<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C. 20549

                                 ____________

                                   FORM 10-Q

(Mark One)

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

          For the quarterly period ended June 30, 1999

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

          For the transition period from ____________to____________

                        Commission File Number 0-25215

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

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

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

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

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

  The number of shares of common stock outstanding on August 6, 1999 was
17,388,193.

<PAGE>

                           ONYX SOFTWARE CORPORATION
                                   CONTENTS

<TABLE>
<S>                                                                                                       <C>
PART I -- FINANCIAL INFORMATION....................................................................       3

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

       Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.......................       3
       Consolidated Statements of Operations for the Three and Six Months
         Ended June 30, 1999 and 1998..............................................................       4
       Consolidated Statement of Shareholders' Equity (Deficit) for
         the Six Months Ended June 30, 1999........................................................       5
       Consolidated Statements of Cash Flows for the Six Months
         Ended June 30, 1999 and 1998..............................................................       6
       Notes to Consolidated Financial Statements..................................................       7

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

  Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................      23

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

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

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

  Item 5. Other Information........................................................................

  Item 6. Exhibits and Reports on Form 8-K.........................................................      24

  SIGNATURES.......................................................................................      24
</TABLE>

                                       2
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                   June 30,       December 31,
                                                                                     1999             1998
                                                                                   --------       ------------
                                                                                  (unaudited)
<S>                                                                               <C>             <C>
Assets....................................................................
 Current assets:
  Cash and cash equivalents...............................................          $14,601            $ 1,853
  Marketable securities...................................................           19,348                 --
  Accounts receivable, less allowances of $406 for 1999 and $536
  for 1998................................................................           13,470             13,149
  Prepaid expense and other...............................................            1,421              1,327
                                                                                    -------            -------
    Total current assets..................................................           48,840             16,329
  Property and equipment, net.............................................            4,903              1,664
  Marketable securities...................................................            3,690                 --
  Purchased technology....................................................            2,179              3,216
  Goodwill................................................................              591                642
  Other assets............................................................              887                639
                                                                                    -------            -------
    Total assets..........................................................          $61,090            $22,490
                                                                                    =======            =======
Liabilities and Shareholders' Equity
 Current liabilities:
  Accounts payable........................................................          $ 1,654            $ 1,654
  Salary and benefits payable.............................................            1,493                905
  Accrued liabilities.....................................................            1,372              1,685
  Income taxes payable....................................................              393                288
  Current portion of capital lease obligations............................              132                216
  Current portion of long-term debt.......................................               59                975
  Deferred revenue........................................................            8,792              6,745
                                                                                    -------            -------
    Total current liabilities.............................................           13,895             12,468
  Capital lease obligations, less current portion.........................              132                191
  Long-term debt, less current portion....................................               63              4,295
  Redeemable convertible preferred stock                                                 --             13,285

 Commitments and Contingencies
 Shareholder's equity (deficit):
  Preferred stock, $0.01 par value.
  Authorized shares -- 10,000,000 shares;
  Designated shares - none................................................               --                 --
  Common stock, $0.01 par value:
  Authorized shares - 40,000,000 shares
  Issued and outstanding shares -
  17,283,614 shares at June 30, 1999
   and 9,852,557 at December 31, 1998..............................                  57,722              1,912
  Notes receivable from officers for common stock.........................             (212)              (212)
  Deferred stock-based compensation.......................................           (1,243)            (1,785)
  Accumulated deficit.....................................................           (9,158)            (7,621)
  Accumulated other comprehensive loss....................................             (109)               (43)
                                                                                    -------            -------
    Total shareholders' equity (deficit)..................................           47,000             (7,749)
                                                                                    -------            -------
    Total liabilities and shareholders' equity............................          $61,090            $22,490
                                                                                    =======            =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                               Three Months Ended June 30,     Six Months Ended June  30,
                                                               ---------------------------     --------------------------
                                                                   1999           1998             1999         1998
                                                               ------------   ------------     -----------    -----------
<S>                                                            <C>            <C>                <C>         <C>
 Revenues:
  License................................................           $ 8,243        $ 5,076        $15,316       $ 9,192
  Support and service....................................             5,037          2,929          9,195         5,768
                                                                    -------        -------        -------       -------
                                                                     13,280          8,005         24,511        14,960

Cost of revenues:
  License................................................               531            240            995           333
  Support and service....................................             2,517          1,918          4,612         3,890
                                                                    -------        -------        -------       -------
                                                                      3,048          2,158          5,607         4,223
                                                                    -------        -------        -------       -------
Gross margin.............................................            10,232          5,847         18,904        10,737
Operating expenses:
  Sales and marketing....................................             6,676          4,381         12,837         8,202
  Research and development...............................             2,698          2,387          5,335         4,457
  General and administrative.............................             1,423            869          2,617        1, 650
                                                                    -------        -------        -------       -------
Total operating expenses.................................            10,797          7,637         20,789        14,309
                                                                    -------        -------        -------       -------

Loss from operations.....................................              (565)        (1,790)        (1,885)       (3,572)
Interest income, net.....................................               421             22            535            62
                                                                    -------        -------        -------       -------
  Loss before income taxes...............................              (144)        (1,768)        (1,350)       (3,510)

Income tax provision.....................................               110             62            187           124
                                                                    -------        -------        -------       -------
Net loss.................................................              (254)        (1,830)        (1,537)       (3,634)
Preferred stock accretion................................                --           (304)        (1,442)         (608)
                                                                    -------        -------        -------       -------
Loss to common shareholders..............................           $  (254)       $(2,134)       $(2,979)      $(4,242)
                                                                    =======        =======        =======       =======
Loss per share:
 Basic and diluted.......................................           $ (0.02)       $ (0.26)       $ (0.21)      $ (0.52)
 Pro forma basic and diluted.............................           $ (0.02)       $ (0.16)       $ (0.10)      $ (0.31)

Shares used in calculation of loss per share:
 Basic and diluted.......................................            15,918          8,161         14,191         8,150
 Pro forma basic and diluted.............................            15,918         11,694         15,011        11,684
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

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

<TABLE>
<CAPTION>

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

<CAPTION>

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

         See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

Consolidated Statements of Cash Flows
(In thousands)

<TABLE>
<CAPTION>
                                                                                    Six Months Ended June 30,
                                                                                ----------------------------------
                                                                                    1999                 1998
                                                                                -------------        --------------
                                                                                            (Unaudited)
<S>                                                                             <C>                  <C>
Operating activities:
      Net loss available to common shareholders...............................  $      (2,979)       $       (4,242)
      Adjustments to reconcile net income loss to net cash
        provided by (used in) operating activities:
           Preferred stock accretion..........................................          1,442                   609
           Depreciation and amortization......................................            876                   440
           Amortization of premiums (discounts) on investments................             44                    (9)
           Noncash stock-based compensation expense...........................            542                    80
           Changes in operating assets and liabilities:
               Accounts receivable............................................           (337)                 (496)
               Other assets...................................................           (550)                 (720)
               Accounts payable and accrued liabilities.......................            394                   481
               Deferred revenue...............................................          2,047                 1,725
               Income taxes...................................................            105                    94
                                                                                -------------        --------------
           Net cash provided by (used in)
           operating activities...............................................          1,584                (2,038)
Investing activities:
      Purchases of securities.................................................        (22,919)                   --
      Proceeds from maturity of securities....................................             --                 2,073
      Purchases of property and equipment.....................................         (3,808)                 (284)
                                                                                -------------        --------------
           Net cash provided by (used in)
           investing activities...............................................        (26,727)                1,789
Financing activities:
      Proceeds from exercise of stock options.................................            114                    11
      Payments on capital lease obligations...................................           (139)                 (208)
      Proceeds from issuance of shares under employee stock purchase plan.....            419                    --
      Payments on long-term debt..............................................         (4,367)                   --
      Net proceeds initial public offering....................................         41,873                    --
                                                                                -------------        --------------
           Net cash provided by (used in) financing activities................         37,900                  (197)
Effects of exchange rate changes on cash......................................             (9)                   (1)
                                                                                -------------        --------------
Net increase in cash and cash equivalents.....................................         12,748                  (447)
Cash and cash equivalents at beginning of year................................          1,853                 3,512
                                                                                -------------        --------------
Cash and cash equivalents at end of year......................................  $      14,601        $        3,065
                                                                                =============        ===============
Supplemental cash flow disclosure:
      Interest paid...........................................................  $          62        $           37
      Income taxes paid, net..................................................             82                    30
      Fixed assets financed through capital
      lease obligations.......................................................             --                   266
      Issuance of common stock to employees in connection with fourth
      quarter 1998 bonus......................................................            119
</TABLE>


See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                           ONYX SOFTWARE CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  (Unaudited)


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

     Description of Onyx Software Corporation

     Onyx Software Corporation and subsidiaries ("Onyx") is a leading provider
of Web-based customer relationship management solutions. We derive the majority
of our revenues from the Onyx Front Office product family, which includes Onyx
Customer Center, Onyx Customer Center - Unplugged, Onyx Web Wizards, Onyx
Insight, Onyx Channel Connect and Onyx EnCyc. We recently added Onyx Enterprise
Portal to the Onyx Front Office product family. Onyx Enterprise Portal was made
generally available at the end of July 1999. We were incorporated in the State
of Washington on February 23, 1994 and maintain our headquarters in Bellevue,
Washington.

     Interim Financial Information

     The accompanying unaudited consolidated financial statements have been
prepared in conformity with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed, or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. In our opinion,
the statements include all adjustments necessary (which are of a normal and
recurring nature) for the fair presentation of the results of the interim
periods presented. These consolidated financial statements should be read in
conjunction with our audited consolidated financial statements for the year
ended December 31, 1998, included in our prospectus, dated February 11, 1999,
filed with the Securities and Exchange Commission in connection with our initial
public offering and our interim consolidated financial statements for the three
months ended March 31, 1999 included in our Form 10-Q filed with the Securities
and Exchange Commission on May 14, 1999. Our results of operations for any
interim period are not necessarily indicative of the results of operations for
any other interim period or for a full fiscal year.

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

     Revenue Recognition

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

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

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

     .     there is persuasive evidence of an arrangement;

     .     collection is probable;

                                       7
<PAGE>

     .     the fee is fixed or determinable; and

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

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

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

     Research and Development Costs

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

     3.   Net Loss Per Common Share
          -------------------------

     Basic and diluted net loss per common share is calculated by dividing the
net loss available to common shareholders by the weighted average number of
common shares outstanding. Pro forma basic and diluted net loss per share is
computed based on the net loss divided by the weighted average number of common
shares outstanding and the weighted average convertible redeemable preferred
stock outstanding as if such shares were converted to common stock at the time
of issuance.

                                      8
<PAGE>

<TABLE>
<CAPTION>
                                                        Three Months Ended June 30,               Six Months Ended June 30,
                                                   -------------------------------------     -----------------------------------
                                                         1999                 1998                  1999               1998
                                                         ----                 ----                  ----               ----
                                                                         (in thousands, except per share data)

<S>                                                <C>                   <C>                  <C>                <C>
Net loss (A)                                       $    (254)            $   (1,830)          $   (1,537)        $   (3,634)

Preferred stock accretion (1)                             --                   (304)              (1,442)              (608)
                                                   -----------------------------------        ---------------------------------
Loss to common shareholders (B)                         (254)                (2,134)              (2,979)            (4,242)
                                                   -----------------------------------        ---------------------------------

Weighted average number of common shares ( 2):        15,918                  8,161               14,191              8,151
  Effect of dilutive securities                            *                      *                    *                  *
  Stock options                                            *                      *                    *                  *
  Redeemable convertible preferred stock                   *                      *                    *                  *
                                                   -----------------------------------        ---------------------------------
Adjusted weighted average shares
   and assumed conversions (D)                        15,918                  8,161               14,191              8,151
Pro forma adjustment for redeemable convertible
 preferred stock                                          --                  3,533                  820              3,533
                                                   -----------------------------------        ---------------------------------
Pro forma weighted average shares (E)                 15,918                 11,694               15,011             11,684
                                                   ===================================        =================================
Loss per share:
Basic and diluted (B)/(D)                            $ (0.02)               $ (0.26)             $ (0.21)           $ (0.52)
Proforma basic and diluted (A)/(E)                   $ (0.02)               $ (0.16)             $ (0.10)           $ (0.31)
</TABLE>

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

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

    *Excluded from the computation of diluted earnings per share because the
effects are anti-dilutive. Options to purchase 4,357,546 shares of Common Stock
with exercise prices of $0.10 to $2.50 per share were outstanding as of June 30,
1998 and options to purchase 4,520,454 shares of Common Stock with exercise
prices of $0.10 to $23.35 per share (including shares discussed in (1) above)
were outstanding as of June 30, 1999.

4.  Comprehensive Income (Loss)

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

<TABLE>
<CAPTION>
                                                  Three Months Ended June 30,    Six Months Ended June 30,
                                                     1999            1998           1999           1998
                                                 -------------  --------------  -------------  ------------
<S>                                              <C>            <C>             <C>            <C>
                                                                        (Unaudited)

Net income (loss)                                       $(254)        $(1,830)       $(1,537)      $(3,634)
Other comprehensive income (loss):
     Unrealized currency gain (loss)...............        23              (4)           (21)           (6)
     Unrealized loss on marketable securities......       (45)             --            (45)           --
                                                        -----         -------        -------       -------
Total comprehensive income (loss)..................      (276)         (1,834)        (1,603)       (3,640)
                                                        =====         =======        =======       =======
</TABLE>

                                       9
<PAGE>

     5.   International Operations

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


<TABLE>
<CAPTION>

                                                          Three Months Ended June 30,          Six Months Ended June 30,
                                                          ----------------------------         -------------------------
                                                         1999                     1998         1999                 1998
                                                         ----                     ----         ----                 ----
<S>                                                    <C>                     <C>           <C>                  <C>
North America                                          $ 10,939                $   7,255     $  20,279            $ 13,586
Rest of World                                             2,341                      750         4,232               1,374
                                                       ---------------------------------     -----------------------------
Total revenues                                         $ 13,280                $   8,005     $  24,511            $ 14,960
                                                       =================================     =============================
</TABLE>

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


<TABLE>
<CAPTION>

                                                              North      Rest of
                                                              America    World        Total
                                                             --------------------------------
<S>                                                          <C>         <C>         <C>
Quarter ended June 30, 1999:
     Revenues                                               $   10,939  $  2,341    $  13,280
     Operating income ( loss)                                      346      (911)        (565)
     Interest, net                                                 421        --          421
     Depreciation and amortization                                 496        20          516
     Purchases of property and equipment                         2,358       106        2,464
     Long-lived assets                                          11,714       536       12,250
     Total assets                                               59,273     1,817       61,090

Quarter ended June 30, 1998:
     Revenues                                               $    7,255  $    750    $   8,005
     Operating loss                                               (636)   (1,154)      (1,790)
     Interest, net                                                  22        --          114
     Depreciation and amortization                                 217        10          227
     Purchases of property and equipment                           112        52          164
     Long-lived assets                                           2,346       376        2,722
     Total assets                                               14,105       662       14,768

Six months ended June 30, 1999:
     Revenues                                               $   20,279  $  4,232    $  24,511
     Operating loss                                                (37)   (1,848)      (1,885)
     Interest, net                                                 535        --          535
     Depreciation and amortization                                 842        34          876
     Purchases of property and equipment                         3,690       118        3,808
     Long-lived assets                                          11,714       536       12,250
     Total assets                                               59,273     1,817       61,090

Six months ended June 30, 1998:
     Revenues                                               $  13 ,586  $  1,374    $  14,960
     Operating loss                                             (1,536)   (2,036)      (3,572)
     Interest, net                                                  62        --           62
     Depreciation and amortization                                 420        20          440
     Purchases of property and equipment                           227        57          284
     Long-lived assets                                           2,346       376        2,722
     Total assets                                               14,105       662       14,768
</TABLE>

     6.   Long-Term Debt, Commitments and Contingencies

     In June 1998, Onyx entered into a noncancelable agreement with a third-
party software developer to license certain technology which was to be embedded
in a future release of our core product. The agreement called for eight
quarterly payments of $156,250 totaling $1.25 million through April 2000. At
December 31, 1998, the initial cost of this technology of $1.25 million was
recorded as purchased technology with remaining amounts outstanding of
$1,093,000 in long-term debt ($781,000 as a current liability) in the
consolidated balance sheet.

     During the second quarter of 1999, as a result of a change in product
direction and partnering strategy, the two parties agreed to amend the terms of
the agreement. The first three installments totaling $468,750 remain as
purchased technology in our consolidated balance sheet as of June 30, 1999 and
represent consideration for the licensing of certain technology which will be
embedded in a future release of our core product, however, on a far less-widely
distributed basis. Upon release of this product with the embedded third-party
technology, the intangible will be expensed on the higher of a per user basis
over the projected product life or straight-line amortization of two years from
the date of release. Under the amended terms of the agreement, Onyx will apply
the remaining five quarterly payments (April 1999 through April 2000 totaling
$781,250) against future third-party products we resell. These payments are
treated as prepaid software licenses and have been ($312,500 as of June 30,
1999) and will be included in "Prepaid expenses and other" in the consolidated
balance sheet. The prepaid software licenses will be expensed on a per

                                       10
<PAGE>

user basis as the third-party products are resold. In conjunction with amending
the original agreement, Onyx agreed to an additional purchase commitment of
$375,000 in software licenses through the end of June 2000.

  7. Subsequent Event

  On August 2, 1999, we acquired Versametrix Corporation, a privately-held
developer of a comprehensive, browser-based personalization framework and a
Web-based business intelligence solution. The acquisition of Versametrix expands
our front office portal product offering. In exchange for all the outstanding
shares of Versametrix, we issued 96,193 shares of Onyx Common Stock and assumed
$61,500 of Versametrix's debt, which was immediately liquidated. Including
direct costs of the acquisition, the total purchase price was approximately $1.7
million. The transaction will be accounted for using the purchase method of
accounting, and, accordingly, the results of Versametrix's operations will be
included in our consolidated financial statements from the date of acquisition.
Allocation of the purchase price will be determined in the third quarter of
1999.

                                      11
<PAGE>

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

Forward-Looking Information

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

Overview of Onyx's Financial Performance

  Onyx's History of Operations

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

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

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

  We believe these investments have been critical to our growth. Our revenues
grew to $19.4 million in 1997 and to $35.1 million in 1998. Nevertheless, these
investments have also significantly increased our operating expenses,
contributing to the net losses that we incurred in each fiscal quarter since the
first quarter of 1997. As of June 30, 1999, we had an accumulated deficit of
$9.2 million. We anticipate that our operating expenses will increase
substantially in dollar amount for the foreseeable future as we expand our
product development, sales and marketing and professional services staff.
However, due to the significant investments made to date and management's focus
on returning to profitability, we expect the rate at which our expenses grow to
decline relative to our revenue growth.

Onyx's Results of Operations

  The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three and six months ended June
30, 1999 and 1998 are not necessarily indicative of the results that may be
expected for the full year or for any future period.

                                      12
<PAGE>

<TABLE>
<CAPTION>
                                                                           Three Months Ended           Six Months Ended
                                                                           --------------------        --------------------
                                                                                June 30,                    June 30,
                                                                                --------                    --------
                                                                           1999         1998           1999          1998
                                                                           ----         ----           ----          ----
          <S>                                                              <C>          <C>            <C>           <C>
          Consolidated Statement of Operations Data:
             Revenues:
                 License...........................................           62.1%        63.4%          62.5%         61.4%
                 Service...........................................           37.9         36.6           37.5          38.6
                                                                             -----       ------          -----        ------
                 Total revenues....................................          100.0        100.0          100.0         100.0
                                                                             -----       ------          -----        ------
             Cost of revenues:
                 License...........................................            4.0          3.0            4.1           2.2
                 Service...........................................           19.0         24.0           18.8          26.0
                                                                             -----       ------          -----        ------
                 Total cost of revenues............................           23.0         27.0           22.9          28.2
                                                                             -----       ------          -----        ------
             Gross margin..........................................           77.0         73.0           77.1          71.8
             Operating expenses:
                 Sales and marketing...............................           50.3         54.7           52.3          54.9
                 Research and development..........................           20.3         29.8           21.8          29.8
                 General and administrative........................           10.7         10.9           10.7          11.0
                                                                             -----       ------          -----        ------
                 Total operating expenses..........................           81.3         95.4           84.8          95.7
                                                                             -----       ------          -----        ------
             Income (loss) from operations.........................           (4.3)       (22.4)          (7.7)        (23.9)
             Interest income, net..................................            3.2          0.3            2.2           0.4
                                                                             -----       ------          -----        ------
             Income (loss) before income taxes.....................           (1.1)       (22.1)          (5.5)        (23.5)
             Income tax provision (benefit)........................            0.8          0.8            0.8           0.8
                                                                             -----       ------          -----        ------
             Net income (loss).....................................           (1.9)%      (22.9)%         (6.3)%       (24.3)%
                                                                             -----       ------          -----        ------
</TABLE>

Revenues


  Total revenues, which consist of software license and service revenues,
increased 66%, from $8.0 million in the second quarter of 1998 to $13.3 million
in the second quarter of 1999 and 64%, from $15.0 million in the first six
months of 1998 to $24.5 million in the first six months of 1999. No single
customer accounted for more than 10% of our revenues in the first quarter or
first six months of 1999 or 1998.

  License revenues increased 62%, from $5.1 million in the second quarter of
1998 to $8.3 million in the second quarter of 1999. Of the increase, $1.6
million was due to increased follow-on sales to existing customers and $1.6
million was due to increased sales to new customers. License revenues increased
67%, from $9.2 million in the first six months of 1998 to $15.3 million in the
first six months of 1999. Of the increase, $3.8 million was due to increased
follow-on sales to existing customers and $2.3 million was due to increased
sales to new customers.

  Service revenues increased 72%, from $2.9 million in the second quarter of
1998 to $5.0 million in the second quarter of 1999. Of the increase, $1.4
million was due to increases in maintenance and support revenues and $700,000
was due to increases in consulting and training services. Service revenues
increased 59%, from $5.8 million in the first six months of 1998 to $9.2 million
in the first six months of 1999. Of the increase, $2.6 million was due to
increases in maintenance and support revenues and $800,000 was due to increases
in consulting and training services. The increase in service revenues primarily
results from an increase in our software application sales and the overall
growth of our installed base of customers during these periods.

  Service revenues represented 37% of our total revenues in the second quarter
of 1998 compared to 38% in the second quarter of 1999 and 39% of our total
revenues in the first six months of 1998 compared to 38% of our total revenues
in the first six months of 1999. We expect the proportion of service revenues to
total revenues to fluctuate in the future, depending in part on our customers'
direct use of third-party consulting and implementation service providers and
the ongoing renewals of customer support contracts.

  Revenues outside of North America increased 212%, from $750,000 in the second
quarter of 1998 to $2.3 million in the second quarter of 1999 and 208%, from
$1.4 million in the first six months of 1998 to $4.2 million in the first six
months of 1999. The increase in international revenues resulted from our
investment in direct and indirect sales channels, primarily in Europe, Australia
and Singapore.

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

                                      13
<PAGE>

Cost of Revenues

  Cost of license revenues

  Cost of license revenues consists of license fees for third-party software,
product media, product duplication and manuals. Cost of license revenues
increased 121%, from $240,000 in the second quarter of 1998 to $531,000 in the
second quarter of 1999 and 199%, from $333,000 in the first six months of 1998
to $995,000 in the first six months of 1999. Cost of license revenues as a
percentage of related license revenues was 3% in the second quarter of 1998
compared to 4% in the second quarter of 1999 and 2% in the first six months of
1998 compared to 4% in the first six months of 1999. The increase in dollar
amount in cost of license revenues resulted primarily from an increase in third-
party technology costs. The increase in cost of license revenues as a percentage
of related license revenues resulted primarily from the increase in products we
sold with third-party technology, which contribute significantly lower margins.

  Cost of service revenues

  Cost of service revenues consists of personnel and third-party service
provider costs related to consulting services, customer support and training.
Cost of service revenues increased 31%, from $1.9 million in the second quarter
of 1998 to $2.5 million in the second quarter of 1999 and 19%, from $3.9 million
in the first six months of 1998 to $4.6 million in the first six months of 1999.
The increase in dollar amount resulted primarily from hiring and training
consulting, support and training personnel to support our growing customer base,
offset in part by a decreased use of third-party service providers. Our service
employees increased from 57 as of June 30, 1998 to 82 as of June 30, 1999. Cost
of service revenues as a percentage of related service revenues was 65% in the
second quarter of 1998 compared to 50% in the second quarter of 1999 and 67% in
the first six months of a1998 compared to 50% in the first six months of 1999.
The cost of services as a percentage of service revenues may vary between
periods primarily for two reasons: (1) the mix of services we provide
(consulting, customer support, training), which have different cost structures,
and (2) the resources we use to deliver these services (internal versus third
parties). The decrease in cost of service revenues as a percentage of related
service revenues reflected primarily a lower percentage use of third-party
service providers, which contribute significantly lower margins than internal
resources, and increased customer support revenues, which contribute higher
margins than the other services.

Costs and Expenses

  Sales and marketing

  Sales and marketing expenses consist primarily of salaries, commissions and
bonuses earned by sales and marketing personnel, travel and promotional expenses
and facility and communication costs for direct sales offices. Sales and
marketing expenses increased 52%, from $4.4 million in the second quarter of
1998 to $6.7 million in the second quarter of 1999 and 57%, from $8.2 million in
the first six months of 1998 to $12.8 million in the first six months of 1999.
The increase in dollar amount was primarily attributable to the expansion of our
worldwide sales and marketing organization, which included significant
personnel-related costs to recruit and hire sales management, sales
representatives, sales engineers and marketing professionals. Sales and
marketing employees increased from 114 as of June 30, 1998 to 131 as of June 30,
1999. The increase in dollar amount is also the result of an increase in sales
commissions and bonuses associated with increased revenues and an increase in
marketing activities including trade shows, cyber seminars, and direct mail
campaigns. Sales and marketing expenses represented 55% of our total revenues in
the second quarter of 1998 compared to 50% of our total revenues in the second
quarter of 1999 and 55% of our total revenues in the first six months of 1998
compared to 52% of our total revenues in the first six months of 1999. The
decrease in sales and marketing expenses as a percentage of total revenues
reflects the more rapid growth in our revenues in this period compared to the
growth of sales and marketing expenses due to maturing sales channels, as well
as increased service revenues as a percentage of total revenues. We believe that
we need to significantly increase our sales and marketing efforts to expand our
market position and further increase acceptance of our products. Accordingly, we
anticipate that sales and marketing expenses will increase in future periods.

  Research and development

  Research and development expenses consist primarily of salaries, benefits and
equipment for software developers, quality assurance personnel, program managers
and technical writers and payments to outside contractors. Research and
development expenses increased 13%, from $2.4 million in the second quarter of
1998 to $2.7 million in the second quarter of 1999 and 20%, from $4.5 million
in the first six months of 1998 to $5.3 million in the first six months of 1999.
The increase was primarily due to an increase in the number of development
personnel, offset in part by a decrease in the use of outside contractors.
Research and development

                                      14
<PAGE>

employees increased from 55 as of June 30, 1998 to 77 as of June 30, 1999.
Research and development costs represented 30% of our total revenues in the
second quarter of 1998 compared to 20% in the second quarter of 1999 and 30% of
our total revenues in the first six months of 1998 compared to 22% in the first
six months of 1999. The decrease in research and development expenses as a
percentage of total revenues primarily reflects the more rapid growth in our
revenues in this period compared to the growth of our research and development
expenses which slowed as a result of the economies achieved in recruiting and
substituting full-time development personnel for third party contractors. We
believe that we need to significantly increase our research and development
investment to expand our market position and continue to expand our product
line. Accordingly, we anticipate that research and development expenses will
increase in future periods.

  General and administrative

  General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance, administrative and information
services personnel and professional services fees. General and administrative
expenses increased 64%, from $869,000 in the second quarter of 1998 to $1.4
million in the second quarter of 1999 and 59%, from $1.6 million in the first
six months of 1998 to $2.6 million in the first six months of 1999. The increase
was primarily due to the addition of finance, executive and administrative
personnel to support the growth of our business along with an increase in
professional fees associated with becoming a public company and expanding
internationally. General and administrative employees increased from 26 as of
June 30, 1998 to 36 as of June 30, 1999. General and administrative costs
represented 11% of our total revenues in the second quarter of 1998 and 1999, as
well as for the first six months of 1998 and 1999. We believe our general and
administrative expenses will continue to increase as we expand our domestic and
international administrative staff, and incur expenses associated with being a
public company, including, but not limited to, annual and other public reporting
costs, directors' and officers' liability insurance, investor relations programs
and professional services fees.

  Deferred compensation

  We amortized deferred compensation expense of $45,000 during the second
quarter of 1998 compared to $266,000 in the second quarter of 1999 and $71,000
during the first six months of 1998 compared to $542,000 during the first six
months of 1999.  Deferred compensation is amortized over the vesting periods of
the options.

  Interest income and interest expense, net

  Interest income, net consists of earnings on our cash and cash equivalent and
investment balances net of interest expense associated with our debt
obligations. Interest income, net was $22,000 in the second quarter of 1998 and
$421,000 in the second quarter of 1999 and $62,000 in the first six months of
1998 and $535,000 in the first six months of 1999. This increase reflects the
higher cash and investment base as a result of proceeds we received in February
1999 from our initial public offering.

  Income taxes

  We recorded an income tax provisions of $62,000 in the second quarter of 1998,
and $110,000 in the second quarter of 1999,  and $124,000 in the first six
months of 1998 and $187,000 in the first six months of 1999 in connection with
our foreign operations.  We made no provision or benefit for federal or state
income taxes in 1998 or 1999 due to the operating losses we have incurred since
the first quarter of 1997, which havse resulted in deferred tax assets.  We have
recorded a valuation allowance for the entire deferred tax asset as a result of
uncertainties regarding the realization of the asset balance.

Financial Condition

  Total assets increased from $22.5 million as of December 31, 1998 to $61.1
million as of June 30, 1999, representing an increase of $38.6 million, or 172%.
This increase was primarily due to cash proceeds raised from the sale of common
stock in our recent initial public offering. As of December 31, 1998, we had
cash and cash equivalents of $1.9 million. As of June 30, 1999, we had cash and
cash equivalents of $14.6 million, short-term investments of $19.3 million and
long-term investments of $3.7 million, resulting in total cash and investments
of $37.6 million. This figure represents an increase of $35.8 million over cash
and investment balances at December 31, 1998.

  Accounts receivable were $13.1 million as of December 31, 1998 and $13.5
million as of June 30, 1999, representing an increase of $400,000, or 2%.  This
increase was principally a result of an increase in billed revenues during the
recent quarter, offset in part by significant cash collections during the three
months ended June 30, 1999.  Days' sales outstanding on recognized revenues in
accounts receivable decreased from 108 days as of December 31,

                                      15
<PAGE>

1998 to 92 days as of June 30, 1999. We expect that days' sales outstanding will
fluctuate significantly in future quarters. Property and equipment increased due
to an increase in equipment purchased rather than leased through operating
leases, leasehold improvements and other capital expenditures associated with
our new headquarter facilities and the acquisition of a new trade show booth.

  Total liabilities were $30.2 million as of December 31, 1998 and $14.1 million
as of June 30, 1999, representing a decrease of $16.1 million, or 53%.  This
decrease was principally the result of the conversion of $13.3 million in
redeemable convertible preferred stock to common stock in connection with our
initial public offering and the repayment of borrowings under our working
capital facility.

Liquidity and Capital Resources

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

  As of June 30, 1999, we had cash and cash equivalents of $14.6 million, short-
term investments of $19.3 million and long-term investments of $3.7 million,
representing an increase of $35.8 million from cash and investments held as of
December 31, 1998.  Our working capital at June 30, 1999 was $34.9 million,
compared to $3.9 million at December 31, 1998.

  We have an $8.0 million working capital revolving line of credit with Silicon
Valley Bank that is secured by our accounts receivable and bears interest at the
bank's prime rate or LIBOR plus 2.0%, which wasequaled 8.0% as of June 30, 1999.
This facility allows us to borrow up to the lesser of 80% of our eligible
accounts receivable or $8.0 million. The facility expires in June 2000. The
agreement under which the line of credit was established contains certain
covenants, including a provision requiring us to maintain specified financial
ratios. As of June 30, 1999, we had not outstanding borrowedings under the
working capital facility; however, there was approximately $778,000 in standby
letters of credit outstanding. We also have a $3.0 million term loan facility
with Silicon Valley Bank for the purpose of financing new capital equipment
purchases. This facility operates as a revolver through August 1999, bearing
interest at a rate equal to the bank's prime rate plus 0.25%, which equaled
8.25% as of June 30, 1999, after which time any balances must be paid over a 36-
month term. This facility also requires us to maintain certain financial
covenants, including a requirement that we maintain certain financial ratios. As
of June 30, 1999, we had borrowed $63,000 under this line of credit. We were in
compliance with all financial covenants of the credit facility as of June 30,
1999.

  Our operating activities resulted in net cash outflows of $2.0 million in the
first six months of 1998 compared to net cash inflows of of $1.6 million in the
first six months of 1999. The operating cash outflows in the first six months of
1998 were primarily the result of our operating loss and increases in accounts
receivable, prepaid expenses and other current assets, partially offset by
decreases in our accounts receivable and increases in accounts payable, accrued
liabilities and deferred revenues. The operating cash inflows in the first six
months of 1999 were primarily the result of cash provided by collections on our
accounts receivable and increases in deferred revenues and accrued
liabilitiesand other assets, partially offset by increases in accounts
receivable, prepaid expenses and other assets.cash outflows from our operating
loss.

  Investing activities provided cash of $1.8 million in the first six months of
1998, due primarily to proceeds from the maturity of securities, offset by cash
used to acquire capital equipment. Investing activities used cash of $26.7
million in the first six months 1999, primarily for the purchase of short-term
and long-term marketable securities following our initial public offering and
the purchase of capital equipment. The significant increase in capital
expenditures for the first six months of 1999, as reflected in the Statement of
Cash Flows, is the combined result of (a) our election to purchase new computer
hardware and software used in our operations rather than lease through off-
balance sheet financing arrangements, as was done historically; and (b)
leasehold improvement, equipment and furniture costs associated with the
relocation of our corporate headquarters, which was completed in July 1999.

  Financing activities used cash of $200,000 in the first six months of 1998
resulting from payments on capital lease obligations, offset in part by proceeds
from the exercise of stock options.  Financing activities provided cash of
$37.9 million in the first six months of 1999 primarily due to the proceeds
from our initial public offering in February, offset in part by payments on our
credit facility and capital lease obligations.

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

  .   enter new markets for our products and services;

                                      16
<PAGE>

  .   increase research and development spending;

  .   increase sales and marketing activities;

  .   develop new distribution channels;

  .   improve our operational and financial systems; and

  .   broaden our professional service capabilities.

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

Year 2000 Compliance

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

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

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

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

  To date, we have not incurred any material costs directly associated with our
Year 2000 compliance efforts, except for compensation expense associated with
our salaried employees who have devoted some of their time to our Year 2000
assessment and remediation efforts. As discussed above, we do not expect the
total cost of Year 2000 problems to be material to our business, financial
condition and operating results. However, during the months prior to the century
change, we will continue to evaluate new versions of our software products, new
software and information systems provided to us by third parties and any new
infrastructure systems that we acquire to determine

                                      17
<PAGE>

whether they are Year 2000 compliant. Despite our current assessment, we may not
identify and correct all significant Year 2000 problems on a timely basis. Year
2000 compliance efforts may involve significant time and expense and
unremediated problems could materially adversely affect our business, financial
condition and operating results. We currently have no contingency plans to
address the risks associated with unremediated Year 2000 problems.

FACTORS AFFECTING OPERATING RESULTS

Our future operating results are uncertain and likely to fluctuate.

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

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

  .  the amount of unfulfilled orders for our products at the
     beginning of a quarter is small because our products are
     typically shipped shortly after orders are received; and

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

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

Seasonality affects our revenues.

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

Our results fluctuate from quarter to quarter.

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

We have a limited operating history.

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

We have incurred losses.

  We incurred net losses in each quarter from Onyx's inception through the third
quarter of 1994 and from the first quarter of 1997 tothrough the second quarter
of 1999.  As of June 30, 1999, we had an accumulated deficit of $9.2

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<PAGE>

million. We expect to continue to devote substantial resources to our product
development and sales and customer support. As a result, we will need to
generate significant quarterly revenues to achieve and maintain profitability.
Our business strategies may not be successful, and we may not be profitable in
any future period.

Our market is highly competitive.

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

  .  front-office software applications vendors;

  .  large enterprise software vendors; and

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

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

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

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

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

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

We rely on sales of only one product family.

  Onyx Front Office product license revenues accounted for approximately 55% of
our total revenues, or 84% of total license revenues, during fiscal 1998 and
approximately 62% of our total revenues, or 95% of total license

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<PAGE>

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

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

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

We depend on certain key employees.

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

Our market is subject to rapid technological change.

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

We face risks from expansion of our international operations.

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

We rely heavily on key partners and systems integrators.

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

                                      20
<PAGE>

  We also rely on a number of systems consulting and integration firms to
implement our software, provide customer support services and endorse our
products during the competitive evaluation stage of the sales cycle.  Although
we seek to maintain relationships with these service providers, many of them
have similar, and often more established, relationships with our competitors.
These third parties, many of which have significantly greater resources than we
have, may in the future market software products that compete with ours or
reduce or discontinue their relationships with us or their support of our
products.  In addition, our business, financial condition and operating results
could be materially adversely affected if

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

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

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

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

Our sales cycle is long.

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

We depend on service revenues.

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

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

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

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

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

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<PAGE>

  If service revenues are lower than anticipated, our business, financial
condition and operating results could be materially adversely affected.  Our
ability to increase service revenues will depend in large part on our ability to
increase the scale of our services organization, including our ability to
successfully recruit and train a sufficient number of qualified services
personnel.  We may not be able to do so.

We rely on software licensed to us by third parties.

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

We may be unable to adequately protect our proprietary rights.

  Our success depends in part on our ability to protect our proprietary rights.
To protect our proprietary rights, we rely primarily on a combination of
copyright, trade secret and trademark laws, confidentiality agreements with
employees and third parties, and protective contractual provisions such as those
contained in license agreements with consultants, vendors and customers,
although we have not signed such agreements in every case.  Despite our efforts
to protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary.  Other
parties may breach confidentiality agreements and other protective contracts we
have entered into.  We may not become aware of, or have adequate remedies in the
event of, such breach.

We may be unable to adequately protect our trademarks.

  We pursue the registration of certain of our trademarks and service marks in
the United States and in certain other countries, but we have not secured
registration of all our marks. A significant portion of our marks include the
word "Onyx." ONYX Computers Incorporated has filed a lawsuit against us alleging
trademark infringement of the mark "ONYX" in Canada. We are negotiating to
settle the litigation. However, our negotiations may not be successful. A
negative outcome could materially adversely affect our financial condition and
operating results. Other companies use "Onyx" in their marks alone or in
combination with other words, and we cannot prevent all third-party uses of the
word "Onyx." We license certain trademark rights to third parties. Such
licensees may not abide by compliance and quality control guidelines with
respect to such trademark rights and may take actions that would adversely
affect our trademarks.

Our products may suffer from defects or errors.

  Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released.  We have had
to delay commercial release of certain versions of our products until software
problems were corrected, and in some cases have provided product enhancements to
correct errors in released products. Our new products or releases may not be
free from errors after commercial shipments have begun. Any errors that are
discovered after commercial release could result in loss of revenues or delay in
market acceptance, diversion of development resources, damage to our reputation
or increased service and warranty costs, all of which could materially adversely
affect our business, financial condition and operating results.

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

  In early August 1999, we acquired Versametrix Corporation, a privately-held
developer of a comprehensive, browser-based personalization framework and a Web-
based business intelligence solution. We are currently in the process of
integrating the Versametrix business with our business. This integration is
subject to risks commonly encountered in making acquisitions, including, among
others, risk of loss of key personnel, difficulties associated with assimilating
technologies, products, personnel and operations, potential disruption of our
ongoing business, and the ability of our sales force, consultants and
development staff to adapt to the new product line. We may not successfully
overcome these risks or any other problems encountered in connection with the
acquisition of Versametrix. As part of our business strategy, we expect to
consider acquiring other companies. We may not be able to successfully integrate
any technologies, products, personnel or operations of companies that we may
acquire in the future. If we fail to do so, our business, financial condition
and operating results could be materially adversely affected.

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<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

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

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

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<PAGE>

            PART II -- OTHER INFORMATION

Item 1.   Legal Proceedings

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

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

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

  .   other damages, interest and court costs.

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

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

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

  .   such further relief as the court may determine.

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

Item 2.  Changes in Securities and Use of Proceeds

  (d)    Use of Proceeds

  On February 11, 1999, ONYX's registration statement on form S-1, file number
333-68559, became effective. The offering date was February 12, 1999. The
offering has terminated as a result of all of the shares offered being sold. The
managing underwriters were Credit Suisse First Boston Corporation, SG Cowen
Securities Corporation and Piper Jaffray Inc. The offering consisted of
3,565,000 shares of ONYX common stock, including 465,000 shares of common stock
pursuant to the exercise of the underwriter's over-allotment option. The
aggregate price of the shares offered and sold was $46.3 million. Proceeds to
ONYX, after accounting for $3.2 million in underwriting discounts and
commissions and $1.2 million in other expenses, were $41.9 million. ONYX
generated interest income of approximately $600,000 during the six months ended
June 30, 1999.

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

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

Item 5. Other Information

On July 23, 1999, our Board of Directors unanimously appointed Lee Roberts to
the Board of Directors. Mr. Roberts is President and Chief Executive Officer of
FileNET. Prior to joining FileNET, Roberts served in a variety of sales,
marketing, product and general management roles at IBM for more than 20 years.

On August 2, 1999, we acquired Versametrix Corporation, a privately-held
developer of a comprehensive, browser-based personalization framework and a
Web-based business intelligence solution. The acquisition of Versametrix expands
our front office portal product offering. In exchange for all the outstanding
shares of Versametrix, we issued 96,193 shares of Onyx Common Stock and assumed
$61,500 of Versametrix's debt, which was immediately liquidated. Including
direct costs of the acquisition, the total purchase price was approximately $1.7
million. The transaction will be accounted for using the purchase method of
accounting, and, accordingly, the results of Versametrix's operations will be
included in our consolidated financial statements from the date of acquisition.

Item 6.   Exhibits and Reports on Form 8-K

  (a)  Exhibits

      27.1  Financial Data Schedule.

  (b)  Reports on Form 8-K

No reports on Form 8-K were filed during the quarter covered by this Form 10-Q.



SIGNATURES

  Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                   ONYX SOFTWARE CORPORATION
                                   (Registrant)

Date: August 13, 1999              By  /s/ Sarwat H. Ramadan
                                   -----------------------
                                   Sarwat H. Ramadan
                                   Vice President, Chief Financial Officer,
                                   Secretary and Treasurer
                                   (Principal financial and chief accounting
                                   officer)

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