<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 March 31, 2001

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

    For the transition period from to

                        Commission File Number 0-25361

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

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

                            3180-139th Avenue S.E.
                                   Suite 500
                          Bellevue, Washington 98005
              (Address of principal executive offices) (Zip code)

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

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

     The number of shares of common stock, par value $0.01 per share,
outstanding on May 4, 2001 was 40,732,951.

================================================================================
<PAGE>

                           ONYX SOFTWARE CORPORATION

                                   CONTENTS

<TABLE>
<S>            <C>                                                                                                      <C>
PART I--FINANCIAL INFORMATION.........................................................................................        2

  Item 1.      Consolidated Financial Statements......................................................................        2

               Consolidated Balance Sheets as of December 31, 2000 and March 31, 2001.................................        2

               Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 2001...............        3

               Consolidated Statement of Shareholders' Equity for the Three Months Ended March 31, 2001...............        4

               Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 2001...............        5

               Notes to Consolidated Financial Statements.............................................................        6

  Item 2.      Management's Discussion and Analysis of Financial Condition and Results of Operations..................       13

PART II--OTHER INFORMATION............................................................................................       29

  Item 2.      Changes in Securities and Use of Proceeds..............................................................       29

  Item 5.      Other Information......................................................................................       29

  Item 6.      Exhibits and Reports on Form 8-K.......................................................................       30

SIGNATURES............................................................................................................       31
</TABLE>

                                       1
<PAGE>

                         PART I--FINANCIAL INFORMATION

Item 1.  Consolidated Financial Statements

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

<TABLE>
                                                                                           December 31,           March 31,
                                                                                               2000                 2001
                                                                                           ------------         ------------
                                                                                                                 (Unaudited)
                                               ASSETS
                                               ------
<S>                                                                                           <C>                      <C>
Current assets:
  Cash and cash equivalents.............................................................     $ 11,492              $ 31,844
  Short-term investments................................................................        5,522                 4,506
  Accounts receivable, less allowances of $1,732 in 2000 and $2,392 in 2001.............       43,629                32,187
  Prepaid expense and other.............................................................        4,533                 7,212
                                                                                             --------              --------
    Total current assets................................................................       65,176                75,749

  Property and equipment, net...........................................................       20,848                24,458
  Purchased technology, net.............................................................        1,958                 1,571
  Other intangibles, net................................................................       19,674                22,745
  Other assets..........................................................................        3,878                 2,404
                                                                                             --------              --------
    Total assets........................................................................     $111,534              $126,927
                                                                                             ========              ========

                                LIABILITIES AND SHAREHOLDERS' EQUITY
                                ------------------------------------
Current liabilities:
  Accounts payable......................................................................     $  6,792              $  3,725
  Salary and benefits payable...........................................................        5,778                 4,330
  Accrued liabilities...................................................................        4,739                 3,906
  Income taxes payable..................................................................          808                   721
  Current portion of long-term obligations..............................................          242                   223
  Notes payable to shareholders.........................................................           --                 1,000
  Deferred revenues.....................................................................       19,351                20,304
                                                                                             --------              --------
    Total current liabilities...........................................................       37,710                34,209

Long-term obligations, net of current portion...........................................          428                   352
Deferred tax liability..................................................................        2,201                 2,053
Minority interest in joint venture......................................................        2,895                 2,641

Commitments and Contingencies

Shareholders' equity:
  Preferred stock, $0.01 par value:
   Authorized shares--20,000,000 shares;
   Designated shares--none..............................................................           --                    --
  Common stock, $0.01 par value:
   Authorized shares--80,000,000 shares;
   Issued and outstanding shares--37,597,670 shares at December 31, 2000
    and 40,684,205 at March 31, 2001....................................................       75,416               113,160
  Common stock issuable in acquisition..................................................        4,320                 4,320
  Notes receivable from officers for common stock.......................................         (157)                 (157)
  Deferred stock-based compensation.....................................................         (413)               (1,943)
  Accumulated deficit...................................................................      (10,562)              (26,612)
  Accumulated other comprehensive loss..................................................         (304)               (1,096)
                                                                                             --------              --------
    Total shareholders' equity..........................................................       68,300                87,672
                                                                                             --------              --------
    Total liabilities and shareholders' equity..........................................     $111,534              $126,927
                                                                                             ========              ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       2
<PAGE>

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

<TABLE>
                                                                                             Three Months Ended
                                                                                                  March 31,
                                                                                          -------------------------
                                                                                           2000              2001
                                                                                          -------          --------
                                                                                                 (Unaudited)
<S>                                                                                   <C>              <C>
Revenues:
  License.......................................................................          $14,341          $ 12,988
  Support and service...........................................................            8,843            15,401
                                                                                          -------          --------
     Total revenues.............................................................           23,184            28,389
Cost of revenues:
  License.......................................................................              660               900
  Acquisition-related amortization - technology.................................              205               204
  Support and service...........................................................            4,514             9,674
                                                                                          -------          --------
     Total cost of revenues.....................................................            5,379            10,778
                                                                                          -------          --------
Gross margin....................................................................           17,805            17,611

Operating expenses:
  Sales and marketing...........................................................           11,380            19,188
  Research and development......................................................            3,758             7,229
  General and administrative....................................................            2,119             4,450
  Acquisition-related amortization - other intangibles..........................              676             1,623
  Amortization of stock-based compensation......................................              206               310
                                                                                          -------          --------
     Total operating expenses...................................................           18,139            32,800
                                                                                          -------          --------
Loss from operations............................................................             (334)          (15,189)

Interest income, net............................................................              192               291
Equity investment losses and impairment.........................................             (237)           (1,500)
                                                                                          -------          --------
     Loss before income taxes...................................................             (379)          (16,398)
Income tax provision (benefit)..................................................              108               (94)
Minority interest in loss of consolidated subsidiary............................               --              (254)
                                                                                          -------          --------
Net loss........................................................................          $  (487)         $(16,050)
                                                                                          =======          ========

Net loss per share:
  Basic and diluted.............................................................          $ (0.01)         $  (0.42)
                                                                                          =======          ========

Shares used in calculation of net loss per share:
  Basic and diluted.............................................................           34,256            37,821
                                                                                           ======            ======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                      Note
                                                                   Receivable
                                                         Common       from                               Accumulated
                                      Common Stock        Stock    Officer for  Deferred                    Other
                                     ----------------  Issuable in   Common    Stock-Based  Accumulated Comprehensive Shareholders'
                                     Shares    Amount  Acquisition    Stock    Compensation   Deficit       Loss        Equity
                                     ------    ------  -----------    -----    ------------   -------       ----        ------
<S>                                <C>        <C>      <C>           <C>       <C>           <C>          <C>          <C>
Balance at January 1, 2001.......  37,597,670 $ 75,416   $4,320      $(157)    $  (413)      $(10,562)    $  (304)      $ 68,300
  Issuance of common stock and
   options in connection with
   acquisition...................     185,463    5,659       --         --      (1,840)            --          --          3,819
  Amortization of deferred
   stock compensation............          --       --       --         --         310             --          --            310
  Exercise of stock options......     401,072      560       --         --          --             --          --            560
  Proceeds from public offering,
   net of offering costs of
   $350..........................   2,500,000   31,525       --         --          --             --          --         31,525

Comprehensive income (loss):               --       --       --         --          --             --          --
  Cumulative translation loss....          --       --       --         --          --             --        (780)
  Unrealized losses on
   marketable securities.........          --       --       --         --          --             --         (12)
  Net loss.......................          --       --       --         --          --        (16,050)         --
  Total comprehensive loss.......                                                                                        (16,842)
                                   ---------- --------   ------      -----     -------       --------     -------       --------
Balance at March 31, 2001........  40,684,205 $113,160   $4,320      $(157)    $(1,943)      $(26,612)    $(1,096)      $ 87,672
                                   ========== ========   ======      =====     =======       ========     =======       ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                      Three Months Ended
                                                                                                           March 31,
                                                                                                  ----------------------------
                                                                                                      2000            2001
                                                                                                  -------------   ------------
                                                                                                           (Unaudited)
<S>                                                                                               <C>             <C>
Operating activities:
  Net loss to common shareholders...............................................................    $  (487)        $ (16,050)
  Adjustments to reconcile net loss to net cash provided by operating activities:
     Depreciation and amortization..............................................................      1,611             3,656
     Accretion of premium on investments........................................................         23                 1
     Deferred income taxes......................................................................       (133)             (148)
     Noncash stock-based compensation expense...................................................        206               310
     Minority interest in loss of consolidated subsidiary.......................................          -              (254)
     Equity investment losses and impairment....................................................        237             1,500
     Changes in operating assets and liabilities:
        Accounts receivable.....................................................................      1,992            11,339
        Other assets............................................................................     (3,989)           (2,746)
        Accounts payable and accrued liabilities................................................      1,781            (5,282)
        Deferred revenue........................................................................      2,618               746
        Income taxes............................................................................        157               (87)
                                                                                                    -------         ---------
           Net cash provided by (used in) operating activities..................................      4,016            (7,015)
Investing activities:
  Purchases of securities.......................................................................         --            (2,500)
  Proceeds from maturity of securities..........................................................     15,270             3,515
  Acquisition of CSN in 2000 and RevenueLab in 2001, net of cash................................       (996)              131
  Purchases of property and equipment...........................................................     (1,733)           (5,168)
                                                                                                    -------         ---------
           Net cash provided by (used in) investing activities..................................     12,541            (4,022)
Financing activities:
  Proceeds from exercise of stock options.......................................................        583               560
  Payments on capital lease obligations.........................................................        (45)              (95)
  Payments on long-term debt....................................................................        (51)               --
  Proceeds from shareholder notes...............................................................         55                --
  Proceeds from overdraft facility..............................................................        309                --
  Net proceeds from sale of common stock........................................................         --            31,525
                                                                                                    -------         ---------
           Net cash provided by financing activities............................................        851            31,990
Effects of exchange rate changes on cash........................................................         22              (601)

Net increase in cash and cash equivalents.......................................................     17,430            20,352
Cash and cash equivalents at beginning of period................................................      3,691            11,492
                                                                                                    -------         ---------
Cash and cash equivalents at end of period......................................................    $21,121         $  31,844
                                                                                                    =======         =========
Supplemental cash flow disclosure:
  Interest paid.................................................................................    $    57         $       7
  Income taxes paid, net........................................................................         84               141
  Issuance of common stock and stock options in connection with acquisition.....................      2,261             5,659
  Issuance of short-term debt in connection with acquisition....................................      1,131             1,000
  Technology purchased through short-term debt..................................................        509                --
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       5

<PAGE>

                           ONYX SOFTWARE CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1.  Description of Business and Basis of Presentation

 Description of the Company

     Onyx Software Corporation and subsidiaries (Company) is a leading provider
of enterprise-wide, customer relationship management (CRM) solutions designed to
promote strategic business improvement and revenue growth by enhancing the way
businesses market, sell and service their products. Using the Internet in
combination with traditional forms of interaction, including phone, mail, fax
and email, the Company's solution helps enterprises to more effectively acquire,
manage and retain customer, partner and other relationships. The Company
designed its solution for companies that want to merge new e-business processes
with traditional business processes to enhance their customer-facing operations
such as marketing, sales, customer service and technical support. The Company's
solution uses a single data model across all customer interactions, resulting in
a single repository for all marketing, sales and service information. The
Company was incorporated in the state of Washington on February 23, 1994 and
maintains its headquarters in Bellevue, Washington.

 Interim Financial Information

     The accompanying unaudited consolidated financial statements have been
prepared in conformity with United States 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 United States 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 a fair presentation
for the results of the interim periods presented. These financial statements
should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2000, included in our Form 10-K filed with the
Securities and Exchange Commission on March 6, 2001 and amended by a Form 10-K/A
filed on April 4, 2001. 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

     The Company recognizes revenue in accordance with accounting standards for
software companies including the American Institute of Certified Public
Accountants, or AICPA's, Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), as amended by SOP 98-4, SOP 98-9, and related
interpretations including Technical Practice Aids.

     The Company generates revenues through two sources: (1) software license
revenues and (2) service revenues. Software license revenues are generated from
licensing the rights to use the Company's products directly to end-users and
Application Service Providers (ASPs) and indirectly through sublicense fees from
value-added resellers, or VARs and, to a lesser extent, through third-party
products the Company distributes. Service revenues are generated from sales of
customer support services, consulting services and training services performed
for customers that license the Company's products.

     Revenues from software license agreements are recognized upon delivery of
software if persuasive evidence of an arrangement exists, collection is
probable, the fee is fixed or determinable, and vendor-specific objective
evidence exists to allocate the total fee to the undelivered elements of the
arrangement. Vendor-specific objective evidence is based on the price charged
when an element is sold separately or, in the case of an element not yet sold
separately, the price established by authorized management, if it is probable
that the price, once established, will not change before market introduction.
Elements included in multiple element arrangements could consist of software
products, maintenance (which includes customer support services and upgrades),
or consulting services. If a nonstandard acceptance period is required, revenues
are recognized upon the earlier of customer acceptance or the expiration of the
acceptance period. The Company's agreements with its customers, ASPs and VARs do
not contain product return rights.

                                       6
<PAGE>

                           ONYX SOFTWARE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
                                  (Unaudited)

     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 the Company's
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 on 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 impacted by the services. In cases where license fee
payments are contingent on the acceptance of services, the Company defers
recognition of revenues from both the license and the service elements until the
acceptance criteria are met.

 Concentration of Credit Risk and Major Customers

     Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is dispersed across many different geographic areas
throughout North America, Europe, Asia Pacific and Latin America and consists of
companies in a variety of industries. The Company generally does not require
collateral or other security to support credit sales, but provides an allowance
for bad debts based on historical experience and specifically identified risks.

     During the first quarter of 2001, one customer accounted for approximately
15% of total recognized revenues and 17% of accounts receivable. Approximately
$5.2 million, or 97%, of the total accounts receivable from this customer at
March 31, 2001 was collected on April 17, 2001.

 Foreign Currency Translation

     The functional currency of the Company's foreign subsidiaries is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S. dollars at
the exchange rate in effect on the balance sheet date. Revenues and expenses are
translated at the average monthly rates of exchange prevailing throughout the
year. The translation adjustment resulting from this process is shown within
accumulated other comprehensive income (loss) as a component of shareholders'
equity. Gains and losses on foreign currency transactions are included in the
consolidated statement of operations as incurred. At March 31, 2001, the
unrealized cumulative translation loss primarily related to the weakening of
Japanese yen versus the U.S. dollar for the Company's joint venture in Japan.

 Reclassifications

     Certain prior period amounts have been reclassified to conform with the
current period presentation. Such reclassifications had no impact on the results
of operations or shareholders' equity for any period presented.

3.  Earnings Per Share

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

                                       7
<PAGE>

                           ONYX SOFTWARE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
                                  (Unaudited)


<TABLE>
<CAPTION>
                                                                               Three Months Ended
                                                                                     March 31,
                                                                           --------------------------
                                                                            2000               2001
                                                                           -------           --------
                                                                             (in thousands, except
                                                                                 per share data)
<S>                                                                        <C>               <C>
Net income (loss) (A)..................................................    $  (487)          $(16,050)
                                                                           =======           ========
Weighted average number of common shares (1)(B)........................     34,256             37,821
  Effect of stock options:
  Stock options........................................................          *                  *
                                                                           -------           --------
Adjusted weighted average shares and assumed conversions (C)...........     34,256             37,821
                                                                           =======           ========
Loss per share:
  Basic (A)/(B)........................................................    $ (0.01)          $  (0.42)
  Diluted (A)/(C)......................................................    $ (0.01)          $  (0.42)
</TABLE>

----------
(1)  For purposes of determining the weighted average number of common shares
     outstanding, shares of restricted common stock acquired through the July
     1998 exercise of stock options in exchange for promissory notes to the
     Company are only considered in the calculation of diluted earnings per
     share. The number of restricted shares outstanding during the three months
     ended March 31, 2000 and 2001 was 1,600,000. Included in the weighted
     average number of common shares outstanding for the three months ended
     March 31, 2001 is 1,333,333 weighted shares of common stock from our public
     offering completed February 12, 2001. The total number of shares issued in
     the offering was 2,500,000.

 *   Excluded from the computation of diluted earnings per share because the
     effects are antidilutive. Options to purchase 9,484,579 shares of common
     stock with exercise prices of $0.05 to $38.09 per share were outstanding as
     of March 31, 2000 and options to purchase 9,511,739 shares of common stock
     with exercise prices of $0.10 to $38.09 per share were outstanding as of
     March 31, 2001.

4.  Accumulated Other Comprehensive Income (Loss)

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

<TABLE>
<CAPTION>
                                                         December 31,     March 31,
                                                             2000           2001
                                                         ------------     ---------
                                                                (in thousands)
<S>                                                      <C>              <C>
  Unrealized currency loss............................      $(277)        $(1,057)
  Unrealized loss on marketable securities............        (27)            (39)
                                                            -----         -------
     Total accumulated other comprehensive loss.......      $(304)        $(1,096)
                                                            =====         =======
</TABLE>

5.  Line of Credit

     In November 2000, the Company entered into a loan and security agreement
with Silicon Valley Bank and Comerica Bank, which contains a $25.0 million
working capital revolving line of credit that is secured by the Company's
accounts receivable, property and equipment, and intellectual property. This
facility allows the Company to borrow up to the lesser of 80% of its eligible
accounts receivable or $25.0 million and bears interest at the bank's prime
rate, which was 8.0% as of March 31, 2001. The facility expires in August 2001.
The agreement under which the line of credit was established requires the
Company to maintain specified financial ratios. As of March 31, 2001, the
Company had no outstanding borrowings under the working capital facility;
however, there was approximately $11.0 million in standby letters of credit
outstanding in connection with its facilities, of which $8.3 million represents
a security deposit for tenant improvements and rent associated with the new
corporate headquarters. As a result of our revenue shortfall and operating loss
in the first quarter of 2001, we were not in compliance with one of our

                                       8
<PAGE>

                           ONYX SOFTWARE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
                                  (Unaudited)

financial covenants under the facility as of March 31, 2001. We are working with
Silicon Valley Bank and Comerica Bank California to obtain a waiver concerning
our non-compliance with this covenant.

6.  International Operations

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

<TABLE>
<CAPTION>
                                                                                   North   Rest of
                                                                                  America   World     Total
                                                                                  -------  --------  --------
<S>                                                                               <C>      <C>       <C>
Quarter ended March 31, 2000 (unaudited):
  Revenues......................................................................  $17,370  $ 5,814   $23,184
  Operating loss (including acquisition-related amortization)...................    2,135   (2,469)     (334)
  Interest income, net..........................................................      201       (9)      192
  Depreciation and amortization.................................................      884      727     1,611
  Purchases of property and equipment...........................................    1,655       78     1,733
  Long-lived assets.............................................................   15,825   15,702    31,527
  Total assets..................................................................   62,202   20,851    83,053

Quarter ended March 31, 2001 (unaudited):
  Revenues......................................................................  $ 21,890 $ 6,499   $28,389
  Operating income (loss) (including acquisition-related amortization)..........    (7,194) (7,995)  (15,189)
  Interest income, net..........................................................       290       1       291
  Depreciation and amortization.................................................     2,084   1,572     3,656
  Purchases of property and equipment...........................................     4,607     561     5,168
  Long-lived assets.............................................................    28,785  22,393    51,178
  Total assets..................................................................    91,714  35,213   126,927
</TABLE>

7.  Shareholders' Equity

Stock Split

     In March 2000, the Company completed a two-for-one stock split (effected in
the form of a stock dividend). All share and per share amounts in the
accompanying consolidated financial statements have been adjusted to reflect
this stock split.

Equity Financing Arrangement

On January 4, 2001, the Company entered into an equity financing arrangement
with Ramius Securities, LLC, or Ramius Securities, and Ramius Capital Group,
LLC, or Ramius Capital, under which the Company may from time to time in the
next two years elect to have Ramius Securities sell a limited number of shares
of its common stock on a best-efforts basis or to have Ramius

                                       9
<PAGE>

                           ONYX SOFTWARE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
                                  (Unaudited)

Capital purchase those shares if the selling efforts are unsuccessful. The
obligations of Ramius Securities and Ramius Capital under this financing
arrangement are subject to a number of conditions and limitations, and the
amount of common stock that the Company may sell depends on the daily trading
volumes of its common stock. Sales under the financing arrangement will be made
under the Company's $100 million shelf registration statement on Form S-3, filed
with the SEC in November 2000. In connection with the financing arrangement, the
Company issued Ramius Securities a warrant to purchase 24,024 shares of its
common stock at $12.49 per share. This warrant is fully exercisable and expires
on January 4, 2003. In connection with the equity financing arrangement, the
Company is also obligated to pay an investment banking fee based on a percentage
of the available facility. The value of the warrants issued and the investment
banking fee will be netted against proceeds drawn under the facility. No
securities have been offered under the financing arrangement to date. The
financing arrangement is currently under review by the National Association of
Securities Dealers, or NASD. The financing arrangement does not preclude Onyx
from issuing shares in other transactions should market conditions make those
transactions advantageous.

2001 Nonofficer Employee Stock Compensation Plan

     In January 2001, the Board of Directors adopted the 2001 Nonofficer
Employee Stock Compensation Plan (the 2001 option plan). The 2001 option plan
provides for both stock options and restricted stock awards to nonofficer
employees, agents, advisors, consultants and independent contractors of the
Company. There were 1,000,000 shares of common stock reserved under the 2001
option plan and the plan provides that any options cancelled and returned to the
option plan shall become available for future grant under the option plan.
Options granted under the 2001 option plan generally vest and become exercisable
over a four year period; 25% vest after 12 months, with 2.0833% vesting each
month thereafter.

Firm Underwritten Offering

     On February 12, 2001, the Company completed a firm underwritten offering of
2,500,000 shares of its common stock at a price of $13.50 per share from its
$100.0 million shelf registration. The proceeds totaled $31,525,000 after
deducting the estimated costs of the offering. The over-allotment option granted
to the underwriter expired on March 14, 2001 and was not exercised. The Company
intends to use the net proceeds for design and construction of tenant
improvements in its new corporate headquarters, expansion of its field office
facilities, additional working capital and other general corporate purposes, as
well as the possible acquisition of or investment in complementary businesses,
products and technologies.

8.  Equity Investment Losses and Impairment

     During 1999 and 2000, the Company invested $3.5 million in a small number
of private companies. The carrying value of these investments is included in
"other assets" on the accompanying consolidated balance sheets and totaled $3.0
million at December 31, 2000 and $1.5 million at March 31, 2001.

     One of these investments was accounted for using the equity method of
accounting due to the Company's ability to exercise significant influence, but
not control, over the investee. The entire balance of the $500,000 initial
investment in this company was reduced to zero during 2000 as the Company
recorded its proportionate share of the losses in the investee ($237,000 during
the first quarter of 2000).

                                       10
<PAGE>

                           ONYX SOFTWARE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
                                  (Unaudited)

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

     During the first quarter of 2001, the Company recorded impairment losses,
which totaled $1.5 million, relating to other-than-temporary declines in three
of its cost basis equity investments based upon a recent review of qualitative
and quantitative factors surrounding the financial condition of the investees.
These impairment losses were recorded to reflect each investment at its
estimated fair value. No other than temporary impairment-related losses were
incurred in 2000.

9.  Acquisitions

RevenueLab

     On January 5, 2001, the Company acquired RevenueLab LLC, a privately held
consulting company based in Stamford, Connecticut. RevenueLab builds and
implements go-to-market strategy and revenue acceleration programs for emerging
and established companies. In connection with the acquisition, the Company paid
$313,000 in cash, issued $1.7 million (185,463 shares) of its common stock and
granted options to purchase 635,382 shares of common stock valued at $4.0
million at closing. The Company was also obligated to pay an additional $1.0
million in either cash or common stock with a value of $1.0 million at the date
of payment at the Company's election at any time between March 3, 2001 and April
10, 2001; the Company settled the obligation in cash on April 10, 2001.

The Company recorded $1.9 million for the value allocated to deferred stock
compensation, which represents the excess of the fair value over the exercise
price for the options assumed by the Company. The acquisition, including
$400,000 of acquisition-related costs, was valued at approximately $7.4 million.
The net purchase price, adjusted for deferred stock compensation, was
approximately $5.5 million. The value of the deferred compensation will be
amortized over the remaining stock options' vesting periods of 4.5 years using a
graded vesting approach. The Company accounted for the transaction using the
purchase method of accounting, and, accordingly, the results of RevenueLab's
operations have been included in the Company's consolidated financial statements
from the date of acquisition.

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

<TABLE>
<S>                                                                    <C>
   Common stock and options..........................................  $ 5,659
   Cash paid to shareholders.........................................      313
   Notes payable to shareholders.....................................    1,000
   Accrued direct acquisition costs..................................      400
                                                                       -------
     Sub-total.......................................................    7,372
   Less: deferred stock compensation expense.........................   (1,840)
                                                                       -------
     Net purchase price..............................................  $ 5,532
                                                                       =======
</TABLE>

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

<TABLE>
<S>                                                                    <C>
   Assets acquired...................................................  $1,106
   Liabilities assumed...............................................    (268)
   Goodwill and other intangibles....................................   4,694
                                                                       ------
                                                                       $5,532
                                                                       ======
</TABLE>


                                       11
<PAGE>

                           ONYX SOFTWARE CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
                                  (Unaudited)

The Company plans to have a formal analysis completed prior to the end of 2001
to formally allocate the fair value of the intangible assets among the
identified intangible assets and goodwill.  Based upon the nature of the
identified intangible assets, which are primarily comprised of assembled
workforce and customer contracts, the impact of the analysis on the estimated
useful lives of the $4.7 million in goodwill and other intangibles is not
expected to be material.

10.  Subsequent Events

2001 Nonofficer Employee Stock Compensation Plan

     On April 27, 2001, the Board of Directors approved an amendment to the 2001
Nonofficer Employee Stock Option Plan increasing the total number of shares
reserved for issuance under the plan to 3,500,000.

Related-Party Transaction

     On April 11, 2001, one of the Company's executive officers borrowed $1.0
million as a bridge loan from a commercial bank that matures on August 6, 2001.
As part of the bridge loan transaction, the Company agreed to guaranty the
officers' obligations under the bridge loan. If the Company's obligations under
the guaranty are triggered, Onyx has full recourse against personal assets
(other than shares of Onyx common stock) of the officer and his family having a
fair value in excess of the officer's total indebtedness to the Company and the
bank. In addition, the officer has agreed to pledge 1,000,000 shares of Onyx
common stock to the Company to secure the Company's guaranty. The officer is
currently making arrangements to satisfy the bridge loan on or before it
matures. The Company expects that the guaranty of the officer's loan will not be
renewed beyond the term of the bridge loan.

                                       12
<PAGE>

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

Forward-Looking Information

     Our disclosure and analysis in this report contain forward-looking
statements, which provide our current expectations or forecasts of future
events. Forward-looking statements include statements about our plans,
objectives, expectations and intentions and other statements that are not
historical facts. When used in this discussion, the words "believes,"
"anticipates" and "intends" and similar expressions may identify forward-looking
statements, but the absence of these words does not necessarily mean that a
statement is not forward-looking. Forward-looking statements are subject to
known and unknown risks and uncertainties and are based on potentially
inaccurate assumptions that could cause actual results to differ materially from
those expected or implied by the forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements for many reasons, including the factors described under "Important
Factors That May Affect Our Business, Our Results of Operations and Our Stock
Price."

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

Overview

     Onyx is a leading provider of enterprise-wide, customer relationship
management (CRM) solutions designed to promote strategic business improvement
and revenue growth by enhancing the way businesses market, sell and service
their products. Using the Internet in combination with traditional forms of
interaction, including phone, mail, fax and email, our solution helps
enterprises to more effectively acquire, manage and maintain customer, partner
and other relationships. We designed our solution for companies that want to
merge new e-business processes with traditional business processes to enhance
their customer-facing operations such as marketing, sales, customer service and
technical support. Our solution uses a single data model across all customer
interactions, resulting in a single repository for all marketing, sales and
service information. We designed our solution from inception to be fully
integrated across all customer-facing departments and interaction media. Our
solution is designed to be easy to use, widely accessible, rapidly deployable,
scalable, flexible, customizable and reliable, resulting in a low total cost of
ownership and rapid return on investment.

History of Operations

     Onyx was founded in February 1994. We commercially released version 1.0 of
our flagship product, Onyx Customer Center, in December 1994. In our first three
years of operation, we focused primarily on research and development activities,
recruiting personnel, purchasing operating assets, marketing our products,
building a direct sales force and expanding our service business. Our revenues
totaled $2.2 million in 1995 and $9.6 million in 1996. In mid-1996, we
substantially expanded our operations to capitalize on our opportunity within
the rapidly emerging customer relationship management, or CRM, market. We
decided, at the potential expense of profitability, to accelerate our
investments in research and development, marketing, domestic and international
sales channels, professional services and our general and administrative
infrastructure. We believe these investments have been critical to our growth.
Our revenues grew to $19.4 million in 1997, $35.1 million in 1998 and $60.6
million in 1999. Nevertheless, these investments have also significantly
increased our operating expenses, contributing to the net losses that we
incurred in each fiscal quarter from the first quarter of 1997 through the
second quarter of 1999. After achieving profitability in the third and fourth
quarters of 1999, we decided to again accelerate our investments in research and
development, marketing, domestic and international sales channels, professional
services and our general and administrative infrastructure to further capitalize
on our opportunity within the CRM market. Our revenues grew to $121.5 million in
2000. Excluding acquisition-related amortization and equity investment losses,
after tax net income in 2000 totaled $2.5 million. Including these charges, we
incurred a net loss in 2000 totaling $2.5 million.

     As referenced in previous filings, it is particularly difficult to predict
the timing or amount of our license revenues, which comprise the majority of our
total revenues, because:

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

                                       13
<PAGE>

     .  a substantial portion of our sales are completed at the end of the
        quarter and, as a result, a substantial portion of our license revenues
        are recognized in the last month of a quarter, and often in the last
        weeks or days of a quarter; and

     .  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.

     .  new products are occasionally delivered in the last weeks or days of a
        particular quarter and are a key element to certain customer contracts.
        Should such product releases be delayed, it could have a material
        adverse effect on our quarterly revenues. Specifically, at the end of
        June 2001, we anticipate the general availability of our next major
        product release on both the Windows NT/Microsoft BackOffice and
        Unix/Oracle platforms. Should these product releases be delayed, it
        would have a material adverse effect on our revenues for the quarter.

     Even though our revenues are difficult to predict, we base our decisions
regarding our operating expenses on anticipated revenue trends. Many of our
expenses are relatively fixed, and we cannot quickly reduce spending if our
revenues are lower than expected. During the first quarter of 2001, we saw a
shift in the buying behavior of our targeted new and existing customer base as a
result of economic conditions leading to a delay of their capital spending
initiatives, which we believe was the primary reason we experienced a
significant license revenue shortfall relative to our operating plan. As a
result, this revenue shortfall led to a net loss of $16.0 million, which was a
significantly greater loss than anticipated.

     The uncertainty of near-term sales growth in this economic environment made
the company infrastructure that produced triple-digit revenue growth in the
prior year no longer suitable. On April 3, 2001 we announced that we would
engage in a restructuring to re-align our organization towards profitable
growth. As part of this restructuring, we reduced our total workforce by
approximately 17% and will incur charges in the second quarter of 2001 as a
result of the restructuring. The restructuring charge will include severance as
well as a material charge for excess facilities that will be held for sublease,
the majority of which are in Bellevue, Washington. In the near-term, we believe
our costs and operating expenses, excluding restructuring-related charges, will
decrease from the first quarter of 2001 to a level that is closer to our
expected revenues while allowing us to continue to invest in accordance with our
strategic priorities. As we gain visibility into our long-term growth
opportunity, we believe that we may need to significantly increase our sales and
marketing, product development and professional services efforts to expand our
market position and further increase acceptance of our products. As a result, we
may incur operating losses in future quarters.

Onyx's Results of Operations

     The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three months ended March 31,
2000 and 2001 are not necessarily indicative of the results that may be expected
for the full year or any future period.

<TABLE>
<CAPTION>
                                                                                   Three Months  Ended
                                                                                         March 31,
                                                                                   --------------------
                                                                                    2000          2001
                                                                                   -----         ------
<S>                                                                                <C>           <C>
Consolidated Statement of Operations Data:
Revenues:
  License.......................................................................    61.9%          45.8%
  Support and service...........................................................    38.1           54.2
                                                                                   -----         ------
     Total revenues.............................................................   100.0          100.0
                                                                                   -----         ------
Cost of revenues:
  License.......................................................................     2.8            3.2
  Acquisition-related amortization--technology..................................     0.9            0.7
  Support and service...........................................................    19.5           34.1
                                                                                   -----         ------
     Total cost of revenues.....................................................    23.2           38.0
                                                                                   -----         ------
Gross margin....................................................................    76.8           62.0
Operating expenses:
  Sales and marketing...........................................................    49.1           67.6
  Research and development......................................................    16.2           25.4
  General and administrative....................................................     9.1           15.7
  Acquisition-related charges--other intangibles................................     2.9            5.7
  Amortization of stock-based compensation......................................     0.9            1.1
                                                                                   -----         ------
     Total operating expenses...................................................    78.2          115.5
                                                                                   -----         ------
Loss from operations............................................................    (1.4)         (53.5)
Interest income, net............................................................     0.8            1.0
Equity investment losses and impairment.........................................    (1.0)          (5.3)
                                                                                   -----         ------
Income (loss) before income taxes...............................................    (1.6)         (57.8)
Income tax provision (benefit)..................................................     0.5           (0.4)
Minority interest in loss of consolidated subsidiary............................      --           (0.9)
                                                                                   -----         ------
Net loss........................................................................    (2.1)%        (56.5)%
                                                                                   =====         ======
</TABLE>

                                       14
<PAGE>

Revenues

     Total revenues, which consist of software license and service revenues,
increased 22% from $23.2 million in the first quarter of 2000 to $28.4 million
in the first quarter of 2001. No single customer accounted for more than 10% of
our revenues in the first quarter of 2000. One single customer accounted for 15%
of our revenues in the first quarter of 2001.

     Our license revenues decreased 9%, from $14.3 million in the first quarter
of 2000 to $13.0 million in the first quarter of 2001. We believe the decrease
was primarily due to a shift in the buying behavior of our targeted new and
existing customer base as a result of economic conditions leading to a delay of
their capital spending initiatives.

     Our support and service revenues increased 74%, from $8.9 million in the
first quarter of 2000 to $15.4 million in the first quarter of 2001. Of the
increase, $4.8 million was due to increased consulting and training services and
$1.7 million was due to increased maintenance and support revenues. Support and
service revenues represented 38% of our total revenues in the first quarter of
2000 and 54% in the first quarter of 2001. We expect the proportion of support
and service revenues to total revenues to fluctuate in the future, depending in
part on our customers' direct use of third-party consulting and implementation
service providers and the ongoing renewals of customer support contracts, as
well as our overall sales of software licenses to new and existing customers.

     Revenues outside of North America increased 12%, from $5.8 million in the
first quarter of 2000 to $6.5 million in the first quarter of 2001. The increase
in international revenues was primarily due to in increase in service revenues
in Europe, Australia and Southeast Asia.

Cost of Revenues

 Cost of license revenues

     Cost of license revenues consists of license fees for third-party software,
amortization of acquired technology, product media, product duplication,
manuals, product fulfillment and shipping costs. Cost of license revenues
increased 36%, from $660,000 in the first quarter of 2000 to $900,000 in the
first quarter of 2001. Cost of license revenues as a percentage of related
license revenues was 5% in the first quarter of 2000 and 7% in the first quarter
of 2001. The increase in cost of license revenues in dollars and as a percentage
of related license revenues resulted primarily from a reserve against third-
party product inventory not yet sold.

 Acquisition-related amortization--technology

     Acquisition-related amortization--technology represents the amortization of
capitalized technology associated with our acquisitions of EnCyc in 1998 and
Versametrix and Market Solutions in 1999. Acquisition-related amortization--
technology was $205,000 in the first quarter of 2000 and $204,000 in the first
quarter of 2001.

 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 114%, from $4.5 million in the first quarter
of 2000 to $9.7 million in the first quarter of 2001. The increase in dollar
amount resulted primarily from hiring and training consulting, support and
training personnel to support our growing customer base, as well as an increase
in the use of third-party service providers which have a higher cost structure
than our internal resources. Our service employees increased 71% from March 31,
2000 to March 31, 2001. Cost of service revenues as a percentage of related
service revenues was 51% in the first quarter of 2000 compared to 63% in the
first quarter of 2001. The increase in cost of service revenues as a percentage
of related service revenues is due to a higher proportion of service revenues
from consulting and training services, which have a higher cost structure and
therefore contribute lower margins than our customer support services, coupled
with a higher percentage use of third-party service providers in our consulting
engagements, which contribute significantly lower margins than internal
resources. The cost of services as a percentage of service revenues may vary
between periods primarily for two reasons: (1) the mix of services we provide
(consulting, customer support, training), which have different cost structures,
and (2) the resources we use to deliver these services (internal versus third
parties).

                                       15
<PAGE>

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 69%, from $11.4 million in the first quarter of
2000 to $19.2 million in the first quarter of 2001. The increase in dollar
amount was primarily attributable to the expansion of our worldwide sales and
marketing organization, which included significant increases in personnel-
related costs associated with the employment of additional sales
representatives, sales engineers and marketing professionals. Sales and
marketing employees increased 60% from March 31, 2000 to March 31, 2001. The
increase in dollar amount is also the result of an increase in marketing
activities, including trade shows, cyber seminars and direct mail campaigns in
the first quarter of 2001. Sales and marketing expenses represented 49% of our
total revenues in the first quarter of 2000 compared to 68% in the first quarter
of 2001. The increase in sales and marketing expenses as a percentage of total
revenues reflects the more rapid growth of sales and marketing expenses in this
period compared to the growth of revenues where we experienced an unexpected
shortfall.

     We have reduced our distribution infrastructure to re-align our
organization towards profitable growth and will incur a restructuring charge in
the second quarter of 2001 as a result of the restructuring. In the near-term,
we believe our sales and marketing expenses will decrease from the first quarter
of 2001 while allowing us to continue to invest in accordance with our strategic
priorities. As we gain visibility into our long-term sales growth opportunity,
we believe that we may need to significantly increase our sales and marketing
efforts to expand our market position and further increase acceptance of our
products.

 Research and development

     Research and development expenses consist primarily of salaries, benefits
and equipment for software developers, quality assurance personnel, program
managers and technical writers and payments to outside contractors. Research and
development expenses increased 92%, from $3.8 million in the first quarter of
2000 to $7.2 million in the first quarter of 2001. The increase was primarily
due to an increase in the use of outside contractors coupled with an increase in
the number of development personnel. Research and development employees
increased 22% from March 31, 2000 to March 31, 2001. Research and development
costs represented 16% of our total revenues in the first quarter of 2000
compared to 25% in the first quarter of 2001. The increase in research and
development expenses as a percentage of total revenues is largely related to
investments we have made in expanding our product line to the Unix/Oracle
platform and an increase in the use of outside contractors, along with the more
rapid growth of research and development expenses in this period compared to the
growth of revenues where we experienced an unexpected shortfall.

     Although research and development expenses were affected by the
restructuring, those development projects that we believe to be most strategic
to our long-term growth were protected. In the near-term, we believe our
research and development expenses will decrease from the first quarter of 2001
while allowing us to continue to invest in line with our strategic priorities.
As we gain visibility into our long-term sales growth opportunity, we believe
that we may need to significantly increase our research and development
investment to expand our market position and continue to expand our product
line.

 General and administrative

     General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance, human resource and administrative
personnel, professional services fees and allowances for bad debt. General and
administrative expenses increased 110%, from $2.1 million in the first quarter
of 2000 to $4.5 million in the first quarter of 2001. The increase was primarily
due to the addition of executive, finance, human resource and administrative
personnel to support the growth of our business globally, together with an
increase in professional fees and allowances for bad debt expense. General and
administrative employees increased 78% from March 31, 2000 to March 31, 2001.
General and administrative costs represented 9% of our total revenues in the
first quarter of 2000 compared to 16% in the first quarter of 2001. The increase
in general and administrative expenses as a percentage of total revenues
primarily reflects the more rapid growth of general and administrative expenses
in this period, particularly in the areas of executive recruitment and
allowances for bad debt, compared to the growth of revenues where we experienced
an unexpected shortfall.

                                      16
<PAGE>

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

 Acquisition-related amortization - other intangibles

     Acquisition-related amortization - other intangibles consists of intangible
amortization associated with our acquisitions of EnCyc in 1998, Versametrix and
Market Solutions in 1999, CSN Computer Consulting in 2000 and RevenueLab in
2001. Acquisition-related amortization - other intangibles totaled $676,000 in
the first quarter of 2000 and $1.6 million in the first quarter of 2001. The
increase in acquisition-related amortization and stock compensation expense over
the prior year results primarily from the fact that we completed our acquisition
of CSN Computer Consulting in February 2000 and RevenueLab in January 2001.

 Amortization of stock-based compensation

     We recorded deferred compensation of $2.2 million in 1998, representing the
difference between the exercise prices of options granted to acquire shares of
common stock during 1998 and the deemed fair value for financial reporting
purposes of our common stock on the grant dates. We recorded an additional $1.8
million in deferred compensation in connection with the options granted to new
employees in conjunction with the acquisition of RevenueLab in January 2001. We
amortized deferred compensation expense of $206,000 during the first quarter of
2000 compared to $310,000 in the first quarter of 2001. Deferred compensation is
amortized over the vesting periods of the options.

 Interest income, net

     Interest income, net consists of earnings on our cash and cash equivalent
and short-term investment balances offset by interest expense associated with
debt obligations. Interest income, net was $192,000 in the first quarter of 2000
compared to $291,000 in the first quarter of 2001. The increase in interest
income, net over the prior year is the result of a higher average cash and
investment base during the current period as compared to the same period of
2000.

 Equity investment losses and impairment

     During the first quarter of 2000, we recorded a loss of $237,000 from an
equity-method investee representing our share of losses in this company. The
entire balance of the $500,000 initial investment in this company was reduced to
zero during 2000 as the Company recorded its proportionate share of the losses
in the investee. During the first quarter of 2001, we recorded impairment losses
totaling $1.5 million relating to other-than-temporary declines in three of our
cost basis equity investments based on a recent review of qualitative and
quantitative factors surrounding the financial condition of the investees. These
impairment losses were recorded to reflect each investment at its estimated fair
value.

 Income taxes

     We recorded an income tax provision of $108,000 in the first quarter of
2000 and a benefit of $94,000 in the first quarter of 2001. Our income tax
provision (benefit) in both the first quarter of 2000 and 2001 is the net result
of income taxes in connection with our foreign operations offset by the deferred
tax benefit associated with our international acquisitions of Market Solutions
and CSN Computer Consulting. We made no provision or benefit for federal or
state income taxes in the first quarter of 2000 or the first quarter of 2001 due
to our historical operating losses, resulting 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.

Liquidity and Capital Resources

     In January 2001, we entered into an equity financing arrangement with
Ramius Securities, LLC, or Ramius Securities, and Ramius Capital Group, LLC, or
Ramius Capital, under which we may from time to time in the next two years elect
to have Ramius Securities sell a limited number of shares of our common stock on
a best-efforts basis or to have Ramius Capital purchase those shares if the
selling efforts are unsuccessful. The obligations of Ramius Securities and
Ramius Capital under this arrangement are subject to a number of conditions and
limitations, and the amount of common stock that we may sell depends on the
daily trading

                                       17
<PAGE>

volumes of our common stock on the Nasdaq National Market. As a result, we may
be unable to sell our common stock under this facility in the amount and at the
times we want. In addition, the terms of the equity financing arrangement have
not been reviewed or approved by the National Association of Securities Dealers,
or NASD. NASD review is pending and no securities will be offered under the
arrangement unless and until NASD approval is obtained. Any sales under the
facility will be made under our shelf registration statement on Form S-3, filed
with the SEC in November 2000. In connection with the financing arrangements, we
issued Ramius Securities a warrant to purchase 24,024 shares of our common stock
at $12.49 per share. This warrant is fully exercisable and expires on January 4,
2003. The facility does not preclude us from issuing shares in other
transactions should market conditions make those transactions advantageous.

     On February 12, 2001, we completed a firm underwritten public offering of
2.5 million shares of our common stock at a price of $13.50 per share from our
$100.0 million shelf registration statement filed in November 2000. We estimate
the net proceeds from the offering to be approximately $31.5 million after
deducting the estimated costs associated with the offering. The over-allotment
option granted to the underwriter expired on March 14, 2001 and was not
exercised. We intend to use the net proceeds of the offering for design and
construction of tenant improvements in our new corporate headquarters, expansion
of our field office facilities, additional working capital and other general
corporate purposes, as well as the possible acquisition of or investment in
complementary businesses, products and technologies.

     As of March 31, 2001, we had cash and cash equivalents of $31.8 million, an
increase of $20.4 million from cash and cash equivalents held as of December 31,
2000. The increase in cash and cash equivalents from year-end is primarily the
result of the public offering we completed in February 2001. We have invested
our cash in excess of current operating requirements in a portfolio of
investment-grade securities. Short-term investments totaled $4.5 million at
March 31, 2001 compared to $5.5 million at December 31, 2000. The investments
have variable and fixed interest rates and maturities of less than one year. Our
working capital at March 31, 2001 was $41.5 million, compared to $27.5 million
at December 31, 2000.

     We have a $25.0 million working capital revolving line of credit, shared
equally by Silicon Valley Bank and Comerica Bank California, which is secured by
our accounts receivable, property and equipment and intellectual property. This
facility allows us to borrow up to the lesser of 80% of our eligible accounts
receivable or $25.0 million and bears interest at the bank's prime rate, which
was 8.0% as of March 31, 2001. The facility expires in August 2001. The
agreement under which the line of credit was established requires us to maintain
specified financial ratios. As of March 31, 2001, we had no outstanding
borrowings under the facility; however, there was approximately $11.0 million in
standby letters of credit outstanding in connection with our facilities, of
which $8.3 million represents a security deposit for tenant improvements and
rent associated with our new corporate headquarters. As a result of our revenue
shortfall and operating loss in the first quarter of 2001, we were not in
compliance with one of our financial covenants under the facility as of March
31, 2001. We are working with Silicon Valley Bank and Comerica Bank California
to obtain a waiver concerning our non-compliance with this covenant.

     Our operating activities resulted in net cash inflows of $4.0 million in
the first quarter of 2000 compared to net cash outflows of $7.0 million in the
first quarter of 2001. Our operating cash inflows in the first quarter of 2000
were primarily the result of cash provided by collections on our accounts
receivable and increases in deferred revenues and other current liabilities
coupled with income from our operations adjusted for non-cash amortization
charges, offset in part by increases in other assets. Our operating cash
outflows in the first quarter of 2001 were primarily the result of our operating
loss, decreases in accounts payable and accrued liabilities, increases in
prepaid expenses and other assets, offset in part by cash provided by
collections on accounts receivable and increases in deferred revenues.

     Investing activities provided cash of $12.5 million in the first quarter of
2000, primarily due to proceeds from the maturity of securities offset by cash
used to purchase capital equipment and cash used to acquire CSN Computer
Consulting. Investing activities used cash of $4.0 million in the first quarter
2001, primarily for the purchase of capital equipment associated with our new
corporate facility.

     Financing activities provided cash of $851,000 in the first quarter of 2000
due to proceeds from the exercise of stock options and the overdraft facility
provided to our subsidiary in the United Kingdom, offset in part by payments on
capital lease and other debt obligations. Financing activities provided cash of
$32.0 million in the first quarter of 2001 primarily due to the proceeds from
our sale of common stock in February and proceeds from the exercise of stock
options, offset in part by payments on our long-term obligations.

     In the near-term, we believe our costs and operating expenses will decrease
from the first quarter of 2001 to a level that is closer to our expected
revenues while allowing us to continue to invest in accordance with our
strategic priorities. However, as we gain visibility into our long-term sales
growth opportunity, we anticipate that we will experience significant growth in
our operating expenses for the foreseeable future as we

                                       18
<PAGE>

     .  enter new markets for our products and services;

     .  increase research and development spending;

     .  increase sales and marketing activities;

     .  develop new distribution channels;

     .  expand our headquarters and field office facilities and infrastructure;

     .  expand our senior management team;

     .  improve our operational and financial systems; and

     .  broaden our professional service capabilities.

     These operating expenses along with near-term restructuring costs will
consume a material amount of our cash resources. We may also use a portion of
our cash resources to acquire complementary technologies or businesses; however,
we currently have no commitments or agreements with respect to any transactions
of this nature.

     We believe that our existing cash and cash equivalents, investments,
available bank borrowings and our arrangement with Ramius Capital and Ramius
Securities will be sufficient to meet our capital and requirements for at least
the next twelve months. However, we may seek additional funds before that time
through public or private equity financing or from other sources to fund our
operations and pursue our growth strategy. Except for the arrangement with
Ramius Securities and Ramius Capital, we have no commitment for additional
financing, and we may experience difficulty in obtaining additional financing on
favorable terms, if at all. Any financing we obtain may contain covenants that
restrict our freedom to operate our business or may have rights, preferences or
privileges senior to our common stock and may dilute our current shareholders'
ownership interest in Onyx. Any common stock that we issue under the arrangement
with Ramius Securities and Ramius Capital, or otherwise, will dilute our current
shareholders' ownership interest in Onyx.

IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR RESULTS OF OPERATIONS AND
 OUR STOCK PRICE

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

     Our operating results have varied widely in the past, and we expect that
they will continue to fluctuate in the future. In the first quarter of 2001, our
operating results fell below the expectations of securities analysts and
investors and our operating results for a future quarter or year may again fail
to meet market expectations. This could result in a decrease in our stock price.
Some of the factors that could affect the amount and timing of our software
license revenues and related expenses and cause our operating results to
fluctuate include:

     .  market acceptance of our solution;

     .  our ability to compete in the highly competitive CRM market;

     .  continued purchases by our existing customers, including additional
        license and maintenance revenues;

     .  our ability to expand our sales and support infrastructure;

     .  our ability to successfully expand our international operations;

     .  our ability to develop, introduce and market new products on a timely
        basis;

     .  our ability to enable our products to operate on multiple platforms;

                                       19
<PAGE>

     .  variability in the mix of our license versus service revenues, the mix
        of our direct versus indirect license revenues and the mix of services
        that we perform versus those performed by third-party service providers;

     .  the cost and financial accounting effects of any acquisitions of
        companies or complementary technologies that we may complete;

     .  the loss of any key technical, sales, customer support or management
        personnel and the timing of any new hires;

     .  the timing of customer orders, which can be affected by customer
        ordering and budgeting cycles or by customer order deferrals in
        anticipation of new products or product enhancements introduced by us or
        our competitors; and

     .  general economic conditions, which may affect our customers' capital
        investment levels in management information systems.

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

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

     .  a substantial portion of our sales are completed at the end of the
        quarter and, as a result, a substantial portion of our license revenues
        are recognized in the last month of a quarter, and often in the last
        weeks or days of a quarter; and

     .  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.

     .  new products are occasionally delivered in the last weeks or days of a
        particular quarter and are a key element to certain customer contracts.
        Should such product releases be delayed, it could have a material
        adverse effect on our quarterly revenues. Specifically, at the end of
        June 2001, we anticipate the general availability of our next major
        product release on both the Windows NT/Microsoft BackOffice and
        Unix/Oracle platforms. Should these product releases be delayed, it
        would have a material adverse effect on our revenues for the quarter.

     Beginning in the fourth quarter of 2000 and continuing into the first
quarter of 2001, we have seen a general economic downturn in the U.S. economy,
which has affected the demand for our products and services. We do not know how
long this economic downturn will last or how severe it will become. We also
cannot predict the extent and timing, if any, of the impact of the economic
downturn in the United States on economies in other countries and geographic
regions in which we conduct business. To the extent that this downturn continues
or spreads to other geographic regions, demand for our products and services is
likely to be adversely affected and could result in a decline in our stock
price.

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

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

     Our stock price may decrease due to seasonal fluctuations in our revenues.
We 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. We believe that these fluctuations are caused in part
by customer buying patterns and the efforts of our direct sales force to meet or
exceed fiscal year-end quotas. We expect that these seasonal trends are likely
to continue in the future.

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

     We originally designed our products to operate exclusively on the Windows
NT and Microsoft BackOffice platforms. As a result, we historically have only
been able to market our solution to customers which have developed their
enterprise computing systems around these platforms, which limits our potential
sales. In December 2000, we announced the release of a new product version
designed to operate on the Unix/Oracle platform. Because the Unix/Oracle version
of our product is relatively new, we cannot predict the degree to which it will
achieve market acceptance. Moreover, enabling our products to run on multiple
platforms could lengthen the development cycle, thus delaying the release date
of such products. If our new product version does not achieve market acceptance,
or such delays do occur, our revenue growth will be limited.

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

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

     .  no history of sustained profitability;

     .  uncertain growth in the market for, and uncertain market acceptance of,
        our solution;

     .  reliance on one product family;

     .  the risk that competition, technological change or evolving customer
        preferences, such as preferences for different computing platforms,
        could adversely affect sales of our solution;

     .  the need to expand our sales and support infrastructure;

     .  the need to expand our international operations;

                                       20
<PAGE>

     .  dependence on a limited number of key technical, customer support, sales
        and managerial personnel; and

     .  the risk that our management will not be able to effectively manage
        growth or any acquisition we may undertake.

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

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

  If we do not return to profitability in future quarters, our stock price could
decrease. We incurred net losses in each quarter from Onyx's inception through
the third quarter of 1994, from the first quarter of 1997 to the second quarter
of 1999, in all four quarters of 2000 and in the first quarter of 2001. As of
March 31, 2001, we had an accumulated deficit of $26.6 million. We expect to
continue to devote substantial resources to our product development and sales
and customer support. In addition, we currently anticipate that we may continue
to experience significant growth in our operating expenses for the foreseeable
future as we

     .  increase sales and marketing activities;

     .  enter new markets for our solution;

     .  increase research and development spending;

     .  develop new distribution channels;

     .  expand our headquarters and field office facilities and infrastructure;

     .  expand our senior management team;

     .  improve our operational and financial systems; and

     .  broaden our professional service capabilities.

As a result, we will need to generate significant quarterly revenues to achieve
profitability. We cannot assure you that we will be able to do so. Our business
strategies may not be successful and, as a result, we may not be profitable in
any future period. Further, in the near term, we may elect to accelerate
investments in our operations at the potential expense of profitability to
capitalize on our opportunity within the rapidly emerging e-business systems
market.

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

     Our solution targets the CRM market. This market is intensely competitive,
fragmented, rapidly changing and significantly affected by new product
introductions. We face competition in the CRM market primarily from front-office
software application vendors, large enterprise software vendors and our
potential customers' information technology departments, which may seek to
develop proprietary CRM systems. The dominant competitor in our industry
is Siebel Systems, Inc. Other companies with which we compete include, but are
not limited to, BroadVision, Inc., E.piphany, Inc., Kana Communications, Inc.,
Nortel Networks, Oracle Corporation, PeopleSoft, Inc. and Pivotal Corporation.

     In addition, as we develop new products, including new product versions
operating on new platforms, we may begin competing with companies with whom we
have not previously competed. It is also possible that new competitors will
enter the market or that our competitors will form alliances that may enable
them to rapidly increase their market share. An increase in competitive
pressures in our market or our failure to compete effectively may result in
pricing reductions, reduced gross margins and loss of market share. Many of our
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
other resources than we do. In addition, a number of our competitors have
recently been acquired by other large technology companies, which further
enhances their resources. As a result, they may be able to adapt more quickly to
new technologies and customer needs, devote greater resources to promoting or
selling their products and services, initiate and withstand substantial price
competition, take advantage of acquisition or other strategic opportunities more
readily or develop and expand their product and service offerings more quickly.

                                      21
<PAGE>

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

     The market for CRM systems is still emerging, and continued growth in
demand for and acceptance of CRM systems remains uncertain. Even if the market
for CRM systems grows, businesses may purchase our competitors' products or
develop their own. We believe that many of our potential customers are not fully
aware of the benefits of CRM systems and that they may never achieve market
acceptance. We have spent, and will continue to spend, considerable resources
educating potential customers not only about our solution but also about CRM
systems in general. However, even with these educational efforts, market
acceptance of our solution may not increase. We will not succeed unless we can
educate our target market about the benefits of CRM systems and about our
ability to provide them in a cost-effective and easy-to-use manner.

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

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

If we are unable to continue to develop products that are compatible with the
Internet and if use of the Internet does not continue to expand, demand for our
products may be limited.

     Our products communicate through public and private networks over the
Internet. The success of our products may depend, in part, on our ability to
continue developing products that are compatible with the Internet. We are
uncertain how businesses will use the Internet as a means of communication and
commerce and whether a significant market will develop for Internet-based e-
business systems. The use of the Internet is evolving rapidly, and many
companies are developing products and services that use the Internet. The
increased commercial use of the Internet could require substantial modification
of our products and the introduction of new products. We do not know what forms
of products and services may emerge as alternatives to our existing products or
to any future Internet-based or electronic commerce features and services we may
introduce.

     In addition, critical issues concerning the commercial use of the Internet,
including security, demand, reliability, cost, ease of use, accessibility,
quality of service and potential tax or other government regulation, remain
unresolved and may affect the use of the Internet as a medium to support the
functionality of our products and distribution of our software. If these
critical issues are not favorably resolved, our Internet-related products may
not achieve market acceptance.

We may be unable to expand our sales infrastructure, which could harm our
ability to expand our business.

     To date, we have sold our solution primarily through our direct sales
force. As a result, our future revenue growth will depend in large part on
recruiting and training additional direct sales personnel and expanding our
indirect distribution channels, such as VARs, ASPs, original equipment
manufacturer, or OEM, partners and system integrators and consultants. We have
experienced and continue to experience difficulty in recruiting qualified direct
sales personnel and in establishing third-party relationships with VARs, ASPs,
OEM partners and systems integrators and consultants. We may not be able to
successfully expand our direct sales force or other distribution channels, which
could limit our ability to expand our business. Even if we successfully expand
our direct sales force and other distribution channels, the expansion may not
result in expected revenue growth.

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

                                       22
<PAGE>

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

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

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

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

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

     To be successful, we must continue to 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. Even if we successfully
translate our software and develop new channels, we may not be able to maintain
or increase international market demand for the Onyx product family. We, or our
VARs or ASPs, may not be able to sustain or increase international revenues from
licenses or from consulting and customer support. In addition, our international
sales are subject to the risks inherent in international business activities,
including

     .  costs of customizing products for foreign countries;

     .  export and import restrictions, tariffs and other trade barriers;

     .  the need to comply with multiple, conflicting and changing laws and
        regulations;

     .  reduced protection of intellectual property rights and increased
        liability exposure; and

     .  regional economic, cultural and political conditions.

     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 have not materially affected our
operating results in the past. However, our operating results could be
materially harmed if we enter into license agreements providing for significant
amounts of foreign currencies with extended payment terms if the values of those
currencies fall in relation to the U.S. dollar over the payment period.

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

                                       23
<PAGE>

     We rely on our relationships with a number of key partners, including
management consulting firms, system integrators, VARs, ASPs and third-party
technology vendors, that are important to worldwide sales and marketing of our
solution. These key partners often provide consulting, implementation and
customer support services, and endorse our solution during the competitive
evaluation stage of the sales cycle. Although we seek to maintain relationships
with our key partners, many of them have similar, and often more established,
relationships with our competitors. These key partners, many of which have
significantly greater resources than we have, may in the future market software
products that compete with our solution or reduce or discontinue their
relationships with us or their support of our solution. In addition, our sales
will be limited if

     .  we are unable to develop and maintain effective, long-term relationships
        with our key partners;

     .  we are unable to adequately train a sufficient number of key partners;

     .  our key partners do not have or do not devote the resources necessary to
        implement our solution; or

     .  our key partners endorse a product or technology other than our
        solution.

If our relationships with application service providers are unsuccessful, our
ability to market and sell our solution will be limited.

     We expect a significant percentage of our revenues to be derived from our
relationships with domestic and international ASPs that market and sell our CRM
systems. If these ASPs do not successfully market our solution, our operating
results will be materially harmed. Because our relationships with ASPs are
relatively new, we cannot predict the degree to which the ASPs will succeed in
marketing and selling our solution. In addition, because the ASP model for
selling software is relatively new and unproven, we cannot predict the degree to
which our potential customers will accept this delivery model. If the ASPs fail
to provide adequate implementation and support for our products and services,
end-users could decide not to subscribe, or cease subscribing, for our products
and services. The ASPs typically offer our products and services in combination
with other products and services, some of which may compete with our products
and services.

Our sales cycle is long, and sales delays could cause our operating results to
fluctuate, which could cause a decline in our stock price.

     An enterprise's decision to purchase a CRM system is discretionary,
involves a significant commitment of its resources and is influenced by its
budget cycles. To successfully sell our solution, we generally must educate our
potential customers regarding the use and benefit of our solution, which can
require significant time and resources. Consequently, the period between initial
contact and the purchase of our solution is often long and subject to delays
associated with the lengthy budgeting, approval and competitive evaluation
processes that typically accompany significant capital expenditures. Our sales
cycles are lengthy and variable, typically ranging between two and six months
from our initial contact with a potential customer to the signing of a license
agreement, although the amount of time varies substantially from customer to
customer and occasionally sales require substantially more time. Sales delays
could cause our operating results to fall below the expectations of securities
analysts or investors, which could result in a decrease in our stock price.

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

     Support and service revenues represented 37% of our total revenues in 1999,
38% of our total revenues in 2000. Due largely to the unexpected sequential
quarter decrease in license revenues, support and service revenues represented
54% of our total revenues in the first quarter of 2001. We anticipate that
service revenues will continue to represent a significant percentage of total
revenues. Because service revenues have lower gross margins than license
revenues, a continued increase in the percentage of total revenues represented
by service revenues or an unexpected decrease in license revenues could have a
detrimental impact on our overall gross margins and thus on our operating
results. We subcontract some of our consulting, customer support and training
services to third-party service providers. Third-party contract revenues
generally carry even lower gross margins than our service business overall. As a
result, our service revenues and related margins may vary from period to period,
depending on the mix of these third-party contract revenues. 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, service revenues as
a percentage of total revenues could decline if customers select third-party
service providers to install and service our products more frequently than they
have in the past. If service revenues are lower than anticipated, our operating
results could fall below the expectations of securities analysts or investors,
which could result in a decrease in our stock price.

                                       24
<PAGE>

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

     We incorporate into our products software that is licensed to us by third-
party software developers, including Cognos, Greyware Automation Products, Inso,
Scribe Software, Sybase and Trilogy Software. We depend on these third parties'
abilities to deliver and support reliable products, enhance their current
products, develop new products on a timely and cost-effective basis, and respond
to emerging industry standards and other technological changes. The third-party
software currently offered in conjunction with our products may become obsolete
or incompatible with future versions of our products. We believe there are other
sources for the functionality we derive from this licensed software and that we
could identify and incorporate alternative software within a relatively short
period of time, approximately four to six months. However, a significant
interruption in the supply of this technology could delay our sales until we can
find, license and integrate equivalent technology.

We may have to reduce or cease operations if we are unable to obtain the funding
necessary to meet our working capital requirements.

     Our future revenues may be insufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable to generate
sufficient cash flow from operations or to obtain funds through additional
financing, we may have to reduce some or all of our development and sales and
marketing efforts or cease operations. Under our equity financing arrangement
with Ramius Securities and Ramius Capital, we may from time to time until
January 2003 elect to have Ramius Securities sell a limited number of shares of
our common stock (up to $30 million) on a best-efforts basis or to have Ramius
Capital purchase those shares if the selling efforts are unsuccessful. The
obligations of Ramius Securities and Ramius Capital under this arrangement are
subject to a number of conditions and limitations, and the amount of common
stock that we may sell depends on the daily trading volumes of our common stock
on the Nasdaq National Market. As a result, we may be unable to sell our common
stock under this facility in the amounts and at the times that we want. In
addition, the terms of the equity financing arrangement have not been reviewed
or approved by the NASD. NASD review is pending and no securities will be
offered under the arrangement unless and until NASD approval is obtained.

     We completed a public offering of our common stock on February 12, 2001,
which resulted in net proceeds to us of approximately $31.3 million. We believe
that the net proceeds from this offering, together with our existing cash and
cash equivalents balances, our arrangement with Ramius Securities and Ramius
Capital and our existing lines of credit will be sufficient to meet our capital
requirements for at least the next twelve months. However, we may seek
additional funds before that time through public or private equity financing or
from other sources to fund our operations and pursue our growth strategy. Except
for the arrangement with Ramius Securities and Ramius Capital, we have no
commitment for additional financing, and we may experience difficulty in
obtaining funding on favorable terms, if at all. Any financing we obtain may
contain covenants that restrict our freedom to operate our business or may have
rights, preferences or privileges senior to our common stock and may dilute our
current shareholders' ownership interest in Onyx. Any common stock that we issue
under the arrangement with Ramius Securities and Ramius Capital, or otherwise,
will dilute our current shareholders' ownership interest in Onyx.

Failure to address strain on our resources caused by our rapid growth will
result in our inability to effectively manage our business.

     Our current systems, management and resources will be inadequate if we
experience rapid growth again. Our business has historically grown rapidly in
size and complexity. This rapid expansion placed significant strain on our
administrative, operational and financial resources and resulted in increasing
responsibilities for each of our management personnel. We will be unable to
effectively manage our business if we are unable to timely and successfully
alleviate the strain on our resources caused by rapid growth in future periods.

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

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

                                       25
<PAGE>

growing use of the Internet. In any event, competitors may independently develop
similar or superior technologies or duplicate the technologies we have
developed, which could substantially limit the value of our intellectual
property.

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

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

     .  stop or delay selling, incorporating or using products that incorporate
        the challenged intellectual property;

     .  pay damages;

     .  enter into licensing or royalty agreements, which may be unavailable on
        acceptable terms; or

     .  redesign products or services that incorporate infringing technology,
        which we might not be able to do at an acceptable price, in a timely
        fashion or at all.

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

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

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

The integration of Market Solutions, CSN Computer Consulting, RevenueLab and any
future acquisitions may be difficult and disruptive.

     In October 1999, we acquired Market Solutions, a privately held provider of
Internet-based CRM systems in the United Kingdom. In February 2000, we acquired
CSN Computer Consulting, a privately held e-business consulting, training and
technology development company headquartered in Germany. In January 2001, we
acquired RevenueLab, a provider of proprietary go-to-market strategy and revenue
acceleration programs. We are currently in the process of integrating these
companies into our business. This integration is subject to risks commonly
encountered in making acquisitions, including

     .  loss of key personnel;

     .  difficulties associated with assimilating technologies, products,
        personnel and operations;

     .  potential disruption of our ongoing business; and

     .  the inability of our sales force, consultants and development staff to
        adapt to the new product line in a timely manner.

     We may not successfully overcome these or any other problems encountered in
connection with integrating Market Solutions, CSN and RevenueLab. 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 have acquired or that we may acquire in the
future.

                                       26
<PAGE>

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

     As of March 26, 2001, our officers, directors and affiliated entities
together beneficially owned approximately 19.7% of the outstanding shares of our
common stock. As a result, these shareholders may, as a practical matter, be
able to exert significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions such as acquisitions, and to block unsolicited tender
offers. This concentration of ownership may delay, deter or prevent a third
party from acquiring control over us at a premium over the then-current market
price of our common stock, which could result in a decrease in our stock price.

Our stock price may be volatile.

     Since our initial public offering in February 1999, the price of our common
stock has been volatile, particularly in the last year. As a result of
fluctuations in the price of our common stock, you may be unable to sell your
shares at or above the price at which you purchased them. The trading price of
our common stock could be subject to fluctuations for a number of reasons,
including

     .  future announcements concerning us or our competitors;

     .  actual or anticipated quarterly variations in operating results;

     .  changes in analysts' earnings projections or recommendations;

     .  announcements of technological innovations;

     .  the introduction of new products;

     .  changes in product pricing policies by us or our competitors;

     .  proprietary rights litigation or other litigation; or

     .  changes in accounting standards that adversely affect our revenues and
        earnings.

     In addition, stock prices for many technology companies fluctuate widely
for reasons that may be unrelated to operating results of these companies. These
fluctuations, as well as general economic, market and political conditions, such
as national or international currency and stock market volatility, recessions or
military conflicts, may materially and adversely affect the market price of our
common stock, regardless of our operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against these companies.
Litigation brought against us could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect on our business, financial condition and operating results.

Changes in accounting standards and in the way we charge for licenses could
affect our future operating results.

     In October 1997, the American Institute of Certified Public Accountants
issued its Statement of Position 97-2, Software Revenue Recognition, and later
amended its position by its Statement of Position 98-4 and Statement of Position
98-9. Based on our interpretation of the AICPA's position, we believe our
current revenue recognition policies and practices are consistent with Statement
of Position 97-2, Statement of Position 98-4 and Statement of Position 98-9.
However, Technical Practice Aids for these standards continue to be issued by
the accounting standard setters. Any such Technical Practice Aids could lead to
unanticipated changes in our current revenue accounting practices, which could
materially adversely affect our business, financial condition and operating
results.

     Accounting standard setters, including the SEC and the Financial Accounting
Standards Board, are also currently reviewing the accounting standards related
to business combinations and other areas. Any changes to these accounting
standards or the way these standards are interpreted or applied could require us
to change the way we account for any acquisitions we may pursue, or other
aspects of our business, in a manner that could adversely affect our reported
financial results.

                                       27
<PAGE>

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

     Certain provisions of our articles of incorporation and bylaws and
Washington law could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our shareholders. These provisions could
discourage companies from presenting acquisition proposals to us and could
delay, deter or prevent a change of control of us, which could reduce the market
price of our common stock.

                                       28
<PAGE>

                          PART II--OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds

     (c)  Sales of Unregistered Securities During the Quarter

     On January 5, 2001, we issued 185,463 shares of our common stock as partial
consideration for the acquisition of RevenueLab. This transaction was exempt
from Securities Act registration under Section 4(2) of the Securities Act and
Regulation D promulgated under the Securities Act, on the basis that the
transaction did not involve a public offering and each purchaser was an
accredited or sophisticated investor.

Item 5.  Other Information

     On January 30, 2001 we granted Leslie Rechan a nonqualified stock option to
purchase 600,000 shares of our common stock in connection with his employment as
our President and Chief Operating Officer and pursuant to a Stock Option
Agreement which we filed as an exhibit to our current report on 8-K filed
February 6, 2001. On April 4, 2001 we granted Brian Henry a nonqualified Stock
Option to purchase 500,000 shares in connection with his employment as our Chief
Financial Officer and pursuant to a Stock Option Agreement which we filed as an
exhibit to our current report on Form 8-K filed April 12, 2001. We originally
granted each of these options outside of our stock option plans.

     On April 18, 2001, we entered into a Revised Stock Option Agreements with
each of Mr. Rechan and Mr. Henry, which supersede the original Stock Option
Agreements. Under the Revised Stock Option Agreements, each option contains all
of its original terms, but is granted under Onyx's 1998 Stock Incentive
Compensation Plan. The Revised Stock Option Agreements are attached as exhibits
to this quarterly report.

     On April 11, 2001, one of our executive officers borrowed $1.0
million as a bridge loan from a commercial bank that matures on August 6, 2001.
As part of the bridge loan transaction, we agreed to guaranty the officer's
obligations under the bridge loan. If our obligations under the guaranty are
triggered, Onyx has full recourse against personal assets (other than shares of
Onyx common stock) of the officer and his family having a fair value in excess
of the officer's total indebtedness to Onyx and the bank. In addition, the
officer has agreed to pledge 1,000,000 shares of Onyx common stock to Onyx to
secure our guaranty. The officer is currently making arrangements to satisfy the
bridge loan on or before it matures. We expect that our guaranty of the
officer's loan will not be renewed beyond the term of the bridge loan.

     On April 27, 2001, our Board of Directors approved an amendment to our 2001
Nonofficer Employee Stock Compensation Plan increasing the number of shares
reserved for issuance under the plan to 3,500,000.

                                       29
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

     (a)  Exhibits

<TABLE>
<CAPTION>
Number                            Description
--------------------------------------------------------------------------------
<C>      <S>
  2.1    Unit Purchase Agreement dated January 5, 2001 among the registrant,
         RevenueLab, LLC, and the members of RevenueLab, LLC (exhibit 10.1)(a)
  3.1    Amended and Restated Articles of Incorporation of the registrant
         (exhibit 3.1)(b)
  3.2    Amended and Restated Bylaws of the registrant
  4.1    Rights Agreement, dated as of October 25, 1999, between the registrant
         and ChaseMellon Shareholder Services, L.L.C. (exhibit 2.1)(c)
 10.1    Onyx Software Corporation 2001 Nonofficer Employee Stock Compensation
         Plan
 10.2    Stand-By Purchase Agreement dated January 4, 2001 between Ramius
         Capital Group, LLC and the registrant (exhibit 10.1)(e)
 10.3    Registration Rights Agreement dated January 5, 2001 between the
         registrant and Odyssey Strategic Partners, LLC (exhibit 10.2)(a)
 10.4    Employment Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.2)(d)
 10.5    Stock Option Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.3)(d)
 10.6    Stock Option Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.4)(d)
 10.7    Stock Option Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.5)(d)
 10.8    Employment Agreement dated January 30, 2001 between the registrant and
         Leslie Rechan (exhibit 10.1)(f)
 10.9    Revised Stock Option Agreement dated April 18, 2001 between the
         registrant and Leslie Rechan
 10.10   Employment Agreement dated March 14, 2001 between the registrant and
         Brian Henry (exhibit 10.1)(g)
 10.11   Stock Option Letter Agreement dated April 4, 2001 between the
         registrant and Brian Henry (exhibit 10.3)(g)
 10.12   Stock Option Letter Agreement dated April 4, 2001 between the
         registrant and Brian Henry (exhibit 10.4)(g)
 10.13   Revised Stock Option Agreement dated April 18, 2001 between the
         registrant and Brian Henry
 10.14   Loan Modification Agreement dated April 12, 2001 among the registrant,
         Silicon Valley Bank and Comerica Bank-California
-------------------
 (a)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (no. 0-25361) filed January 10, 2001.
 (b)     Incorporated by reference to the designated exhibit to the registrant's
         Annual Report on Form 10-K (no. 0-25361) for the fiscal year ending
         December 31, 2000.
 (c)     Incorporated by reference to the designated exhibit to the registrant's
         registration statement on Form 8-A (No. 0-25361) filed October 28,
         1999.
 (d)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.
 (e)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (No. 0-25361) filed January 9, 2001.
 (f)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.
 (g)     Incorporated by reference to the registrant's Current Report on Form
         8-K (No. 0-25361) filed April 12, 2001.
</TABLE>

     (b)  Reports on Form 8-K

(1)  On January 9, 2001, we filed a current report on Form 8-K announcing that
     we had entered into an equity financing arrangement with Ramius Securities
     and Ramius Capital.

(2)  On January 10, 2001, we filed a current report on Form 8-K announcing our
     acquisition of RevenueLab.

(3)  On January 31, 2001, we filed a current report on Form 8-K regarding our
     announcement of financial results for the quarter and year ended December
     31, 2000.

(4)  On February 6, 2001, we filed a current report on Form 8-K announcing that
     we had named Leslie J. Rechan as our President and Chief Operating Officer.

(5)  On February 6, 2001, we filed a current report on Form 8-K with several
     material contracts attached as exhibits.

(6)  On February 7, 2001, we filed a current report on Form 8-K announcing that
     we had entered into an underwriting agreement with Dain Rauscher Wessels, a
     division of Dain Rauscher Incorporated.

                                       30
<PAGE>

     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: May 15, 2001                     By:        /s/ Brent R. Frei
                                          --------------------------------------
                                                      Brent R. Frei
                                               Chief Executive Officer and
                                                  Chairman of the Board


Date: May 15, 2001                     By:       /s/ Brian C. Henry
                                          --------------------------------------
                                                     Brian C. Henry
                                              Executive Vice President and
                                                 Chief Financial Officer
                                              (Principal financial officer)


Date: May 15, 2001                     By:         /s/ Amy E. Kelleran
                                          --------------------------------------
                                                      Amy E. Kelleran
                                                  Vice President Finance,
                                                   Corporate Controller
                                                  and Assistant Secretary
                                              (Principal accounting officer)

                                       31
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
Number                            Description
--------------------------------------------------------------------------------
<C>      <S>
  2.1    Unit Purchase Agreement dated January 5, 2001 among the registrant,
         RevenueLab, LLC, and the members of RevenueLab, LLC (exhibit 10.1)(a)
  3.1    Amended and Restated Articles of Incorporation of the registrant
         (exhibit 3.1)(b)
  3.2    Amended and Restated Bylaws of the registrant
  4.1    Rights Agreement, dated as of October 25, 1999, between the registrant
         and ChaseMellon Shareholder Services, L.L.C. (exhibit 2.1)(c)
 10.1    Onyx Software Corporation 2001 Nonofficer Employee Stock Compensation
         Plan
 10.2    Stand-By Purchase Agreement dated January 4, 2001 between Ramius
         Capital Group, LLC and the registrant (exhibit 10.1)(e)
 10.3    Registration Rights Agreement dated January 5, 2001 between the
         registrant and Odyssey Strategic Partners, LLC (exhibit 10.2)(a)
 10.4    Employment Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.2)(d)
 10.5    Stock Option Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.3)(d)
 10.6    Stock Option Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.4)(d)
 10.7    Stock Option Agreement dated January 5, 2001 between the registrant and
         Kevin Corcoran (exhibit 10.5)(d)
 10.8    Employment Agreement dated January 30, 2001 between the registrant and
         Leslie Rechan (exhibit 10.1)(f)
 10.9    Revised Stock Option Agreement dated April 18, 2001 between the
         registrant and Leslie Rechan
 10.10   Employment Agreement dated March 14, 2001 between the registrant and
         Brian Henry (exhibit 10.1)(g)
 10.11   Stock Option Letter Agreement dated April 4, 2001 between the
         registrant and Brian Henry (exhibit 10.3)(g)
 10.12   Stock Option Letter Agreement dated April 4, 2001 between the
         registrant and Brian Henry (exhibit 10.4)(g)
 10.13   Revised Stock Option Agreement dated April 18, 2001 between the
         registrant and Brian Henry
 10.14   Loan Modification Agreement dated April 12, 2001 among the registrant,
         Silicon Valley Bank and Comerica Bank-California
-------------------
 (a)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (no. 0-25361) filed January 10, 2001.
 (b)     Incorporated by reference to the designated exhibit to the registrant's
         Annual Report on Form 10-K (no. 0-25361) for the fiscal year ending
         December 31, 2000.
 (c)     Incorporated by reference to the designated exhibit to the registrant's
         registration statement on Form 8-A (No. 0-25361) filed October 28,
         1999.
 (d)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.
 (e)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (No. 0-25361) filed January 9, 2001.
 (f)     Incorporated by reference to the designated exhibit to the registrant's
         Current Report on Form 8-K (No. 0-25361) filed February 6, 2001.
 (g)     Incorporated by reference to the registrant's Current Report on Form
         8-K (No. 0-25361) filed April 12, 2001.
</TABLE>

                                       32