |           |  |                  | 5.96 |  |  |  | 393,139   |  |  |   | 65.60 | 
|                         |  |             |           |                  |  |                  |       |           |  |                  |      |  |  |  |           |  |  |   |       | 
|$ 0.40 - $152.38         |  |             | 3,242,208 |                  |  |                  | 16.09 |           |  |                  | 7.84 |  |  |  | 1,517,796 |  |  |   | 24.37 | 
|                         |  |             |           |                  |  |                  |       |           |  |                  |      |  |  |  |           |  |  |   |       | 

The weighted average price of exercisable options
was $34.80 at December 31, 2001 and $32.68 at
December 31, 2002.

1998 Employee
Stock Purchase Plan

The 1998 Employee Stock Purchase Plan (the
ESPP) permits eligible employees of the Company and its
subsidiaries to purchase common stock through payroll deductions
of up to 10% of their compensation. The Company authorized the
issuance under the ESPP of a total of 250,000 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
lesser of (a) 100,000 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 is
being 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, 2001,
2002 and 2003, 59,385 shares, 77,891 shares and
109,340 shares of common stock were purchased under the
ESPP, respectively. At December 31, 2003, the Company had a
total of 323,769 shares of common stock reserved for future
issuance under its ESPP. On January 1, 2004, an additional
100,000 shares became available for issuance pursuant to
the automatic plan increase.

73



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##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Fair Value of
Stock Options and Employee Stock Purchase Rights Under
SFAS No. 123

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,
|                        |  |             
|                        |  | 2001         |         | 2002 |  | 2003
|                        |  |              |         |      |  |     
|Expected dividend yield |  |              | 0.0%    |      |  |      | 0.0%    |  |  |  | 0.0%       | 
|Risk-free interest rate |  |              | 4.1%    |      |  |      | 3.0%    |  |  |  | 3.0%       | 
|Volatility              |  |              | 125%    |      |  |      | 85%     |  |  |  | 72% to 85% | 
|Expected life           |  |              | 3 years |      |  |      | 5 years |  |  |  | 5 years    | 

For purposes of the pro forma disclosures, the
estimated weighted average fair value of the options granted,
estimated to be $17.84, $10.00 and $2.80 at December 31,
2001, 2002 and 2003, respectively, is amortized to expense over
the options vesting period.

The fair value of employees stock purchase
rights under the ESPP at December 31, 2001 was estimated
using the Black-Scholes model with the same assumptions as the
table above, except the expected life is six months. The fair
value of employees stock purchase rights under the ESPP at
December 31, 2002 was estimated using the Black-Scholes
model with an expected dividend yield of 0.0%, a risk-free
interest rate of 1.5%, volatility of 85% and an expected life of
1.25 years. The fair value of employees stock
purchase rights under the ESPP at December 31, 2003 was
estimated using the Black-Scholes model with an expected
dividend yield of 0.0%, a risk-free interest rate of 1.5%,
volatility of 72% and an expected life of 1.25 years.

Common Shares
Reserved for Future Issuance

The Company has reserved shares of common stock
as of December 31, 2003 as follows:

|                             |  |  |           | 
|---------------------------- |  |  | --------- | 
|Stock options                |  |  | 4,350,069 | 
|Employee Stock Purchase Plan |  |  | 323,769   | 
|                             |  |  |           | 
|                             |  |  | 4,673,838 | 
|                             |  |  |           | 

74



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##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                          
|--- | -------------------------
|12. | Earnings (Loss) Per Share

The following represents the calculations for net
loss per share:

|                                                                |                                |                         |         |       |    |      |         |       |    |   |        |       |    | 
|--------------------------------------------------------------- | ------------------------------ | ----------------------- | ------- | ----- | -- | ---- | ------- | ----- | -- | - | ------ | ----- | -- | 
|                                                                |                                |                        
|                                                                |                                | Year Ended December 31,
|                                                                |                                |                        
|                                                                |                                | 2001                    |         | 2002  |    | 2003
|                                                                |                                |                         |         |       |    |     
|                                                                |                                |                        
|                                                                |                                | (In thousands, except  
|                                                                |                                | per share data)        
|Net loss (A)                                                    |                                | $                       | (95,515 | )     |    | $    | (13,770 | )     |    | $ | (6,154 | )    
|Weighted average number of common shares(1)(B)                  |                                |                         | 10,092  |       |    |      | 12,481  |       |    |   | 13,442 |      
|                                                                | Effect of dilutive securities: |                         |         |       |    |      |         |       |    |   |        |       |   
|                                                                |                                | Stock options           |         |       | *  |      |         |       | *  |   |        |       | *  | 
|                                                                |                                | Warrants                |         |       | ** |      |         |       | ** |   |        |       | ** | 
|                                                                |                                |                         |         |       |    |      |         |       |    |   |        |      
|Adjusted weighted average shares and assumed
    conversions(C) |                                |                         | 10,092  |       |    |      | 12,481  |       |    |   | 13,442 |      
|                                                                |                                |                         |         |       |    |      |         |       |    |   |        |      
|Earnings (loss) per share:                                      |                                |                         |         |       |    |      |         |       |    |   |        |      
|                                                                | Basic(A)/(B)                   |                         | $       | (9.46 | )  |      | $       | (1.10 | )  |   | $      | (0.46 | ) 
|                                                                | Diluted(A)/(C)                 |                         | $       | (9.46 | )  |      | $       | (1.10 | )  |   | $      | (0.46 | ) 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    outstanding promissory note was paid in full during the second
    quarter of 2001 and the related 400,000 shares of common
    stock were released from restriction. If the Company had been
    profitable during 2001, the approximate number of restricted
    shares included in the computation of diluted earnings per share
    would have been 195,000 based on the average number of days the
    promissory note was outstanding during the period.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | The effect of stock options are excluded from the
    computation of diluted earnings per share because the effects
    are antidilutive. Outstanding stock options of 2,494,370,
    2,456,673, and 3,242,208 at December 31, 2001, 2002 and
    2003, respectively, were excluded from the computation of
    diluted earnings per share because their effect was antidilutive
    (see Note 11 for additional stock option information).
    Outstanding options will be included in the computation of
    diluted earnings per share in future periods to the extent their
    effects are dilutive. If the Company had been profitable during
    any of the periods reported, based on the average price of the
    Companys common stock during each period using the
    treasury stock method, the approximate number of dilutive
    options included in the computation of diluted earnings per
    share would have been 568,000 shares, 210,000 shares
    and 111,000 shares, respectively, during the year ended
    December 31, 2001, 2002 and 2003.



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | In January 2003, the Company issued warrants to
    purchase 198,750 shares of its common stock at exercise
    prices ranging from $10.38 to $13.84 per share in
    connection with the termination of excess facilities. There were
    no warrants outstanding prior to January 2003. Outstanding
    warrants were excluded from the computation of diluted earnings
    per share for the year ended December 31, 2003 because
    their effect was antidilutive. Outstanding warrants will be
    included in the computation of diluted earnings per share in
    future periods to the extent their effects are dilutive.

75



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##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |             
|--- | ------------
|13. | Income Taxes

Income (loss) before taxes consists of the
following:

|        |  |                         |         |      |  |      |         |   |  |   |        |  
|------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------ | -
|        |  |                        
|        |  | Year Ended December 31,
|        |  |                        
|        |  | 2001                    |         | 2002 |  | 2003
|        |  |                         |         |      |  |     
|        |  |                        
|        |  | (In thousands)         
|U.S.    |  | $                       | (93,632 | )    |  | $    | (13,452 | ) |  | $ | (7,263 | )
|Foreign |  |                         | (3,460  | )    |  |      | (765    | ) |  |   | 1,255  |  
|        |  |                         |         |      |  |      |         |   |  |   |        |  
|        |  | $                       | (97,092 | )    |  | $    | (14,217 | ) |  | $ | (6,008 | )
|        |  |                         |         |      |  |      |         |   |  |   |        |  

The provision for income taxes consists of the
following:

|         |                                |                            |   |        |     |      |   |       |       |  |   |      |     | 
|-------- | ------------------------------ | -------------------------- | - | ------ | --- | ---- | - | ----- | ----- |  | - | ---- | --- | 
|         |                                |                           
|         |                                | Year Ended December 31,   
|         |                                |                           
|         |                                | 2001                       |   | 2002   |     | 2003
|         |                                |                            |   |        |     |     
|         |                                |                           
|         |                                | (In thousands)            
|Current: |                                |                            |   |        |     |      |   |       |       |  |   |     
|         | Federal                        |                            | $ | 0      |     |      | $ | 0     |       |  | $ | 0    |    
|         | State and local                |                            |   | 15     |     |      |   | 22    |       |  |   | 20   |    
|         | Foreign                        |                            |   | 820    |     |      |   | 1,024 |       |  |   | 601  |    
|         |                                |                            |   |        |     |      |   |       |       |  |   |     
|         |                                | Total current income taxes |   |        | 835 |      |   |       | 1,046 |  |   |      | 621 | 
|         | Deferred  foreign             |                            |   | (1,129 | )   |      |   | (461  | )     |  |   | (357 | )  
|         |                                |                            |   |        |     |      |   |       |       |  |   |     
|         | Income tax provision (benefit) |                            | $ | (294   | )   |      | $ | 585   |       |  | $ | 264  |    
|         |                                |                            |   |        |     |      |   |       |       |  |   |     

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

|                                                          |  |                         |         |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                          |  |                        
|                                                          |  | Year Ended December 31,
|                                                          |  |                        
|                                                          |  | 2001                    |         | 2002 |  | 2003
|                                                          |  |                         |         |      |  |     
|                                                          |  |                        
|                                                          |  | (In thousands)         
|Income tax expense (benefit) at statutory rate of
    34% |  | $                       | (33,011 | )    |  | $    | (4,834 | ) |  | $ | (2,043 | )
|State taxes, net of federal benefit                       |  |                         | 10      |      |  |      | 15     |   |  |   | 13     |  
|Losses producing no current tax benefit                   |  |                         | 32,707  |      |  |      | 5,404  |   |  |   | 2,294  |  
|                                                          |  |                         |         |      |  |      |        |   |  |   |        |  
|Income tax provision                                      |  | $                       | (294    | )    |  | $    | 585    |   |  | $ | 264    |  
|                                                          |  |                         |         |      |  |      |        |   |  |   |        |  

At December 31, 2003, the Company had
federal, state and foreign net operating loss carryforwards of
$106.6 million, $9.8 million and $8.0 million,
respectively, which expire between 2004 and 2023. Additionally,
the Company had capital loss, research and development and
foreign tax credit carryforwards of $2.0 million,
$2.7 million, and $1.4 million, respectively, which
expire between 2004 and 2023. 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 of a change in
ownership, as defined in the Internal Revenue Code. 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 $7.3 million, the resulting
benefits will be credited to shareholders equity.

76



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##### 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,  
|                                      |                                               |               
|                                      |                                               | 2002           |         | 2003  
|                                      |                                               |                |         |       
|                                      |                                               |               
|                                      |                                               | (In thousands)
|Deferred tax assets:                  |                                               |                |         |        |   |   |         |       
|                                      | U.S. net operating loss carryforwards         |                | $       | 33,029 |   |   | $       | 39,580 |  
|                                      | U.S. capital loss carryforwards               |                |         | 729    |   |   |         | 723    |  
|                                      | Foreign net operating loss carryforwards      |                |         | 2,039  |   |   |         | 2,721  |  
|                                      | Research and development credit carryforwards |                |         | 2,900  |   |   |         | 2,690  |  
|                                      | Foreign tax credit carryforwards              |                |         | 1,256  |   |   |         | 1,435  |  
|                                      | Restructuring and other accrued liabilities   |                |         | 4,549  |   |   |         | 1,288  |  
|                                      | Other                                         |                |         | 2,139  |   |   |         | 1,210  |  
|                                      |                                               |                |         |        |   |   |         |       
|Total gross deferred tax assets       |                                               |                | 46,641  |        |   |   | 49,647  |       
|Less valuation allowance              |                                               |                | (46,368 | )      |   |   | (49,285 | )     
|                                      |                                               |                |         |        |   |   |         |       
|                                      |                                               |                | 273     |        |   |   | 362     |       
|Deferred tax liabilities:             |                                               |                |         |        |   |   |         |       
|                                      | Purchased technology and other intangibles    |                |         | (497   | ) |   |         | (229   | )
|                                      |                                               |                |         |        |   |   |         |       
|                                      |                                               |                | (497    | )      |   |   | (229    | )     
|                                      |                                               |                |         |        |   |   |         |       
|Net deferred tax (liabilities) assets |                                               | $              | (224    | )      |   | $ | 133     |       
|                                      |                                               |                |         |        |   |   |         |       

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, except for certain deferred tax assets
related to foreign operations. The valuation allowance for
deferred tax assets increased by $9.9 million during 2002
and by $2.9 million during 2003.



|    |                      
|--- | ---------------------
|14. | 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
60% 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 2001, the
Company recorded $65,000 in employer matching contribution
expenses. In 2002 and 2003, no employer contributions were made.



|    |                                   
|--- | ----------------------------------
|15. | Segment and Geographic Information

The Company and its subsidiaries are principally
engaged in the design, development, marketing and support 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.
Substantially all revenue results from the licensing of the
Companys software products and related consulting and
customer support (maintenance) services. The Companys
chief operating decision maker reviews financial information
presented on a consolidated basis, accompanied by disaggregated
information about revenue by geographic region for purposes of
making operating decisions and assessing financial performance.
Accordingly, the Company considers itself to be in a single
industry segment, specifically the license, implementation and
support of its software applications and to have only one
operating segment. The Company does not prepare

77



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##### Table of Contents



ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reports for, or measure the performance of, its
individual software applications and, accordingly, the Company
has not presented revenue or any other related financial
information by individual software product.

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

Total revenues outside of North America for the
years ended December 31, 2001, 2002 and 2003 were
$29.6 million, $24.8 million and $22.9 million,
respectively.

The following geographic information is presented
for the years ended December 31, 2001, 2002 and 2003 (in
thousands):

|                              |         |         |   |         |  |         |   |        |  |  |   |        |  |  |   |        | 
|----------------------------- | ------- | ------- | - | ------- |  | ------- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                              |         | North   |   | United  |  | Rest of |   |       
|                              |         | America |   | Kingdom |  | World   |   | Total 
|                              |         |         |   |         |  |         |   |       
|Year ended December 31, 2001: |         |         |   |         |  |         |   |        |  |  |   |        |  |  |   |       
|                              | Revenue |         | $ | 70,090  |  |         | $ | 9,889  |  |  | $ | 19,721 |  |  | $ | 99,700 | 
|Year ended December 31, 2002: |         |         |   |         |  |         |   |        |  |  |   |        |  |  |   |       
|                              | Revenue |         | $ | 44,556  |  |         | $ | 11,712 |  |  | $ | 13,116 |  |  | $ | 69,384 | 
|Year ended December 31, 2003: |         |         |   |         |  |         |   |        |  |  |   |        |  |  |   |       
|                              | Revenue |         | $ | 35,454  |  |         | $ | 8,002  |  |  | $ | 14,917 |  |  | $ | 58,373 | 



|    |                             
|--- | ----------------------------
|16. | Litigation and Contingencies

The Company, several of its officers and
directors and Dain Rauscher Wessels 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 Company common stock
during various time periods. The consolidated amended complaint
in these lawsuits alleges that the Company violated the
Securities Act of 1933 (Securities Act) and the Securities
Exchange Act of 1934 (Exchange Act), and seeks certification of
a class action for purchasers of Company common stock in the
Companys February 12, 2001 public offering and on the
open market during the period January 23, 2001 through
July 24, 2001. The parties have executed an agreement to
settle the matter on terms that will not require a payment by
any of the defendants, inasmuch as the settlement consideration
will be paid entirely by insurance proceeds. The court has
preliminarily approved the settlement and has set a final
approval hearing for September 9, 2004. None of the
complaints or claims specifies the amount of damages to be
claimed.

The Company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 the Company by allegedly failing to supervise the
Companys public statements and public filings with the
SEC. The complaint alleges that, as a result of these breaches,
misinformation about the Companys financial condition was
disseminated into the marketplace and filed with the SEC. The
complaint asserts that these actions have exposed the Company to
harmful and costly securities litigation that could potentially
result in an award of damages against the Company, and seeks to
recover on behalf of the Company any amounts the Company is
required to pay in that litigation. The parties have executed an
agreement to settle the matter on terms that will not require a
payment by any of the defendants, inasmuch as the settlement
consideration will be paid entirely by insurance proceeds. The
settlement agreement will be presented to the court for
approval. The settlements of both the derivative action and the
putative class action described above are contingent on both
settlements receiving final court approval.

78



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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company, one of its officers and one of its
former officers 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 the Companys common stock sold
under the February 12, 1999 registration statement and
prospectus for its initial public offering. The complaint
alleges that the Company and the individual defendants violated
the Securities Act by failing to disclose excessive commissions
allegedly obtained by its 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. The
parties have agreed in principle to settle the matter, along
with similar lawsuits against more than 300 other issuers. The
terms of the settlement, which are in the process of being
definitively documented, would require the Company and the other
issuers to contribute to the settlement, which is being funded
by a consortium of insurance carriers for the various issuers,
only in the event that their carriers become insolvent or their
insurance coverage is exhausted. The Company believes it is
unlikely that any such contribution by the Company will be
required.

In the event any of the above settlements do not
receive final court approval, the Company 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 the Company is not successful in its defense of these claims,
however, the Company could be forced to make significant
payments to the plaintiffs and their lawyers and such payments,
if not covered by the Companys insurance carriers, could
harm its financial condition, operating results and cash flows.
Even if these claims are not successful, the litigation could
result in substantial costs to the Company and could divert
managements time and attention away from business
operations. The uncertainty associated with this unresolved
litigation may also impair the Companys relationships with
existing customers and the Companys ability to obtain new
customers.



|    |          
|--- | ---------
|17. | Liquidity

The Companys near-term restructuring costs
related to the mitigation of excess facilities liabilities will
consume a material amount of its cash resources. The termination
of approximately 202,000 square feet in Bellevue,
Washington will result in cash outflows of approximately
$1.4 million over the four-month period ending April 2004
and is included in current restructuring-related liabilities at
December 31, 2003. The termination of these excess
facilities commitments is contingent upon the following
conditions, among others, being met as of April 30, 2004:
(a) the Company is current in its payments under the lease
and (b) the Company has not filed a bankruptcy or other
liquidation petition, or otherwise attempted to reject or
contest the lease. If the Company is not in compliance with any
of these conditions as of April 30, 2004, its original
lease will not terminate and the Company will be required to
continue making payments on the excess facilities subject to the
original lease. If this were to take place, the Companys
business, financial condition and operating results would be
materially adversely affected.

The Company currently has loan and security
agreements with SVB that allow the Company to borrow up to the
lesser (a) 70% of eligible domestic and individually
approved foreign accounts receivable and (b) $13.0 million
under a domestic line, plus up to the lesser of (a) 75% of
eligible foreign accounts receivable and (b) $2.0 million
under a line guaranteed by Exim Bank. The outstanding standby
letters of credit relating to long-term lease obligations
totaled $8.0 million at December 31, 2003. At the time
of this filing, however, no additional amounts are available
under the lines of credit based on the level of the
Companys borrowing base and its outstanding letters of
credit. As long as the Company continues to be in compliance
with the terms of its termination agreement and the surviving
lease agreement with Hines, the outstanding letter of credit
with Hines will be reduced in five equal monthly reductions of
$507,000 ending in May 2004. The Company was in compliance with
the financial covenants of these facilities as of
December 31, 2003, based on an amendment to the loan
agreement on January 12, 2004, which was retroactively
effective as of December 31, 2003. Absent the amendment,
the Company would have been out of compliance with the loan
agreement as of

79



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ONYX SOFTWARE CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2003. The Company is in the
process of renewing its loan and security agreement with SVB,
which expires March 31, 2004. The Company expects the
agreement to be renewed with terms that are acceptable to the
Company. If the Company is unable to negotiate a new agreement
with SVB that has terms acceptable to the Company, the Company
is unable to maintain compliance with its covenants in the
future or if SVB decides to restrict its cash deposits, the
Companys liquidity would be further limited and its
business, financial condition and operating results could be
materially harmed.

The Company believes its revenue performance will
be comparable to the most recent quarterly periods reported and
that the Companys existing cash and cash equivalents will
be sufficient to meet its capital requirements for at least the
next 12 months. Accordingly, the Company believes that it
has sufficient resources to continue as a going concern through
at least December 31, 2004. Should the Companys
revenue results for subsequent quarters fall below the results
achieved in the fourth quarter of 2003, the Company would likely
take action to restructure its operations to preserve its cash.
Such actions would primarily consist of reductions in headcount.
Due to the fact that lower cash balances could negatively impact
the Companys sales efforts, the Company may seek
additional funds in the future through public or private equity
financing or from other sources to fund its operations and
pursue its growth strategy. The Company may experience
difficulty in obtaining funding on favorable terms, if at all.
Any financing the Company might obtain may contain covenants
that restrict the Companys freedom to operate its business
or may require the Company to issue securities that have rights,
preferences or privileges senior to its common stock and may
dilute current shareholders ownership interest in the
Company.

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

Not applicable.






|         |                        
|-------- | -----------------------
|ITEM 9A. | CONTROLS AND PROCEDURES

Evaluation of disclosure controls and
procedures.Based on their evaluation
as of the end of the period covered by this annual report on
Form 10-K, our principal executive officer and principal
financial officer have concluded that our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act) are effective to ensure that information
required to be disclosed in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.

To our knowledge, there were no significant
changes in our internal controls during the fourth quarter of
2003 that have materially affected, or are reasonably likely to
materially affect, our internal controls.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE
    REGISTRANT

(a) The information regarding our directors
required by this item is incorporated into this annual report by
reference to the section entitled Election of
Directors in the proxy statement for our annual meeting of
shareholders to be held on June 7, 2004.

(b) The information regarding our executive
officers required by this item is incorporated into this annual
report by reference to the section entitled Executive
Officers in the proxy statement for our annual meeting of
shareholders to be held on June 7, 2004.

(c) The information regarding our Code of
Ethics required by this item is incorporated into this annual
report by reference to the section entitled Corporate
Governance in the proxy statement for our annual meeting
of shareholders to be held on June 7, 2004.

We will file the proxy statement for our 2004
annual meeting of shareholders within 120 days of
December 31, 2003, our fiscal year-end.






|         |                       
|-------- | ----------------------
|ITEM 11. | EXECUTIVE COMPENSATION

The information regarding executive compensation
required by this item is incorporated into this annual report by
reference to the section entitled Executive
Compensation in the proxy statement for our annual meeting
of shareholders to be held on June 7, 2004. We will file
the proxy statement for our 2004 annual meeting of shareholders
within 120 days of December 31, 2003, our fiscal
year-end.






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

The information regarding beneficial ownership of
our common stock required by this item is incorporated into this
annual report by reference to the section entitled
Security Ownership of Certain Beneficial Owners and
Management and Securities Authorized for Issuance
Under Equity Compensation Plans in the proxy statement for
our 2004 annual meeting of shareholders to be held on
June 7, 2004. We will file the proxy statement within
120 days of December 31, 2003, our fiscal year-end.






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

The information regarding certain relationships
and related transactions required by this item is incorporated
into this annual report by reference to the section entitled
Certain Relationships and Related

81



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##### Table of Contents



Transactions in the proxy statement for our
2004 annual meeting of shareholders to be held on June 7,
2004. We will file the proxy statement within 120 days of
December 31, 2003, our fiscal year-end.







|         |                                           
|-------- | ------------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND
    SERVICES

The information regarding principal accountant
fees and services required by this item is incorporated into
this annual report by reference to the section entitled
Independent Auditors in the proxy statement for our
2004 annual meeting of shareholders to be held on June 7,
2004. We will file the proxy statement within 120 days of
December 31, 2003, our fiscal year-end.




PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|ITEM 15. | 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 KPMG LLP, Independent Auditors                      |  |      | 48 | 
|Report of Ernst & Young
    LLP, Independent Auditors         |  |      | 49 | 
|Consolidated Financial Statements:                            |  |      |    | 
|Balance Sheets                                                |  |      | 50 | 
|Statements of Operations                                      |  |      | 51 | 
|Statements of Shareholders Equity and
    Comprehensive Loss |  |      | 52 | 
|Statements of Cash Flows                                      |  |      | 53 | 
|Notes to Consolidated Financial Statements                    |  |      | 54 | 



|   |                                           
|-- | ------------------------------------------
|2. | Index to Financial Statement
    Schedules

|                                                    |  |  |    | 
|--------------------------------------------------- |  |  | -- | 
|Schedule II  Valuation and
    Qualifying Accounts |  |  | 87 | 

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

(b) Reports on Form 8-K

On October 27, 2003, we furnished a current
report on Form 8-K to announce our financial results for
the quarter ended September 30, 2003.

On November 12, 2003, we filed a current
report on Form 8-K regarding our announcement of our
proposal to acquire Pivotal Corporation.



|    |         
|--- | --------
|(c) | Exhibits

|       |   |             |  |                                                                                                                                          
|------ | - | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Number |   | Description
|       |   |            
|       | 3 | .1          |  | Restated Articles of Incorporation of the
    registrant (exhibit 3.1) (o)                                                               
|       | 3 | .2          |  | Amended and Restated Bylaws of the registrant
    (exhibit 3.2) (f)                                                                      
|       | 4 | .1          |  | Rights Agreement dated October 25, 1999
    between the registrant and ChaseMellon Shareholder Services,
    L.L.C. (exhibit 2.1) (b)    
|       | 4 | .2          |  | Amendment No. 1 to Rights Agreement dated
    March 5, 2003 between the registrant and Mellon Investor
    Services LLC (exhibit 4.1) (n)

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|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ | -- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .1*         |  | Lease Termination Agreement dated
    November 7, 2002 between EOP-Sunset North Bellevue, L.L.C.
    and the registrant (exhibit 10.2) (k)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 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 on March 21, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .6          |  | 2001 Nonofficer Employee Stock Compensation Plan
    as amended and restated April 27, 2001 (exhibit 10.1)
    (f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 10 | .7          |  | 1998 Employee Stock Purchase Plan as amended and
    restated April 6, 2001 (exhibit 10.1) (h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 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) (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       | 10 | .10         |  | Third Amendment to Lease dated December 20,
    2002 between the registrant and Bellevue Hines Development,
    L.L.C. (exhibit 10.2) (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 10 | .11         |  | Office Building Lease dated December 20,
    2002 between the registrant and Bellevue Hines Development,
    L.L.C. (exhibit 10.1) (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 10 | .12         |  | Form of Registration Rights Agreement entered
    into by the registrant and Bellevue Hines Development, L.L.C.
    (exhibit 10.3) (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 10 | .13         |  | Form of Warrant LT-1 issued to Bellevue Hines
    Development, L.L.C. (exhibit 10.4) (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 10 | .14         |  | Form of Warrant LT-2 issued to Bellevue Hines
    Development, L.L.C. (exhibit 10.5) (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 10 | .15         |  | Form of Warrant LT-3 issued to Bellevue Hines
    Development, L.L.C. (exhibit 10.6) (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 10 | .16*        |  | Joint Venture Agreement dated September 14,
    2000 between the registrant and Prime Systems Corporation
    (exhibit 10.1) (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 10 | .17         |  | Loan and Security Agreement dated
    February 14, 2002 by and between the registrant and Silicon
    Valley Bank (exhibit 10.11) (j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       | 10 | .18         |  | Amendment to Loan Documents dated
    July 10, 2002 by and between the registrant and Silicon
    Valley Bank (exhibit 10.1) (m)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 10 | .19         |  | Amendment to Loan Documents dated
    December 27, 2002 by and between the registrant and Silicon
    Valley Bank (exhibit 10.19) (n)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       | 10 | .20         |  | Amendment to Loan Documents dated
    March 28, 2003 by and between the registrant and Silicon
    Valley Bank (exhibit 10.1) (p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10 | .21         |  | Amendment to Loan Documents dated
    May 5, 2003 by and between the registrant and Silicon
    Valley Bank (exhibit 10.2) (p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 10 | .22         |  | Loan and Security Agreement (Exim Program) dated
    May 5, 2003 by and between the registrant and Silicon
    Valley Bank (exhibit 10.3) (p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 10 | .23        |  | Amendment to Loan Documents dated
    January 12, 2004 by and between the registrant and Silicon
    Valley Bank                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 10 | .24        |  | Amendment to Loan Documents (Exim Program)
    dated January 12, 2004 by and between the registrant and
    Silicon Valley Bank                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 10 | .25         |  | Intellectual Property Security Agreement dated
    November 8, 2000 between the registrant and Silicon Valley
    Bank (exhibit 10.7) (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

83



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|       |    |             |  |                                                                                                                                                                                                                                                               
|------ | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 10 | .26         |  | Employment Agreement dated March 14, 2001 by
    and between the registrant and Brian C. Henry
    (exhibit 10.1) (g)                                                                                                                                         
|       | 10 | .27         |  | Stock Option Agreement dated April 4, 2001
    by and between the registrant and Brian C. Henry
    (exhibit 10.3) (g)                                                                                                                                        
|       | 10 | .28         |  | Stock Option Agreement dated April 4, 2001
    by and between the registrant and Brian C. Henry
    (exhibit 10.4) (g)                                                                                                                                        
|       | 10 | .29         |  | Revised Stock Option Agreement dated
    April 18, 2001 by and between the registrant and Brian C.
    Henry (exhibit 10.3) (f)                                                                                                                               
|       | 10 | .30         |  | Amendment to Employment Agreement dated
    November 14, 2001 by and between the registrant and Brian
    C. Henry (exhibit 10.2) (i)                                                                                                                         
|       | 10 | .31         |  | Second Amendment to Employment Agreement dated
    April 16, 2003 by and between the registrant and Brian C.
    Henry (exhibit 10.5) (p)                                                                                                                     
|       | 10 | .32         |  | Letter Agreement dated January 7, 2002,
    between the registrant and Ramius Securities, LLC
    (exhibit 10.1) (i)                                                                                                                                          
|       | 10 | .33         |  | Employment Agreement dated June 26, 2002 by
    and between the registrant and Benjamin E. Kiker, Jr.
    (exhibit 10.29) (n)                                                                                                                                 
|       | 10 | .34         |  | First Amendment to Employment Agreement dated
    April 16, 2003 by and between the registrant and Benjamin
    E. Kiker, Jr. (exhibit 10.6) (p)                                                                                                              
|       | 10 | .35        |  | Employment Agreement dated February 19, 2004
    by and between the registrant and Brent R. Frei                                                                                                                                                              
|       | 10 | .36         |  | Letter Agreement dated March 5, 2003 by and
    between the registrant and Mazama Capital Management, Inc.
    (exhibit 10.30) (n)                                                                                                                            
|       | 21 | .1         |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                
|       | 23 | .1         |  | Consent of KPMG LLP, Independent Auditors                                                                                                                                                                                                                     
|       | 23 | .2         |  | Consent of Ernst & Young
    LLP, Independent Auditors                                                                                                                                                                                                        
|       | 24 | .1         |  | Power of Attorney (contained on signature page)                                                                                                                                                                                                               
|       | 31 | .1         |  | Certification of Chief Executive Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) under the Securities
    Exchange Act of 1934, as amended                                                                                                              
|       | 31 | .2         |  | Certification of Chief Financial Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) under the Securities
    Exchange Act of 1934, as amended                                                                                                              
|       | 32 | .1         |  | Certification of Chief Executive Officer
    furnished pursuant to Rules 13a-14(b) and 15d-14(b) under
    the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
|       | 32 | .2         |  | Certification of Chief Financial Officer
    furnished pursuant to Rules 13a-14(b) and 15d-14(b) under
    the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002



---



|    |  |                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Confidential treatment has been granted for
    portions of this document.                                                                                                   
|   
|   |  | Filed herewith.                                                                                                                                                              
|   
|(a) |  | Incorporated by reference to the designated
    exhibit to the registrants Registration Statement on
    Form S-1 (No. 333-68559) filed 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 on 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 registrants second Current Report on
    Form 8-K (No. 0-25361) filed February 6, 2001.                      
|   
|(f) |  | Incorporated by reference to the designated
    exhibit to the registrants Quarterly Report on
    Form 10-K (No. 0-25361) for the quarter ended
    March 31, 2001.        

84



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|    |  |                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(g) |  | Incorporated by reference to the designated
    exhibit to the registrants Current Report on Form 8-K
    (No. 0-25361) filed April 12, 2001.                           
|   
|(h) |  | 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.     
|   
|(i) |  | () Incorporated by reference to the designated
    exhibit to the registrants first Current Report on
    Form 8-K (No. 0-25361) filed January 29, 2002.                
|   
|(j) |  | Incorporated by reference to the designated
    exhibit to the registrants Annual Report on From 10-K
    (No. 0-25361) for the year ended December 31, 2001.           
|   
|(k) |  | 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, 2002.
|   
|(l) |  | Incorporated by reference to the designated
    exhibit to the registrants Current Report on Form 8-K
    (No. 0-25361) filed January 13, 2003.                         
|   
|(m) |  | 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, 2002.     
|   
|(n) |  | Incorporated by reference to the designated
    exhibit to the registrants Annual Report on Form 10-K
    (No. 0-25361) for the year ended December 31, 2002.           
|   
|(o) |  | 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, 2003.
|   
|(p) |  | 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, 2003.    

85



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the
city of Bellevue, state of Washington, on March 12, 2004.



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

|                                         |  |                                                                                                         |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                         |  |                                                                                                         |  |               
|Name                                     |  | Title                                                                                                   |  | Date          
|                                         |  |                                                                                                         |  |               
|                                        
|/s/ BRENT R. FREIBrent R. Frei           |  | Chief Executive Officer and
    Chairman of the Board
    (Principal Executive Officer)                 |  | March 12, 2004
|                                        
|/s/ BRIAN C. HENRYBrian C. Henry         |  | Chief Financial Officer and
    Executive Vice President
    (Principal Financial Officer)              |  | March 12, 2004
|                                        
|/s/ AMY E. KELLERANAmy E. Kelleran       |  | Vice President Finance, Corporate Controller and
    Assistant Secretary (Principal Accounting Officer) |  | March 12, 2004
|                                        
|/s/ H. RAYMOND BINGHAMH. Raymond Bingham |  | Director                                                                                                |  | March 12, 2004
|                                        
|/s/ TERESA A. DIALTeresa A. Dial         |  | Director                                                                                                |  | March 12, 2004
|                                        
|/s/ WILLIAM B. ELMOREWilliam B. Elmore   |  | Director                                                                                                |  | March 12, 2004
|                                        
|/s/ DANIEL R. SANTELLDaniel R. Santell   |  | Director                                                                                                |  | March 12, 2004

86



---



##### Table of Contents



SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

ONYX SOFTWARE CORPORATION

December 31, 2003


|                             |                               |                                 |  |                    |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |   |       | 
|---------------------------- | ----------------------------- | ------------------------------- |  | ------------------ | ----- | ----------- |  | ------------ | ----- | ------------- |  | - | --- |  |  | - | ------ | - |  | - | ----- | 
|                             |                               |                                 |  |                    |       |             |  |             
|Column A                     |                               | Column B                        |  | Column C Additions |       | Column D    |  | Column E    
|                             |                               |                                 |  |                    |       |             |  |             
|                             |                               |                                 |  |                    |       | Charged to  |  |              |       |              
|                             |                               | Balance at                      |  | Charged to         |       | Other       |  |              |       |              
|                             |                               | Beginning                       |  | Costs and          |       | Accounts   |  | Deductions  |       | Balance at   
|Description                  |                               | of Period                       |  | Expenses(1)        |       | Describe(2) |  | Describe(3)  |       | End of Period
|                             |                               |                                 |  |                    |       |             |  |              |       |              
|                             |                               |                                
|                             |                               | (In thousands)                 
|Year ended December 31, 2001 |                               |                                 |  |                    |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |  
|                             | Deducted from asset accounts: |                                 |  |                    |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |   |      
|                             |                               | Allowance for doubtful accounts |  | $                  | 1,732 |             |  | $            | 2,527 |               |  | $ | 400 |  |  | $ | (2,580 | ) |  | $ | 2,079 | 
|Year ended December 31, 2002 |                               |                                 |  |                    |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |  
|                             | Deducted from asset accounts: |                                 |  |                    |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |   |      
|                             |                               | Allowance for doubtful accounts |  | $                  | 2,079 |             |  | $            |      |               |  | $ |    |  |  | $ | (1,040 | ) |  | $ | 1,039 | 
|Year ended December 31, 2003 |                               |                                 |  |                    |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |  
|                             | Deducted from asset accounts: |                                 |  |                    |       |             |  |              |       |               |  |   |     |  |  |   |        |   |  |   |      
|                             |                               | Allowance for doubtful accounts |  | $                  | 1,039 |             |  | $            | (225  | )             |  | $ |    |  |  | $ | (326   | ) |  | $ | 488   | 



---



|    |                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In 2003, net benefit recorded due to collections
    of accounts previously believed to be uncollectible                                       
|   
|(2) | In 2001, amounts charged against revenue ($200)
    and deferred revenue ($200) primarily, for billed but
    uncollected maintenance revenues.
|   
|(3) | Uncollectible accounts written off, net of
    recoveries.                                                                                     

87



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##### Table of Contents



EXHIBIT INDEX

|       |    |      |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------ | -- | ---- |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    |      |  | Description
|       |    |      |  |            
|       | 3  | .1   |  |             |  | Restated Articles of Incorporation of the
    registrant (exhibit 3.1)(o)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 3  | .2   |  |             |  | Amended and Restated Bylaws of the registrant
    (exhibit 3.2)(f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 4  | .1   |  |             |  | Rights Agreement dated October 25, 1999
    between the registrant and ChaseMellon Shareholder Services,
    L.L.C. (exhibit 2.1)(b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 4  | .2   |  |             |  | Amendment No. 1 to Rights Agreement dated
    March 5, 2003 between the registrant and Mellon Investor
    Services LLC (exhibit 4.1)(n)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 10 | .1*  |  |             |  | Lease Termination Agreement dated
    November 7, 2002 between EOP-Sunset North Bellevue, L.L.C.
    and the registrant (exhibit 10.2)(k)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 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 on March 21, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .6   |  |             |  | 2001 Nonofficer Employee Stock Compensation Plan
    as amended and restated April 27, 2001
    (exhibit 10.1)(f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10 | .7   |  |             |  | 1998 Employee Stock Purchase Plan as amended and
    restated April 6, 2001 (exhibit 10.1)(h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 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)(e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|       | 10 | .10  |  |             |  | Third Amendment to Lease dated December 20,
    2002 between the registrant and Bellevue Hines Development,
    L.L.C. (exhibit 10.2)(l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 10 | .11  |  |             |  | Office Building Lease dated December 20,
    2002 between the registrant and Bellevue Hines Development,
    L.L.C. (exhibit 10.1)(l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       | 10 | .12  |  |             |  | Form of Registration Rights Agreement entered
    into by the registrant and Bellevue Hines Development, L.L.C.
    (exhibit 10.3)(l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|       | 10 | .13  |  |             |  | Form of Warrant LT-1 issued to Bellevue Hines
    Development, L.L.C. (exhibit 10.4)(l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       | 10 | .14  |  |             |  | Form of Warrant LT-2 issued to Bellevue Hines
    Development, L.L.C. (exhibit 10.5)(l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       | 10 | .15  |  |             |  | Form of Warrant LT-3 issued to Bellevue Hines
    Development, L.L.C. (exhibit 10.6)(l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|       | 10 | .16* |  |             |  | Joint Venture Agreement dated September 14,
    2000 between the registrant and Prime Systems Corporation
    (exhibit 10.1)(d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 10 | .17  |  |             |  | Loan and Security Agreement dated
    February 14, 2002 by and between the registrant and Silicon
    Valley Bank (exhibit 10.11)(j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .18  |  |             |  | Amendment to Loan Documents dated
    July 10, 2002 by and between the registrant and Silicon
    Valley Bank (exhibit 10.1)(m)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 10 | .19  |  |             |  | Amendment to Loan Documents dated
    December 27, 2002 by and between the registrant and Silicon
    Valley Bank (exhibit 10.19)(n)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .20  |  |             |  | Amendment to Loan Documents dated
    March 28, 2003 by and between the registrant and Silicon
    Valley Bank (exhibit 10.1)(p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 10 | .21  |  |             |  | Amendment to Loan Documents dated
    May 5, 2003 by and between the registrant and Silicon
    Valley Bank (exhibit 10.2)(p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 10 | .22  |  |             |  | Loan and Security Agreement (Exim Program) dated
    May 5, 2003 by and between the registrant and Silicon
    Valley Bank (exhibit 10.3)(p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



---



##### Table of Contents



|       |    |      |  |             |  |                                                                                                                                                                                                                                                               
|------ | -- | ---- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    |      |  | Description
|       |    |      |  |            
|       | 10 | .23 |  |             |  | Amendment to Loan Documents dated
    January 12, 2004 by and between the registrant and Silicon
    Valley Bank                                                                                                                                              
|       | 10 | .24 |  |             |  | Amendment to Loan Documents (Exim Program)
    dated January 12, 2004 by and between the registrant and
    Silicon Valley Bank                                                                                                                               
|       | 10 | .25  |  |             |  | Intellectual Property Security Agreement dated
    November 8, 2000 between the registrant and Silicon Valley
    Bank (exhibit 10.7)(e)                                                                                                                      
|       | 10 | .26  |  |             |  | Employment Agreement dated March 14, 2001 by
    and between the registrant and Brian C. Henry
    (exhibit 10.1)(g)                                                                                                                                          
|       | 10 | .27  |  |             |  | Stock Option Agreement dated April 4, 2001
    by and between the registrant and Brian C. Henry
    (exhibit 10.3)(g)                                                                                                                                         
|       | 10 | .28  |  |             |  | Stock Option Agreement dated April 4, 2001
    by and between the registrant and Brian C. Henry
    (exhibit 10.4)(g)                                                                                                                                         
|       | 10 | .29  |  |             |  | Revised Stock Option Agreement dated
    April 18, 2001 by and between the registrant and Brian C.
    Henry (exhibit 10.3)(f)                                                                                                                                
|       | 10 | .30  |  |             |  | Amendment to Employment Agreement dated
    November 14, 2001 by and between the registrant and Brian
    C. Henry (exhibit 10.2)(k)                                                                                                                          
|       | 10 | .31  |  |             |  | Second Amendment to Employment Agreement dated
    April 16, 2003 by and between the registrant and Brian C.
    Henry (exhibit 10.5)(p)                                                                                                                      
|       | 10 | .32  |  |             |  | Letter Agreement dated January 7, 2002,
    between the registrant and Ramius Securities, LLC
    (exhibit 10.1)(i)                                                                                                                                           
|       | 10 | .33  |  |             |  | Employment Agreement dated June 26, 2002 by
    and between the registrant and Benjamin E. Kiker, Jr.
    (exhibit 10.29)(n)                                                                                                                                  
|       | 10 | .34  |  |             |  | First Amendment to Employment Agreement dated
    April 16, 2003 by and between the registrant and
    Benjamin E. Kiker, Jr. (exhibit 10.6) (p)                                                                                                              
|       | 10 | .35 |  |             |  | Employment Agreement dated February 19, 2004
    by and between the registrant and Brent R. Frei                                                                                                                                                              
|       | 10 | .36  |  |             |  | Letter Agreement dated March 5, 2003 by and
    between the registrant and Mazama Capital Management, Inc.
    (exhibit 10.30)(n)                                                                                                                             
|       | 21 | .1  |  |             |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                
|       | 23 | .1  |  |             |  | Consent of KPMG LLP, Independent Auditors                                                                                                                                                                                                                     
|       | 23 | .2  |  |             |  | Consent of Ernst & Young
    LLP, Independent Auditors                                                                                                                                                                                                        
|       | 24 | .1  |  |             |  | Power of Attorney (contained on signature page)                                                                                                                                                                                                               
|       | 31 | .1  |  |             |  | Certification of Chief Executive Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) under the Securities
    Exchange Act of 1934, as amended                                                                                                              
|       | 31 | .2  |  |             |  | Certification of Chief Financial Officer pursuant
    to Rules 13a-14(a) and 15d-14(a) under the Securities
    Exchange Act of 1934, as amended                                                                                                              
|       | 32 | .1  |  |             |  | Certification of Chief Executive Officer
    furnished pursuant to Rules 13a-14(b) and 15d-14(b) under
    the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002
|       | 32 | .2  |  |             |  | Certification of Chief Financial Officer
    furnished pursuant to Rules 13a-14(b) and 15d-14(b) under
    the Securities Exchange Act of 1934, as amended, and
    18 U.S.C. § 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002



---



|    |  |                                                                                                                                                                              
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Confidential treatment has been granted for
    portions of this document.                                                                                                   
|   
|   |  | Filed herewith.                                                                                                                                                              
|   
|(a) |  | Incorporated by reference to the designated
    exhibit to the registrants Registration Statement on
    Form S-1 (No. 333-68559) filed 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 on 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.         



---



##### Table of Contents





|    |  |                                                                                                                                                                          
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 registrants second Current Report on
    Form 8-K (No. 0-25361) filed February 6, 2001.                  
|   
|(f) |  | Incorporated by reference to the designated
    exhibit to the registrants Quarterly Report on
    Form 10-K (No. 0-25361) for the quarter ended
    March 31, 2001.    
|   
|(g) |  | Incorporated by reference to the designated
    exhibit to the registrants Current Report on Form 8-K
    (No. 0-25361) filed April 12, 2001.                           
|   
|(h) |  | 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.     
|   
|(i) |  | Incorporated by reference to the designated
    exhibit to the registrants first Current Report on
    Form 8-K (No. 0-25361) filed January 29, 2002.                   
|   
|(j) |  | Incorporated by reference to the designated
    exhibit to the registrants Annual Report on From 10-K (no.
    0-25361) for the year ended December 31, 2001.           
|   
|(k) |  | 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, 2002.
|   
|(l) |  | Incorporated by reference to the designated
    exhibit to the registrants Current Report on Form 8-K
    (No. 0-25361) filed January 13, 2003.                         
|   
|(m) |  | 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, 2002.     
|   
|(n) |  | Incorporated by reference to the designated
    exhibit to the registrants Annual Report on Form 10-K
    (No. 0-25361) for the year ended December 31, 2002.           
|   
|(o) |  | 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, 2003.
|   
|(p) |  | 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, 2003.