<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                 ____________

                                   FORM 10-Q

(Mark One)

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

      For the quarterly period ended September 30, 1999

[_]        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 0-25215

                           ONYX SOFTWARE CORPORATION
            (Exact name of registrant as specified in its charter)

          Washington                                      91-1629814
(State or other jurisdiction of               (IRS Employer Identification No.)
incorporation or organization)

                         3180 139th Ave SE, Suite 500
                            Bellevue, WA 98005-4091
                   (Address of principal executive offices)

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

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

     The number of shares of common stock outstanding on November 8, 1999 was
17,590,067.

                                       1
<PAGE>

                           ONYX SOFTWARE CORPORATION
                                   CONTENTS


PART I -- FINANCIAL INFORMATION.............................................   3

Item 1. Consolidated Financial Statements...................................   3

        Consolidated Balance Sheets as of September 30, 1999 and December
          31, 1998..........................................................   3

        Consolidated Statements of Operations for the Three and Nine Months
          Ended September 30, 1999 and 1998.................................   4

        Consolidated Statement of Shareholders' Equity (Deficit) for the
          Nine Months Ended September 30, 1999..............................   5

        Consolidated Statements of Cash Flows for the Nine Months Ended
          September 30, 1999 and 1998.......................................   6

        Notes to Consolidated Financial Statements..........................   7

Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations...............................................  12

Item 3. Quantitative and Qualitative Disclosures About Market Risk..........  24

PART II -- OTHER INFORMATION................................................  24

Item 1. Legal Proceedings...................................................  24

Item 2. Changes in Securities and Use of Proceeds...........................  24

Item 6. Exhibits and Reports on Form 8-K....................................  25

SIGNATURES..................................................................  26

                                       2
<PAGE>

PART I -- FINANCIAL INFORMATION
Item 1.  Consolidated Financial Statements
Consolidated Balance Sheets
(In thousands, except share and per share data)

<TABLE>
<CAPTION>

                                                                    September 30,   December 31,
                                                                        1999           1998
                                                                   --------------  -------------
                                                                     (unaudited)
<S>                                                                <C>             <C>
Assets
Current assets:
 Cash and cash equivalents.......................................      $ 8,275        $ 1,853
 Marketable securities...........................................       23,879             --
 Accounts receivable, less allowances of $747 for 1999 and $536
  for 1998.......................................................       18,005         13,149
 Prepaid expense and other.......................................        1,713          1,327
                                                                       -------        -------
  Total current assets...........................................       51,872         16,329
 Property and equipment, net.....................................        7,690          1,664
 Marketable securities...........................................        1,006             --
 Purchased technology, net.......................................        2,718          3,216
 Goodwill and other intangibles, net.............................        1,232            642
 Other assets....................................................          899            639
                                                                       -------        -------
  Total assets...................................................      $65,417        $22,490
                                                                       =======        =======
Liabilities and Shareholders' Equity
Current liabilities:
 Accounts payable................................................      $ 1,957        $ 1,654
 Salary and benefits payable.....................................        2,366            905
 Accrued liabilities.............................................        1,473          1,685
 Income taxes payable............................................          446            288
 Current portion of capital lease obligations....................          135            216
 Current portion of long-term debt...............................           37            975
 Deferred revenue................................................        9,634          6,745
                                                                       -------        -------
  Total current liabilities......................................       16,048         12,468
 Capital lease obligations, less current portion.................           97            191
 Long-term debt, less current portion............................           63          4,295
 Redeemable convertible preferred stock                                     --         13,285

Commitments and Contingencies
Shareholder's equity (deficit):
 Preferred stock, $0.01 par value.
 Authorized shares -- 10,000,000 shares;
 Designated shares - none........................................           --             --
Common stock, $0.01 par value:
 Authorized shares - 40,000,000 shares
 Issued and outstanding shares -
 17,489,289 shares at September 30, 1999
 and 9,852,557 at December 31, 1998..............................       59,441          1,912
 Notes receivable from officers for common stock.................         (212)          (212)
 Deferred stock-based compensation...............................       (1,059)        (1,785)
 Accumulated deficit.............................................       (8,822)        (7,621)
 Accumulated other comprehensive loss............................         (139)           (43)
                                                                       -------        -------
  Total shareholders' equity (deficit)...........................       49,209         (7,749)
                                                                       -------        -------
  Total liabilities and shareholders' equity.....................      $65,417        $22,490
                                                                       =======        =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

<TABLE>
<CAPTION>

                                                        Three Months Ended September 30,   Nine Months Ended September 30,
                                                      ----------------------------------- ---------------------------------
                                                            1999              1998              1999             1998
                                                      ----------------  ----------------- ----------------  ---------------
<S>                                                   <C>               <C>                <C>              <C>

Revenues:
 License.............................................     $ 9,922            $ 5,961          $25,238          $15,153
 Support and service.................................       5,821              3,083           15,016            8,851
                                                          -------            -------          -------          -------
                                                           15,743              9,044           40,254           24,004

Cost of revenues:
 License.............................................         494                274            1,488              607
 Support and service.................................       2,946              2,035            7,558            5,925
                                                          -------            -------          -------          -------
                                                            3,440              2,309            9,046            6,532
                                                          -------            -------          -------          -------
Gross margin.........................................      12,303              6,735           31,208           17,472
Operating expenses:
 Sales and marketing.................................       7,484              5,491           20,322           13,693
 Research and development............................       2,643              2,274            7,760            6,731
 General and administrative..........................       1,567              1,013            4,184            2,663
 Acquisition-related charges and amortization........         552                                 770
                                                          -------            -------          -------          -------
Total operating expenses.............................      12,246              8,778           33,036           23,087
                                                          -------            -------          -------          -------

Income/(loss) from operations........................          57             (2,043)          (1,828)          (5,615)
Interest income, net.................................         407                 33              942               95
                                                          -------            -------          -------          -------
 Income/(loss) before income taxes...................         464             (2,010)            (886)          (5,520)

Income tax provision.................................         128                 69              315              193
                                                          -------            -------          -------          -------
Net income/(loss)....................................         336             (2,079)          (1,201)          (5,713)
Preferred stock accretion............................          --               (304)          (1,442)            (911)
                                                          -------            -------          -------          -------
Income/(loss) to common shareholders.................     $   336            $(2,383)         $(2,643)         $(6,624)
                                                          =======            =======          =======          =======
Income/(loss) per share:
 Basic................................................    $  0.02            $ (0.29)         $ (0.18)         $ (0.81)
 Diluted..............................................    $  0.02            $ (0.29)         $ (0.18)         $ (0.81)
 Pro forma basic and diluted..........................         NA            $ (0.18)         $ (0.08)         $ (0.49)

Shares used in calculation of income (loss) per share
 Basic................................................     16,097              8,313           14,832            8,205
 Diluted..............................................     19,760              8,313           14,832            8,205
 Pro forma basic and diluted..........................         NA             11,847           15,376           11,739
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>


Consolidated Statement of Shareholders' Equity (Deficit)
For the Nine Months Ended September 30, 1999
(In thousands, except share data)
(unaudited)

<TABLE>
<CAPTION>

                                                                       Notes
                                                                     Receivable                                Accumulated
                                                                        from         Deferred      Retained       Other
                                                  Common Stock      Officers for   Stock-Based    Earnings     Comprehen-
                                           -----------------------     Common       Compensa-   (Accumulated  sive Income
                                              Shares       Amount      Stock          tion        Deficit)      (Loss)
                                           ------------  --------- -------------  ------------  ------------  ------------
<S>                                        <C>           <C>        <C>            <C>          <C>           <C>
Balance at January 1, 1998                   9,852,557    $ 1,912    $   (212)     $  (1,785)    $  (7,621)     $   (43)
 Proceeds from initial public offering,
  net of offering costs                      3,565,000     41,873           -              -             -            -
Preferred stock accretion                            -     (1,442)          -              -             -            -
Conversion of redeemable convertible
 preferred stock into common
 stock                                       3,533,925     14,727           -              -             -            -
Amortization of deferred
 stock compensation                                  -          -           -            276             -            -
Exercise of stock options                      213,608         80           -              -             -            -
Issuance of common stock to
 Employees                                      13,731        119           -              -             -            -
Cumulative translation adjustment                    -          -           -              -             -          (44)
Net loss                                             -          -           -              -        (1,283)           -
Total comprehensive loss
                                           ------------  --------- -------------  ------------  ------------  ----------
Balance at March 31, 1999                   17,178,821    $57,269    $   (212)     $  (1,509)    $  (8,904)     $   (87)
 Amortization of deferred
 stock compensation                                  -          -           -            266             -            -
 Exercise of stock options                      72,579         34           -              -             -            -
 Issuance of common stock under
  employee stock purchase plan                  32,214        419           -              -             -            -
 Cumulative translation adjustment                   -          -           -              -             -           23
 Unrealized gains (losses) on
  marketable securities                              -          -           -              -             -          (45)
 Net loss                                            -          -           -              -          (254)           -
 Total comprehensive loss
                                           ------------  --------- -------------  ------------  ------------  -----------
Balance at June 30, 1999                    17,283,614    $57,722    $   (212)     $  (1,243)    $  (9,158)     $  (109)
 Amortization of deferred
 stock compensation                                  -          -           -            184             -            -
 Exercise of stock options                     109,482        146           -              -             -            -
 Stock compensation expense                                    19           -              -             -            -
 Issuance of common stock in
  connection with acquisition                   96,193      1,554           -              -             -            -
 Cumulative translation adjustment                   -          -           -              -             -            5
 Unrealized gains (losses) on
  marketable securities                              -          -           -              -             -          (35)
 Net income                                          -          -           -              -           336            -
 Total comprehensive loss
                                           ------------  --------- -------------  ------------  ------------  -----------
Balance at September 30, 1999               17,489,289    $59,441    $   (212)     $  (1,059)    $  (8,822)     $  (139)
                                           ============  ========= =============  ============  ============  ===========
</TABLE>


<TABLE>
<CAPTION>
                                              Total
                                           Shareholders'
                                              Equity
                                            (Deficit)
                                           ------------
<S>                                        <C>
Balance at January 1, 1998                 $    (7,749)
 Proceeds from initial public offering,
  net of offering costs                         41,873
 Preferred stock accretion                      (1,442)
 Conversion of redeemable convertible
   preferred stock into common
  stock                                         14,727
 Amortization of deferred
 stock compensation                                276
 Exercise of stock options                          80
 Issuance of common stock to
  Employees                                        119
 Cumulative translation adjustment
 Net loss
 Total comprehensive loss                       (1,327)
                                           -----------
Balance at March 31, 1999                  $    46,557
  Amortization of deferred
  stock compensation                               266
  Exercise of stock options                         34
  Issuance of common stock under
    employee stock purchase plan                   419
  Cumulative translation adjustment
  Unrealized gains (losses) on
     marketable securities
  Net loss
  Total comprehensive loss                        (276)
                                           -----------
Balance at June 30, 1999                   $    47,000
  Amortization of deferred
  stock compensation                               184
  Exercise of stock options                        146
  Stock compensation expense                        19
  Issuance of common stock in
    connection with acquisition                  1,554
  Cumulative translation adjustment
  Unrealized gains (losses) on
    marketable securities
  Net income
  Total comprehensive income                       306
                                           -----------
Balance at September 30, 1999              $    49,209
                                           ===========
</TABLE>

   See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

Consolidated Statements of Cash Flows
(In thousands)

<TABLE>
<CAPTION>

                                                                         Nine Months Ended September 30,
                                                                        ---------------------------------
                                                                              1999             1998
                                                                        ----------------  ---------------
                                                                          (Unaudited)
<S>                                                                     <C>               <C>


Operating activities:
 Net loss available to common shareholders............................         $ (2,643)         $(6,624)
 Adjustments to reconcile net income (loss) to net cash
  provided by (used in) operating activities:
   Preferred stock accretion..........................................            1,442              911
   Noncash acquisition-related charge.................................              390
   Depreciation and amortization.........................................         1,612              691
   Amortization of premiums (discounts) on investments..............                 92               (9)
   Noncash stock-based compensation expense...........................              745              305
   Changes in operating assets and liabilities:
    Accounts receivable...............................................           (4,846)          (1,509)
    Other assets......................................................             (646)          (1,059)
    Accounts payable and accrued liabilities..........................            1,516            1,158
    Deferred revenue..................................................            2,889            2,576
    Income taxes......................................................              158              139
                                                                               --------          -------
   Net cash provided by (used in)
   operating activities...............................................              709           (3,421)
Investing activities:
 Purchases of securities..............................................          (31,953)
 Proceeds from maturity of securities.................................            6,990            2,073
 Acquisition of Versametrix...........................................             (162)
 Acquisition of EnCyc.................................................                              (750)
 Purchases of property and equipment..................................           (7,032)            (681)
                                                                               --------          -------
   Net cash provided by (used in)
   investing activities...............................................          (32,157)             642
Financing activities:
 Proceeds from exercise of stock options..............................              146               25
 Payments on capital lease obligations................................             (175)            (429)
 Proceeds from issuance of shares under employee stock purchase plan..              419               --
 Payments on long-term debt...........................................           (4,389)            (156)
 Net proceeds from initial public offering............................           41,873               --
                                                                               --------          -------
   Net cash provided by (used in) financing activities................           37,874             (560)
Effects of exchange rate changes on cash..............................               (4)               4
                                                                               --------          -------
Net increase in cash and cash equivalents.............................            6,422           (3,335)
Cash and cash equivalents at beginning of year........................            1,853            3,512
                                                                               --------          -------
Cash and cash equivalents at end of year..............................         $  8,275          $   177
                                                                               ========          =======
Supplemental cash flow disclosure:
 Interest paid........................................................         $     70          $    42
 Income taxes paid, net...............................................              157               53
 Fixed assets financed through capital
 lease obligations....................................................                               317
 Issuance of common stock to employees in connection with fourth
 quarter 1998 bonus...................................................              119
 Acquisition purchased with equity....................................            1,554            1,411
 Technology purchased through long-term debt..........................                             1,250
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                           ONYX SOFTWARE CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        (Unaudited, except where noted)


1.   Description of Business and Basis of Presentation
     -------------------------------------------------

     Description of Onyx Software Corporation

     Onyx Software Corporation and subsidiaries ("Onyx") is a leading provider
of Web-based customer relationship management solutions. We derive the majority
of our revenues from the Onyx Front Office product family, which includes Onyx
Enterprise Portal, Onyx Customer Center, Onyx Customer Center - Unplugged, Onyx
Web Wizards, Onyx Insight, Onyx Channel Connect, Onyx EnCyc, Onyx Enterprise
DataMart and Onyx eMetrix. We were incorporated in the State of Washington on
February 23, 1994 and maintain our headquarters in Bellevue, Washington.

     Interim Financial Information

     The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In our opinion,
the statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These consolidated financial statements should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 1998, included in our prospectus, dated February 11, 1999,
filed with the Securities and Exchange Commission in connection with our initial
public offering and our interim consolidated financial statements for the three
and six months ended June 30, 1999 included in our Form 10-Q filed with the
Securities and Exchange Commission on August 13, 1999. Our results of operations
for any interim period are not necessarily indicative of the results of
operations for any other interim period or for a full fiscal year.

2.   Summary of Significant Accounting Policies
     ------------------------------------------

     Revenue Recognition

     Statement of Position 97-2, Software Revenue Recognition (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public Accountants
and was amended by Statement of Position 98-4 (SOP 98-4). We adopted SOP 97-2
effective January 1, 1998. Based upon our interpretation of SOP 97-2 and SOP 98-
4, we believe our current revenue recognition policies and practices are
materially consistent with SOP 97-2 and SOP 98-4. Additionally, the AICPA
recently issued SOP 98-9, which provides certain amendments to SOP 97-2, that
are effective for transactions entered into beginning January 1, 2000. The
pronouncement is not expected to materially impact our revenue recognition
practices. Further implementation guidelines relating to SOP 97-2 and related
modifications may result in unanticipated changes in our revenue recognition
practices, and such changes could materially adversely affect the timing of our
future revenues and earnings.

     We generate revenues through two sources: (i) software license revenues and
(ii) service revenues. Software license revenues are generated from licensing
the rights to use our products directly to end-users and indirectly through
sublicense fees from resellers and, to a lesser extent, through third-party
products we distribute. Service revenues are generated from sales of post-
contract support, consulting and training services performed for customers that
license our products.

  Revenues from software license agreements are recognized upon delivery of
software products if

                                       7
<PAGE>

       .   there is persuasive evidence of an arrangement;

       .   collection is probable;

       .   the fee is fixed or determinable; and

       .   there is sufficient vendor-specific objective evidence to support
           allocating the total fee to all elements of multiple-element
           arrangements.

     Vendor-specific objective evidence is typically based on the price charged
when an element is sold separately, or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple element arrangements could consist of software
products, upgrades, enhancements, customer support services, or consulting
services. If an acceptance period is required, revenues are recognized upon the
earlier of customer acceptance or the expiration of the acceptance period. We
enter into reseller arrangements that typically provide for sublicense fees
based on a percentage of list price. Sublicense fees are generally recognized
when reported by the reseller upon relicensing of our products to end-users. Our
agreements with our customers and resellers do not contain product return
rights.

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

     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 our current
practice of developing new products and enhancements, the technological
feasibility of the underlying software is not established until substantially
all product development is complete, including 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.

3.   Earnings Per Share
     ------------------

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

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

                                       8
<PAGE>

<TABLE>
<CAPTION>
                                                  Three Months Ended September 30,       Nine Months Ended September 30,
                                                  --------------------------------       -------------------------------
                                                       1999             1998                 1999              1998
                                                       ----             ----                 ----              ----
                                                                  (in thousands, except per share data)
                                                                     (audited)                               (audited)
<S>                                                <C>               <C>                  <C>              <C>
Net income (loss) (A)                                $   336         $  (2,079)          $   (1,201)        $   (5,713)
Preferred stock accretion (1)                             --              (304)              (1,442)              (911)
                                                     -------          --------            ---------          ---------
Income (loss) to common shareholders (B)                 336            (2,383)              (2,643)            (6,624)
                                                     -------          --------            ---------          ---------

Weighted average number of common shares (2)(C):      16,097             8,313               14,832              8,205
 Effect of dilutive securities:
 Stock options                                         3,663                 *                    *                  *
 Redeemable convertible preferred stock                    *                 *                    *                  *
                                                     -------          --------            ---------          ---------
Adjusted weighted average shares
 and assumed conversions (D)                          19,760             8,313               14,832              8,205
Pro forma adjustment for redeemable convertible
 preferred stock                                                         3,534                  544              3,534
                                                     -------          --------            ---------          ---------
Pro forma weighted average shares (E)                 19,760            11,847               15,376             11,739
                                                     =======          ========            =========          =========
Earnings (loss) per share:
Basic (B)/(C)                                        $  0.02          $  (0.29)           $   (0.18)         $   (0.81)
Diluted (B)/(D)                                      $  0.02          $  (0.29)           $   (0.18)         $   (0.81)
Proforma basic and diluted (A)/(E)                        NA          $  (0.18)           $   (0.08)         $   (0.49)
</TABLE>

     (1)  Included within preferred stock accretion in the nine months ended
September 30, 1999 is a $1.3 million deemed dividend resulting from the 100,000
share increase in the number of shares of common stock issued upon conversion of
the Series B Redeemable Convertible Preferred Stock.

     (2)  For purposes of determining the weighted average number of common
shares outstanding, 1,300,000 shares of restricted common stock acquired through
the July 1998 exercise of stock options in exchange for promissory notes to Onyx
are only considered in the calculation of diluted earnings per share.

     *Excluded from the computation of diluted earnings per share because the
effects are anti-dilutive. Options to purchase 4,652,127 shares of Common Stock
with exercise prices of $0.10 to $5.00 per share were outstanding as of
September 30, 1998 and options to purchase 5,098,036 shares of Common Stock with
exercise prices of $0.10 to $23.35 per share were outstanding as of September
30, 1999. Options outstanding at both dates included the shares discussed in
(2) above.

4.   Comprehensive Income (Loss)

The following table reconciles net income (loss) as reported to comprehensive
income (loss) under the provisions of SFAS 130 for the three and nine months
ended September 30, 1999 and 1998:

<TABLE>
<CAPTION>
                                               Three Months Ended September 30,     Nine Months Ended September 30,
                                              ---------------------------------    ---------------------------------
                                                   1999              1998               1999              1998
                                              --------------   ----------------    ---------------  ----------------
                                                                          (in thousands)
                                                                   (audited)                           (audited)
<S>                                          <C>                <C>                <C>              <C>
Net income (loss)                                 $ 336           $(2,079)           $(1,201)          $(5,713)
Other comprehensive income (loss):
 Unrealized currency gain (loss)...........           5                21                (16)               15
 Unrealized loss on marketable securities..         (35)               --                (80)               --
                                                  -----           -------            -------          --------
Total comprehensive income (loss)..........         306           $(2,058)            (1,297)           (5,698)
                                                  =====           =======            =======          ========
</TABLE>

                                       9
<PAGE>

5.   International Operations

     The Company licenses and markets its products through direct and indirect
channels throughout the world. Information regarding revenues in different
geographic regions is as follows:

<TABLE>
<CAPTION>

                     Three Months Ended September 30,    Nine Months Ended September 30,
                     --------------------------------    -------------------------------
                         1999              1998               1999             1998
                       --------          --------           --------         --------
                                                (in thousands)
                                        (audited)                           (audited)
<S>                  <C>                <C>              <C>                <C>
North America          $ 12,970          $ 6,264            $ 33,250        $ 19,850
Rest of World             2,773            2,780               7,004           4,154
                       -------------------------            ------------------------
Total revenues         $ 15,743          $ 9,044            $ 40,254        $ 24,004
                       =========================            ========================
</TABLE>

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


<TABLE>
<CAPTION>
                                                      North     Rest of
                                                     America     World     Total
                                                    ---------  --------  ---------
                                                            (in thousands)
<S>                                                 <C>        <C>       <C>
Three months ended September 30, 1999:
 Revenues                                            $12,970   $ 2,773    $15,743
 Operating income (loss)                                 726      (669)        57
 Interest, net                                           407                  407
 Depreciation and amortization                           716        20        736
 Purchases of property and equipment                   3,174        50      3,224
 Long-lived assets                                    12,941       604     13,545
 Total assets                                         63,727     1,690     65,417

Three months ended September 30, 1998 (audited):
 Revenues                                            $ 6,264   $ 2,780    $ 9,044
 Operating loss                                       (2,104)       61     (2,043)
 Interest, net                                            33                   33
 Depreciation and amortization                           246         5        251
 Purchases of property and equipment                     335        62        397
 Long-lived assets                                     5,186       439      5,625
 Total assets                                         16,304       948     17,252

Nine months ended September 30, 1999:
 Revenues                                            $33,250   $ 7,004    $40,254
 Operating loss                                          689    (2,517)    (1,828)
 Interest, net                                           942        --        942
 Depreciation and amortization                         1,558        54      1,612
 Purchases of property and equipment                   6,864       168      7,032
 Long-lived assets                                    12,941       604     13,545
 Total assets                                         63,727     1,690     65,417

Nine months ended September 30, 1998 (audited):
 Revenues                                            $19,850   $ 4,154    $24,004
 Operating loss                                       (3,640)   (1,975)    (5,615)
 Interest, net                                            95                   95
 Depreciation and amortization                           666        25        691
 Purchases of property and equipment                     562       119        681
 Long-lived assets                                     5,186       439      5,625
 Total assets                                         16,304       948     17,252
</TABLE>

                                       10
<PAGE>

6.   Acquisition

     On August 2, 1999, we acquired Versametrix Corporation, a privately held
developer of a comprehensive, browser-based personalization framework and a Web-
based business intelligence solution.  In exchange for all the outstanding
shares of Versametrix, we issued 96,193 shares of Onyx Common Stock and assumed
$62,000 of Versametrix's debt, which was immediately liquidated.  As a result of
the acquisition, $100,000 of recent royalty advances to Versametrix were
capitalized and accounted for as part of the purchase price. Including direct
costs of the acquisition, the total purchase price was approximately $1.8
million. The transaction was accounted for using the purchase method of
accounting, and, accordingly, the results of Versametrix's operations have been
included in our consolidated financial statements from the date of acquisition.

     A summary of the purchase price for the acquisition is as follows (in
thousands):

<TABLE>
    <S>                                                            <C>
     Common stock.................................................  $1,554
     Cash paid to liquidate notes payable.........................      62
     Capitalization of royalty advances...........................     100
     Accrued direct acquisition costs.............................     130
                                                                    ------
                                                                    $1,846
                                                                    ======
</TABLE>

     The purchase price was allocated as follows (in thousands):

<TABLE>
     <S>                                                           <C>
     Assets acquired..............................................  $    7
     Liabilities assumed..........................................     (25)
     In-process research and development..........................     390
     Purchased technology.........................................     798
     Assembled workforce..........................................     240
     Goodwill.....................................................     436
                                                                    ------
                                                                    $1,846
                                                                    ======
</TABLE>

7.   Subsequent Event

     On October 1, 1999, Onyx acquired Market Solutions Limited, a corporation
formed under the laws of England. Market Solutions, a privately held company
established in 1989, is a leading provider of Web-based customer relationship
management ("CRM") systems in the United Kingdom. Market Solutions develops,
sells, implements and supports CRM systems for customers such as Lloyd's Bank,
National Provident Institution, Barclay's Global Investors, Anheuser-Busch,
Virgin Atlantic and Bass Brewers.

     Under the terms and conditions of the Sale and Purchase Agreement, at
closing, we paid $5 million in cash and issued approximately $1 million (66,024
shares) of common stock in exchange for all the outstanding capital stock of
Market Solutions. Onyx is also obligated to issue up to an additional $3.6
million in common stock on October 1, 2000 and up to an

                                       11
<PAGE>

additional $4.32 million in common stock on October 1, 2001, depending on Market
Solutions' attainment of certain revenue and profitability targets in each of
the next two years. These shares of Onyx common stock will be valued based on
the trading prices of Onyx common stock on the Nasdaq National Market on the
three trading days immediately prior to issuance. The transaction will be
accounted for using the purchase method of accounting, and, accordingly, the
results of Market Solutions operations will be included in our consolidated
financial statements from the date of acquisition. Allocation of the purchase
price will be determined in the fourth quarter of 1999.


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

Forward-Looking Information

     Certain statements in this Form 10-Q contain "forward-looking" information
(as defined in Section 27A of the Securities Act of 1933, as amended) that
involve risks and uncertainties which may cause actual results to differ
materially from those predicted in the forward-looking statements. Forward-
looking statements can be identified by their use of such verbs as "expects,"
"anticipates," and "believes" or similar verbs or conjugations of such verbs. If
any of our assumptions on which the statements are based prove incorrect or
should unanticipated circumstances arise, our actual results could materially
differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors,
including, but not limited to, the "Factors Affecting Operating Results"
described herein and the Risk Factors described in our Securities and Exchange
Commission filings, including the Prospectus related to our initial public
offering, dated February 11, 1999.

Overview of Onyx's Financial Performance

  Onyx's History of Operations

     Onyx Software Corporation is a leading provider of Web-based customer
relationship management systems. Our e-business software combines comprehensive
customer relationship management functionality, third-party applications and
Internet content into personalized digital workplaces for marketing, sales and
service employees, business partners and customers, enabling companies to
maximize the productivity and effectiveness of their front-office. The Onyx
solution, optimized for Microsoft Back Office, is rapidly deployable, scalable,
flexible and reliable, resulting in a low total cost of ownership and rapid
return on investment.

     Onyx was founded in February 1994. We commercially released version 1.0 of
our flagship product, Onyx Customer Center, in December 1994. In our first three
years of operation, we focused primarily on research and development activities,
recruiting personnel, purchasing operating assets, marketing our products,
building a direct sales force and expanding our service business. Our revenues
totaled $2.2 million in 1995 and $9.6 million in 1996.

     In mid-1996, we substantially expanded our operations to capitalize on our
opportunity within the rapidly emerging customer relationship management market.
We decided, at the potential expense of profitability, to accelerate our
investments in research and development, marketing, domestic and international
sales channels, professional services and our general and administrative
infrastructure.

     We believe these investments have been critical to our growth. Our revenues
grew to $19.4 million in 1997 and to $35.1 million in 1998. Nevertheless, these
investments have also significantly increased our operating expenses,
contributing to the net losses that we incurred in each fiscal quarter from the
first quarter of 1997 through the second quarter of 1999. Although we achieved
profitability in the third quarter of 1999, we anticipate that our operating
expenses will increase substantially in dollar amount for the foreseeable future
as we expand our product development, sales and marketing and professional
services staff. As a result, we may incur operating losses in future quarters.

Onyx's Results of Operations

     The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The

                                       12
<PAGE>

operating results for the three and nine months ended September 30, 1999 and
1998 are not necessarily indicative of the results that may be expected for the
full year or for any future period.

<TABLE>
<CAPTION>
                                                      Three Months Ended       Nine Months Ended
                                                     --------------------     -------------------
                                                        September 30,            September 30,
                                                        -------------            -------------
                                                       1999        1998         1999      1998
                                                      ------      ------       ------    ------
                                                                (audited)               (audited)
<S>                                                   <C>         <C>          <C>       <C>
Consolidated Statement of Operations Data:
 Revenues:
  License........................................     63.0%        65.9%        62.7%      63.1%
  Service........................................     37.0         34.1         37.3       36.9
                                                     -----       ------        -----     ------
  Total revenues.................................    100.0        100.0        100.0      100.0
                                                     -----       ------        -----     ------
 Cost of revenues:
  License........................................      3.1          3.0          3.7        2.5
  Service........................................     18.7         22.5         18.8       24.7
                                                     -----       ------        -----     ------
  Total cost of revenues.........................     21.8         25.5         22.5       27.2
                                                     -----       ------        -----     ------
 Gross margin....................................     78.2         74.5         77.5       72.8
 Operating expenses:
  Sales and marketing............................     47.5         60.7         50.5       57.0
  Research and development.......................     16.8         25.2         19.3       28.1
  General and administrative.....................     10.0         11.2         10.4       11.1
   Acquisition-related charges and amortization..      3.5                       1.9
                                                     -----       ------        -----     ------
  Total operating expenses.......................     77.8         97.1         82.1       96.2
                                                     -----       ------        -----     ------
 Income (loss) from operations...................      0.4        (22.6)        (4.6)     (23.4)
 Interest income, net............................      2.6          0.4          2.4        0.4
                                                     -----       ------        -----     ------
 Income (loss) before income taxes...............      3.0        (22.2)        (2.2)     (23.0)
 Income tax provision (benefit)..................      0.8          0.8          0.8        0.8
                                                     -----       ------        -----     ------
 Net income (loss)...............................      2.2%       (23.0)%       (3.0)%    (23.8)%
                                                     -----       ------        -----     ------
</TABLE>

Revenues

     Total revenues, which consist of software license and service revenues,
increased 74%, from $9.0 million in the third quarter of 1998 to $15.7 million
in the third quarter of 1999 and 68%, from $24.0 million in the first nine
months of 1998 to $40.3 million in the first nine months of 1999. No single
customer accounted for more than 10% of our revenues in the third quarter or
first nine months of 1999 or 1998.

     License revenues increased 66%, from $6.0 million in the third quarter of
1998 to $9.9 million in the third quarter of 1999. The increase was primarily
due to sales to new customers. License revenues increased 67%, from $15.1
million in the first nine months of 1998 to $25.2 million in the first nine
months of 1999. Of the increase, $6.7 million was due to sales to new customers
and $3.4 million was due to increased follow-on sales to existing customers.

     Service revenues increased 89%, from $3.1 million in the third quarter of
1998 to $5.8 million in the third quarter of 1999. Of the increase, $1.5 million
was due to increases in maintenance and support revenues and $1.2 million was
due to increases in consulting and training services. Service revenues increased
70%, from $8.8 million in the first nine months of 1998 to $15.0 million in the
first nine months of 1999. Of the increase, $4.1 million was due to increases in
maintenance and support revenues and $2.1 million was due to increases in
consulting and training services. The increase in service revenues primarily
results from an increase in our software application sales and the overall
growth of our installed base of customers during these periods.

     Service revenues represented 34% of our total revenues in the third quarter
of 1998 compared to 37% in the third quarter of 1999 and 37% of our total
revenues in the first nine months of 1998 and 1999. We expect the proportion of
service revenues to total revenues to fluctuate in the future, depending in part
on our customers' direct use of third-party consulting and implementation
service providers and the ongoing renewals of customer support contracts.

     Revenues outside of North America totaled $2.8 million in the third quarter
of 1998 and 1999 representing 31% of total revenues in 1998 compared to 18% of
total revenues in 1999. The decrease in the proportion of revenues outside of
North America to total revenues in

                                       13
<PAGE>

the third quarter of 1999 is the result of exceptional performance by our
European region in the third quarter of 1998 which was not expected to be
sustainable in future quarters. Revenues outside of North America increased 69%
from $4.1 million in the first nine months of 1998 to $7.0 million in the first
nine months of 1999. Revenues outside of North America represented 17% of total
revenues for the first nine months of 1998 and 1999. The increase in dollar
amount of international revenues in the first nine months of 1999 resulted from
our investment in direct and indirect sales channels, primarily in Australia,
Europe and Singapore.

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

Cost of Revenues

  Cost of license revenues

     Cost of license revenues consists of license fees for third-party software,
product media, product duplication and manuals. Cost of license revenues
increased 80%, from $274,000 in the third quarter of 1998 to $494,000 in the
third quarter of 1999 and 145%, from $607,000 in the first nine months of 1998
to $1.5 million in the first nine months of 1999. Cost of license revenues as a
percentage of related license revenues were 5% in the third quarter of 1998 and
1999 and 4% in the first nine months of 1998 compared to 6% in the first nine
months of 1999. The increase in dollar amount in cost of license revenues
resulted primarily from an increase in third-party technology costs.  We expect
our cost of license revenue as a percentage of total license revenue to
fluctuate depending upon the volume of products we sell with third-party
technology, which contribute significantly lower margins.

  Cost of service revenues

     Cost of service revenues consists of personnel and third-party service
provider costs related to consulting services, customer support and training.
Cost of service revenues increased 45%, from $2.0 million in the third quarter
of 1998 to $2.9 million in the third quarter of 1999 and 28%, from $5.9 million
in the first nine months of 1998 to $7.6 million in the first nine months of
1999. The increase in dollar amount resulted primarily from hiring and training
consulting, support and training personnel to support our growing customer base,
offset in part by a decreased use of third-party service providers. Our service
employees increased from 61 as of September 30, 1998 to 89 as of September 30,
1999. Cost of service revenues as a percentage of related service revenues was
66% in the third quarter of 1998 compared to 51% in the third quarter of 1999
and 67% in the first nine months of 1998 compared to 50% in the first nine
months of 1999. The cost of services as a percentage of service revenues may
vary between periods primarily for two reasons: (1) the mix of services we
provide (consulting, customer support, training), which have different cost
structures, and (2) the resources we use to deliver these services (internal
versus third parties). The decrease in cost of service revenues as a percentage
of related service revenues reflected primarily a lower percentage use of third-
party service providers, which contribute significantly lower margins than
internal resources, and increased customer support revenues, which contribute
higher margins than the other services.

Costs and Expenses

  Sales and marketing

     Sales and marketing expenses consist primarily of salaries, commissions and
bonuses earned by sales and marketing personnel, travel and promotional expenses
and facility and communication costs for direct sales offices. Sales and
marketing expenses increased 36%, from $5.5 million in the third quarter of 1998
to $7.5 million in the third quarter of 1999 and 48%, from $13.7 million in the
first nine months of 1998 to $20.3 million in the first nine months of 1999. The
increase in dollar amount was primarily attributable to the expansion of our
worldwide sales and marketing organization, which included significant
personnel-related costs to recruit and hire sales management, sales
representatives, sales engineers and marketing professionals. Sales and
marketing employees increased from 114 as of September 30, 1998 to 140 as of
September 30, 1999. The increase in dollar amount is also the result of an
increase in sales commissions and bonuses associated with increased revenues and
an increase in marketing activities including trade shows, cyber seminars, and
direct mail campaigns. Sales and marketing expenses represented 61% of our total
revenues

                                       14
<PAGE>

in the third quarter of 1998 compared to 48% of our total revenues in the third
quarter of 1999 and 57% of our total revenues in the first nine months of 1998
compared to 50% of our total revenues in the first nine months of 1999. The
decrease in sales and marketing expenses as a percentage of total revenues
reflects the more rapid growth in our revenues in this period compared to the
growth of sales and marketing expenses due to maturing sales channels, as well
as increased service revenues as a percentage of total revenues. We believe that
we need to significantly increase our sales and marketing efforts to expand our
market position and further increase acceptance of our products. Accordingly, we
anticipate that sales and marketing expenses will increase in future periods.

  Research and development

     Research and development expenses consist primarily of salaries, benefits
and equipment for software developers, quality assurance personnel, program
managers and technical writers and payments to outside contractors. Research and
development expenses increased 16%, from $2.3 million in the third quarter of
1998 to $2.6 million in the third quarter of 1999 and 15%, from $6.7 million in
the first nine months of 1998 to $7.8 million in the first nine months of 1999.
The increase was primarily due to an increase in the number of development
personnel, offset in part by a decrease in the use of outside contractors.
Research and development employees increased from 65 as of September 30,
1998 to 84 as of September 30, 1999. Research and development costs represented
25% of our total revenues in the third quarter of 1998 compared to 17% in the
third quarter of 1999 and 28% of our total revenues in the first nine months of
1998 compared to 19% in the first nine months of 1999. The decrease in research
and development expenses as a percentage of total revenues primarily reflects
the more rapid growth in our revenues in this period compared to the growth of
our research and development expenses which slowed as a result of the economies
achieved in recruiting and substituting full-time development personnel for
third party contractors. We believe that we need to significantly increase our
research and development investment to enhance our market position and continue
to expand our product line. Accordingly, we anticipate that research and
development expenses will increase in future periods.

  General and administrative

     General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance, and administrative personnel and
professional services fees. General and administrative expenses increased 55%,
from $1.0 million in the third quarter of 1998 to $1.6 million in the third
quarter of 1999 and 57%, from $2.7 million in the first nine months of 1998 to
$4.2 million in the first nine months of 1999. The increase was primarily due to
the addition of finance, executive and administrative personnel to support the
growth of our business along with an increase in professional fees associated
with becoming a public company and expanding internationally. General and
administrative employees increased from 31 as of September 30, 1998 to 40 as of
September 30, 1999. General and administrative costs represented 11% of our
total revenues in the third quarter of 1998 compared to 10% in the third quarter
of 1999, and 11% of our total revenues in the first nine months of 1998 compared
to 10% in the first nine months of 1999. We believe our general and
administrative expenses will continue to increase as we expand our domestic and
international administrative staff, and incur expenses associated with being a
public company, including, but not limited to, annual and other public reporting
costs, directors' and officers' liability insurance, investor relations programs
and professional services fees.

  Deferred compensation

     We amortized deferred compensation expense of $234,000 during the third
quarter of 1998 compared to $184,000 in the third quarter of 1999 and $296,000
during the first nine months of 1998 compared to $726,000 during the first nine
months of 1999. Deferred compensation is amortized over the vesting periods of
the options.

  Interest income and interest expense, net

     Interest income, net consists of earnings on our cash and cash equivalent
and investment balances net of interest expense associated with our debt
obligations. Interest income, net was $33,000 in the third quarter of 1998
compared to $407,000 in the third quarter of 1999 and $95,000 in the first nine
months of 1998 compared to $942,000 in the first nine months of 1999. This
increase reflects the higher cash and investment base as a result of proceeds we
received in February 1999 from our initial public offering.

                                       15
<PAGE>

  Income taxes

     We recorded income tax provisions of $69,000 in the third quarter of 1998,
$128,000 in the third quarter of 1999, $193,000 in the first nine months of 1998
and $315,000 in the first nine months of 1999 in connection with our foreign
operations.  We made no provision or benefit for federal or state income taxes
in 1998 or 1999 due to the operating losses we incurred since the first quarter
of 1997 through the second quarter of 1999, which have resulted in deferred tax
assets.  We have recorded a valuation allowance for the entire deferred tax
asset as a result of uncertainties regarding the realization of the asset
balance.

Financial Condition

     Total assets increased 191% from $22.5 million as of December 31, 1998 to
$65.4 million as of September 30, 1999. This increase was primarily due to cash
proceeds raised from the sale of common stock in our recent initial public
offering along with an increase in accounts receivable. As of December 31, 1998,
we had cash and cash equivalents of $1.9 million. As of September 30, 1999, we
had cash and cash equivalents of $8.3 million, short-term investments of $23.9
million and long-term investments of $1.0 million, resulting in total cash and
investments of $33.2 million. This figure represents an increase of $31.3
million over cash and investment balances at December 31, 1998. Our working
capital at September 30, 1999 was $35.8 million, compared to $3.9 million at
December 31, 1998.

     Accounts receivable increased 37% from $13.1 million as of December 31,
1998 to $18.0 million as of September 30, 1999. This increase was principally a
result of an increase in billed revenues during the recent quarter. Property and
equipment increased due to leasehold improvements and other capital expenditures
associated with our new headquarter facilities, and to a lesser extent due to an
increase in equipment purchased rather than leased through operating leases.

     Total liabilities decreased 46% from $30.2 million as of December 31, 1998
and $16.2 million as of September 30, 1999. This decrease was principally the
result of the conversion of $13.3 million in redeemable convertible preferred
stock to common stock in connection with our initial public offering and the
repayment of borrowings under our working capital facility.

Liquidity and Capital Resources

     Prior to our initial public offering, we primarily financed our operations
through private placements of our common and preferred stock. To a lesser
extent, we have financed our operations through equipment financing and
traditional financing arrangements. In February 1999, we completed our initial
public offering and issued 3,565,000 shares of common stock at an initial public
offering price of $13.00 per share. We received approximately $41.9 million in
cash proceeds from the offering, net of underwriting discounts, commissions and
other offering costs.

     We have an $8.0 million working capital revolving line of credit with
Silicon Valley Bank that is secured by our accounts receivable and bears
interest at the bank's prime rate or LIBOR plus 2.0%, which was 8.25% as of
September 30, 1999. This facility allows us to borrow up to the lesser of 80% of
our eligible accounts receivable or $8.0 million. The facility expires in June
2000. The agreement under which the line of credit was established contains
certain covenants, including a provision requiring us to maintain specified
financial ratios. As of September 30, 1999, we had no outstanding borrowings
under the working capital facility; however, there was approximately $778,000 in
standby letters of credit outstanding. We also have a $3.0 million term loan
facility with Silicon Valley Bank for the purpose of financing new capital
equipment purchases. This facility operated as a revolver through August 1999,
bearing interest at a rate equal to the bank's prime rate plus 0.25%, which
equaled 8.50% as of September 30, 1999. As of September 30, 1999, the facility
converted to a 36-month term loan. This facility also requires us to comply with
certain financial covenants, including a requirement that we maintain certain
financial ratios. As of September 30, 1999, we had borrowed $63,000 under this
line of

                                       16
<PAGE>

credit. We were in compliance with all financial covenants of the credit
facility as of September 30, 1999.

     Our operating activities resulted in net cash outflows of $3.4 million in
the first nine months of 1998 compared to net cash inflows of $709,000 in the
first nine months of 1999. The operating cash outflows in the first nine months
of 1998 were primarily the result of our operating loss and increases in
accounts receivable, prepaid expenses and other current assets, partially offset
by decreases in our accounts receivable and increases in accounts payable,
accrued liabilities and deferred revenues. The operating cash inflows in the
first nine months of 1999 were primarily the result of increases in deferred
revenues and accrued liabilities and other assets, partially offset by increases
in accounts receivable, prepaid expenses and other assets and cash outflows from
our operating loss.

     Investing activities provided cash of $640,000 in the first nine months of
1998, due primarily to proceeds from the maturity of securities, offset by cash
used to acquire capital equipment. Investing activities used cash of $32.2
million in the first nine months 1999, primarily for the purchase of short-term
and long-term marketable securities following our initial public offering and
the purchase of capital equipment. The significant increase in capital
expenditures for the first nine months of 1999, as reflected in the Statement of
Cash Flows, is the combined result of (a) leasehold improvement, equipment and
furniture costs associated with the relocation of our corporate headquarters,
which was completed in July 1999; and to a lesser extent (b) our election to
purchase new computer hardware and software used in our operations rather than
lease through off-balance sheet financing arrangements, as we had done
historically.

     Financing activities used cash of $560,000 in the first nine months of 1998
resulting from payments on capital lease obligations, offset in part by proceeds
from the exercise of stock options.  Financing activities provided cash of $37.9
million in the first nine months of 1999 primarily due to the proceeds from our
initial public offering in February, offset in part by payments on our credit
facility and capital lease obligations.

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

       .   enter new markets for our products and services;

       .   increase research and development spending;

       .   increase sales and marketing activities;

       .   develop new distribution channels;

       .   improve our operational and financial systems; and

       .   broaden our professional service capabilities.

     Such operating expenses will consume a material amount of our cash
resources. We believe that our existing cash and cash equivalents, investments
and available bank borrowings will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next twelve
months. Thereafter, we may require additional funds to support our working
capital requirements or for other purposes and may seek to raise such additional
funds through public or private equity financing or from other sources. We may
not be able to obtain adequate or favorable financing at that time. Any
financing we obtain may dilute your ownership interest in Onyx.

Year 2000 Compliance

     Many currently installed computer systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, beginning on January 1,
2000, computer systems and software used by many companies and organizations in
a wide variety of industries (including technology, transportation, utilities,
finance and telecommunications) will produce erroneous results or fail unless
they have been modified or upgraded to process date information correctly.
Significant uncertainty exists in the software industry and other industries
concerning the scope and magnitude of problems associated with the century
change. We recognize the need to ensure our operations will not be adversely
affected by Year 2000 software failures.

                                       17
<PAGE>

     We have completed our initial assessment of the potential overall impact of
the impending century change on our business, financial condition and operating
results. Based on our current assessment, we believe the current versions of our
software products are Year 2000 compliant--that is, they are capable of
adequately distinguishing 21st century dates from 20th century dates. However,
our products are generally integrated into enterprise systems involving
sophisticated hardware and complex software products that we cannot adequately
evaluate for Year 2000 compliance. We may face claims based on Year 2000
problems in other companies' products, or issues arising from the integration of
multiple products within an overall system. Although we have not been a party to
any litigation or arbitration proceeding involving our products or services
related to Year 2000 compliance issues, we may in the future be required to
defend our products or services in such proceedings, or to negotiate resolutions
of claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, regardless of the merits of such disputes, and any
liability we have for Year 2000-related damages, including consequential
damages, could materially adversely affect our business, financial condition and
operating results. In addition, we believe that the purchasing patterns of
customers and potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct or upgrade their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase software products such as those we offer. To
the extent Year 2000 issues cause a significant delay in, or cancellation of,
decisions to purchase our products or services, our business, financial
condition and operating results would be materially adversely affected.

     We have reviewed our internal management information and other critical
business systems to identify any Year 2000 problems. We also have communicated
with the external vendors that supply us with material software and information
systems and with our significant suppliers to determine their Year 2000
readiness. In the course of these investigations, we have not encountered any
material Year 2000 problems with these third-party products.

     We relocated our principal offices in July 1999 to a new office location.
As part of the relocation effort, we completed an evaluation of the
infrastructure and building systems associated with our new facility, such as
security and sprinkler systems, and all information technology systems, such as
telephone and computer network systems. Based on this evaluation, we believe
that the systems associated with our new facility are Year 2000 compliant.

     To date, we have not incurred any material costs directly associated with
our Year 2000 compliance efforts, except for compensation expense associated
with our salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts. As discussed above, we do not expect the
total cost of Year 2000 problems to be material to our business, financial
condition and operating results. However, during the months prior to the century
change, we will continue to evaluate new versions of our software products, new
software and information systems provided to us by third parties and any new
infrastructure systems that we acquire to determine whether they are Year 2000
compliant. Despite our current assessment, we may not identify and correct all
significant Year 2000 problems on a timely basis. Year 2000 compliance efforts
may involve significant time and expense and unremediated problems could
materially adversely affect our business, financial condition and operating
results. We currently have no contingency plans to address the risks associated
with unremediated Year 2000 problems.

FACTORS AFFECTING OPERATING RESULTS

Our future operating results are uncertain and likely to fluctuate.

     Our operating results have varied widely in the past, and we expect that
they will continue to fluctuate in the future. In addition, our operating
results may not follow any past trends. It is particularly difficult to predict
the timing or amount of our license revenues because

       .  our sales cycles are lengthy and variable, typically ranging
          between two to six months from our initial contact with a
          potential customer to the signing of a license agreement,
          although occasionally sales require substantially more time;


       .  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

                                       18
<PAGE>

       .  we recognize a substantial portion of our license revenues
          in the last month of a quarter, and often in the last weeks
          or days of a quarter.

     Nevertheless, we base our decisions regarding our operating expenses on
anticipated revenue trends. Because many of our expenses are relatively fixed, a
delay in recognizing revenue from a limited number of license transactions could
cause our operating results to vary significantly from quarter to quarter and
could result in operating losses. To the extent these expenses are not followed
by increased revenues, our operating results will suffer.

Seasonality affects our revenues.

     We continue to experience significant seasonality with respect to software
license revenues. In recent years, we have recognized more license revenues in
our fourth quarter than in each of the first three quarters of a fiscal year and
have experienced lower license revenues in our first quarter than in the
preceding fourth quarter.

Our results fluctuate from quarter to quarter.

     In the past, the software industry has experienced significant downturns,
particularly when general economic conditions decline and spending on management
information systems decreases. Our business, financial condition and operating
results may fluctuate substantially from quarter to quarter as a consequence of
general economic conditions in the software industry. In addition, the fiscal or
quarterly budget cycles of our customers can cause our revenues to fluctuate
from quarter to quarter. As a result of all of these factors, we believe that
period-to-period comparisons of our operating results are not meaningful, and
you should not rely on such comparisons to predict our future performance.
Fluctuations in our operating results, particularly compared to the expectations
of market analysts or investors, could cause volatility in the price of our
common stock.

We have a limited operating history.

     We commenced operations in February 1994 and commercially released version
1.0 of Onyx Customer Center in December 1994. Accordingly, we have a limited
operating history, and we face all of the risks and uncertainties encountered by
early-stage companies. Our limited operating history makes it difficult to
forecast our future operating results. The new and evolving nature of the
enterprise relationship management market increases these risks and
uncertainties.

We have incurred losses.

     We incurred net losses in each quarter from Onyx's inception through the
third quarter of 1994 and from the first quarter of 1997 through the second
quarter of 1999. Although we achieved profitability in the third quarter of
1999, we anticipate that our operating expenses will increase substantially in
dollar amount for the foreseeable future as we expand our product development,
sales and marketing and professional services staff. As a result, we may incur
operating losses in future periods.

Our market is highly competitive.

     The market for customer relationship management software is intensely
competitive, fragmented and rapidly changing.  We face competition in the
customer relationship management software market primarily from

       .  front-office software applications vendors;

       .  large enterprise software vendors; and

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

     In addition, as we develop new products, particularly applications focused
on particular industries, we may begin competing with companies with whom we
have not previously competed. It is also possible that new competitors will
enter the market or that our

                                       19
<PAGE>

competitors will form alliances that may enable them to rapidly increase their
market share. Recently, two of our key competitors were acquired by companies
with significantly greater resources than us. We are uncertain as to what impact
this may have in the customer relationship management software market. As a
result, our business, financial condition and operating results could be
materially adversely affected.


We depend on the performance and continued adoption of the Windows NT/Microsoft
BackOffice platforms.

     We have designed our products to operate exclusively on the Windows NT and
Microsoft BackOffice platforms. As a result, we market our products exclusively
to customers who have developed their enterprise computing systems around these
platforms. Our future financial performance will depend on continued growth in
the number of enterprises that successfully adopt the Windows NT and Microsoft
BackOffice computing platforms. The market for enterprise operating systems is
highly competitive. The Windows NT and Microsoft BackOffice computing platforms
face increasing competition, particularly from open source platforms, such as
Unix and Linux. We believe that the Linux platform in particular is currently
growing at a faster annual percentage growth rate than the Windows NT and
Microsoft BackOffice Platforms. Acceptance of the Windows NT and Microsoft
BackOffice platforms may not continue to increase in the future. The adoption of
new operating systems and computing platforms, and the market for software
applications that run on those platforms, has in the past been significantly
affected by the timing of new product releases, competitive operating systems
and enhancements to computing platforms. If the Windows NT and Microsoft
BackOffice market fails to grow or grows more slowly than we currently expect,
our business, financial condition and operating results could be materially
adversely affected. Microsoft has delayed the release of Windows 2000 (formerly
known as Windows NT 5.0) and although we do not believe that this delay has
materially adversely affected our business, financial condition or operating
results, future delays in the release of new or enhanced products could have
such an effect. Also, the performance of our products depends, to some extent,
on the technical capabilities of the Windows NT and Microsoft BackOffice
platforms. If the Windows NT and Microsoft BackOffice platforms do not meet the
technical demands of our products, the performance or scalability of the Onyx
solution could be limited and, as a result, our business, financial condition
and operating results could be materially adversely affected.

The market for customer relationship management solutions is new and highly
uncertain.

     The market for customer relationship management products is still emerging,
and continued growth in demand for and acceptance of customer relationship
management products remains uncertain. Even if the market for customer
relationship management software grows, businesses may purchase our competitors'
products or develop their own. We believe that many of our potential customers
are not fully aware of the benefits of customer relationship management
solutions and that these solutions may never achieve market acceptance. We have
spent, and will continue to spend, considerable resources educating potential
customers about our products and customer relationship management software
solutions in general. However, even with these educational efforts, market
acceptance of our products may not increase. If the market for our products does
not grow or grows more slowly than we currently anticipate, our business,
financial condition and operating results would be materially adversely
affected.

We rely on sales of only one product family.

     Onyx Front Office product license revenues accounted for approximately 55%
of our total revenues, or 84% of total license revenues, during fiscal 1998 and
approximately 60% of our total revenues, or 96% of total license revenues for
the first nine months of 1999. We expect product license revenues from the Onyx
Front Office product family to continue to account for a substantial majority of
our future revenues. As a result, factors adversely affecting the pricing of or
demand for the Onyx Front Office product family, such as competition or
technological change, could materially adversely affect our business, financial
condition and operating results. Our future financial performance will
substantially depend on successfully deploying current versions of the Onyx
Front Office product family and developing, introducing and establishing
customer acceptance of new and enhanced versions of the Onyx Front Office
product family.

                                       20
<PAGE>

We may be unable to expand our sales and support infrastructure.

     To date, we have sold our products primarily through our direct sales force
and have supported our customers with our consulting and customer support staff.
Our future revenue growth will depend in large part on recruiting and training
additional direct sales, consulting and customer support personnel and expanding
our indirect distribution channels. We have experienced and continue to
experience difficulty in recruiting qualified sales and support personnel and in
establishing third-party relationships. We may not be able to successfully
expand our direct sales force or other distribution channels and any such
expansion may not result in increased revenues. If we are unable to hire highly
trained consulting and customer support personnel, we may be unable to meet
customer demands. Our business, financial condition and operating results will
be materially adversely affected if we fail to expand our direct sales force or
other distribution channels or our technical and customer support staff.

We depend on certain key employees.

     Our future performance will also largely depend on the efforts and
abilities of our key technical, customer support, sales and managerial personnel
and on our ability to retain them. We have in the past experienced difficulty in
hiring qualified technical, customer support, sales and managerial personnel.
Our success will depend on our ability to attract and retain such personnel in
the future. In addition, the loss of any of our executive officers could
materially adversely affect our business, financial condition and operating
results.

Our market is subject to rapid technological change.

     The software market in which we compete is characterized by rapid
technological change. Existing products become obsolete and unmarketable when
products using new technologies are introduced and new industry standards
emerge. For example, we may 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 such developments. We have delayed enhancements or new
product release dates several times in the past and may not be able to introduce
enhancements or new products successfully or in a timely manner in the future.
Our business, financial condition and operating results would be materially
adversely affected if we delay release of our products and product enhancements
or if these products and product enhancements fail to achieve market acceptance
when released. In addition, customers may defer or forego purchases of our
products if we, our competitors or major hardware, systems or software vendors
introduce or announce new products or product enhancements. Such events could
materially adversely affect our business, financial condition and operating
results.

We face risks from expansion of our international operations.

     We intend to substantially expand our international operations and enter
new international markets. This expansion will require significant management
attention and financial resources to successfully translate and localize our
software products to various languages and to develop direct and indirect
international sales and support channels. We may not be able to maintain or
increase international market demand for the Onyx Front Office product family.
We, or our distributors or resellers, may not be able to sustain or increase
international revenues from licenses or from consulting and customer support.
Our foreign subsidiaries operate primarily in local currencies, and their
results are translated into U.S. dollars. We do not currently engage in currency
hedging activities, but we may do so in the future. Increases in the value of
the U.S. dollar relative to foreign currencies could materially adversely affect
our operating results.

We rely heavily on key partners and systems integrators.

     We rely heavily on our relationships with a number of organizations that
are important to worldwide sales and marketing of our products. If we fail to
maintain our existing relationships, or to establish new relationships, or if
our partners do not perform to our expectations, our business, financial
condition and operating results could be materially adversely affected.

     We also rely on a number of systems consulting and integration firms to
implement our software, provide customer support services and endorse our
products during the competitive

                                       21
<PAGE>

evaluation stage of the sales cycle. Although we seek to maintain relationships
with these service providers, many of them have similar, and often more
established, relationships with our competitors. These third parties, many of
which have significantly greater resources than we have, may in the future
market software products that compete with ours or reduce or discontinue their
relationships with us or their support of our products. In addition, our
business, financial condition and operating results could be materially
adversely affected if

       .  we are unable to develop and retain effective, long-term
          relationships with our systems integrators;

       .  we are unable to adequately train a sufficient number of
          systems integrators;

       .  our systems integrators do not have or do not devote the
          resources necessary to facilitate implementation of our
          products; or

       .  our systems integrators endorse a product or technology
          other than ours.

Our sales cycle is long.

     We believe that an enterprise's decision to purchase a customer
relationship management system is discretionary, involves a significant
commitment of its resources and is influenced by its budget cycles. To
successfully sell our products, we generally must educate our potential
customers regarding the use and benefit of our products, which can require
significant time and resources. Consequently, the period between initial contact
and the purchase of our products is often long and subject to delays associated
with the lengthy budgeting, approval and competitive evaluation processes that
typically accompany significant capital expenditures. Our sales cycles are
lengthy and variable, typically ranging between two to six months from our
initial contact with a potential customer to the signing of a license agreement,
although occasionally sales require substantially more time. Sales delays could
cause our operating results to vary widely.

We depend on service revenues.

     Support and service revenues represented 35% of our total revenues for 1998
and 37% of our total revenues for the first nine months of 1999. We anticipate
that service revenues will continue to represent a significant percentage of
total revenues.

       .  Because service revenues have lower gross margins than
          license revenues, a continued increase in the percentage of
          total revenues represented by service revenues or an
          unexpected decrease in license revenues could have a
          detrimental impact on overall gross margins and our
          operating results.

       .  We subcontract certain consulting, customer support and
          training services to third-party service providers. Third-
          party contract revenues generally carry lower gross margins
          than our service business overall; as a result, our service
          revenues and related margins may vary from period to period,
          depending on the mix of these third-party contract revenues.

       .  Service revenues depend in part on ongoing renewals of
          support contracts by our customers, some of which may not
          renew their support contracts.

       .  In addition, consulting revenues as a percentage of total
          revenues could decline if customers select third-party
          service providers to install and service our products more
          frequently than they have in the past.


     If service revenues are lower than anticipated, our business, financial
condition and operating results could be materially adversely affected. Our
ability to increase service

                                       22
<PAGE>

revenues will depend in large part on our ability to increase the scale of our
services organization, including our ability to successfully recruit and train a
sufficient number of qualified services personnel. We may not be able to do so.

We rely on software licensed to us by third parties.

     We incorporate into our products certain software that is licensed to us by
third-party software developers, currently Sybase, Inc., Greyware Automation
Products and Inso Corporation.  We believe there are other sources for this
licensed software and that we could replicate the functionality of this licensed
software within a relatively short period of time, approximately four to six
months.  Because our products incorporate software developed and maintained by
third parties, however, we depend on such third parties' abilities to deliver
and support reliable products, enhance their current products, develop new
products on a timely and cost-effective basis, and respond to emerging industry
standards and other technological changes.  The third-party software currently
offered in conjunction with our products may become obsolete or incompatible
with future versions of our products.

We may be unable to adequately protect our proprietary rights.

     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 such 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. We may not become aware of, or have adequate remedies in the
event of, such breach.

We may be unable to adequately protect our trademarks.

     We pursue the registration of certain of our trademarks and service marks
in the United States and in certain other countries, but we have not secured
registration of all our marks. A significant portion of our marks include the
word "Onyx." ONYX Computers Incorporated has filed a lawsuit against us alleging
trademark infringement of the mark "ONYX" in Canada. A negative outcome could
materially adversely affect our financial condition and operating results. 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
certain trademark rights to third parties. Such licensees may not abide by
compliance and quality control guidelines with respect to such trademark rights
and may take actions that would adversely affect our trademarks.

Our products may suffer from defects or errors.

     Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released.  We have had
to delay commercial release of certain versions of our products until software
problems were corrected, and in some cases have provided product enhancements 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
or increased service and warranty costs, all of which could materially adversely
affect our business, financial condition and operating results.

The integration of Versametrix, Market Solutions and any future acquisitions may
be difficult and disruptive.

     In early August 1999, we acquired Versametrix Corporation, a privately-held
developer of a comprehensive, browser-based personalization framework and a Web-
based business intelligence solution. On October 1, 1999, we acquired Market
Solutions Limited, a privately held company established in 1989, which is a
leading provider of Web-based customer relationship management systems in the
United Kingdom.  We are currently in the process of integrating these companies
with our business.  This integration is subject to risks commonly encountered in
making acquisitions, including, among others, risk of loss of key personnel,
difficulties associated with assimilating technologies, products, personnel and
operations, potential disruption of our ongoing business, and the ability of our
sales

                                       23
<PAGE>

force, consultants and development staff to adapt to the new product line. We
may not successfully overcome these risks or any other problems encountered in
connection with the acquisition of Versametrix and Market Solutions. As part of
our business strategy, we expect to consider acquiring other companies. We may
not be able to successfully integrate any technologies, products, personnel or
operations of companies that we may acquire in the future. If we fail to do so,
our business, financial condition and operating results could be materially
adversely affected.


Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     We are exposed to financial market risks, including changes in interest
rates. We typically do not attempt to reduce or eliminate our market exposures
on our investment securities because the majority of our investments are short-
term. We do not have any derivative instruments.

     The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the short-term nature of the major portion of our
investment portfolio. All of the potential changes noted above are based on
sensitivity analysis performed on our balances as of September 30, 1999.


PART II -- OTHER INFORMATION

Item 1.   Legal Proceedings

     On September 25, 1998, ONYX Computers Incorporated filed a lawsuit against
us in the Federal Court of Canada--Trial Division in Toronto. ONYX Computers
Incorporated alleges trademark infringement of the mark "ONYX" in Canada and
seeks

       .   a permanent injunction preventing us from using the mark
           "ONYX," the trade name "Onyx Software Corporation" or any
           other similar marks or trade names in Canada;

       .   an order requiring us to deliver or destroy all materials in
           our possession or under our control bearing the mark "ONYX";
           and

       .   other damages, interest and court costs.

     On February 10, 1999, we filed an answer to this claim and a counterclaim
seeking

       .   an order that ONYX Computers Incorporated's registration of
           the mark "ONYX" be canceled;

       .   an order that ONYX Computers Incorporated pay the costs of
           the counterclaim; and

       .   such further relief as the court may determine.

     This claim, even if not meritorious, could require the expenditure of
significant financial and managerial resources. A negative outcome could
materially adversely affect our business, financial condition and operating
results. Other than the trademark infringement matter described above, as of the
date of this filing, we are not a party to any litigation that, if adversely
determined, would have a material adverse effect on our business, financial
condition and operating results.

Item 2.  Changes in Securities and Use of Proceeds

     (a)  Instruments Defining the Rights of Security Holders

     On October 22, 1999, our Board of Directors adopted a Shareholder Rights
Plan and declared a distribution of one preferred share purchase right on each
outstanding share of our common stock. You should refer to our Current Report on
Form 8-K filed with the Securities and Exchange Commission on October 28, 1999
for a complete description of the Shareholders Rights Plan.

                                       24
<PAGE>

     (b)  Unregistered Sales of Securities

     On August 2, 1999, we issued 96,193 shares of Onyx Common Stock as partial
consideration for the acquisition of Versametrix Corporation.  The issuance was
exempt from registration under the Securities Act of 1933, as amended, pursuant
to Section 4(2) and Rule 506 thereof on the basis that the transaction did not
involve a public offering.

     (d)  Use of Proceeds

     On February 11, 1999, Onyx's registration statement on form S-1, file #333-
68559, became effective. The offering date was February 12, 1999. The offering
has terminated as a result of all of the shares offered being sold. The managing
underwriters were Credit Suisse First Boston Corporation, SG Cowen Securities
Corporation and Piper Jaffray Inc. The offering consisted of 3,565,000 shares of
ONYX common stock, including 465,000 shares of common stock pursuant to the
exercise of the underwriter's over-allotment option. The aggregate price of the
shares offered and sold was $46.3 million. Proceeds to ONYX, after accounting
for $3.2 million in underwriting discounts and commissions and $1.2 million in
other expenses, were $41.9 million. ONYX generated interest income of
approximately $1.0 million during the nine months ended September 30, 1999.

     We are using the net proceeds raised in the initial public offering for
additional working capital, repayment of short-term indebtedness, and general
corporate purposes, including increased domestic and international sales and
marketing expenditures, increased research and development expenditures and
capital expenditures made in the ordinary course of business.  We have used and
intend to use these proceeds for possible acquisitions of businesses, products
and technologies that are complementary to ours, such as the acquisitions of
Versametrix Corporation and Market Solutions. Although there are no current
agreements or understandings with respect to any such transactions, we do from
time to time evaluate such opportunities. Pending such uses, the net proceeds
will be invested in investment-grade, interest-bearing instruments, the majority
of which are short-term.

     None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly to directors,
officers or general partners of Onyx or their associates, persons owning 10% or
more of any class of our securities, or affiliates of Onyx.

Item 6.  Exhibits and Reports on Form 8-K

     (a)  Exhibits

          3.1  Third Amended and Restated Articles of Incorporation of the
registrant, as further amended by Articles of Amendment (Incorporated herein by
reference to exhibit number 3.1 to registrant's registration statement on Form
S-1 (file #333-68559), filed on January 21, 1999.)

          3.2  Amended and Restated Bylaws of the registrant (Incorporated
herein by reference to exhibit number 3.2 to registrant's registration statement
on Form S-1 (file #333-68559), filed on January 21, 1999.)

          4.1  Rights Agreement, dated as of October 25, 1999, between Onyx
Software Corporation and Chase Mellon Shareholder Services, LLC (Incorporated
herein by reference to exhibit number 2.1 to registrant's registration statement
on Form 8-A (file #0-25215), filed on October 27, 1999.)

         27.1  Financial Data Schedule.

     (b)  Reports on Form 8-K

     On July 8, 1999, we filed a Form 8-K under Item 5 announcing the
introduction of Onyx Enterprise Portal.

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<PAGE>

  SIGNATURES

     Pursuant to the requirements 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.

                                        ONYX SOFTWARE CORPORATION
                                        (Registrant)

Date: November 12, 1999                 By  /s/ Sarwat H. Ramadan
                                           -----------------------
                                           Sarwat H. Ramadan
                                           Vice President, Chief Financial
                                            Officer,
                                           Secretary and Treasurer
                                           (Principal financial and chief
                                            accounting officer)

                                       26