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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)

|x |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|- |  | ----------------------------------------------------------------------------------
|  |  |                                                                                   
|  |  | For the quarterly period ended September 30, 2003                                 
|  |  |                                                                                   
|o |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|  |  |                                                                                   
|  |  | For the transition period from ________ to _________                              

Commission File Number 0-25361

ONYX SOFTWARE CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

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

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

The number of shares of common stock, par value $0.01 per share,
outstanding on November 3, 2003 was 13,913,563.



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TABLE OF CONTENTS



|                             |                                                                                               |                                                          |  |  |  |  |  | 
|---------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------- |  |  |  |  |  | 
|PART IFINANCIAL INFORMATION
|                             | Item 1. Condensed Consolidated Financial Statements                                          
|                             |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS                   
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS         
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|                             |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS         
|                             |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS    
|                             | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                             | Item 3. Quantitative and Qualitative Disclosures about Market Risk                           
|                             | Item 4. Controls and Procedures                                                              
|PART IIOTHER INFORMATION   
|                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                             | Item 5. Other Information                                                                    
|                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                  
|EXHIBIT 3.1                 
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32.1                
|EXHIBIT 32.2                



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##### Table of Contents



ONYX SOFTWARE CORPORATION

CONTENTS

|                             |  |                                                                                                                  |    |  |    | 
|---------------------------- |  | ---------------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART IFINANCIAL INFORMATION |  |                                                                                                                  | 3  | 
|Item 1.                      |  | Condensed Consolidated Financial Statements (Unaudited)                                                          |    |  | 3  | 
|                             |  | Condensed Consolidated Balance Sheets as of December 31, 2002 and September 30, 2003.                            |    |  | 3  | 
|                             |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,
2002 and 2003. |    |  | 4  | 
|                             |  | Condensed Consolidated Statement of Shareholders Equity for the
Three and Nine Months Ended September 30, 2003. |    |  | 5  | 
|                             |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2003            |    |  | 6  | 
|                             |  | Notes to Condensed Consolidated Financial Statements                                                             |    |  | 7  | 
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                            |    |  | 18 | 
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                                                       |    |  | 41 | 
|Item 4.                      |  | Controls and Procedures                                                                                          |    |  | 42 | 
|PART IIOTHER INFORMATION    |  |                                                                                                                  | 43 | 
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                                              |    |  | 43 | 
|Item 5.                      |  | Other Information                                                                                                |    |  | 44 | 
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                                                 |    |  | 44 | 
|SIGNATURES                   |  |                                                                                                                  | 45 | 

2



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PART IFINANCIAL INFORMATION




Item 1. Condensed Consolidated Financial Statements




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

|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |         |        |  | 
|----------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------------------------------------ | ------- | ------------ | ------ | ------------- | ------- | ------ |  | 
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         | December 31, |        | September 30,
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         | 2002         |        | 2003         
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |              
|                                                                  |                                                                         |                                                                                                           |                                            | ASSETS                               |         |              |        |               |         |        |  | 
|Current assets:                                                   |                                                                         |                                                                                                           |                                            |                                      |         |              |        |              
|                                                                  | Cash and cash equivalents                                               |                                                                                                           | $                                          | 17,041                               |         |              | $      | 8,950         |        
|                                                                  | Restricted cash                                                         |                                                                                                           |                                            | 2,238                                |         |              |        | 3,033         |        
|                                                                  | Accounts receivable, less allowances of $1,039 in 2002 and
$500 in 2003 |                                                                                                           |                                            | 14,408                               |         |              |        | 12,419        |        
|                                                                  | Current deferred tax asset                                              |                                                                                                           |                                            | 273                                  |         |              |        | 272           |        
|                                                                  | Prepaid expenses and other                                              |                                                                                                           |                                            | 3,374                                |         |              |        | 2,912         |        
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |        
|Total current assets                                              |                                                                         |                                                                                                           | 37,334                                     |                                      |         |              | 27,586 |              
|Property and equipment, net                                       |                                                                         |                                                                                                           | 6,474                                      |                                      |         |              | 4,501  |              
|Purchased technology, net                                         |                                                                         |                                                                                                           | 253                                        |                                      |         |              | 3      |              
|Other intangibles, net                                            |                                                                         |                                                                                                           | 1,461                                      |                                      |         |              | 835    |              
|Goodwill, net                                                     |                                                                         |                                                                                                           | 8,180                                      |                                      |         |              | 8,180  |              
|Other assets                                                      |                                                                         |                                                                                                           | 1,085                                      |                                      |         |              | 830    |              
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |        
|                                                                  |                                                                         |                                                                                                           | Total assets                               |                                      | $       | 54,787       |        |               | $       | 41,935 | 
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |        
|                                                                  |                                                                         |                                                                                                           |                                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |              |        |               |         |        |  | 
|Current liabilities:                                              |                                                                         |                                                                                                           |                                            |                                      |         |              |        |              
|                                                                  | Accounts payable                                                        |                                                                                                           | $                                          | 1,484                                |         |              | $      | 1,026         |        
|                                                                  | Salary and benefits payable                                             |                                                                                                           |                                            | 1,675                                |         |              |        | 1,531         |        
|                                                                  | Accrued liabilities                                                     |                                                                                                           |                                            | 3,147                                |         |              |        | 2,489         |        
|                                                                  | Income taxes payable                                                    |                                                                                                           |                                            | 660                                  |         |              |        | 1,003         |        
|                                                                  | Current portion of capital-lease obligations                            |                                                                                                           |                                            | 180                                  |         |              |        |              |        
|                                                                  | Current portion of restructuring-related liabilities                    |                                                                                                           |                                            | 10,224                               |         |              |        | 4,055         |        
|                                                                  | Deferred revenue                                                        |                                                                                                           |                                            | 16,258                               |         |              |        | 14,287        |        
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |        
|Total current liabilities                                         |                                                                         |                                                                                                           | 33,628                                     |                                      |         |              | 24,391 |              
|Capital-lease obligations, less current portion                   |                                                                         |                                                                                                           | 77                                         |                                      |         |              |       |              
|Long-term restructuring-related liabilities, less current portion |                                                                         |                                                                                                           | 2,600                                      |                                      |         |              | 567    |              
|Long-term restructuring-related liabilitieswarrants              |                                                                         |                                                                                                           | 920                                        |                                      |         |              | 786    |              
|Deferred tax liabilities                                          |                                                                         |                                                                                                           | 497                                        |                                      |         |              | 284    |              
|Minority interest in joint venture                                |                                                                         |                                                                                                           | 237                                        |                                      |         |              | 35     |              
|Commitments and contingencies                                     |                                                                         |                                                                                                           |                                            |                                      |         |              |        |              
|Shareholders equity:                                             |                                                                         |                                                                                                           |                                            |                                      |         |              |        |              
|                                                                  | Preferred stock, $0.01 par value:                                       |                                                                                                           |                                            |                                      |         |              |        |               |        
|                                                                  |                                                                         | Authorized shares  20,000,000; Issued and outstanding
shares  none                                      |                                            |                                      |        |              |        |               |        |       
|                                                                  | Common stock, $0.01 par value:                                          |                                                                                                           |                                            |                                      |         |              |        |               |        
|                                                                  |                                                                         | Authorized shares  80,000,000; Issued and outstanding
shares  12,696,739 in 2002 and 13,907,284 in 2003 |                                            |                                      | 139,459 |              |        |               | 142,445 |       
|                                                                  | Deferred stock-based compensation                                       |                                                                                                           |                                            | (84                                  | )       |              |        |              |        
|                                                                  | Accumulated deficit                                                     |                                                                                                           |                                            | (122,061                             | )       |              |        | (126,619      | )      
|                                                                  | Accumulated other comprehensive income (loss)                           |                                                                                                           |                                            | (486                                 | )       |              |        | 46            |        
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |        
|                                                                  |                                                                         |                                                                                                           | Total shareholders equity                 |                                      |         | 16,828       |        |               |         | 15,872 | 
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |        
|                                                                  |                                                                         |                                                                                                           | Total liabilities and shareholders equity |                                      | $       | 54,787       |        |               | $       | 41,935 | 
|                                                                  |                                                                         |                                                                                                           |                                            |                                      |         |              |        |               |        

See accompanying notes to condensed consolidated financial statements.

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

|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |        |        |  
|------------------------------------------------- | ----------------------------------------------- | ------------------------ | ------ | ------------------ | ------ | ----------------- | ----- | ------ | ------ | ---- | ------- | ------ | ------- | - | ------ | ------ | ------ | -
|                                                  |                                                 |                          |        | Three Months Ended |        | Nine Months Ended
|                                                  |                                                 |                          |        | September 30,      |        | September 30,    
|                                                  |                                                 |                          |        |                    |        |                  
|                                                  |                                                 |                          |        | 2002               |        | 2003              |       | 2002   |        | 2003
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |     
|Revenue:                                          |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  | License                                         |                          | $      | 7,265              |        |                   | $     | 3,633  |        |      | $       | 16,828 |         |   | $      | 9,374  |       
|                                                  | Support and service                             |                          |        | 11,763             |        |                   |       | 11,767 |        |      |         | 35,325 |         |   |        | 36,043 |       
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |        |       
|                                                  |                                                 | Total revenue            |        |                    | 19,028 |                   |       |        | 15,400 |      |         |        | 52,153  |   |        |        | 45,417 |  
|Cost of revenue:                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  | License                                         |                          |        | 270                |        |                   |       | 175    |        |      |         | 667    |         |   |        | 657    |       
|                                                  | Amortization of acquired technology             |                          |        | 138                |        |                   |       | 84     |        |      |         | 414    |         |   |        | 252    |       
|                                                  | Support and service                             |                          |        | 4,922              |        |                   |       | 5,251  |        |      |         | 15,181 |         |   |        | 16,129 |       
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  |                                                 | Total cost of revenue    |        |                    | 5,330  |                   |       |        | 5,510  |      |         |        | 16,262  |   |        |        | 17,038 |  
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|Gross margin                                      |                                                 |                          | 13,698 |                    |        |                   | 9,890 |        |        |      | 35,891  |        |         |   | 28,379 |       
|Operating expenses:                               |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  | Sales and marketing                             |                          |        | 7,882              |        |                   |       | 4,460  |        |      |         | 20,941 |         |   |        | 16,025 |       
|                                                  | Research and development                        |                          |        | 3,530              |        |                   |       | 2,798  |        |      |         | 11,506 |         |   |        | 9,074  |       
|                                                  | General and administrative                      |                          |        | 2,382              |        |                   |       | 2,158  |        |      |         | 7,358  |         |   |        | 6,253  |       
|                                                  | Restructuring and other related charges         |                          |        | 1,171              |        |                   |       | 162    |        |      |         | 7,729  |         |   |        | 1,256  |       
|                                                  | Amortization of acquisition-related intangibles |                          |        | 209                |        |                   |       | 209    |        |      |         | 627    |         |   |        | 627    |       
|                                                  | Amortization of stock-based compensation        |                          |        | 51                 |        |                   |       | 4      |        |      |         | 203    |         |   |        | 32     |       
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  |                                                 | Total operating expenses |        |                    | 15,225 |                   |       |        | 9,791  |      |         |        | 48,364  |   |        |        | 33,267 |  
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|Income (loss) from operations                     |                                                 |                          | (1,527 | )                  |        |                   | 99    |        |        |      | (12,473 | )      |         |   | (4,888 | )     
|Other income (expense), net                       |                                                 |                          | 269    |                    |        |                   | (117  | )      |        |      | (73     | )      |         |   | 3      |       
|Change in fair value of outstanding warrants      |                                                 |                          |       |                    |        |                   | (123  | )      |        |      |        |        |         |   | 134    |       
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  |                                                 | Loss before income taxes |        |                    | (1,258 | )                 |       |        | (141   | )    |         |        | (12,546 | ) |        |        | (4,751 | )
|Income tax provision (benefit)                    |                                                 |                          | (29    | )                  |        |                   | 86    |        |        |      | 383     |        |         |   | 7      |       
|Minority interest in consolidated subsidiary      |                                                 |                          | (345   | )                  |        |                   | 32    |        |        |      | (817    | )      |         |   | (200   | )     
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|Net loss                                          |                                                 | $                        | (884   | )                  |        | $                 | (259  | )      |        | $    | (12,112 | )      |         | $ | (4,558 | )     
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |        |       
|Net loss per share:                               |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  | Basic and diluted                               |                          | $      | (0.07              | )      |                   | $     | (0.02  | )      |      | $       | (0.97  | )       |   | $      | (0.34  | )     
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |        |       
|Shares used in calculation of net loss per share: |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       
|                                                  | Basic and diluted                               |                          |        | 12,641             |        |                   |       | 13,902 |        |      |         | 12,427 |         |   |        | 13,284 |       
|                                                  |                                                 |                          |        |                    |        |                   |       |        |        |      |         |        |         |   |        |       

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(In thousands, except share data)
(Unaudited)

|                              |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |        |      |  
|----------------------------- | ----------------------------------------------------- | --------------------------------------------- | ---------- | ------------ | ----- | ----------- | ------- | ------------ | --- | ------------- | --- | ----------------- | -- | ------ | -------- | ------ | ---- | - | ---- | --- | --- | - | ------ | ------ | ---- | -
|                              |                                                       |                                               |            | Common Stock |       | Deferred    |         |              |     |               |     | Accumulated Other |    |        |          |       
|                              |                                                       |                                               |            |              |       | Stock-Based |         | Accumulated  |     | Comprehensive |     | Shareholders    
|                              |                                                       |                                               |            | Shares       |       | Amount      |         | Compensation |     | Deficit       |     | Income (Loss)     |    | Equity
|                              |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |       
|Balance at December 31, 2002  |                                                       |                                               | 12,696,739 |              |       | $           | 139,459 |              |     | $             | (84 | )                 |    | $      | (122,061 | )      |      | $ | (486 | )   |     | $ | 16,828 |       
|                              | Amortization of deferred
stock-based compensation     |                                               |            |             |       |             |         |             |     |               |     | 13                |    |        |          |       |      |   |      |    |     |   |        | 13     |     
|                              | Exercise of stock options                             |                                               |            | 3,698        |       |             |         | 5            |     |               |     |                  |    |        |          |       |      |   |      |    |     |   |        | 5      |     
|Comprehensive income (loss):  |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |       
|                              | Cumulative translation gain                           |                                               |            |             |       |             |         |             |     |               |     |                  |    |        |          |       |      |   |      | 129 |     |   |        |        |     
|                              | Net loss                                              |                                               |            |             |       |             |         |             |     |               |     |                  |    |        |          | (3,402 | )    |   |      |    |     |   |        |        |     
|                              | Total comprehensive loss                              |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        | (3,273 | )   
|                              |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |       
|Balance at March 31, 2003     |                                                       |                                               | 12,700,437 |              |       |             | 139,464 |              |     |               | (71 | )                 |    |        | (125,463 | )      |      |   | (357 | )   |     |   | 13,573 |       
|                              | Amortization of deferred
stock-based compensation     |                                               |            |             |       |             |         |             |     |               |     | 13                |    |        |          |       |      |   |      |    |     |   |        | 13     |     
|                              | Stock-based compensation                              |                                               |            |             |       |             |         | 2            |     |               |     |                  |    |        |          |       |      |   |      |    |     |   |        | 2      |     
|                              | Proceeds from private
offering, net of offering
costs |                                               |            | 1,135,697    |       |             |         | 2,815        |     |               |     |                  |    |        |          |       |      |   |      |    |     |   |        | 2,815  |     
|                              | Exercise of stock options                             |                                               |            | 1,125        |       |             |         | 3            |     |               |     |                  |    |        |          |       |      |   |      |    |     |   |        | 3      |     
|                              | Issuance of common stock
under ESPP                   |                                               |            | 60,596       |       |             |         | 201          |     |               |     |                  |    |        |          |       |      |   |      |    |     |   |        | 201    |     
|Comprehensive income (loss):  |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |       
|                              | Cumulative translation gain                           |                                               |            |             |       |             |         |             |     |               |     |                  |    |        |          |       |      |   |      | 292 |     |   |        |        |     
|                              | Net loss                                              |                                               |            |             |       |             |         |             |     |               |     |                  |    |        |          | (897   | )    |   |      |    |     |   |        |        |     
|                              | Total comprehensive loss                              |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        | (605   | )   
|                              |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |       
|Balance at June 30, 2003      |                                                       |                                               | 13,897,855 |              |       |             | 142,485 |              |     |               | (58 | )                 |    |        | (126,360 | )      |      |   | (65  | )   |     |   | 16,002 |       
|                              |                                                       | Reversal of deferred
stock-based compensation |            |              |      |             |         |              | (54 | )             |     |                   | 54 |        |          |        |     |   |      |     |    |   |        |        |     |  
|                              |                                                       | Stock-based compensation                      |            |              |      |             |         |              |    |               |     |                   | 4  |        |          |        |     |   |      |     |    |   |        |        | 4    |  
|                              |                                                       | Exercise of stock options                     |            |              | 9,429 |             |         |              | 14  |               |     |                   |   |        |          |        |     |   |      |     |    |   |        |        | 14   |  
|Comprehensive income (loss):  |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |       
|                              |                                                       | Cumulative translation gain                   |            |              |      |             |         |              |    |               |     |                   |   |        |          |        |     |   |      |     | 111 |   |        |        |      |  
|                              |                                                       | Net loss                                      |            |              |      |             |         |              |    |               |     |                   |   |        |          |        | (259 | ) |      |     |    |   |        |        |      |  
|                              |                                                       | Total comprehensive loss                      |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |        | (148 | )
|                              |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |       
|Balance at September 30, 2003 |                                                       |                                               | 13,907,284 |              |       | $           | 142,445 |              |     | $             |    |                   |    | $      | (126,619 | )      |      | $ | 46   |     |     | $ | 15,872 |       
|                              |                                                       |                                               |            |              |       |             |         |              |     |               |     |                   |    |        |          |        |      |   |      |     |     |   |        |       

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

|                                                     |                                                                             |                                                      |                                          |                                           |       |                   |         |        |       |        |        |  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------- | ----------------------------------------- | ----- | ----------------- | ------- | ------ | ----- | ------ | ------ | -
|                                                     |                                                                             |                                                      |                                          |                                           |       | Nine Months Ended
|                                                     |                                                                             |                                                      |                                          |                                           |       | September 30,    
|                                                     |                                                                             |                                                      |                                          |                                           |       |                  
|                                                     |                                                                             |                                                      |                                          |                                           |       | 2002              |         | 2003  
|                                                     |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|Operating activities:                                |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|                                                     | Net loss                                                                    |                                                      | $                                        | (12,112                                   | )     |                   | $       | (4,558 | )    
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                      |                                          |                                           |       |                   |         |        |      
|                                                     |                                                                             | Depreciation and amortization                        |                                          |                                           | 4,915 |                   |         |        | 3,497 |       
|                                                     |                                                                             | Loss on disposal of assets                           |                                          |                                           | 709   |                   |         |        | 284   |       
|                                                     |                                                                             | Deferred income taxes                                |                                          |                                           | (268  | )                 |         |        | (212  | )     
|                                                     |                                                                             | Noncash stock-based compensation expense             |                                          |                                           | 203   |                   |         |        | 32    |       
|                                                     |                                                                             | Change in fair value of outstanding warrants         |                                          |                                           |      |                   |         |        | (134  | )     
|                                                     |                                                                             | Minority interest in loss of consolidated subsidiary |                                          |                                           | (817  | )                 |         |        | (200  | )     
|                                                     |                                                                             | Changes in operating assets and liabilities:         |                                          |                                           |       |                   |         |        |       |       
|                                                     |                                                                             |                                                      | Accounts receivable                      |                                           |       | 7,761             |         |        |       | 2,215  |       
|                                                     |                                                                             |                                                      | Other assets                             |                                           |       | (1,376            | )       |        |       | 717    |       
|                                                     |                                                                             |                                                      | Accounts payable and accrued liabilities |                                           |       | (1,538            | )       |        |       | (1,260 | )     
|                                                     |                                                                             |                                                      | Restructuring-related liabilities        |                                           |       | (4,539            | )       |        |       | (8,202 | )     
|                                                     |                                                                             |                                                      | Deferred revenue                         |                                           |       | (3,994            | )       |        |       | (1,971 | )     
|                                                     |                                                                             |                                                      | Income taxes payable                     |                                           |       | (382              | )       |        |       | 343    |       
|                                                     |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|                                                     |                                                                             |                                                      |                                          | Net cash used in operating activities     |       |                   | (11,438 | )      |       |        | (9,449 | )
|Investing activities:                                |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|                                                     | Restricted cash                                                             |                                                      |                                          | (4,670                                    | )     |                   |         | (795   | )    
|                                                     | Purchases of property and equipment                                         |                                                      |                                          | (416                                      | )     |                   |         | (933   | )    
|                                                     | Proceeds on disposal of equipment                                           |                                                      |                                          | 174                                       |       |                   |         |       |      
|                                                     |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|                                                     |                                                                             |                                                      |                                          | Net cash used in investing activities     |       |                   | (4,912  | )      |       |        | (1,728 | )
|Financing activities:                                |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|                                                     | Proceeds from exercise of stock options                                     |                                                      |                                          | 237                                       |       |                   |         | 22     |      
|                                                     | Proceeds from issuance of shares under employee stock purchase plan         |                                                      |                                          | 272                                       |       |                   |         | 201    |      
|                                                     | Payments on capital lease obligations                                       |                                                      |                                          | (142                                      | )     |                   |         | (257   | )    
|                                                     | Net proceeds from sale of common stock                                      |                                                      |                                          | 20,531                                    |       |                   |         | 2,815  |      
|                                                     |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|                                                     |                                                                             |                                                      |                                          | Net cash provided by financing activities |       |                   | 20,898  |        |       |        | 2,781  |  
|Effects of exchange rate changes on cash             |                                                                             |                                                      | 398                                      |                                           |       |                   | 305     |       
|Net increase (decrease) in cash and cash equivalents |                                                                             |                                                      | 4,946                                    |                                           |       |                   | (8,091  | )     
|Cash and cash equivalents at beginning of period     |                                                                             |                                                      | 15,868                                   |                                           |       |                   | 17,041  |       
|                                                     |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|Cash and cash equivalents at end of period           |                                                                             | $                                                    | 20,814                                   |                                           |       | $                 | 8,950   |       
|                                                     |                                                                             |                                                      |                                          |                                           |       |                   |         |        |      
|Supplemental cash flow disclosure:                   |                                                                             |                                                      |                                          |                                           |       |                   |         |       
|                                                     | Interest paid                                                               |                                                      | $                                        | 89                                        |       |                   | $       | 85     |      
|                                                     | Income taxes paid (refunded), net                                           |                                                      |                                          | 290                                       |       |                   |         | (124   | )    
|                                                     | Payment of obligation with common stock                                     |                                                      |                                          | 50                                        |       |                   |         |       |      

See accompanying notes to condensed consolidated financial statements.

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ONYX SOFTWARE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Description of Business and Basis of Presentation

Description of the Company

Onyx Software Corporation and subsidiaries (Company) is a leading provider
of enterprise-wide customer relationship management (CRM) solutions designed to
promote strategic business improvement and revenue growth by enhancing the way
businesses market, sell and service their products. Using the Internet in
combination with traditional forms of interaction, including phone, mail, fax
and e-mail, the Companys solution helps enterprises to more effectively
acquire, manage and maintain customer, partner and other relationships. The
Company markets its solution to companies that want to merge new, online
business processes with traditional business processes to enhance their
customer-facing operations, such as marketing, sales, customer service and
technical support. The Companys solution uses a single data model across all
customer interactions, resulting in a single repository for all marketing,
sales and service information. It is fully integrated across all
customer-facing departments and interaction media. The Companys solution is
designed to be easy to use, widely accessible, rapidly deployable, scalable,
flexible, customizable and reliable, which can result in a comparatively low
total cost of ownership and rapid return on investment. The Company was
incorporated in the state of Washington on February 23, 1994 and maintains its
headquarters in Bellevue, Washington.

Interim Financial Information

The accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly,
certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed, or omitted, pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). In
the Companys opinion, the statements include all adjustments necessary (which
are of a normal and recurring nature) for a fair presentation for the results
of the interim periods presented. These financial statements should be read in
conjunction with the Companys audited consolidated financial statements for
the year ended December 31, 2002, included in its Form 10-K filed with the SEC
on March 26, 2003. The Companys results of operations for any interim period
are not necessarily indicative of the results of operations for any other
interim period or for a full fiscal year.

Reverse Stock Split

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

2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

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

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Revenue Recognition

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

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

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

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

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

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

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

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

Cash Equivalents and Restricted Cash

The Company considers all highly liquid investments with a remaining
maturity of three months or less at the date of purchase to be cash
equivalents. At December 31, 2002 and September 30, 2003, the Companys cash
equivalents consisted of money market funds.

Separately, the Company had $3.0 million in restricted cash at September
30, 2003, which was security for its credit line with Silicon Valley Bank that
supports its outstanding letters of credit.

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Stock-Based Compensation

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

SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS 123)
established accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation plans. As allowed by
SFAS 123, the Company has elected to continue to apply the
intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS 123. The following table illustrates
the effect on net loss had the fair-value-based method been applied to all
outstanding and unvested awards in each period.

|                                                                                                          |           |   |                                       |   |                                 |   |       |   |      |   |         |   |  |   |        |   | 
|--------------------------------------------------------------------------------------------------------- | --------- | - | ------------------------------------- | - | ------------------------------- | - | ----- | - | ---- | - | ------- | - |  | - | ------ | - | 
|                                                                                                          |           |   | Three Months Ended September 30,      |   | Nine Months Ended September 30,
|                                                                                                          |           |   |                                       |   |                                
|                                                                                                          |           |   | 2002                                  |   | 2003                            |   | 2002  |   | 2003
|                                                                                                          |           |   |                                       |   |                                 |   |       |   |     
|                                                                                                          |           |   | (In thousands, except per share data)
|                                                                                                          | Net loss: |   |                                       |   |                                 |   |       |   |      |   |         |   |  |   |        |   | 
|As reported                                                                                               |           | $ | (884                                  | ) |                                 | $ | (259  | ) |      | $ | (12,112 | ) |  | $ | (4,558 | )
|Add: stock-based
employee expense
included in
reported net loss                                           |           |   | 51                                    |   |                                 |   | 4     |   |      |   | 203     |   |  |   | 32     |  
|Deduct: stock-based
employee
compensation
expense determined
under
fair-value-based
method for all
awards |           |   | (2,123                                | ) |                                 |   | (678  | ) |      |   | (7,559  | ) |  |   | (4,002 | )
|                                                                                                          |           |   |                                       |   |                                 |   |       |   |      |   |         |   |  |   |        |  
|Pro forma                                                                                                 |           | $ | (2,956                                | ) |                                 | $ | (933  | ) |      | $ | (19,468 | ) |  | $ | (8,528 | )
|                                                                                                          |           |   |                                       |   |                                 |   |       |   |      |   |         |   |  |   |        |  
|Net loss per share:                                                                                       |           |   |                                       |   |                                 |   |       |   |      |   |         |   |  |   |        |  
|As reported                                                                                               |           | $ | (0.07                                 | ) |                                 | $ | (0.02 | ) |      | $ | (0.97   | ) |  | $ | (0.34  | )
|Pro forma                                                                                                 |           | $ | (0.23                                 | ) |                                 | $ | (0.07 | ) |      | $ | (1.57   | ) |  | $ | (0.64  | )

Other Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income (loss) and its components in the
financial statements. The only items of other comprehensive income (loss) that
the Company currently reports are foreign currency translation adjustments and
unrealized gains (losses) on marketable securities. Total comprehensive loss
for the three months ended March 31, 2002 was $6.5 million which included
approximately $20,000 of cumulative translation gains. Total comprehensive loss
for the three months ended June 30, 2002 was $4.0 million which included
approximately $675,000 of cumulative translation gains. Total comprehensive
loss for the three months ended September 30, 2002 was $1.0 million which
included approximately $112,000 of cumulative translation losses. The total
comprehensive loss for the three and nine months ended September 30, 2003 was
$148,000 and $4.0 million, respectively, which included approximately $111,000
and $532,000 of cumulative translation gains.

Accounting for Costs Associated with Exit or Disposal Activities

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS 146). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This statement requires
that a liability for a cost associated with an exit or disposal

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activity be recognized at fair value when the liability is incurred. The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
Company applied the provisions of EITF 94-3 to those restructuring activities
initiated prior to December 31, 2002. The adoption of SFAS 146 has not had a
material effect on the Companys consolidated financial statements.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). FIN 46
addresses the consolidation by business enterprises of variable interest
entities as defined in FIN 46. FIN 46 applies immediately to variable interests
in variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. As
amended by FASB Staff Position (FSP) No. FIN 46-6, FIN 46 is effective for
variable interests in a variable interest entity created before February 1,
2003 at the end of the first interim or annual period ending after December 15,
2003. The Company does not expect the adoption of FIN 46 to have a material
impact on its financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement of financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The Companys
adoption of SFAS 149 did not have a significant impact on its financial
position or results of operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS
150). SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS 150 is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of
adoption. The Companys adoption of SFAS 150 did not have a significant impact
on its financial position or results of operations.

3. Restructuring and Other Related Charges

In April and again in September 2001, the Company approved a restructuring
plan to reduce headcount, reduce infrastructure and eliminate excess and
duplicate facilities. During 2001, the Company recorded approximately $51.8
million in restructuring and other related charges. During 2002, the Company
recorded approximately $8.5 million in restructuring and other related charges.
During the first quarter of 2003, the Company recorded approximately $340,000
in restructuring and other related charges.

The components of the first quarter 2003 charges and a roll-forward of the
related liability follow (in thousands):

|                             |  |              |        |                |  |                |      |            |  |                |        |   |  |   |      |   |  |   |        | 
|---------------------------- |  | ------------ | ------ | -------------- |  | -------------- | ---- | ---------- |  | -------------- | ------ | - |  | - | ---- | - |  | - | ------ | 
|                             |  |              |        |                |  | Charge for the |      | Cash       |  |                |        |   |  |   |      |  
|                             |  | Balance at   |        | Three Months   |  | Payments       |      |            |  |                |        |   |  |  
|                             |  | December 31, |        | Ended          |  | and Write-     |      | Fair Value |  | Balance at    
|                             |  | 2002         |        | March 31, 2003 |  | offs           |      | Adjustment |  | March 31, 2003
|                             |  |              |        |                |  |                |      |            |  |               
|Excess facilities            |  | $            | 12,134 |                |  | $              | 354  |            |  | $              | (3,376 | ) |  | $ |     |   |  | $ | 9,112  | 
|Excess facilities  warrants |  |              | 920    |                |  |                |     |            |  |                |       |   |  |   | (242 | ) |  |   | 678    | 
|Employee separation costs    |  |              | 636    |                |  |                | (101 | )          |  |                | (167   | ) |  |   |     |   |  |   | 368    | 
|Asset impairments, net       |  |              |       |                |  |                | 87   |            |  |                | (87    | ) |  |   |     |   |  |   |       | 
|Other                        |  |              | 54     |                |  |                |     |            |  |                | (35    | ) |  |   |     |   |  |   | 19     | 
|                             |  |              |        |                |  |                |      |            |  |                |        |   |  |   |      |   |  |   |        | 
|Total                        |  | $            | 13,744 |                |  | $              | 340  |            |  | $              | (3,665 | ) |  | $ | (242 | ) |  | $ | 10,177 | 
|                             |  |              |        |                |  |                |      |            |  |                |        |   |  |   |      |   |  |   |        | 

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In April 2003, the Company approved a restructuring plan to reduce
additional headcount. Severance costs associated with this restructuring plan
were charged to expense during the second quarter of 2003. The components of
the second quarter 2003 charges and a roll-forward of the related liability
follow (in thousands):

|                             |  |            |        |               |  |                |     |            |  |               |        |   |  |   |     |   |  |   |       | 
|---------------------------- |  | ---------- | ------ | ------------- |  | -------------- | --- | ---------- |  | ------------- | ------ | - |  | - | --- | - |  | - | ----- | 
|                             |  |            |        |               |  | Charge for the |     | Cash       |  |               |        |   |  |   |     |  
|                             |  | Balance at |        | Three Months  |  | Payments       |     |            |  |               |        |   |  |  
|                             |  | March 31,  |        | Ended         |  | and Write-     |     | Fair Value |  | Balance at   
|                             |  | 2003       |        | June 30, 2003 |  | offs           |     | Adjustment |  | June 30, 2003
|                             |  |            |        |               |  |                |     |            |  |              
|Excess facilities            |  | $          | 9,112  |               |  | $              | 15  |            |  | $             | (2,441 | ) |  | $ |    |   |  | $ | 6,686 | 
|Excess facilities  warrants |  |            | 678    |               |  |                |    |            |  |               |       |   |  |   | (15 | ) |  |   | 663   | 
|Employee separation costs    |  |            | 368    |               |  |                | 739 |            |  |               | (964   | ) |  |   |    |   |  |   | 143   | 
|Other                        |  |            | 19     |               |  |                |    |            |  |               | (18    | ) |  |   |    |   |  |   | 1     | 
|                             |  |            |        |               |  |                |     |            |  |               |        |   |  |   |     |   |  |   |       | 
|Total                        |  | $          | 10,177 |               |  | $              | 754 |            |  | $             | (3,423 | ) |  | $ | (15 | ) |  | $ | 7,493 | 
|                             |  |            |        |               |  |                |     |            |  |               |        |   |  |   |     |   |  |   |       | 

The components of the third quarter 2003 charges and a roll-forward of the
related liability follow (in thousands):

|                             |  |            |       |                    |  |                |     |            |  |                    |        |   |  |   |     |  |  |   |       | 
|---------------------------- |  | ---------- | ----- | ------------------ |  | -------------- | --- | ---------- |  | ------------------ | ------ | - |  | - | --- |  |  | - | ----- | 
|                             |  |            |       |                    |  | Charge for the |     | Cash       |  |                    |        |   |  |   |     | 
|                             |  | Balance at |       | Three Months       |  | Payments       |     |            |  |                    |        |   |  |  
|                             |  | June 30,   |       | Ended              |  | and Write-     |     | Fair Value |  | Balance at        
|                             |  | 2003       |       | September 30, 2003 |  | offs           |     | Adjustment |  | September 30, 2003
|                             |  |            |       |                    |  |                |     |            |  |                   
|Excess facilities            |  | $          | 6,686 |                    |  | $              | 112 |            |  | $                  | (2,211 | ) |  | $ |    |  |  | $ | 4,587 | 
|Excess facilities  warrants |  |            | 663   |                    |  |                |    |            |  |                    |       |   |  |   | 123 |  |  |   | 786   | 
|Employee separation costs    |  |            | 143   |                    |  |                | 50  |            |  |                    | (159   | ) |  |   |    |  |  |   | 34    | 
|Other                        |  |            | 1     |                    |  |                |    |            |  |                    |       |   |  |   |    |  |  |   | 1     | 
|                             |  |            |       |                    |  |                |     |            |  |                    |        |   |  |   |     |  |  |   |       | 
|Total                        |  | $          | 7,493 |                    |  | $              | 162 |            |  | $                  | (2,370 | ) |  | $ | 123 |  |  | $ | 5,408 | 
|                             |  |            |       |                    |  |                |     |            |  |                    |        |   |  |   |     |  |  |   |       | 

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

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

The most significant mitigation of the Companys excess facility
commitments was completed in December 2002 when the Company reached an
agreement with the landlord, Bellevue Hines Development, L.L.C. (Hines),
relating to its 262,000 square feet of office space in Bellevue, Washington.
The partial lease termination reduces the Companys excess facilities in
Bellevue, Washington by approximately 202,000 square feet. The Company
continues to lease approximately 60,000 square feet at this facility, which
began serving as its new corporate headquarters effective at the end of January
2003. The new lease for 60,000 square feet expires in December 2013. The
partial lease termination requires cash outflows of approximately $2.5 million
over the 7-month period ending April 2004, which is included in current
restructuring-related liabilities at September 30, 2003. In addition to cash
payments, the Company issued three five-year warrants to Hines for the purchase
of up to an aggregate of 198,750 shares of the Companys common stock,
including a warrant to purchase 66,250 shares of common stock at an exercise
price of $10.38 per share, a warrant to purchase 66,250 shares of common stock
at an exercise price of $12.11 per share and a warrant to purchase 66,250
shares of common stock at an exercise price of $13.84 per share. If the Company
either undergoes a change of control or issues securities with rights and
preferences superior to the Companys common stock within two years after the
warrants were issued, Hines will have the option of

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canceling any unexercised warrants and receiving a cash cancellation
payment of $18.40 per share in the case of the $10.38 warrants, $16.00 per
share in the case of the $12.11 warrants and $13.92 per share in the case of
the $13.84 warrants. These contingent cash payments aggregate $3.2 million. The
Company also entered into a registration rights agreement with Hines, pursuant
to which the Company filed a registration statement on February 14, 2003
covering the resale of the shares of the Companys common stock subject to
purchase by Hines under the warrants. The warrant value as of December 31, 2002
was estimated at $920,000 based on (a) the estimated value of the warrants
using the Black-Scholes model with an expected dividend yield of 0.0%, a
risk-free interest rate of 5.0%, volatility of 85% and an expected life of five
years and (b) the estimated value of the cash cancellation payments in the
event of a change in control. The warrants are subject to variable accounting
and the Company is required to mark the warrants to market at each reporting
period. At September 30, 2003, the warrant value was estimated at $786,000
using similar assumptions to those used at December 31, 2002, and is included
in long-term liabilities.

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

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

The current portion of restructuring-related liabilities totaled $4.1
million at September 30, 2003, the long-term portion of restructuring-related
liabilities totaled $567,000 at September 30, 2003 and the value of the
warrants issued in connection with the termination of certain facility lease
obligations was $786,000 at September 30, 2003.

4. Shareholders Equity

Private Offering

In May 2003, the Company completed a private offering of 1,038,475 shares
of its common stock at a purchase price of $2.60 per share with an existing
institutional investor and 97,222 shares of its common stock at a purchase
price of $3.22 per share with certain officers and directors of the Company.
The proceeds to the Company totaled approximately $2.8 million after deducting
the costs of the offering. In connection with the private offering the Company
granted anti-dilution rights to the existing institutional investor whereby the
Company will issue warrants to purchase common stock if additional shares of
common stock are sold at a price less than $2.60 per share before November 19,
2003.

Increase in Authorized Capital

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

5. Litigation and Contingencies

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The Company, several of the Companys officers and directors and Dain
Rauscher Wessels have been named as defendants in a series of related lawsuits
filed in the United States District Court for the Western District of
Washington on behalf of purchasers of publicly traded Company common stock
during various time periods. The consolidated amended complaint in these
lawsuits alleges that the Company violated the Securities Act of 1933
(Securities Act) and the Securities Exchange Act of 1934 (Exchange Act), and
seeks certification of a class action for purchasers of Company common stock in
the Companys February 12, 2001 public offering and on the open market during
the period January 30, 2001 through July 24, 2001. In addition, a shareholder
to whom the Company issued shares in the first quarter of 2001 has claimed that
the Company made certain misrepresentations and omissions and otherwise
violated the securities laws. None of the complaints or claims specifies the
amount of damages to be claimed.

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

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

The Company disputes the allegations of wrongdoing in these complaints and
intends to vigorously defend itself and, where applicable, its officers and
directors against these lawsuits and claims, and believes it has several
meritorious defenses and, in certain instances, counterclaims. Accordingly, the
Company does not believe it is probable that the outcome of these litigation
matters will be unfavorable to the Company. While it is unlikely that the
outcomes would result in a material adverse outcome, the Company cannot provide
assurance that some or all of these matters will not materially and adversely
affect the Companys business, future results of operations, financial position
or cash flows in a particular period.

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6. Earnings (Loss) Per Share

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

|                                             |                                |               |        |                    |     |                   |        |       |    |      |         |       |     |   |        |       |    | 
|-------------------------------------------- | ------------------------------ | ------------- | ------ | ------------------ | --- | ----------------- | ------ | ----- | -- | ---- | ------- | ----- | --- | - | ------ | ----- | -- | 
|                                             |                                |               |        | Three Months Ended |     | Nine Months Ended
|                                             |                                |               |        | September 30,      |     | September 30,    
|                                             |                                |               |        |                    |     |                  
|                                             |                                |               |        | 2002               |     | 2003              |        | 2002  |    | 2003
|                                             |                                |               |        |                    |     |                   |        |       |    |     
|Net loss (A)                                 |                                | $             | (884   | )                  |     | $                 | (259   | )     |    | $    | (12,112 | )     |     | $ | (4,558 | )    
|                                             |                                |               |        |                    |     |                   |        |       |    |      |         |       |     |   |        |      
|Weighted average number of common shares (B) |                                |               | 12,641 |                    |     |                   | 13,902 |       |    |      | 12,427  |       |     |   | 13,284 |      
|                                             | Effect of dilutive securities: |               |        |                    |     |                   |        |       |    |      |         |       |     |   |        |       |   
|                                             |                                | Stock options |        |                    | *   |                   |        |       | *  |      |         |       | *   |   |        |       | *  | 
|                                             |                                | Warrants      |        |                    | N/A |                   |        |       | ** |      |         |       | N/A |   |        |       | ** | 
|                                             |                                |               |        |                    |     |                   |        |       |    |      |         |       |     |   |        |      
|Adjusted weighted average shares (C)         |                                |               | 12,641 |                    |     |                   | 13,902 |       |    |      | 12,427  |       |     |   | 13,284 |      
|                                             |                                |               |        |                    |     |                   |        |       |    |      |         |       |     |   |        |      
|Loss per share:                              |                                |               |        |                    |     |                   |        |       |    |      |         |       |     |   |        |      
|                                             | Basic (A)/(B)                  |               | $      | (0.07              | )   |                   | $      | (0.02 | )  |      | $       | (0.97 | )   |   | $      | (0.34 | ) 
|                                             | Diluted (A)/(C)                |               | $      | (0.07              | )   |                   | $      | (0.02 | )  |      | $       | (0.97 | )   |   | $      | (0.34 | ) 



---

|*  |  | The effect of stock options are excluded from the computation of diluted
earnings per share because the effects are antidilutive. Outstanding stock
options of 2,621,296 and 3,388,673 at September 30, 2002 and 2003,
respectively, were excluded from the computation of diluted earnings per
share because their effect was antidilutive. Outstanding options will be
included in the computation of diluted earnings per share in future
periods to the extent their effects are dilutive. If the Company had been
profitable during any of the periods reported, based on the average price
of the Companys common stock during each period using the treasury stock
method, the approximate number of dilutive options included in the
computation of diluted earnings per share would have been 176,000 shares
and 228,000 shares for the three and nine months ended September 30, 2002,
respectively, and 108,000 and 112,000 during the three and nine months
ended September 30, 2003, respectively.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|** |  | In January 2003, the Company issued warrants to purchase 198,750 shares
of its common stock at exercise prices ranging from $10.38 to $13.84 per
share in connection with the termination of excess facilities. There were
no warrants outstanding prior to January 2003. Outstanding warrants were
excluded from the computation of diluted earnings per share for the three
and nine months ended September 30, 2003 because their effect was
antidilutive. Outstanding warrants will be included in the computation of
diluted earnings per share in future periods to the extent their effects
are dilutive.                                                                                                                                                                                                                                                                                                                                                                                                

7. Stock-Based Compensation

Stock-based compensation includes stock-based charges resulting from
option-related deferred compensation recorded at the Companys initial public
offering and certain compensation arrangements with third-party consultants, as
well as the portion of acquisition-related consideration conditioned on the
continued service of key employees of certain acquired businesses, which must
be classified as compensation expense rather than as a component of purchase
price under accounting principles generally accepted in the United States of
America. Stock-based compensation was $51,000 and $4,000 for the three months
ended September 30, 2002 and 2003, respectively and $203,000 and $32,000 for
the nine months ended September 30, 2002 and 2003. Option-related deferred
compensation recorded at the Companys initial public offering was fully
amortized as of December 31, 2002.

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

|                                  |                                                |   |                    |    |                   |   |      |   |      |   |     |     |  |   |    |    | 
|--------------------------------- | ---------------------------------------------- | - | ------------------ | -- | ----------------- | - | ---- | - | ---- | - | --- | --- |  | - | -- | -- | 
|                                  |                                                |   | Three Months Ended |    | Nine Months Ended
|                                  |                                                |   | September 30,      |    | September 30,    
|                                  |                                                |   |                    |    |                  
|                                  |                                                |   | 2002               |    | 2003              |   | 2002 |   | 2003
|                                  |                                                |   |                    |    |                   |   |      |   |     
|Support and service cost of sales |                                                | $ | 29                 |    |                   | $ | 4    |   |      | $ | 114 |     |  | $ | 30 |   
|Sales and marketing               |                                                |   | 10                 |    |                   |   |     |   |      |   | 42  |     |  |   | 2  |   
|Research and development          |                                                |   | 4                  |    |                   |   |     |   |      |   | 15  |     |  |   |   |   
|General and administrative        |                                                |   | 8                  |    |                   |   |     |   |      |   | 32  |     |  |   |   |   
|                                  |                                                |   |                    |    |                   |   |      |   |      |   |     |     |  |   |    |   
|                                  | Total amortization of
stock-based compensation |   | $                  | 51 |                   |   | $    | 4 |      |   | $   | 203 |  |   | $  | 32 | 
|                                  |                                                |   |                    |    |                   |   |      |   |      |   |     |     |  |   |    |   

8. Line of Credit

In documents dated March 28, 2003 and May 5, 2003, the Company amended its
Loan and Security Agreement with Silicon Valley Bank (SVB), which was
originally entered into in February 2002, and entered into a second Loan and
Security Agreement with SVB that is intended to take advantage of a loan
guarantee by the Export Import Bank of the United States (Exim Bank). Under the
terms of these agreements, the Company has a total $15.0 million working
capital revolving line of credit with SVB, which is split between a $13.0
million domestic facility and a $2.0 million Exim Bank facility. Both are
secured by accounts receivable, property and equipment and intellectual
property. The domestic facility allows the Company to borrow up to the lesser
of (a) 75% of eligible domestic and individually approved foreign accounts
receivable and (b) $13.0 million. The Exim Bank facility allows the Company to
borrow up to the lesser of (a) 80% of eligible foreign accounts receivable and
(b) $2.0 million. If the borrowing base calculation falls below the outstanding
standby letters of credit issued by SVB on the Companys behalf, SVB may
require the Company to cash secure the amount by which outstanding standby
letters of credit exceed the borrowing base. The amount required to be
restricted under the loan agreement was $3.0 million, measured as of September
30, 2003. Due to the variability in the Companys borrowing base, the Company
may be subject to restrictions on its cash at various times throughout the
year. Any borrowings will bear interest at SVBs prime rate, which was 4.00% as
of September 30, 2003, plus 1.5%, subject to a minimum rate of 6.0%. The loan
agreements require that the Company maintain certain financial covenants based
on its adjusted quick ratio and tangible net worth. The Company was in
compliance with these covenants at September 30, 2003. The Company is also
prohibited under the loan and security agreements from paying dividends. The
facilities expire in March 2004. Based on the outstanding standby letters of
credit relating to long-term lease obligations totaling $9.7 million at
September 30, 2003, no additional amounts are currently available under the
credit facilities.

9. Segment and Geographic Information

The Company and its subsidiaries are principally engaged in the design,
development, marketing and support of enterprise-wide CRM solutions designed to
promote strategic business improvement and revenue growth by enhancing the way
businesses market, sell and service their products. Substantially all revenue
results from licensing the Companys software products and related consulting
and customer support (maintenance) services. The Companys Chief Executive
Officer and Chief Financial Officer, who are the Companys chief operating
decision makers, review financial information presented on a consolidated
basis, accompanied by disaggregated information about revenue by geographic
region for purposes of making operating decisions and assessing financial
performance. Accordingly, the Company considers itself to be in a single
industry segment, specifically the license, implementation and support of its
software applications, and to have only one operating segment. The Company does
not prepare reports for, or measure the performance of, its individual software
applications and, accordingly, the Company has not presented revenue or any
other related financial information by individual software product.

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

15



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Total revenues outside of North America for the three months ended
September 30, 2002 and 2003 were $7.2 million and $5.2 million, respectively.
Total revenues outside of North America for the nine months ended September 30,
2002 and 2003 were $17.9 million and $17.6 million, respectively.

The following geographic information is presented for the three and nine
months ended September 30, 2002 and 2003 (in thousands):

|                                       |         |  |         |        |         |  |         |       |       |  |   |        |  |  |   |        | 
|-------------------------------------- | ------- |  | ------- | ------ | ------- |  | ------- | ----- | ----- |  | - | ------ |  |  | - | ------ | 
|                                       |         |  | North   |        | United  |  | Rest of |       |       |  |  
|                                       |         |  | America |        | Kingdom |  | World   |       | Total
|                                       |         |  |         |        |         |  |         |       |      
|Three months ended September 30, 2002: |         |  |         |        |         |  |         |       |       |  |   |        |  |  |   |       
|                                       | Revenue |  | $       | 11,853 |         |  | $       | 5,157 |       |  | $ | 2,018  |  |  | $ | 19,028 | 
|Three months ended September 30, 2003: |         |  |         |        |         |  |         |       |       |  |   |        |  |  |   |       
|                                       | Revenue |  | $       | 10,194 |         |  | $       | 1,790 |       |  | $ | 3,416  |  |  | $ | 15,400 | 
|Nine months ended September 30, 2002:  |         |  |         |        |         |  |         |       |       |  |   |        |  |  |   |       
|                                       | Revenue |  | $       | 34,269 |         |  | $       | 8,511 |       |  | $ | 9,373  |  |  | $ | 52,153 | 
|Nine months ended September 30, 2003:  |         |  |         |        |         |  |         |       |       |  |   |        |  |  |   |       
|                                       | Revenue |  | $       | 27,845 |         |  | $       | 6,209 |       |  | $ | 11,363 |  |  | $ | 45,417 | 

10. Guarantees

In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 provides expanded
accounting guidance surrounding liability recognition and disclosure
requirements related to guarantees, as defined by this Interpretation. We
adopted FIN No. 45 during the quarter ended December 31, 2002. In the ordinary
course of business, we are not subject to potential obligations under
guarantees that fall within the scope of FIN No. 45 except for standard
indemnification and warranty provisions that are contained within many of our
customer license and service agreements, and give rise only to the disclosure
requirements prescribed by FIN No. 45.

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

11. Onyx Japan

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

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

The Company has entered into a distribution agreement with Onyx Japan,
which was approved by the minority shareholders, that provides for a fee to the
Company based on license and maintenance revenues in Japan. During the three
months ended September 30, 2002 and 2003, fees charged under this agreement
were $77,000 and $175,000, respectively and during the nine months ended

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September 30, 2002 and 2003, fees charged under this agreement were
$328,000 and $361,000. The intercompany fees are eliminated in consolidation;
however, the Company allocates 42% of the fees to the minority shareholders.

Although profitable in the third quarter of 2003, Onyx Japan incurred
substantial losses in previous periods. The minority shareholders capital
account balance as of September 30, 2003 was $35,000. Additional Onyx Japan
losses above approximately $84,000 in the aggregate will be absorbed 100% by
the Company, as compared to 58% in prior periods

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

12. Liquidity

The Companys near-term restructuring costs related to the mitigation of
excess facilities liabilities will consume a material amount of its cash
resources. The termination of approximately 202,000 square feet in Bellevue,
Washington will result in cash outflows of approximately $2.5 million over the
7-month period ending April 2004 and is included in current
restructuring-related liabilities at September 30, 2003. The termination of
these excess facilities commitments is contingent upon the following
conditions, among others, being met as of April 30, 2004: (a) the Company is
current in its payments under the lease and (b) the Company has not filed a
bankruptcy or other liquidation petition, or otherwise attempted to reject or
contest the lease. If the Company is not in compliance with any of these
conditions as of April 30, 2004, its original lease will not terminate and the
Company will be required to continue making payments on the excess facilities
subject to the original lease. If this were to take place, the Companys
business, financial condition and operating results would be materially
adversely affected.

Onyx currently has loan and security agreements with SVB that allow the
Company to borrow up to the lesser (a) 75% of eligible domestic and
individually approved foreign accounts receivable and (b) $13.0 million under a
domestic line, plus up to the lesser of (a) 80% of eligible foreign accounts
receivable and (b) $2.0 million under a line guaranteed by Exim Bank. At the
time of this filing, however, no additional amounts are available under the
lines of credit based on the level of the Companys borrowing base and its
outstanding letters of credit. The Company was in compliance with the financial
covenants of these facilities as of September 30, 2003. If the Company is
unable to maintain compliance with its covenants in the future or if SVB
decides to restrict its cash deposits, the Companys liquidity would be further
limited and its business, financial condition and operating results could be
materially harmed.

Assuming the Companys future revenue performance is comparable to the
most recent quarterly periods reported, the Company believes that, with the
expense reduction efforts instituted in April 2003 and the proceeds from the
private placement completed in May 2003, existing cash and cash equivalents
will be sufficient to meet its capital requirements for at least the next 12
months. Should the Companys results for subsequent quarters fall below the
results the Company achieved in the first quarter of 2003, the Company would
likely take action to restructure its operations to preserve its cash.
Mitigation of the Companys excess facilities liabilities will consume a material amount of the Companys cash resources. In addition, the
Company may bear substantial costs associated with the proposed acquisition of
Pivotal Corporation, or Pivotal, discussed more fully below, whether or not the
acquisition is completed. Although the Company expects the proposed Pivotal
acquisition to be accretive to shareholders, if it is successfully completed,
the combined company may require additional funds to support significantly
larger operations and pursue expected market opportunities. As a result of
these factors, along with the impact lower cash balances could have on the
Companys sales, the Company may seek additional funds in the future through
public or private equity financing or from other sources to fund its operations
and pursue the Companys growth strategy. The Company may experience difficulty
in obtaining funding on favorable terms, if at all. Any financing the Company
might obtain may contain covenants that restrict the Companys freedom to
operate its business or may require the Company to issue securities that have
rights, preferences or privileges senior to its common stock and may dilute
current shareholders ownership interest in the Company.

13. Subsequent Event

On November 12, 2003, the Company announced an unsolicited proposal to acquire
Pivotal by way of a business combination in a stock-for-stock transaction. Under the terms of the
proposal which was submitted by letter to the Pivotal Board of Directors on
November 12, 2003, the companies would be combined on the basis of 0.475 shares
of Onyx common stock for each common share of Pivotal, or approximately 12.5
million shares of Onyx common stock. The

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approximate price per Pivotal common share is $2.25 based on the $4.73 closing
price of Onyx common stock on November 11, 2003. On October 8, 2003, Pivotal
announced that it had entered into a definitive agreement to be acquired by
Talisma Corporation in a cash transaction financed by Oak Investment Partners
valued at $1.78 per share.

The Companys offer was not solicited by Pivotal and, as of this filing, the
Company had not received any response from Pivotals Board of Directors.
Pivotal may reject the Companys offer and Pivotal or Oak may employ certain
defensive tactics, such as adopting a poison pill or other takeover defense
measures, to delay or discourage the Company from pursuing its offer. In
addition, Oak may increase the value of its offer to match or exceed the
premium represented by the Companys proposal. As a result, the Company may
not be successful in completing its proposed acquisition of Pivotal and the
Company may incur substantial costs in pursuing the transaction. If the
Company does successfully complete the acquisition, the combined company would
have to pay a $1.5 million breakup fee associated with the pending Talisma
transaction and would incur additional restructuring costs.

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

Forward-Looking Information

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



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

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

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

Overview

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

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Overview of the Results for the Three and Nine Months Ended September 30, 2003

Key financial data points relating to our three and nine month performance
include:



| |  | Revenue of $15.4 million, down 19% from the third quarter of 2002 and down 3% from the second quarter of 2003;                                                                                                                                
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | License revenue of $3.6 million, down 50% from the third quarter of 2002 and up 16% from the second quarter of 2003;                                                                                                                          
| 
| |  | Service revenue of $11.8 million, consistent with service revenue from the third quarter of 2002 and down 7% from the
second quarter of 2003;                                                                                                 
| 
| |  | Service margins of 55%, down from 58% in the third quarter of 2002 and down from 57% in the second quarter of 2003;                                                                                                                           
| 
| |  | Operating expenses, excluding acquisition-related amortization, stock compensation and restructuring charges, of $9.4
million, down from $13.8 million in the third quarter of 2002 and down from $10.1 million in the second quarter of 2003;
| 
| |  | Revenue for the first nine months of 2003 of $45.4 million, down 13% from the first nine months of 2002;                                                                                                                                      
| 
| |  | License revenue for the first nine months of 2003 of $9.4 million, down 44% from the first nine months of 2002;                                                                                                                               
| 
| |  | Service revenue for the first nine months of 2003 of $36.0 million, up 2% from the first nine months of 2002;                                                                                                                                 
| 
| |  | Service margins for the first nine months of 2003 of 55%, down from 57% for the first nine months of 2002;                                                                                                                                    
| 
| |  | Operating expenses, excluding acquisition-related amortization, stock compensation and restructuring charges, for the first
nine months of 2003 of $31.4 million, down from $39.8 million for the first nine months of 2002;                  
| 
| |  | Cash and restricted cash balances of $12.0 million at September 30, 2003, down from $13.9 million at June 30, 2003 and down
from $19.3 million at December 31, 2002; and                                                                      
| 
| |  | Days sales outstanding, based on end of period receivable balances, at 74 days compared to 59 days in the third quarter of
2002 and 74 days in the second quarter of 2003.                                                                    

We believe that continued adverse economic conditions have affected our
ability to generate license revenue during the first nine months of 2003. Our
service revenue, service margins and operating expense management, however,
continued to be solid during the first nine months of 2003.

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

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



| |  | successful rebuilding of our direct sales force;                                                                          
|- |  | --------------------------------------------------------------------------------------------------------------------------
| 
| |  | managing our costs to allow our return to profitability and allow us to preserve our cash;                                
| 
| |  | sales management aimed at focusing our resources and efforts on the opportunities with the highest probability of success;

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| |  | maximizing the value of our partnerships with key system integration and technology vendors, particularly as it relates to
our Embedded CRM initiative and our key vertical industries;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | aggressive marketing of our recent major product releases on the Windows NT/Microsoft BackOffice and Oracle/Unix platforms;
and                                                        
| 
| |  | maintaining high customer satisfaction levels.                                                                                                                                         

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

Critical Accounting Policies and Estimates

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

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

Revenue Recognition

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

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

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

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

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

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

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

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

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

Allowance for Doubtful Accounts

A considerable amount of judgment is required when we assess the ultimate
realization of receivables, including assessing the probability of collection
and the current creditworthiness of each customer. Although no expenses were
required in 2002 and we have recorded a net benefit year to date through
September 30, 2003, significant expenses were recorded to increase our
allowance for doubtful accounts in prior years due to the rapid downturn in the
economy, and in the technology sector in particular, and we may record
additional expenses in the future.

Impairment of Intangible Assets

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

Restructuring

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

In June 2002, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. This statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities, and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). This statement requires
that a liability for a cost associated with an exit or disposal activity be
recognized at fair value when the liability is

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incurred. The provisions of this statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The adoption of SFAS No. 146 has not had a material
effect on our consolidated financial statements.

Contingencies and Litigation

We are subject to proceedings, lawsuits and other claims related to class
action lawsuits and other matters. We are required to assess the likelihood of
any adverse judgments or outcomes to these matters, as well as potential ranges
of probable losses. A determination of the amount of loss accrual required, if
any, for these contingencies are made after careful analysis of each individual
issue. The required accruals may change in the future due to new developments
in each matter.

Onyx Japan

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

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

We have entered into a distribution agreement with Onyx Japan, which was
approved by the minority shareholders, that provides for a fee to us based on
license and maintenance revenues in Japan. During the three months ended
September 30, 2002 and 2003, fees charged under this agreement were $77,000 and
$175,000, respectively and during the nine months ended September 30, 2002 and
2003, fees charged under this agreement were $328,000 and $361,000. All
intercompany fees are eliminated in consolidation; however, we allocate 42% of
the fees to the minority shareholders.

Although profitable in the third quarter of 2003, Onyx Japan incurred
substantial losses in previous periods. The minority shareholders capital
account balance as of September 30, 2003 was $35,000. Additional Onyx Japan
losses above approximately $84,000 in the aggregate will be absorbed 100% by
Onyx, as compared to 58% in prior periods.

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

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Results of Operations

The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenue for the
periods indicated. The operating results for the three and nine months ended
September 30, 2002 and 2003 are not necessarily indicative of the results that
may be expected for the full year or any future period.

|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |      |       |   
|-------------------------------------------- | ----------------------------------------------- | ------------------------ | ---- | ------------------ | ----- | ----------------- | ---- | ---- | ----- | ---- | ----- | ---- | ----- | -- | ----- | ---- | ----- | --
|                                             |                                                 |                          |      | Three Months Ended |       | Nine Months Ended
|                                             |                                                 |                          |      | September 30,      |       | September 30,    
|                                             |                                                 |                          |      |                    |       |                  
|                                             |                                                 |                          |      | 2002               |       | 2003              |      | 2002 |       | 2003
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |     
|Consolidated Statement of Operations Data:   |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|Revenue:                                     |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|                                             | License                                         |                          |      | 38.2               | %     |                   |      | 23.6 | %     |      |       | 32.3 | %     |    |       | 20.6 | %    
|                                             | Support and service                             |                          |      | 61.8               |       |                   |      | 76.4 |       |      |       | 67.7 |       |    |       | 79.4 |      
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|                                             |                                                 | Total revenue            |      |                    | 100.0 |                   |      |      | 100.0 |      |       |      | 100.0 |    |       |      | 100.0 |   
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|Cost of revenue:                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|                                             | License                                         |                          |      | 1.4                |       |                   |      | 1.1  |       |      |       | 1.3  |       |    |       | 1.4  |      
|                                             | Amortization of acquired technology             |                          |      | 0.7                |       |                   |      | 0.6  |       |      |       | 0.8  |       |    |       | 0.6  |      
|                                             | Support and service                             |                          |      | 25.9               |       |                   |      | 34.1 |       |      |       | 29.1 |       |    |       | 35.5 |      
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|                                             |                                                 | Total cost of revenue    |      |                    | 28.0  |                   |      |      | 35.8  |      |       |      | 31.2  |    |       |      | 37.5  |   
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|Gross margin                                 |                                                 |                          | 72.0 |                    |       |                   | 64.2 |      |       |      | 68.8  |      |       |    | 62.5  |     
|Operating expenses:                          |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|                                             | Sales and marketing                             |                          |      | 41.4               |       |                   |      | 29.0 |       |      |       | 40.2 |       |    |       | 35.3 |      
|                                             | Research and development                        |                          |      | 18.6               |       |                   |      | 18.2 |       |      |       | 22.1 |       |    |       | 20.0 |      
|                                             | General and administrative                      |                          |      | 12.5               |       |                   |      | 14.0 |       |      |       | 14.1 |       |    |       | 13.8 |      
|                                             | Restructuring and other-related charges         |                          |      | 6.1                |       |                   |      | 1.0  |       |      |       | 14.8 |       |    |       | 2.7  |      
|                                             | Amortization of acquisition-related intangibles |                          |      | 1.1                |       |                   |      | 1.4  |       |      |       | 1.2  |       |    |       | 1.4  |      
|                                             | Amortization of stock-based compensation        |                          |      | 0.3                |       |                   |      |     |       |      |       | 0.4  |       |    |       | 0.1  |      
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|                                             |                                                 | Total operating expenses |      |                    | 80.0  |                   |      |      | 63.6  |      |       |      | 92.8  |    |       |      | 73.3  |   
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|Income (loss) from operations                |                                                 |                          | (8.0 | )                  |       |                   | 0.6  |      |       |      | (24.0 | )    |       |    | (10.8 | )   
|Interest and other income (expense), net     |                                                 |                          | 1.4  |                    |       |                   | (0.7 | )    |       |      | (0.1  | )    |       |    | 0.0   |     
|Change in fair value of outstanding warrants |                                                 |                          |     |                    |       |                   | (0.8 | )    |       |      |      |      |       |    | 0.3   |     
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|Loss before income taxes                     |                                                 |                          | (6.6 | )                  |       |                   | (0.9 | )    |       |      | (24.1 | )    |       |    | (10.5 | )   
|Income tax provision (benefit)               |                                                 |                          | (0.2 | )                  |       |                   | 0.6  |      |       |      | 0.7   |      |       |    | 0.0   |     
|Minority interest in consolidated subsidiary |                                                 |                          | (1.8 | )                  |       |                   | 0.2  |      |       |      | (1.6  | )    |       |    | (0.4  | )   
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     
|                                             |                                                 | Net loss                 |      |                    | (4.6  | )%                |      |      | (1.7  | )%   |       |      | (23.2 | )% |       |      | (10.1 | )%
|                                             |                                                 |                          |      |                    |       |                   |      |      |       |      |       |      |       |    |       |     

Revenue

Total revenue, which consists of software license and support and service
revenue, decreased 19% from $19.0 million in the third quarter of 2002 to $15.4
million in the third quarter of 2003. Total revenue decreased 13% from $52.2
million in the first nine months of 2002 to $45.4 million in the first nine
months of 2003. For the three months ended September 30, 2002, NTL Group
accounted for approximately 15% of total revenue. For the nine months ended
September 30, 2002, no single customer accounted for more than 10% of total
revenue. For the three and nine months ended September 30, 2003, no single
customer accounted for more than 10% of total revenue.

Our license revenue decreased 50%, from $7.3 million in the third quarter
of 2002 to $3.6 million in the third quarter of 2003. Our license revenues
decreased 44% from $16.8 million in the first nine months of 2002 to $9.4
million in the first nine months of 2003. We believe that continued adverse
economic conditions led to disappointing license revenue results for the first
nine months of 2003 as compared to the prior year. We believe that
macroeconomic conditions will continue to be challenging in the near term which
may delay capital spending initiatives of our prospective and existing
customers.

Our support and service revenue in the third quarter of 2002 were
consistent with the third quarter of 2003 at $11.8 million. Support and service
revenue represented 62% of our total revenue in the third quarter of 2002 and
76% in the third quarter of 2003. Our support and service revenues increased 2%
from $35.3 million in the first nine months of 2002 to $36.0 million in the
first nine months of 2003. Support and service revenue represented 68% of our
total revenue in the first nine months of 2002 and 79% in the first nine months
of 2003. We expect the dollar amount of our support and service revenue to
decline slightly in the near term compared with recent results due to the unusually high demand for our
professional services that we experienced in the second and third quarters of
2003. We may also experience a modest decline in maintenance revenue as some customers
elect not to renew annual maintenance contracts, primarily due to specific
economic circumstances facing these customers and fewer new licenses sold in
2002 and the first nine months of 2003. We expect that the proportion of
support and service revenue to total revenue to fluctuate in the future,
depending on our overall sales of software licenses to new and existing
customers, as well as our customers direct use of third-party consulting and
implementation service providers, the degree to which we provide opportunities
for our partners to engage with our customers and the ongoing renewals of
customer support contracts.

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Revenue outside of North America decreased 27%, from $7.2 million in the
third quarter of 2002 to $5.2 million in the third quarter of 2003. The
decrease in international revenue in the third quarter of 2003 compared to the
third quarter of 2002 was due to a decrease in license revenue in Europe.
Revenue outside of North America decreased 2%, from $17.9 million in the first
nine months of 2002 to $17.6 million in the first nine months of 2003.

Cost of Revenue

Cost of license revenue

Cost of license revenue consists of license fees for third-party software,
amortization of acquired technology, product media, product duplication,
manuals, product fulfillment and shipping costs. Cost of license revenue
decreased 35%, from $270,000 in the third quarter of 2002 to $175,000 in the
third quarter of 2003. Cost of license revenue as a percentage of related
license revenue was 4% in the third quarter of 2002 and 5% in the third quarter
of 2003. Cost of license revenue decreased 1%, from $667,000 in the first nine
months of 2002 to $657,000 in the first nine months of 2003. Cost of license
revenue as a percentage of related license revenue was 4% in the first nine
months of 2002 and 7% in the first nine months of 2003. The increase in cost of
license revenue as a percentage of related license revenue in the three and
nine months ended September 30, 2003 compared to the same periods of the prior
year was primarily the result of a higher concentration of license revenue
subject to third-party product royalty costs coupled with the impact of certain
fixed third-party product royalty agreements which do not vary directly with
license revenue.

Amortization of acquired technology

Amortization of acquired technology represents the amortization of
capitalized technology associated with our acquisitions of EnCyc in 1998 and
Market Solutions in 1999. Amortization of acquired technology was $138,000 in
the third quarter of 2002 and $84,000 in the third quarter of 2003.
Amortization of acquired technology was $414,000 in the first nine months of
2002 and $252,000 in the first nine months of 2003. The decrease in
amortization of acquired technology in the three and nine months ended
September 30, 2003 compared to same periods of the prior year is the result of
the completion of the amortization of acquired technology for Market Solutions
in the third quarter of 2002. The unamortized balance of acquired technology,
all of which relates to our acquisition of EnCyc, totaled $3,000 at September
30, 2003 and is expected to be amortized in full during the fourth quarter of
2003.

Cost of support and service revenue

Cost of support and service revenue consists of personnel and third-party
service provider costs related to consulting services, customer support and
training. Cost of service revenue increased 7%, from $4.9 million in the third
quarter of 2002 to $5.3 million in the third quarter of 2003. Cost of support
and service revenue as a percentage of related support and service revenue was
42% in the third quarter of 2002 compared to 45% in the third quarter of 2003.
The increase in cost of support and service revenue in dollar amount and as a
percentage of related support and service revenue in the third quarter of 2003
compared to the same period of the prior year is due to a higher concentration
of professional service revenue, which contributes lower margins than support
revenue. Cost of service revenue increased 6%, from $15.2 million in the first
nine months of 2002 to $16.1 million in the first nine months of 2003. Cost of
support and service revenue as a percentage of related support and service
revenue was 43% in the first nine months of 2002 compared to 45% in the first
nine months of 2003. The increase in cost of support and service revenue in
dollar amount and as a percentage of related support and service revenue in the
first nine months of 2003 compared to the same period of the prior year is due
to a higher concentration of professional service revenue, which contributes
lower margins than support revenue, as well as an increase in overall service
revenue. The cost of support and services as a percentage of support and
service revenue may vary between periods primarily for two reasons: (1) the mix
of services we provide (consulting, customer support, training), which have
different cost structures, and (2) the resources we use to deliver these
services (internal versus third parties).

Operating Expenses and Other

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Sales and marketing

Sales and marketing expenses consist primarily of salaries, commissions
and bonuses earned by sales and marketing personnel, travel and promotional
expenses and facility and communication costs for direct sales offices. Sales
and marketing expenses decreased 43%, from $7.9 million in the third quarter of
2002 to $4.5 million in the third quarter of 2003. Sales and marketing expenses
decreased 23%, from $20.9 million in the first nine months of 2002 to $16.0
million in the first nine months of 2003. The decrease in dollar amount from
2002 to 2003 was primarily due to restructuring activities and reductions in
sales and marketing headcounts, along with a decrease in sales commissions and
bonuses associated with lower license revenues. Sales and marketing employees
decreased 32% from September 30, 2002 to September 30, 2003. Sales and
marketing expenses represented 41% of our total revenue in the third quarter of
2002, compared to 29% in the third quarter of 2003. Sales and marketing
expenses represented 40% of our total revenue in the first nine months of 2002,
compared to 35% in the first nine months of 2003.

We expect our sales and marketing expenses to decrease in dollars in 2003
relative to 2002 as we gain the full benefit of our April 2003 restructuring
efforts and invest in resource levels that are more closely aligned with the
expected demand for our products. As we gain visibility into our long-term
sales growth opportunity, we believe that we may need to increase
our sales and marketing efforts, particularly in support of our vertical and
embedded CRM strategies, to expand our market position and further increase
acceptance of our products.

Research and development

Research and development expenses consist primarily of salaries, benefits
and equipment for software developers, quality assurance personnel, program
managers and technical writers, and payments to outside contractors. Research
and development expenses decreased 21%, from $3.5 million in the third quarter
of 2002 to $2.8 million in the third quarter of 2003. Research and development
expenses decreased 21%, from $11.5 million in the first nine months of 2002 to
$9.1 million in the first nine months of 2003. The decrease was primarily due
to a decrease in the use of outside contractors, and to a lesser extent, due to
a decrease in the number of development personnel. Research and development
employees decreased 16% from September 30, 2002 to September 30, 2003. Research
and development costs represented 19% of our total revenue in the third quarter
of 2002, compared to 18% in the third quarter of 2003. Research and development
costs represented 22% of our total revenue in the first nine months of 2002,
compared to 20% in the first nine months of 2003.

Although research and development expenses were affected by our April 2003
restructuring efforts, we believe that those development projects that are most
essential to our long-term growth were least affected. We believe that our
research and development investments are essential to our long-term strategy.
To fully realize our long-term sales growth opportunity, we believe that we may
need to increase our research and development investment in the future in
dollars.

General and administrative

General and administrative expenses consist primarily of salaries,
benefits and related costs for our executive, finance, human resource and
administrative personnel, professional services fees and allowances for bad
debt. General and administrative expenses decreased 9%, from $2.4 million in
the third quarter of 2002 to $2.2 million in the third quarter of 2003. General
and administrative expenses decreased 15%, from $7.4 million in the first nine
months of 2002 to $6.3 million in the first nine months of 2003. The decrease
in dollar amount for the third quarter of 2003 compared to the same period of
the prior year was primarily due to reductions in executive and administrative
personnel, in particular, costs associated with the role of the President and
Chief Operating Officer position that was eliminated in October 2002. The
decrease in dollar amount for the first nine months of 2003 compared to the
same period of the prior year was due to reductions in executive and
administrative personnel, along with a decrease in professional services fees
and the benefit from collections of accounts previously believed to be
uncollectible during the first and second quarters of 2003. General and
administrative costs represented 13% of our total revenue in the third quarter
of 2002, compared to 14% in the third quarter of 2003. General and
administrative costs represented 14% of our total revenue in the first nine
months of 2002, consistent with the first nine months of 2003.

Although general and administrative expenses were affected by our April
2003 restructuring efforts, our general and administrative expenses may
increase in future quarters as we incur additional professional services fees
related to the satisfaction of new compliance requirements under the
Sarbanes-Oxley Act of 2002. We also believe that we may need to expand our
administrative staff, domestically and internationally, in the future to pursue
our long-term sales growth opportunities.

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Restructuring and other related charges

In April and again in September 2001, Onyx approved a restructuring plan
to reduce headcount, reduce infrastructure and eliminate excess and duplicate
facilities. During 2001, we recorded approximately $51.8 million in
restructuring and other related charges. During 2002, we recorded approximately
$8.5 million in restructuring and other related charges. During the first
quarter of 2003, we recorded approximately $340,000 in restructuring and other
related charges.

The components of the first quarter 2003 charges and a roll-forward of the
related liability follow (in thousands):

|                             |  |              |        |                |  |                |      |            |  |                |        |   |  |   |      |   |  |   |        | 
|---------------------------- |  | ------------ | ------ | -------------- |  | -------------- | ---- | ---------- |  | -------------- | ------ | - |  | - | ---- | - |  | - | ------ | 
|                             |  |              |        |                |  | Charge for the |      | Cash       |  |                |        |   |  |   |      |  
|                             |  | Balance at   |        | Three Months   |  | Payments       |      |            |  |                |        |   |  |  
|                             |  | December 31, |        | Ended          |  | and Write-     |      | Fair Value |  | Balance at    
|                             |  | 2002         |        | March 31, 2003 |  | offs           |      | Adjustment |  | March 31, 2003
|                             |  |              |        |                |  |                |      |            |  |               
|Excess facilities            |  | $            | 12,134 |                |  | $              | 354  |            |  | $              | (3,376 | ) |  | $ |     |   |  | $ | 9,112  | 
|Excess facilities  warrants |  |              | 920    |                |  |                |     |            |  |                |       |   |  |   | (242 | ) |  |   | 678    | 
|Employee separation costs    |  |              | 636    |                |  |                | (101 | )          |  |                | (167   | ) |  |   |     |   |  |   | 368    | 
|Asset impairments, net       |  |              |       |                |  |                | 87   |            |  |                | (87    | ) |  |   |     |   |  |   |       | 
|Other                        |  |              | 54     |                |  |                |     |            |  |                | (35    | ) |  |   |     |   |  |   | 19     | 
|                             |  |              |        |                |  |                |      |            |  |                |        |   |  |   |      |   |  |   |        | 
|Total                        |  | $            | 13,744 |                |  | $              | 340  |            |  | $              | (3,665 | ) |  | $ | (242 | ) |  | $ | 10,177 | 
|                             |  |              |        |                |  |                |      |            |  |                |        |   |  |   |      |   |  |   |        | 

In April 2003, Onyx approved a restructuring plan to reduce additional
headcount. Severance costs associated with this restructuring plan were charged
to expense during the second quarter of 2003. The components of the second
quarter 2003 charges and a roll-forward of the related liability follow (in
thousands):

|                             |  |                |        |               |  |                |     |            |  |               |        |   |  |   |     |   |  |   |       | 
|---------------------------- |  | -------------- | ------ | ------------- |  | -------------- | --- | ---------- |  | ------------- | ------ | - |  | - | --- | - |  | - | ----- | 
|                             |  |                |        |               |  | Charge for the |     | Cash       |  |               |        |   |  |   |     |  
|                             |  |                |        |               |  | Three Months   |     | Payments   |  |               |        |   |  |   |     |  
|                             |  | Balance at     |        | Ended         |  | and Write-     |     | Fair Value |  | Balance at   
|                             |  | March 31, 2003 |        | June 30, 2003 |  | offs           |     | Adjustment |  | June 30, 2003
|                             |  |                |        |               |  |                |     |            |  |              
|Excess facilities            |  | $              | 9,112  |               |  | $              | 15  |            |  | $             | (2,441 | ) |  | $ |    |   |  | $ | 6,686 | 
|Excess facilities  warrants |  |                | 678    |               |  |                |    |            |  |               |       |   |  |   | (15 | ) |  |   | 663   | 
|Employee separation costs    |  |                | 368    |               |  |                | 739 |            |  |               | (964   | ) |  |   |    |   |  |   | 143   | 
|Other                        |  |                | 19     |               |  |                |    |            |  |               | (18    | ) |  |   |    |   |  |   | 1     | 
|                             |  |                |        |               |  |                |     |            |  |               |        |   |  |   |     |   |  |   |       | 
|Total                        |  | $              | 10,177 |               |  | $              | 754 |            |  | $             | (3,423 | ) |  | $ | (15 | ) |  | $ | 7,493 | 
|                             |  |                |        |               |  |                |     |            |  |               |        |   |  |   |     |   |  |   |       | 

The components of the third quarter 2003 charges and a roll-forward of the
related liability follow (in thousands):

|                             |  |            |       |                    |  |                |     |            |  |                    |        |   |  |   |     |  |  |   |       | 
|---------------------------- |  | ---------- | ----- | ------------------ |  | -------------- | --- | ---------- |  | ------------------ | ------ | - |  | - | --- |  |  | - | ----- | 
|                             |  |            |       |                    |  | Charge for the |     | Cash       |  |                    |        |   |  |   |     | 
|                             |  | Balance at |       | Three Months       |  | Payments       |     |            |  |                    |        |   |  |  
|                             |  | June 30,   |       | Ended              |  | and Write-     |     | Fair Value |  | Balance at        
|                             |  | 2003       |       | September 30, 2003 |  | offs           |     | Adjustment |  | September 30, 2003
|                             |  |            |       |                    |  |                |     |            |  |                   
|Excess facilities            |  | $          | 6,686 |                    |  | $              | 112 |            |  | $                  | (2,211 | ) |  | $ |    |  |  | $ | 4,587 | 
|Excess facilities  warrants |  |            | 663   |                    |  |                |    |            |  |                    |       |   |  |   | 123 |  |  |   | 786   | 
|Employee separation costs    |  |            | 143   |                    |  |                | 50  |            |  |                    | (159   | ) |  |   |    |  |  |   | 34    | 
|Other                        |  |            | 1     |                    |  |                |     |            |  |                    |        |   |  |   |    |  |  |   | 1     | 
|                             |  |            |       |                    |  |                |     |            |  |                    |        |   |  |   |     |  |  |   |       | 
|Total                        |  | $          | 7,493 |                    |  | $              | 162 |            |  | $                  | (2,370 | ) |  | $ | 123 |  |  | $ | 5,408 | 
|                             |  |            |       |                    |  |                |     |            |  |                    |        |   |  |   |     |  |  |   |       | 

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

In 2002, we made significant progress in our efforts to mitigate excess
facility commitments. Specifically, in August 2002, we executed a sublease
agreement on our 21,000 square foot facility in the United Kingdom that reduces
our obligation on seven of the remaining 14 years on the lease, and in November
2002, we executed a lease termination agreement on our former
100,000-square-foot corporate headquarters facility in Bellevue, Washington.
This lease termination resulted in accelerated cash outflows of

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approximately $2.0 million during the fourth quarter of 2002. We paid our
monthly lease obligation of approximately $250,000 associated with this
facility in January 2003, after which we relocated our corporate headquarters
and no further obligations remained. The signing of this agreement, which
required us to move our corporate headquarters, resulted in accelerated
amortization of leasehold improvements and furniture, of which approximately
$1.3 million was charged to expense in the fourth quarter of 2002. An
additional $450,000 in accelerated amortization was charged to expense in
January 2003.

The most significant mitigation of our excess facility commitments was
completed in December 2002 when we reached an agreement with the landlord,
Bellevue Hines Development, L.L.C, or Hines, relating to our 262,000 square
feet of office space in Bellevue, Washington. The partial lease termination
reduces our excess facilities in Bellevue, Washington by approximately 202,000
square feet. Onyx continues to lease approximately 60,000 square feet at this
facility, which began serving as our new corporate headquarters effective at
the end of January 2003. The new lease for 60,000 square feet expires in
December 2013. The partial lease termination will require cash outflows of
approximately $2.5 million over the 7-month period ending April 2004, which is
included in current restructuring-related liabilities at September 30, 2003. In
addition to cash payments, Onyx issued three five-year warrants to Hines for
the purchase of up to an aggregate of 198,750 shares of Onyx common stock,
including a warrant to purchase 66,250 shares of common stock at an exercise
price of $10.38 per share, a warrant to purchase 66,250 shares of common stock
at an exercise price of $12.11 per share and a warrant to purchase 66,250
shares of common stock at an exercise price of $13.84 per share. If Onyx either
undergoes a change of control or issues securities with rights and preferences
superior to Onyxs common stock within two years after the warrants were
issued, Hines will have the option of canceling any unexercised warrants and
receiving a cash cancellation payment of $18.40 per share in the case of the
$10.38 warrants, $16.00 per share in the case of the $12.11 warrants and $13.92
per share in the case of the $13.84 warrants. These contingent cash payments
aggregate $3.2 million. We also entered into a registration rights agreement
with Hines, pursuant to which we filed a registration statement on February 14,
2003 covering the resale of the shares of Onyx common stock subject to purchase
by Hines under the warrants. The warrant value as of December 31, 2002 was
estimated at $920,000 based on (a) the estimated value of the warrants using
the Black-Scholes model with an expected dividend yield of 0.0%, a risk-free
interest rate of 5.0%, volatility of 85% and an expected life of five years and
(b) the estimated value of the cash cancellation payments in the event of a
change in control. The warrants are subject to variable accounting and we are
required to mark the warrants to market at each reporting period. At September
30, 2003, the warrant value was estimated at $786,000 using similar assumptions
to those used at December 31, 2002, and is included in long-term liabilities.

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

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

The current portion of restructuring-related liabilities totaled $4.1
million at September 30, 2003, the long-term portion of restructuring-related
liabilities totaled $567,000 at September 30, 2003 and the value of the
warrants issued in connection with the termination of certain facility lease
obligations was $786,000 at September 30, 2003.

We are continuing to align our operations and review our restructuring
efforts. We may, however, be unable to achieve these expense reductions without
adversely affecting our business and operating results. We may continue to
experience losses and negative cash flows in the near term, unless sales of our
products and services grow.

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Amortization of acquisition-related intangibles

Amortization of acquisition-related intangibles consists of intangible
amortization associated with our acquisitions of EnCyc in 1998 and Market
Solutions in 1999. Amortization of other acquisition-related intangibles
totaled $209,000 in the third quarter of 2002 and 2003 and $627,000 in the
first nine months of 2002 and 2003.

Amortization of stock-based compensation

We recorded deferred stock-based compensation of $2.2 million in 1998,
representing the difference between the exercise prices of options granted to
acquire shares of common stock during 1997 and 1998, prior to our initial
public offering, and the deemed fair value for financial reporting purposes of
our common stock on the grant dates. We recorded an additional $1.8 million in
deferred compensation in connection with the options granted to new employees
in conjunction with the acquisition of RevenueLab in January 2001. Deferred
compensation is amortized over the vesting periods of the options. We recorded
stock-based compensation expense of $51,000 in the third quarter of 2002 and
$4,000 in the third quarter of 2003. We recorded stock-based compensation
expense of $203,000 in the first nine months of 2002 and $32,000 in the first
nine months of 2003. Approximately $1.0 million of the deferred compensation
that was recorded in January 2001 in connection with options granted to
employees of RevenueLab was reversed within shareholders equity during 2001
and 2002 upon the employees termination. Option-related deferred compensation
recorded at our initial public offering was fully amortized as of December 31,
2002. The deferred stock-based compensation balance of $54,000 at June 30, 2003
was reversed within shareholders equity during the third quarter of 2003 due
to the departure of the last eligible RevenueLab employee in August 2003.

Other Income (Expense), Net

Other income (expense), net consists of earnings on our cash and cash
equivalent and short-term investment balances and foreign currency transaction
gains, offset by interest expense, bank fees associated with debt obligations
and credit facilities and foreign currency transaction losses. Other income
(expense), net was income of $269,000 in the third quarter of 2002 compared to
expense of $117,000 in the third quarter of 2003. The decrease in other income
(expense), net during the third quarter of 2003 compared to the same period of
the prior year is primarily the result of a benefit recorded in the third
quarter of 2002 relating to lower than previously estimated equity
transaction-related expenses which were not associated with the sale of
securities, originally recorded in the first quarter of 2002, coupled with a
decrease in interest income. Other income (expense), net was an expense of
$73,000 in the first nine months of 2002 compared to income of $3,000 in the
first nine months of 2003. The increase in other income (expense), net during
the first nine months of 2003 compared to the first nine months of 2002 is
primarily the result of equity transaction-related expenses which were not
associated with the sale of securities recorded during 2002, coupled with an
increase in foreign currency gains during the first nine months of 2003, offset
in part by a decrease in interest income during the first nine months of 2003.

Change in Fair Value of Outstanding Warrants

Based on the terms of the warrants issued in connection with the partial
lease termination of excess facilities in Bellevue, Washington, we are subject
to variable accounting and will be required to mark the warrants to market at
each reporting period. During the third quarter of 2003, we recorded an expense
of $123,000 representing the change in fair value of the outstanding warrants.
The benefit recorded during the nine months ended September 30, 2003 totaled
$134,000.

Income Tax Provision (Benefit)

We recorded an income tax benefit of $29,000 in the third quarter of 2002
and a provision of $86,000 in the third quarter of 2003. We recorded an income
tax provision of $383,000 in the first nine months of 2002 and a provision of
$7,000 in the first nine months of 2003. The increase in the provision for
income taxes during the third quarter of 2003 compared to the same period of
the prior year is the result of an increase in estimated taxes related to
operations of our subsidiaries in Australia and the United Kingdom. The
significant provision recorded in the nine months ended September 30, 2002 was
primarily related to withholding taxes associated with the settlement of
royalties due our U.S. entity by the Japanese joint venture. Our income tax
provision (benefit) in all periods reported is the net result of income taxes
in connection with our foreign operations, offset by the deferred tax benefit
recorded as we amortize the intangibles associated with our international
acquisitions. We made only insignificant provisions and recorded no benefit for
federal or state income taxes in the third quarter and first nine months of
2002 and the third quarter and first nine months of 2003

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due to our historical operating losses, which resulted in deferred tax
assets. We have recorded a valuation allowance for all but $272,000 of our
deferred tax assets as a result of uncertainties regarding the realization of
the asset balance at September 30, 2003.

Minority Interest in Loss of Onyx Japan

In the third quarter of 2002 the minority shareholders interest in Onyx
Japans losses totaled $345,000 and in the third quarter of 2003 the minority
shareholders interest in Onyx Japans income totaled $32,000, respectively. In
the first nine months of 2002 and 2003, the minority shareholders interest in
Onyx Japans losses totaled $817,000 and $200,000, respectively. At September
30, 2003, the minority shareholders remaining interest in the joint venture,
net of their share of cumulative translation losses, totaled $35,000. As a
result, additional Onyx Japan losses above approximately $84,000 in the
aggregate will be absorbed 100% by Onyx, as compared to 58% in prior periods.

Liquidity and Capital Resources

As of September 30, 2003, we had unrestricted cash and cash equivalents of
$9.0 million, a decrease of $8.1 million from unrestricted cash and cash
equivalents held as of December 31, 2002. As of September 30, 2003, we also had
restricted cash balances totaling $3.0 million, as compared to $2.2 million at
December 31, 2002. We invest our cash in excess of current operating
requirements in a portfolio of investment-grade securities. We did not hold any
short-term marketable securities as of December 31, 2002 or September 30, 2003.

As of September 30, 2003, our principal obligations consisted of
restructuring-related liabilities totaling $4.6 million, excluding the value
assigned to warrants, of which $4.1 million is expected to be paid within the
next 12 months, accrued liabilities of $2.5 million, trade payables of $1.0
million and salaries and benefits payable of $1.5 million. The majority of the
restructuring-related liabilities relate to excess facilities in domestic and
international markets, the most significant portion of which relates to the
termination agreement signed in December 2002 in connection with excess
facilities in Bellevue, Washington. The majority of our accounts payable,
salaries and benefits payable and accrued liabilities at September 30, 2003
will be settled during the next three months and will result in a corresponding
decline in the amount of cash and cash equivalents, offset by liabilities
associated with activity in the fourth quarter of 2003. Off-balance sheet
obligations as of September 30, 2003 primarily consisted of operating leases
associated with facilities in Bellevue, Washington and other domestic and
international field office facilities. Our contractual commitments at September
30, 2003 are substantially similar to those at December 31, 2002 disclosed in
our annual report on Form 10-K.

In documents dated March 28, 2003 and May 5, 2003, we amended our Loan and
Security Agreement with Silicon Valley Bank, or SVB, which was originally
entered into in February 2002, and entered into a second Loan and Security
Agreement with SVB that is intended to take advantage of a loan guarantee by
the Export Import Bank of the United States, or Exim Bank. Under the terms of
these agreements, we have a total $15.0 million working capital revolving line
of credit with SVB, which is split between a $13.0 million domestic facility
and a $2.0 million Exim Bank facility. Both are secured by accounts receivable,
property and equipment and intellectual property. The domestic facility allows
us to borrow up to the lesser of (a) 75% of eligible domestic and individually
approved foreign accounts receivable and (b) $13.0 million. The Exim Bank
facility allows us to borrow up to the lesser of (a) 80% of eligible foreign
accounts receivable and (b) $2.0 million. If the borrowing base calculation
falls below the outstanding standby letters of credit issued by SVB on our
behalf, SVB may require us to cash secure the amount by which outstanding
standby letters of credit exceed the borrowing base. The amount required to be
restricted under the loan agreement was $3.0 million, measured as of September
30, 2003. Due to the variability in our borrowing base, we may be subject to
restrictions on our cash at various times throughout the year. Any borrowings
will bear interest at SVBs prime rate, which was 4.00% as of September 30,
2003, plus 1.5%, subject to a minimum rate of 6.0%. The loan agreements require
us to maintain certain financial covenants based on its adjusted quick ratio
and tangible net worth. We were in compliance with these covenants at September
30, 2003. We are also prohibited under the loan and security agreements from
paying dividends. The facilities expire in March 2004. Based on the outstanding
standby letters of credit relating to long-term lease obligations totaling $9.7
million at September 30, 2003, no additional amounts are currently available
under the credit facilities.

Our operating activities resulted in net cash outflows of $11.4 million in
the first nine months of 2002 and $9.4 million in the first nine months of
2003. The operating cash outflow in the first nine months of 2002 was primarily
the result of our operating loss for the period adjusted for non-cash
amortization and impairment charges, decreases in accounts payable and accrued
liabilities, decreases in restructuring-related liabilities, decreases in
deferred revenues, decreases in income taxes payable and increases in prepaid
expenses and other assets, offset in part by cash provided by collections on
accounts receivable. The operating cash outflow in the first nine

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months of 2003 was primarily the result of our operating loss for the
period adjusted for non-cash amortization and impairment charges, decreases in
accounts payable, salaries and benefits payable and accrued liabilities,
decreases in restructuring-related liabilities, decreases in deferred revenues,
offset in part by cash provided by collections on accounts receivable,
decreases in prepaid expenses and other assets and increases in income taxes
payable. The net cash outflow of $11.4 million in the first nine months of 2002
includes $11.9 million in cash paid for restructured items and the net cash
outflow of $9.4 million in the first nine months of 2003 includes $9.3 million
in cash paid for restructured items.

Investing activities used cash of $4.9 million in the first nine months of
2002, primarily due to the restriction of cash used to secure outstanding
letters of credit. Investing activities used cash of $1.7 million in the first
nine months of 2003 primarily due to the restriction of cash used to secure
outstanding letters of credit and capital expenditures associated with the
relocation of our corporate headquarters in January 2003.

Financing activities provided cash of $20.9 million in the first nine
months of 2002 primarily due to the proceeds from our public offering of common
stock in February 2002 and proceeds from our employee stock purchase plan and
the exercise of stock options, offset in part by payments on our long-term
obligations. Financing activities provided cash of $2.8 million in the first
nine months of 2003 primarily due to the proceeds from our private offering of
common stock in May 2003 and proceeds from our employee stock purchase plan and
the exercise of stock options, offset in part by payments on our long-term
obligations.

Our near-term restructuring costs related to the mitigation of our excess
facilities liabilities will consume a material amount of our cash resources.
The termination of approximately 202,000 square feet in Bellevue, Washington
will result in cash outflows of approximately $2.5 million over the 7-month
period ending April 2004 and is included in current restructuring-related
liabilities at September 30, 2003. We may also use a portion of our cash
resources to provide further capital to Onyx Japan. If Onyx Japan continues to
incur losses and no additional capital is invested, we may have to further
restructure our operations in Japan. Finally, it is also possible that we will
use a portion of our cash resources to acquire or invest in complementary
business, products or technologies; however, we currently have no commitments
or agreements with respect to any transactions of this nature.

Assuming our future revenue performance is comparable to the most recent
quarterly periods reported, we believe that, with the expense reduction efforts
instituted in April 2003 and the proceeds from the private placement completed
in May 2003, existing cash and cash equivalents will be sufficient to meet our
capital requirements for at least the next 12 months. Should our results for
subsequent quarters fall below the results we achieved in the first quarter of
2003, we would likely take action to restructure our operations to preserve our
cash. Mitigation of our excess facilities liabilities will consume a material amount of our cash resources. In addition, we may bear
substantial costs associated with the proposed acquisition of Pivotal, whether
or not the acquisition is completed. Although we expect the proposed Pivotal
acquisition to be accretive to shareholders, if it is successfully completed,
the combined company may require additional funds to support significantly
larger operations and pursue expected market opportunities. As a result of
these factors, along with the impact lower cash balances could have on our
sales, we may seek additional funds in the future through public or private
equity financing or from other sources to fund our operations and pursue our
growth strategy. We may experience difficulty in obtaining funding on favorable
terms, if at all. Any financing we might obtain may contain covenants that
restrict our freedom to operate our business or may require us to issue
securities that have rights, preferences or privileges senior to our common
stock and may dilute current shareholders ownership interest in Onyx.

Recent Accounting Pronouncements

In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51, or FIN 46. FIN
46 addresses the consolidation by business enterprises of variable interest
entities as defined in FIN 46. FIN 46 applies immediately to variable interests
in variable interest entities created after January 31, 2003, and to variable
interests in variable interest entities obtained after January 31, 2003. As
amended by FASB Staff Position (FSP) No. FIN 46-6, FIN 46 is effective for
variable interests in a variable interest entity created before February 1,
2003 at the end of the first interim or annual period ending after December 15,
2003. We do not expect the adoption of FIN 46 to have a material impact on our
financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, or SFAS 149. SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement of financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS 149 is
generally effective for contracts entered into or modified after June 30, 2003
and for hedging relationships designated after June 30, 2003. The adoption of
SFAS 149 did not have a significant impact on our financial position or results
of operations.

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In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, or SFAS 150.
SFAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. SFAS 150 is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the
statement and still existing at the beginning of the interim period of
adoption. The adoption of SFAS 150 did not have a significant impact on our
financial position or results of operations.

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

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

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



| |  | general economic conditions, which may affect our customers capital investment levels in management information systems
and the timing of their purchases;                                                              
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | rate of market acceptance of our CRM solution;                                                                                                                                                                           
| 
| |  | budget and spending decisions by our prospective and existing customers;                                                                                                                                                 
| 
| |  | customers and prospects decisions to defer orders or implementations, particularly large orders or implementations, from
one quarter to the next, or to proceed with smaller-than-forecasted orders or implementations;
| 
| |  | level of purchases by our existing customers, including additional license and maintenance revenues;                                                                                                                     
| 
| |  | our ability to enable our products to operate on multiple platforms;                                                                                                                                                     
| 
| |  | our ability to compete in the highly competitive CRM market;                                                                                                                                                             
| 
| |  | the loss of any key technical, sales, customer support or management personnel and the timing of any new hires;                                                                                                          
| 
| |  | our ability to develop, introduce and market new products and product versions on a timely basis;                                                                                                                        
| 
| |  | variability in the mix of our license versus service revenue, the mix of our direct versus indirect license revenue and the
mix of services that we perform versus those performed by third-party service providers;     
| 
| |  | our ability to successfully expand our operations, and the amount and timing of expenditures related to this expansion; and                                                                                              
| 
| |  | the cost and financial accounting effects of any acquisitions of companies or complementary technologies that we may
complete.                                                                                           

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



| |  | our sales cycles are lengthy and variable, typically ranging between six and eighteen months from our initial contact with
a potential customer to the signing of a license agreement, although the sales cycle varies substantially from customer to
customer, and occasionally sales require substantially more time;
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | a substantial portion of our sales are completed at the end of the quarter and, as a result, a substantial portion of our
license revenue is recognized in the last month of a quarter, and often in the last weeks or days of a quarter;                                                                              

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

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

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

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

We currently have loan and security agreements with SVB that allow us to
borrow up to the lesser (a) 75% of eligible domestic and individually approved
foreign accounts receivable and (b) $13.0 million under a domestic line, plus
up to the lesser of (a) 80% of eligible foreign accounts receivable and (b)
$2.0 million under a line guaranteed by Exim Bank. At the time of this filing,
however, no additional amounts are available under the lines of credit based on
the level of our borrowing base and our outstanding letters of credit. We were
in compliance with the financial covenants of these facilities as of September
30, 2003. If we are unable to maintain compliance with our covenants in the
future or if SVB decides to restrict our cash deposits, our liquidity would be
further limited and our business, financial condition and operating results
could be materially harmed.

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

Assuming our future revenue performance is comparable to the most recent
quarterly periods reported, we believe that, with the expense reduction efforts
instituted in April 2003 and the proceeds from the private placement completed
in May 2003, existing cash and cash equivalents will be sufficient to meet our
capital requirements for at least the next 12 months. Should our results for
subsequent quarters fall below the results we achieved in the first quarter of
2003, we would likely take action to restructure our operations to preserve our
cash. Mitigation of our excess facilities liabilities  will consume a material amount of our cash resources. In addition, we may bear
substantial costs associated with the proposed acquisition of Pivotal, whether
or not the acquisition is completed. Although we expect the proposed Pivotal
acquisition to be accretive to shareholders, if it is successfully completed,
the combined company may require additional funds to support significantly
larger operations and pursue expected market opportunities. As a result of
these factors, along with the impact lower cash balances could have on our
sales, we may seek additional funds in the future through public or private
equity financing or from other sources to fund our operations and pursue our
growth strategy. We may experience difficulty in obtaining funding on favorable
terms, if at all. Any financing we might obtain may contain covenants that
restrict our freedom to operate our business or may require us to issue
securities that have rights, preferences or privileges senior to our common
stock and may dilute current shareholders ownership interest in Onyx.

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

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If we do not return to profitability in future quarters, our stock price
could decrease. We incurred net losses in each quarter from Onyxs inception
through the third quarter of 1994, from the first quarter of 1997 through the
second quarter of 1999, and from the first quarter of 2000 through the third
quarter of 2003. As of September 30, 2003, we had an accumulated deficit of
$126.6 million. Our accumulated deficit and financial condition have caused
some of our potential customers to question our viability, which we believe has
in turn hampered our ability to sell some of our products.

In the near-term, we believe our costs and operating expenses, excluding
restructuring-related charges, may increase modestly in certain areas as we
continue to invest in our strategic priorities. We expect our costs and
operating expenses in the near-term to be at a level that is at or below our
expected revenue. We may, however, incur substantial costs in pursuing our
proposed acquisition of Pivotal. We may not be able to increase our revenue
sufficiently to keep pace with any growth in expenditures, if at all, and, as a
result, may be unable to achieve or maintain profitability in the future.

Although
profitable in the third quarter of 2003, Onyx Japan, our joint venture with Softbank Investment
Corporation and Prime Systems Corporation, incurred substantial
losses in previous periods. The
minority shareholders capital account balance in Onyx Japan as of September
30, 2003 was $35,000. Additional Onyx Japan losses above approximately $84,000
in the aggregate will be absorbed 100% by Onyx, as compared to 58% in prior
periods, which could impact our ability to achieve profitability in future
periods.

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

Our revenue growth and potential for profitability depend on the overall
demand for CRM software and services. Because our sales are primarily to
corporate customers, we are also impacted by general economic and business
conditions. A softening of demand for computer software caused by the weakened
economy, both domestic and international, has affected our sales and may
continue to result in decreased revenue and growth rates. When economic
conditions weaken, sales cycles for software products tend to lengthen, and, as
a result, we experienced longer sales cycle in 2001, 2002 and the first nine
months of 2003. We expect to continue to experience longer sales cycles than
usual throughout 2003. As a result of the economic downturn, we have also
experienced and may continue to experience difficulties in collecting
outstanding receivables from our customers.

Our management team uses our software to identify, track and forecast
future revenue, backlog and trends in our business. Our sales force monitors
the status of all proposals, such as the date when they estimate that a
transaction will close and the potential dollar amount of such sale. We
aggregate these estimates regularly in order to generate a sales pipeline and
then evaluate the pipeline at various times to look for trends in our business.
While this pipeline analysis provides us with visibility about our potential
customers and the associated revenue for budgeting and planning purposes, these
pipeline estimates may not consistently correlate to revenue in a particular
quarter or over a longer period of time. The slowdown in the domestic and
international economies, as well as the ongoing effects of armed conflict, may continue to cause customer purchasing
decisions to be delayed, reduced in amount or cancelled, which could reduce the
rate of conversion of the pipeline into contracts during a particular period of
time. In particular, as a result of the economic slowdown, we believe that a
number of our potential customers may delay or cancel their purchase of our
software, consulting services or customer support services or may elect to
develop their own CRM solution or solutions. A variation in the pipeline or in
the conversion of the pipeline into contracts could adversely affect our
business and operating results. In addition, because a substantial portion of
our sales are completed at the end of the quarter, and often in the last weeks
or days of a quarter, we may be unable to adjust our cost structure in response
to a variation in the conversion of the pipeline into contracts in a timely
manner, which could adversely affect our business and operating results. We
have also recently experienced a trend of smaller initial orders by new
purchasers of our software. Some customers are reluctant to make large
purchases before they have had the opportunity to observe how our software
performs in their organization, and have opted instead to make their planned
purchase in stages. Additional purchases, if any, may follow only if the
software performs as expected. We believe that this is a symptom of poor
economic conditions, lack of successful deployments by competitors and
increasing averseness to risk among our customers and potential customers. To
the extent that this trend continues, it will impact the pace of our revenue
flow, and could also result in a reduction of the total amount of revenue over
time.

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

During 2001, 2002 and the first nine months of 2003, our support and
service revenue represented a higher percentage of our total revenue than in
past periods, which negatively impacted our gross margins. To the extent that
this trend continues, our gross margins will continue to suffer. Due largely to
the decrease in license revenue in 2001, 2002 and the first nine months of
2003, support and service revenue represented 62% of our total revenue in 2001,
67% of our total revenue in 2002 and 79% of our total revenue in the

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

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

Our stock price may decrease due to seasonal fluctuations in our revenue.
We have experienced and expect in the future to experience significant
seasonality in the amount of our software license revenue. In fiscal years
before 2001, we recognized more license revenue in our fourth quarter than in
each of the first three quarters of the fiscal year and experienced lower
license revenue in the first quarter than in the preceding fourth quarter. We
believe that these fluctuations are caused in part by customer buying patterns
and the efforts of our direct sales force to meet or exceed fiscal year-end
quotas. Our fourth quarter 2001 revenue was, however, lower than the revenue we
achieved in the first and second quarters of 2001, and was only slightly higher
than the revenue we achieved in the third quarter of 2001. Similarly, our
fourth quarter 2002 revenue was lower than the revenue we achieved in the
second and third quarters of 2002. Our first quarter 2003 revenue was lower
than the revenue we achieved in the fourth quarter of 2002. We believe that
this deviation from our historical experience reflects recessionary economic
conditions, and that in the current economic environment the approval process
for capital spending will be lengthy. We experienced delays in the customer
procurement process throughout 2002, which caused our seasonal sales to vary
from the historical pattern. We believe these delays may continue through the
rest of 2003 or beyond, before we return to the seasonal patterns described
above.

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

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



| |  | no history of sustained profitability;                                                                                                                                    
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | uncertain growth in the market for, and uncertain market acceptance of, our solution;                                                                                     
| 
| |  | reliance on one product family;                                                                                                                                           
| 
| |  | the risk that competition, technological change or evolving customer preferences, such as preferences for different
computing platforms, could harm sales of our solution;
| 
| |  | the need to implement our sales, marketing and after-sales service initiatives, both domestically and internationally;                                                    
| 
| |  | the need to execute our product development activities;                                                                                                                   
| 
| |  | dependence on a limited number of key technical, customer support, sales and managerial personnel; and                                                                    
| 
| |  | the risk that our management will be unable to effectively manage growth, a downturn or any acquisition we may undertake.                                                 

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

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In attempting to acquire Pivotal and to integrate the business and technology
of Pivotal or any future acquisition, we could incur significant costs that may
not be outweighed by any benefits of the acquisition.

As part of our business strategy, from time to time, we acquire other
companies, products or technologies, and these acquisitions may result in
substantial costs that may not be outweighed by any benefits of the
acquisition. On November 12, 2003, we announced an unsolicited proposal to
acquire Pivotal by way of a business combination in a stock-for-stock
transaction. Under the
terms of the proposal which was submitted by letter to the Pivotal Board of
Directors on November 12, 2003, the companies would be combined on the basis of
0.475 shares of Onyx common stock for each common share of Pivotal, or
approximately 12.5 million shares of Onyx common stock. The approximate price
per Pivotal common share is $2.25 based on the $4.73 closing price of Onyx common
stock on November 11, 2003. On October 8, 2003, Pivotal announced that it had
entered into a definitive agreement to be acquired by Talisma Corporation in a
cash transaction financed by Oak Investment Partners valued at $1.78 per share.

Our offer was not solicited by Pivotal and, as of this filing, we have not
received any response from Pivotals Board of Directors. Pivotal may reject
our offer and Pivotal or Oak may employ certain defensive tactics, such as
adopting a poison pill or other takeover defense measures, to delay or
discourage us from pursuing our offer. In addition, Oak may increase the value
of its offer to match or exceed the premium represented by our proposal. As a result, we may not be successful in completing our proposed acquisition of Pivotal and we may incur substantial costs in pursuing the transaction. If we
do successfully complete the acquisition, the combined company would have to
pay a $1.5 million breakup fee associated with the pending Talisma transaction.

In addition to the breakup fee, the costs of any Pivotal acquisition or
any future acquisitions may include costs for:



| |  | integration of operations, including combining teams and processes in various functional areas;
|- |  | -----------------------------------------------------------------------------------------------
| 
| |  | restructuring costs for reorganization or closure of operations and facilities;                
| 
| |  | integration of new technology into our products;                                               
| 
| |  | fees and expenses of professionals involved in completing the integration process; and         
| 
| |  | potential existing liabilities of Pivotal or any future acquisition target.                    

Successful integration of the operations, technology, products, customers,
suppliers and personnel of Pivotal or any future acquisition could place a
significant burden on our management and internal resources. The diversion of
the attention of our management and any difficulties encountered in the
transition and integration process could disrupt our business and have an
adverse effect on our business and operating results.

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

Our solution targets the CRM market. This market is intensely competitive,
fragmented, rapidly changing and significantly affected by new product
introductions. We face competition in the CRM market primarily from
front-office software application vendors, large enterprise software vendors
and our potential customers information technology departments, which may seek
to develop proprietary CRM systems. The dominant competitor in our industry is
Siebel Systems, Inc., which holds a significantly greater percentage of the CRM
market than we do. Other companies with which we compete include, but are not
limited to, Amdocs Limited, BroadVision, Inc., E.piphany, Inc., Kana
Communications, Inc., Oracle Corporation, PeopleSoft, Inc., Pivotal Corporation
and SAP AG. Microsoft Corporation recently released its version of a new CRM
product. As a result, we are starting to compete with Microsoft in the CRM
market.

In addition, as we develop new products, including new product versions
operating on new platforms, we may begin competing with companies with whom we
have not previously competed. It is also possible that new competitors will
enter the market. In 2002, we experienced an increase in competitive pressures
in our market, which has resulted in enhanced pricing competition among our
competitors. A continued increase in competitive pressures in our market or our
failure to compete effectively may result in pricing reductions, reduced gross
margins and loss of market share. Many of our competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical, marketing and other resources than we do.
Furthermore, we believe that there may be ongoing consolidation among our
competitors. For example, on October 8, 2003, Pivotal announced that it had
entered into a definitive agreement to be acquired by Talisma Corporation, a
privately-held CRM company, in a cash transaction financed by Oak Investment
Partners. On November 12, 2002, we announced an unsolicited proposal to
acquire Pivotal in a stock-for-stock transaction. As a result of consolidation
among our competitors, our competitors may be able to adapt more quickly to new
technologies and customer needs, devote greater resources to promoting or
selling their products and services, initiate and withstand substantial price
competition, take advantage of acquisition or other strategic opportunities
more readily or develop and expand their product and service offerings more
quickly than we can. In addition, our competitors may form strategic
relationships with each other and with other companies in attempts to compete
more successfully against us. These relationships may take the form of
strategic investments, joint marketing agreements, licenses or other
contractual arrangements, any of which may increase our competitors ability,
relative to ours, to address customer needs with their software and service
offerings and that may enable them to rapidly increase their market share.

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

Our future performance will depend largely on the efforts and abilities of
our key technical, sales, customer support and managerial personnel and on our
ability to attract and retain them. In addition, our ability to execute our
business strategy will depend on our ability to recruit additional experienced
management personnel and to retain our existing executive officers. The
competition for qualified personnel in the computer software and technology
markets is particularly intense. We have in the past experienced difficulty in
hiring qualified technical, sales, customer support and managerial personnel,
and we may be unable to attract and retain such personnel in the future. In
addition, due to the intense competition for qualified employees, we may be
required to increase the level of compensation paid to existing and new
employees, which could materially increase our operating expenses. Our key
employees are not obligated to continue their employment with us and could
leave at any time.

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

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

We, several of our officers and directors and Dain Rauscher Wessels have
been named as defendants in a series of related lawsuits filed in the United
States District Court for the Western District of Washington on behalf of
purchasers of publicly traded Onyx common stock during various time periods.
The consolidated amended complaint in these lawsuits alleges that we violated
the Securities Act of 1933, or Securities Act, and the Securities Exchange Act
of 1934, or Exchange Act, and seeks certification of a class action for
purchasers of Onyx common stock in Onyxs February 12, 2001 public offering and
on the open market during the period January 23, 2001 through July 24, 2001. In
addition, a shareholder to which we issued shares in the first quarter of 2001
has claimed that we made certain misrepresentations and omissions and otherwise
violated the securities laws. None of the complaints or claims specifies the
amount of damages to be claimed.

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

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

Onyx intends to vigorously defend itself and, where applicable, its
officers and directors against these lawsuits and claims, and believes it has
several meritorious defenses and, in certain instances, counterclaims. If we
are not successful in our defense of these

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claims, however, we could be forced to make significant payments to the
plaintiffs and their lawyers and such payments, if not covered by our insurance
carriers, could harm our financial condition, operating results and cash flows.
Even if these claims are not successful, the litigation could result in
substantial costs to Onyx and could divert managements time and attention away
from business operations. The uncertainty associated with this unresolved
litigation may also impair our relationships with existing customers and our
ability to obtain new customers.

Our solution may not achieve significant market acceptance.

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

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

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

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

We originally designed our products to operate exclusively on the Windows
NT and Microsoft BackOffice platforms. As a result, our primary market has
historically been to customers that have developed or are willing to develop
their enterprise computing systems around these platforms, which limits our
potential sales. We announced the general availability of an Oracle version of
Onyx Employee Portal, or OEP, designed to operate on the Unix platform in June
2002. Later in 2002, we also introduced an Oracle version of OEP designed to
run on IBM AIX. We cannot predict the degree to which either new product
version will achieve market acceptance or the extent to which they will perform
as our customers expect. If our new product versions contain defects or errors,
or otherwise do not run as expected, their market acceptance may be delayed or
limited, and our reputation may be damaged. Further, if our new product
versions do not achieve general market acceptance, our revenue growth will be
limited. We believe that our ability to effectively expand our business into
large enterprises depends in part on the successful release and market
acceptance of our new platform versions. If we are unable to expand into large
enterprises, the growth of our business and our revenue will be limited.
Moreover, enabling our products to run on multiple platforms could lengthen the
development cycle, thus delaying the release date of future product versions or
new products, which could further restrict our revenue growth.

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

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

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

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

To date, we have sold our solution primarily through our direct sales
force. As a result, our future revenue growth will depend in large part on
recruiting, training and retaining direct sales personnel and expanding our
indirect distribution channels. These indirect channels include VARs, VSPs,
original equipment manufacturer, or OEM, partners, system integrators and
consulting firms. We have experienced and may continue to experience difficulty
in recruiting qualified direct sales personnel and in establishing third-party
relationships with VARs, VSPs, OEM partners, systems integrators and consulting
firms.

In April 2003, we eliminated two significant sales positions: Senior Vice
President of the Americas and one of our regional sales management positions in
North America. We do not plan to hire individuals in either of these positions
in the near term. Our sales organization for the Americas has been realigned
and is now headed by an executive who has been with Onyx since 1995. This
executive has past experience managing Onyxs global sales organization. The
restructuring of the management of our sales organization for the Americas may
result in some disruption in our sales activities in this market and in turn,
reduce our sales or limit our sales growth.

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

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

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

The CRM market is characterized by rapid change due to changing customer
needs, rapid technological developments and advances introduced by competitors.
Existing products can become obsolete and unmarketable when products using new
technologies are introduced and new industry standards emerge. New technologies
could change the way CRM systems are sold or delivered. We may also need to
modify our products when third parties change software that we integrate into
our products. As a result, the life cycles of our products are difficult to
estimate.

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

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

To be successful in the long term, we will need to expand our
international operations. This expansion may be delayed as a result of our
recent operating expense reduction measures and general economic conditions. If
we do expand internationally, it will require significant management attention
and financial resources to successfully translate and localize our software
products to various

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languages and to develop direct and indirect international sales and
support channels. Even if we successfully translate our software and develop
new channels, we may not be able to maintain or increase international market
demand for our solution. We, or our VARs or VSPs, may be unable to sustain or
increase international revenues from licenses or from consulting and customer
support. In addition, our international sales are subject to the risks inherent
in international business activities, including



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

As noted above, Onyx Japan was profitable in the third quarter of 2003,
however, Onyx Japan incurred substantial losses in previous periods. The
minority shareholders capital account balance at of September 30, 2003 was
$35,000. Additional Onyx Japan losses above approximately $84,000 in the
aggregate will be absorbed 100% by Onyx, as compared to 58% in prior periods.
Although restructuring efforts carried out in the second half of 2002
significantly reduced the operating expenses of Onyx Japan and increased the
probability that Onyx Japan can be cash flow positive, as evidenced by the
profits generated by Onyx Japan in the third quarter of 2003, additional
funding may be required to continue the operation of the joint venture. Our
joint venture partners are not obligated to participate in any capital call and
have indicated that they do not currently intend to invest additional sums in
Onyx Japan. We are, however, discussing other ways our partners can assist Onyx
Japan. If Onyx Japan incurs losses in future periods and no additional capital
is invested, we may have to further restructure Onyx Japans operations.

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

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

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

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



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

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

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

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

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



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

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

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

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

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

Since our initial public offering in February 1999, the price of our
common stock has been volatile, particularly in the last year. Our common
stock, on a split-adjusted basis, reached a high of $176.00 per share on March
6, 2000 and traded as low as $2.24 per share on April 30, 2003. As a result of
fluctuations in the price of our common stock, you may be unable to sell your
shares at or

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above the price at which you purchased them. The trading price of our
common stock could be subject to fluctuations for a number of reasons,
including



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

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

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

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

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



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

In October 1999, we adopted a shareholder rights plan, which is triggered
upon commencement or announcement of a hostile tender offer or when any one
person or group acquires 15% or more of our common stock. Once triggered, the
rights plan would result in the issuance of preferred stock to the holders of
our common stock other than the acquirer. The holders of this preferred stock

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would be entitled to ten votes per share on corporate matters. In
addition, these shareholders receive rights under the rights plan to purchase
our common stock, and the stock of the entity acquiring us, at reduced prices.

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

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




Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rate Risk

We typically do not attempt to reduce or eliminate our market exposures on
our investment securities because all of our investments are short-term in
nature and are classified as cash equivalents as of September 30, 2003. Due to
the short-term nature of these investments, their fair value would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates. We do not use any hedging transactions or any financial
instruments for trading purposes and we are not a party to any leveraged
derivatives.

Foreign Currency Risk

In 2002, international revenue accounted for 36% of our consolidated
revenue and in the first nine months of 2003, international revenue accounted
for 41% of our consolidated revenue. International revenue, as well as most of
the related expenses incurred, is denominated in the functional currencies of
the corresponding country. Results of operations from our foreign subsidiaries
are exposed to foreign currency exchange rate fluctuations as the financial
results of these subsidiaries are translated into U.S. dollars upon
consolidation. As exchange rates vary, revenues and other operating results,
when translated, may differ materially from expectations. The effect of foreign
exchange transaction gains and losses were not material to Onyx during the
first six months of 2003 or in prior fiscal years.

At September 30, 2003, we were also exposed to foreign currency risk
related to the current assets and current liabilities of our foreign
subsidiaries, in particular, our consolidated joint venture denominated in Yen.
Cumulative unrealized translation losses related to the consolidation of Onyx
Japan amounted to $475,000 at September 30, 2003, which was offset in part by
cumulative unrealized translation gains related to the consolidation of our
other foreign subsidiaries, resulting in net consolidated cumulative unrealized
translation gains of $46,000.

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




Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures

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

Changes in internal controls

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

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PART IIOTHER INFORMATION




Item 4. Submission of Matters to a Vote of Security Holders

Onyx held its 2003 Annual Meeting of Shareholders on July 23, 2003 at
Onyxs corporate headquarters in Bellevue, Washington. A total of 52,557,318
shares of common stock (representing 94.96% of the outstanding shares of common
stock) were present at the meeting, either in person or represented by proxy,
which constituted a quorum for purposes of the meeting, and voted as follows:



| | (1) |  | Elect one Class 3 director to Onyxs board of directors for a
three-year term.                        
| | --- |  | ------------------------------------------------------------------------------------------------------
|
| |     |  | The incumbent Class 3 director who stood for reelection was elected with
the following voting results.

|              |  |           |            |                |  |  |           | 
|------------- |  | --------- | ---------- | -------------- |  |  | --------- | 
|Nominee       |  | Votes for |            | Votes Withheld
|              |  |           |            |               
|Brent R. Frei |  |           | 50,267,766 |                |  |  | 2,289,552 | 



| | (2) |  | Reapprove Onyxs 1998 Stock Incentive Compensation Plan, as amended
and restated solely to impose limits on the number of shares that may be
granted under the plan to any single employee in any single fiscal year.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 48,711,614 | 
|Against |  |  | 3,808,874  | 
|Abstain |  |  | 36,830     | 



| | (3) |  | Approve an amendment to Onyxs Amended and Restated Articles of
Incorporation effecting a one-for-four reverse stock split and
increasing the number of authorized shares of Onyxs stock after the
reverse stock split from 25,000,000 shares (including 20,000,000 shares
of common stock and 5,000,000 shares of preferred stock) to 100,000,000
shares (including 80,000,000 shares of common stock and 20,000,000
shares of preferred stock).
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|        |  |  |            | 
|------- |  |  | ---------- | 
|For     |  |  | 37,379,281 | 
|Against |  |  | 1,899,946  | 
|Abstain |  |  | 31,208     | 

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Item 5. Other Information

On November 12, 2003, we announced an unsolicited proposal to acquire Pivotal
Corporation by way of a business combination in a stock-for-stock transaction. Under the terms of the
proposal which was submitted by letter to the Pivotal Board of Directors on
November 12, 2003, the companies would be combined on the basis of 0.475 shares
of Onyx common stock for each common share of Pivotal Corporation, or
approximately 12.5 million shares of Onyx common stock. The approximate price
per Pivotal common share is $2.25 based on the $4.73 closing price of Onyx common
stock on November 11, 2003. On October 8, 2003, Pivotal announced that it had
entered into a definitive agreement to be acquired by Talisma Corporation in a
cash transaction financed by Oak Investment Partners valued at $1.78 per share.

Our offer was not solicited by Pivotal and, as of this filing, we have not
received any response from Pivotals Board of Directors. Pivotal may reject
our offer and Pivotal or Oak may employ certain defensive tactics, such as
adopting a poison pill or other takeover defense measures, to delay or
discourage us from pursuing our offer. In addition, Oak may increase the value
of its offer to match or exceed the premium represented by our proposal. As a
result, we may not be successful in completing our proposed acquisition of
Pivotal and we may incur substantial costs in pursuing the transaction. If we
do successfully complete the acquisition, the combined company would have to
pay a $1.5 million breakup fee associated with the pending Talisma transaction
and would incur additional restructuring costs.




Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

|       |  |                                                                                                                                                                                                                                               
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                               
|3.1    |  | Restated Articles of Incorporation of the registrant (filed herewith)                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                               
|3.2    |  | Amended and Restated Bylaws of the registrant (exhibit 3.2)(a)                                                                                                                                                                                
|       |  |                                                                                                                                                                                                                                               
|4.1    |  | Rights Agreement dated October 25, 1999 between the registrant and ChaseMellon
Shareholder Services LLC (exhibit 2.1)(b)                                                                                                                      
|       |  |                                                                                                                                                                                                                                               
|4.2    |  | Amendment No. 1 to Rights Agreement dated March 5, 2003 between the registrant and
Mellon Investor Services LLC (exhibit 4.1)(c)                                                                                                              
|       |  |                                                                                                                                                                                                                                               
|31.1   |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as amended                                                                                                      
|       |  |                                                                                                                                                                                                                                               
|31.2   |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of 1934, as amended                                                                                                      
|       |  |                                                                                                                                                                                                                                               
|32.1   |  | Certification of Chief Executive Officer furnished pursuant to Rules 13a-14(b) and
15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §
1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|       |  |                                                                                                                                                                                                                                               
|32.2   |  | Certification of Chief Financial Officer furnished pursuant to Rules13a-14(b) and
15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §
1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 



|(a) |  | Incorporated by reference to the designated
exhibit to the registrants Quarterly Report on Form 10-Q
(No. 0-25361) for the quarter ended March 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Incorporated by reference to the designated
exhibit to the registrants registration statement on Form 8-A
(No. 0-25361) filed October 28, 1999.         
|   
|(c) |  | Incorporated by reference to the designated
exhibit to the registrants Annual Report on Form 10-K (No.
0-25361) for the year ended December 31, 2002.   

(b) Current Reports on Form 8-K

46



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##### Table of Contents



On July 25, 2003, we furnished a current report on Form 8-K announcing a
1-for-4 reverse stock split of all outstanding shares of common stock approved
at our annual shareholders meeting held on July 23, 2003.

On July 29, 2003 we furnished a current report on Form 8-K announcing our
financial results for the quarter ended June 30, 2003.

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##### Table of Contents






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 14, 2003 |  | By:                                    |  | /s/ Brent R. Frei             
|                        |  |                                        |  |                               
|                        |  |                                        |  | Brent R. Frei                 
|                        |  |                                        |  | Chief Executive Officer and   
|                        |  |                                        |  | Chairman of the Board         
|                        |  |                                        |  | (Principal Executive Officer) 
|                        |  |                                        |  |                               
|Date: November 14, 2003 |  | By:                                    |  | /s/ Brian C. Henry            
|                        |  |                                        |  |                               
|                        |  |                                        |  | Brian C. Henry                
|                        |  |                                        |  | Executive Vice President and  
|                        |  |                                        |  | Chief Financial Officer       
|                        |  |                                        |  | (Principal Financial Officer) 
|                        |  |                                        |  |                               
|Date: November 14, 2003 |  | By:                                    |  | /s/ Amy E. Kelleran           
|                        |  |                                        |  |                               
|                        |  |                                        |  | Amy E. Kelleran               
|                        |  |                                        |  | Vice President Finance,       
|                        |  |                                        |  | Corporate Controller and      
|                        |  |                                        |  | Assistant Secretary           
|                        |  |                                        |  | (Principal Accounting Officer)

48