<PAGE>

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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-Q

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

    For the quarterly period ended June 30, 2000

[_] 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)

<TABLE>
<S>                                            <C>
                 Washington                                      91-1629814
       (State or other jurisdiction of                         (IRS Employer
       incorporation or organization)                       Identification No.)
</TABLE>

                             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, $0.01 par value, outstanding on August
7, 2000 was 36,590,875.

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<PAGE>

                           ONYX SOFTWARE CORPORATION

                                    CONTENTS

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

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

            Consolidated Balance Sheets as of June 30, 2000 and December
            31, 1999.....................................................    3

            Consolidated Statements of Operations for the Three and Six
            Months Ended June 30, 2000 and 1999..........................    4

            Consolidated Statement of Shareholders' Equity (Deficit) for
            the Three Months Ended March 31, 2000 and June 30, 2000......    5

            Consolidated Statements of Cash Flows for the Six Months
            Ended June 30, 2000 and 1999.................................    6

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

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

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

 PART II--OTHER INFORMATION...............................................  25

    Item 2. Changes in Securities and Use of Proceeds....................   25

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

 SIGNATURES...............................................................  26
</TABLE>
<PAGE>

                         PART I--FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

<TABLE>
<CAPTION>
                                                        June 30,   December 31,
                                                          2000         1999
                                                       ----------- ------------
                                                       (Unaudited)

                        ASSETS
                        ------

<S>                                                    <C>         <C>
Current assets:
 Cash and cash equivalents............................   $14,128     $ 3,691
 Securities available-for-sale........................    11,489      19,804
 Accounts receivable, less allowances of $1,008 in
  2000 and $1,154 in 1999.............................    23,823      22,987
 Prepaid expense and other............................     4,060       2,570
                                                         -------     -------
   Total current assets...............................    53,500      49,052
 Long-term marketable securities......................       --          991
 Property and equipment, net..........................    12,905       8,628
 Purchased technology, net............................     2,830       3,071
 Other intangibles, net...............................    14,030      10,683
 Other assets.........................................     3,391         755
                                                         -------     -------
   Total assets.......................................   $86,656     $73,180
                                                         =======     =======

<CAPTION>
         LIABILITIES AND SHAREHOLDERS' EQUITY
         ------------------------------------

<S>                                                    <C>         <C>
Current liabilities:
 Accounts payable.....................................   $ 3,962     $ 1,906
 Salary and benefits payable..........................     4,704       2,557
 Accrued liabilities..................................     3,557       2,673
 Income taxes payable.................................       656         435
 Current portion of capital lease obligations.........       159         183
 Current portion of long-term debt....................       250         123
 Notes payable to shareholders........................     1,131         --
 Deferred revenues....................................    14,976      11,028
                                                         -------     -------
   Total current liabilities..........................    29,395      18,905
Capital lease obligations, less current portion.......         4          70
Long-term debt, net of current portion................        63          63
Deferred tax liability................................     2,037       2,304

Commitments and Contingencies

Shareholders' equity (deficit):
 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--36,533,926 shares at
   June 30, 2000 and 35,329,864 at December 31,
   1999...............................................    65,296      61,166
 Notes receivable from officers for common stock......      (157)       (212)
 Deferred stock-based compensation....................      (608)       (903)
 Accumulated deficit..................................    (9,290)     (8,065)
 Accumulated other comprehensive loss.................       (84)       (148)
                                                         -------     -------
   Total shareholders' equity.........................    55,157      51,838
                                                         -------     -------
   Total liabilities and shareholders' equity.........   $86,656     $73,180
                                                         =======     =======
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                             Three Months      Six Months
                                            Ended June 30,   Ended June 30,
                                            ---------------  ----------------
                                             2000     1999    2000     1999
                                            -------  ------  -------  -------
                                             (Unaudited)       (Unaudited)
<S>                                         <C>      <C>     <C>      <C>
Revenues:
  License.................................. $16,615  $8,243  $30,956  $15,316
  Support and service......................  11,020   5,037   19,863    9,195
                                            -------  ------  -------  -------
    Total revenues.........................  27,635  13,280   50,819   24,511
Cost of revenues:
  License..................................     831     531    1,491      995
  Support and service......................   5,667   2,517   10,214    4,612
                                            -------  ------  -------  -------
    Total cost of revenues.................   6,498   3,048   11,705    5,607
                                            -------  ------  -------  -------
Gross margin...............................  21,137  10,232   39,114   18,904
Operating expenses:
  Sales and marketing......................  13,474   6,676   24,966   12,837
  Research and development.................   4,802   2,589    8,579    5,117
  General and administrative...............   2,500   1,423    4,661    2,617
  Acquisition-related amortization.........   1,086     109    1,967      218
                                            -------  ------  -------  -------
    Total operating expenses...............  21,862  10,797   40,173   20,789
                                            -------  ------  -------  -------
Loss from operations.......................    (725)   (565)  (1,059)  (1,885)
Interest income, net.......................     291     421      483      535
Loss from equity investment................    (200)    --      (437)     --
                                            -------  ------  -------  -------
    Loss before income taxes...............    (634)   (144)  (1,013)  (1,350)
Income tax provision.......................     104     110      212      187
                                            -------  ------  -------  -------
Net loss...................................    (738)   (254)  (1,225)  (1,537)
Preferred stock accretion..................     --      --       --    (1,442)
                                            -------  ------  -------  -------
Loss to common shareholders................ $  (738) $ (254) $(1,225) $(2,979)
                                            =======  ======  =======  =======
Loss per share:
  Basic and diluted........................ $ (0.02) $(0.01) $ (0.04) $ (0.10)
  Pro forma basic and diluted..............      NA      NA       NA  $ (0.05)
Shares used in calculation of loss per
 share:
  Basic and diluted........................  34,720  31,836   34,487   28,382
  Pro forma basic and diluted..............      NA      NA       NA   30,022
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)

                       (In thousands, except share data)
                                  (Unaudited)

<TABLE>
<CAPTION>
                                             Receivable                            Accumulated      Total
                            Common Stock        from       Deferred                   Other     Shareholders'
                         ------------------ Officers for Stock-Based  Accumulated Comprehensive    Equity
                           Shares   Amount  Common Stock Compensation   Deficit   Income (Loss)   (Deficit)
                         ---------- ------- ------------ ------------ ----------- ------------- -------------
<S>                      <C>        <C>     <C>          <C>          <C>         <C>           <C>
Balance at January 1,
 2000................... 35,329,864 $61,166    $(212)       $(903)      $(8,065)      $(148)       $51,838
  Issuance of common
   stock in connection
   with acquisition.....     69,398   2,261      --           --            --          --           2,261
  Amortization of
   deferred stock
   compensation.........        --      --       --           149           --          --             149
  Exercise of stock
   options..............    677,374     583      --           --            --          --             583
  Shareholder loan
   repayment............        --      --        55          --            --          --              55
  Stock-based
   compensation.........        --       57      --           --            --          --              57
Comprehensive income
 (loss):
  Cumulative translation
   gain.................        --      --       --           --            --           33
  Unrealized gains on
   marketable
   securities...........        --      --       --           --            --            7
  Net loss..............        --      --       --           --           (487)        --
  Total comprehensive
   loss.................                                                                              (447)
                         ---------- -------    -----        -----       -------       -----        -------
Balance at March 31,
 2000................... 36,076,636 $64,067    $(157)       $(754)      $(8,552)      $(108)       $54,496
  Amortization of
   deferred stock
   compensation.........        --      --       --           146           --          --             146
  Exercise of stock
   options..............    404,276     389      --           --            --          --             389
  Issuance of common
   stock under ESPP.....     53,014     840      --           --            --          --             840
Comprehensive income
 (loss):
  Cumulative translation
   gain.................        --      --       --           --            --           40
  Unrealized losses on
   marketable
   securities...........        --      --       --           --            --          (16)
  Net loss..............        --      --       --           --           (738)        --
  Total comprehensive
   loss.................                                                                              (714)
                         ---------- -------    -----        -----       -------       -----        -------
Balance at June 30,
 2000................... 36,533,926 $65,296    $(157)       $(608)      $(9,290)      $ (84)       $55,157
                         ========== =======    =====        =====       =======       =====        =======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                             Six Months Ended
                                                                 June 30,
                                                             -----------------
                                                              2000      1999
                                                             -------  --------
                                                               (unaudited)
<S>                                                          <C>      <C>
Operating activities:
  Net loss to common shareholders........................... $(1,225) $ (2,979)
  Adjustments to reconcile net loss to net cash provided by
   operating activities:
    Preferred stock accretion...............................     --      1,442
    Depreciation and amortization...........................   3,909       876
    Accretion of premium on investments.....................      43        44
    Deferred income taxes...................................    (267)      --
    Noncash stock-based compensation expense................     352       542
    Loss from equity investment.............................     437       --
    Changes in operating assets and liabilities:
      Accounts receivable...................................    (614)     (337)
      Other assets..........................................  (4,469)     (550)
      Accounts payable and accrued liabilities..............   4,237       394
      Deferred revenues.....................................   3,948     2,047
      Income taxes..........................................     183       105
                                                             -------  --------
        Net cash provided by operating activities...........   6,534     1,584
Investing activities:
  Purchases of securities...................................  (7,007)  (22,919)
  Proceeds from maturity of securities......................  16,270       --
  Acquisition of CSN, net of cash...........................    (996)      --
  Purchases of property and equipment.......................  (5,720)   (3,808)
                                                             -------  --------
        Net cash provided by (used in) investing
         activities.........................................   2,547   (26,727)
Financing activities:
  Proceeds from exercise of stock options...................     972       114
  Proceeds from issuance of shares under employee stock
   purchase plan............................................     840       419
  Payments on capital lease obligations.....................     (90)     (139)
  Payments on long-term debt................................    (326)   (4,367)
  Proceeds from shareholder notes...........................      55       --
  Payments on operating line of credit......................    (107)      --
  Net proceeds from initial public offering.................     --     41,873
                                                             -------  --------
        Net cash provided by financing activities...........   1,344    37,900
Effects of exchange rate changes on cash....................      12        (9)
Net increase in cash and cash equivalents...................  10,437    12,748
Cash and cash equivalents at beginning of period............   3,691     1,853
                                                             -------  --------
Cash and cash equivalents at end of period.................. $14,128  $ 14,601
                                                             =======  ========
Supplemental cash flow disclosure:
  Interest paid............................................. $   101  $     62
  Income taxes paid, net....................................     296        82
  Issuance of common stock to employees in connection with
   fourth quarter 1998 bonus................................     --        119
  Issuance of common stock in connection with acquisition...   2,261       --
  Issuance of short-term debt in connection with
   acquisition..............................................   1,131       --
  Technology purchased through short-term debt..............     509       --
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                           ONYX SOFTWARE CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)

1. Description of Business and Basis of Presentation

 Description of the Company

  Onyx Software Corporation and subsidiaries (Company) provide enterprise-
wide, customer-centric e-business solutions. Using the Internet in combination
with traditional forms of interaction, including phone, mail, fax and email,
the Company's solutions enable enterprises to more effectively acquire, manage
and maintain customer, partner and other relationships. The Company designed
its solutions for companies that want to merge new e-business processes with
traditional business processes to enhance their customer-facing operations.
The Company's software applications use 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 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 generally accepted accounting principles for
interim financial information and with the instructions for Form 10-Q and
Article 10 of Regulation S-X. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed, or omitted,
pursuant to the rules and regulations of the Securities and Exchange
Commission. In our opinion, the statements include all adjustments necessary
(which are of a normal and recurring nature) for a fair presentation of the
results for the interim periods presented. These financial statements should
be read in conjunction with our audited consolidated financial statements for
the year ended December 31, 1999, included in our Form 10-K filed with the
Securities and Exchange Commission on March 21, 2000. Our results of
operations for any interim period are not necessarily indicative of the
results of operations for any other interim period or for a full fiscal year.

2. Summary of Significant Accounting Policies

 Revenue Recognition

  Statement of Position 97-2, "Software Revenue Recognition" (SOP 97-2), was
issued in October 1997 by the American Institute of Certified Public
Accountants and was amended by Statement of Position 98-4 (SOP 98-4). The
Company adopted SOP 97-2 effective January 1, 1998. The AICPA has also issued
SOP 98-9, which amends SOP 97-2 and is effective for transactions entered into
beginning January 1, 2000. This pronouncement may require more revenue to be
deferred for certain types of transactions.

  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 indirectly through sublicense fees from resellers 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 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, upgrades, enhancements, customer support services or consulting
services. If an acceptance period is required, revenues are recognized upon
the earlier of customer acceptance or the expiration of the acceptance period.
The Company's agreements with its customers and resellers do not contain
product return rights.

                                       7
<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. 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.

 Research and Development Costs

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

3. Earnings Per Share

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

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

<TABLE>
<CAPTION>
                                      Three Months Ended    Six Months Ended
                                           June 30,             June 30,
                                      --------------------  ------------------
                                        2000       1999       2000      1999
                                      ---------  ---------  --------  --------
                                      (in thousands, except per share data)
<S>                                   <C>        <C>        <C>       <C>
Net loss (A)........................  $    (738) $    (254) $ (1,225) $ (1,537)
Preferred stock accretion (1).......        --         --        --     (1,442)
                                      ---------  ---------  --------  --------
Loss to common shareholders (B).....  $    (738) $    (254) $ (1,225) $ (2,979)
                                      =========  =========  ========  ========
Weighted average number of common
 shares (2).........................     34,720     31,836    34,487    28,382
  Effect of dilutive securities.....         *          *         *         *
  Stock options.....................         *          *         *         *
  Redeemable convertible preferred
   stock............................         *          *         *         *
                                      ---------  ---------  --------  --------
Adjusted weighted average shares and
 assumed conversions (D)............     34,720     31,836    34,487    28,382
Pro forma adjustment for redeemable
 convertible preferred stock........        --         --        --      1,640
                                      ---------  ---------  --------  --------
Pro forma weighted average shares
 (E)................................     34,720     31,836    34,487    30,022
                                      =========  =========  ========  ========
Loss per share:
  Basic and diluted (B)/(D).........  $   (0.02) $   (0.01) $  (0.04) $  (0.10)
  Pro forma basic and diluted
   (A)/(E)..........................         NA         NA        NA  $  (0.05)
</TABLE>

                                       8
<PAGE>

                           ONYX SOFTWARE CORPORATION

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

--------
(1)  Included within preferred stock accretion in the six months ended June 30,
     1999 is a $1.3 million deemed dividend resulting from the 200,000 share
     increase in the number of shares of common stock issued upon conversion of
     the Series B Convertible Preferred Stock.
(2)  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 during the three and six months
     ended June 30, 2000 was 1,600,000 and during the three and six months
     ended June 30, 1999 was 2,600,000.
 *   Excluded from the computation of diluted earnings per share because the
     effects are antidilutive. Options to purchase 7,429,533 shares of common
     stock with exercise prices of $0.06 to $38.09 per share were outstanding
     as of June 30, 2000 and options to purchase 9,040,908 shares of common
     stock with exercise prices of $0.05 to $11.68 per share were outstanding
     as of June 30, 1999.

4. Comprehensive Loss

  The following table reconciles net loss as reported to comprehensive loss
under the provisions of SFAS 130 for the three and six months ended June 30,
2000 and 1999:

<TABLE>
<CAPTION>
                                             Three Months       Six Months
                                            Ended June 30,    Ended June 30,
                                            ----------------  ----------------
                                             2000     1999     2000     1999
                                            -------  -------  -------  -------
                                                    (in thousands)
<S>                                         <C>      <C>      <C>      <C>
Net loss................................... $  (738) $  (254) $(1,225) $(1,537)
Other comprehensive income (loss):
  Unrealized currency gain (loss)..........      40       23       73      (21)
  Unrealized gain (loss) on marketable
   securities..............................     (16)     (45)      (9)     (45)
                                            -------  -------  -------  -------
    Total comprehensive loss............... $  (714) $  (276) $(1,161) $(1,603)
                                            =======  =======  =======  =======
</TABLE>

                                       9
<PAGE>

                           ONYX SOFTWARE CORPORATION

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


5. International Operations

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

<TABLE>
<CAPTION>
                                                      North   Rest of
                                                     America   World    Total
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Quarter ended June 30, 2000:
  Revenues.......................................... $21,365  $ 6,270  $27,635
  Operating loss (including acquisition-related
   amortization)....................................   3,439   (4,164)    (725)
  Interest income, net..............................     292       (1)     291
  Depreciation and amortization.....................   1,332      966    2,298
  Purchases of property and equipment...............   3,811      176    3,987
  Long-lived assets.................................  31,941    1,215   33,156
  Total assets......................................  80,907    5,749   86,656
Quarter ended June 30, 1999:
  Revenues.......................................... $10,939  $ 2,341  $13,280
  Operating loss (including acquisition-related
   amortization)....................................     346     (911)    (565)
  Interest income, net..............................     421      --       421
  Depreciation and amortization.....................     496       20      516
  Purchases of property and equipment...............   2,358      106    2,464
  Long-lived assets.................................  11,714      536   12,250
  Total assets......................................  59,273    1,817   61,090
Six months ended June 30, 2000:
  Revenues.......................................... $38,735  $12,084  $50,819
  Operating loss (including acquisition-related
   amortization)....................................   5,574   (6,633)  (1,059)
  Interest income, net..............................     493      (10)     483
  Depreciation and amortization.....................   2,217    1,692    3,909
  Purchases of property and equipment...............   5,466      254    5,720
  Long-lived assets.................................  31,941    1,215   33,156
  Total assets......................................  80,907    5,749   86,656
Six months ended June 30, 1999:
  Revenues.......................................... $20,279  $ 4,232  $24,511
  Operating loss (including acquisition-related
   amortization)....................................     (37)  (1,848)  (1,885)
  Interest income, net..............................     535      --       535
  Depreciation and amortization.....................     842       34      876
  Purchases of property and equipment...............   3,690      118    3,808
  Long-lived assets.................................  11,714      536   12,250
  Total assets......................................  59,273    1,817   61,090
</TABLE>

                                      10
<PAGE>

                           ONYX SOFTWARE CORPORATION

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


6. Long-Term Debt, Commitments and Contingencies

 Leases

  In June 2000, the Company signed a lease for approximately 178,000 square
feet near its corporate headquarters in Bellevue, Washington. In July 2000,
the lease was amended to add approximately 84,000 square feet bringing the
total square footage of the lease to 262,000. Approximately 178,000 square
feet has a lease term of 10 years and is expected to commence April 1, 2001.
The remaining 84,000 square feet has a lease term of 12 years and is expected
to commence March 1, 2001. The minimum lease payments associated with this
lease total $88.2 million over the initial lease term. The Company has the
option to extend the lease for two additional five-year terms. The Company
must provide a $6.6 million letter of credit as security for the lease. The
letter of credit shall be reduced over the course of the lease term in
accordance with the lease agreement.

 Purchased Technology Obligations

  In March 2000, the Company acquired technology from a third-party software
developer for $500,000 that is currently embedded in one of the Company's core
products. The acquired technology was capitalized as purchased technology and
a corresponding short-term liability was recorded at the time of acquisition.
The intangible is being expensed on a straight-line basis over one year from
the date the technology was acquired. We made a payment of $250,000 during the
second quarter of 2000 against this liability. The remaining $250,000 is
included in the current portion of long-term debt balance in the accompanying
consolidated balance sheet as of June 30, 2000. There are no future
commitments associated with this agreement.

7. Stock Split

  On January 21, 2000, the Company's Board of Directors approved a two-for-one
stock split (in the form of a stock dividend), payable on March 1, 2000. All
share and per share amounts in the accompanying consolidated financial
statements have been adjusted to reflect this stock split.

8. Subsequent Events

 Amendment to Market Solutions Limited Sale and Purchase Agreement

  On October 1, 1999, Onyx acquired Market Solutions Limited, a corporation
formed under the laws of England, pursuant to a sale and purchase agreement
dated as of October 1, 1999, by and among the Company and the shareholders of
Market Solutions. Pursuant to the terms of the original sale and purchase
agreement, at closing the Company paid $5 million in cash and issued
approximately $1 million (132,048 shares) of common stock in exchange for all
the outstanding capital stock of Market Solutions. The Company also agreed to
issue up to an additional $3.6 million in common stock on October 1, 2000 and
up to an additional $4.32 million in common stock on October 1, 2001,
depending on Market Solutions' attainment of certain revenue and profitability
targets in each of the first two years following the acquisition (the Earnout
Payments).

  On July 21, 2000, the Company's management team elected to amend the sale
and purchase agreement to better align the financial incentives of the U.K.
management team with the strategic and financial objectives of the Company as
a whole. As a result, on July 7, 2000, the Company and the shareholders of
Market Solutions agreed to remove the revenue and profitability conditions to
the Earnout Payments. The Company will therefore make the full amount of the
Earnout Payments according to the original schedule described above and the
number of shares of the Company's common stock to be issued in satisfaction of
the Earnout Payments will be determined based on the average of the closing
prices of the Company's common stock on each of the three trading days prior
to each issuance. The additional consideration has been accounted for as
additional purchase price related to goodwill and will be amortized over the
remaining expected useful life.

                                      11
<PAGE>

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

Forward-Looking Information

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

Overview

  Onyx is a leading provider of enterprise-wide, customer-centric e-business
solutions. Using the Internet in combination with traditional forms of
interaction, including phone, mail, fax and email, our solutions enable
enterprises to more effectively acquire, manage and maintain customer, partner
and other relationships. We designed our solutions for companies that want to
merge new e-business processes with traditional business processes to enhance
their customer-facing operations. Our solutions use a single data model across
all customer interactions, resulting in a single repository for all marketing,
sales and service information. We designed our solutions from inception to be
fully integrated across all customer-facing departments and interaction media.
Our solutions are 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.
Excluding acquisition-related amortization and minority equity investment
losses after tax, net income for the first six months of 2000 totaled
$911,000. Including these charges, we incurred a net loss in the first six
months of 2000 totaling $1.22 million. We anticipate that our operating
expenses will increase substantially in dollar amount for the foreseeable
future as we expand our product development, sales and marketing and
professional services staff and, as a result, we may incur operating losses in
future quarters.

                                      12
<PAGE>

Results of Operations

  The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three and six months ended
June 30, 2000 and 1999 are not necessarily indicative of the results that may
be expected for the full year or any future period.

<TABLE>
<CAPTION>
                                        Three Months         Six Months
                                       Ended June 30,      Ended June 30,
                                       -----------------   -----------------
                                        2000      1999      2000      1999
                                       -------   -------   -------   -------
<S>                                    <C>       <C>       <C>       <C>
Consolidated Statement of Operations
 Data:
Revenues:
  License.............................    60.1%     62.1%     60.9%     62.5%
  Support and service.................    39.9      37.9      39.1      37.5
                                       -------   -------   -------   -------
    Total revenues....................   100.0     100.0     100.0     100.0
                                       -------   -------   -------   -------
Cost of revenues:
  License.............................     3.0       4.0       2.9       4.1
  Support and service.................    20.5      19.0      20.1      18.8
                                       -------   -------   -------   -------
    Total cost of revenues............    23.5      23.0      23.0      22.9
                                       -------   -------   -------   -------
Gross margin..........................    76.5      77.0      77.0      77.1
Operating expenses:
  Sales and marketing.................    48.8      50.3      49.1      52.3
  Research and development............    17.4      19.5      16.9      21.0
  General and administrative..........     9.0      10.7       9.2      10.7
  Acquisition-related amortization....     3.9       0.8       3.9       0.8
                                       -------   -------   -------   -------
    Total operating expenses..........    79.1      81.3      79.1      84.8
                                       -------   -------   -------   -------
Loss from operations..................    (2.6)     (4.3)     (2.1)     (7.7)
Interest income, net..................     1.0       3.2       1.0       2.2
Loss from equity investment...........    (0.7)      --       (0.9)      --
                                       -------   -------   -------   -------
    Loss before income taxes..........    (2.3)     (1.1)     (2.0)     (5.5)
Income tax provision..................     0.4       0.8       0.4       0.8
                                       -------   -------   -------   -------
Net loss..............................    (2.7)%    (1.9)%    (2.4)%    (6.3)%
                                       =======   =======   =======   =======
</TABLE>

Revenues

  Total revenues, which consist of software license and service revenues,
increased 108% to $27.6 million in the second quarter of 2000 from $13.3
million in the second quarter of 1999. Total revenues increased 107% to $50.8
million in the first six months of 2000 from $24.5 million in the first six
months of 1999. No single customer accounted for more than 10% of our revenues
in any of these periods.

  Our license revenues increased 102% to $16.6 million in the second quarter
of 2000 from $8.2 million in the second quarter of 1999. The increase was
primarily due to increased sales to new customers. For the six months ended
June 30, 2000, license revenues increased 102% to $31.0 million from $15.3
million during the same period of 1999. Of the increase, $12.0 million was due
to increased sales to new customers and $3.7 million was due to increased
follow-on sales to existing customers.

  Our support and service revenues increased 119%, to $11.0 million in the
second quarter of 2000 from $5.0 million in the second quarter of 1999. Of the
increase, $3.7 million was due to increased consulting and training services
and $2.3 million was due to increased maintenance and support revenues.
Support and service revenues represented 40% of our total revenues in the
second quarter of 2000 and 38% in the second quarter of 1999. Our support and
service revenues increased 116%, to $19.9 million in the first six months of
2000 from $9.2 million in the first six months of 1999. Of the increase, $6.0
million was due to increased consulting and

                                      13
<PAGE>

training services and $4.7 million was due to increased maintenance and
support revenues. Support and service revenues represented 39% of our total
revenues in the first six months of 2000 and 38% in the first six months of
1999. 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.

  Revenues outside of North America increased 168%, to $6.3 million in the
second quarter of 2000 from $2.3 million in the second quarter of 1999. For
the first six months of 2000, revenues outside of North America increased
186%, to $12.1 million from $4.2 million in the same period of 1999. The
increase in international revenues resulted from our investment in direct and
indirect sales channels, primarily in Europe, Australia and Singapore,
including the acquisitions of Market Solutions in the United Kingdom and CSN
Computer Consulting in Germany. We do not believe that we can sustain our
historical percentage growth rates of license and service revenues as our
revenue base increases.

Cost of Revenues

 Cost of license revenues

  Cost of license revenues consists of license fees for third-party software,
product media, product duplication, manuals, product fulfillment and shipping
costs. Cost of license revenues increased 56% to $831,000 in the second
quarter of 2000 from $531,000 in the second quarter of 1999. Cost of license
revenues as a percentage of related license revenues was 5% in the second
quarter of 2000 and 6% in the second quarter of 1999. Cost of license revenues
increased 50%, to $1.5 million in the first six months of 2000 from $995,000
in the first six months of 1999. In the first six months of 2000, cost of
license revenues as a percentage of related license revenues was 5% compared
to 6% in the same period of 1999. The decrease in cost of license revenues as
a percentage of related license revenues resulted primarily from a decrease in
the relative proportion of products we sold with third-party technology in the
second quarter and first six months of 2000 as compared to the same periods of
1999, which contribute significantly lower margins.

 Cost of service revenues

  Cost of service revenues consists of personnel and third-party service
provider costs related to consulting services, customer support and training.
Cost of service revenues increased 125% to $5.7 million in the second quarter
of 2000 from $2.5 million in the second quarter of 1999. In the first six
months of 2000, cost of service revenues increased 121% to $10.2 million from
$4.6 million in the same period of 1999. The increase in dollar amount
resulted primarily from hiring and training consulting, support and training
personnel to support our growing customer base. Our service employees
increased to 172 as of June 30, 2000 from 82 as of June 30, 1999. Cost of
service revenues as a percentage of related service revenues was 51% in the
second quarter and six months ended June 30, 2000 compared to 50% in the
second quarter and six months ended June 30, 1999. The cost of services as a
percentage of service revenues may vary between periods primarily for two
reasons: (1) the mix of services we provide (consulting, customer support,
training), which have different cost structures, and (2) the resources we use
to deliver these services (internal versus third parties).

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 102%, to $13.5 million in the second quarter
of 2000 from $6.7 million in the second quarter of 1999. In the first six
months of 2000, sales and marketing expenses increased 94% to $25.0 million
from $12.8 million in the same period of 1999. 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 to 231 as

                                      14
<PAGE>

of June 30, 2000 from 131 as of June 30, 1999. The increase in dollar amount
is also the result of an increase in sales commissions and bonuses associated
with increased revenues and an increase in marketing activities, including
trade shows, cyber seminars and our worldwide customer conference and direct
mail campaigns in the first half of 2000. Sales and marketing expenses
represented 49% of our total revenues both in the second quarter of 2000 and
in the six months ended June 30, 2000 compared to 50% in the second quarter of
1999 and 52% in the six months ended June 30, 1999. The decrease in sales and
marketing expenses as a percentage of total revenues reflects the more rapid
growth in our revenues in this period compared to the growth of sales and
marketing expenses due to maturing direct and indirect sales channels. We
believe that we need to significantly increase our sales and marketing efforts
to expand our market position and further increase acceptance of our products.
Accordingly, we anticipate that sales and marketing expenses will increase in
future periods.

 Research and development

  Research and development expenses consist primarily of salaries, benefits
and equipment for software developers, quality assurance personnel, program
managers and technical writers and payments to outside contractors. Research
and development expenses increased 85% to $4.8 million in the second quarter
of 2000 from $2.6 million in the second quarter of 1999. In the first six
months of 2000, research and development expenses increased 68% to $8.6
million from $5.1 million in the same period of 1999. The increase was
primarily due to an increase in the number of development personnel coupled
with an increase in the use of outside contractors. Research and development
employees increased to 99 as of June 30, 2000 from 77 as of June 30, 1999.
Research and development costs represented 17% of our total revenues in the
second quarter of 2000 and 19% in the second quarter of 1999. In the first six
months of 2000, research and development costs represented 17% of our total
revenues compared to 21% in the same period of 1999. The decrease in research
and development expenses as a percentage of total revenues primarily reflects
the more rapid growth in our revenues in this period compared to the
investment in our research and development activities. We believe that we need
to significantly increase our research and development investment to expand
our market position and continue to expand our product line. Accordingly, we
anticipate that research and development expenses will increase in future
periods.

 General and administrative

  General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance and administrative personnel and
professional services fees. General and administrative expenses increased 76%,
to $2.5 million in the second quarter of 2000 from $1.4 million in the second
quarter of 1999. In the first six months of 2000, general and administrative
expenses increased 78% to $4.7 million from $2.6 million in the same period of
1999. The increase was primarily due to the addition of finance, executive and
administrative personnel to support the growth of our business, together with
an increase in professional fees and investor relations activities associated
with being a public company. General and administrative employees increased to
74 as of June 30, 2000 from 36 as of June 30, 1999. General and administrative
costs represented 9% of our total revenues both in the second quarter and in
the six months ended June 30, 2000 compared to 11% of our total revenues both
in the second quarter of 1999 and in the six months ended June 30, 1999. The
decrease in general and administrative expenses as a percentage of total
revenues primarily reflects the more rapid growth in our revenues in this
period compared to the growth in general and administrative expenses as we
begin to achieve economies of scale in our support infrastructure. We believe
our general and administrative expenses will continue to increase as we expand
our domestic and international administrative staff and incur significant
expenses associated with professional services used to support our global
activities.

 Acquisition-related amortization

  Acquisition-related amortization consists of intangible amortization
associated with our acquisitions of EnCyc in 1998, Versametrix and Market
Solutions in 1999, and CSN Computer Consulting in 2000. Acquisition-related
amortization totaled $1.1 million in the second quarter of 2000 and $109,000
in the second quarter of 1999. For the first six months of 2000, acquisition-
related amortization totaled $2.0 million compared to

                                      15
<PAGE>

$218,000 in the same period of 1999. The increase in acquisition-related
amortization in the second quarter and first six months of 2000 over the prior
year is the result of the completion of these acquisitions.

 Deferred 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 amortized deferred
compensation expense of $146,000 during the second quarter of 2000 compared to
$266,000 in the second quarter of 1999. In the first six months of 2000, we
amortized $295,000 compared to $542,000 in the same period of 1999. 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 equivalents
and short-term investment balances offset by interest expense associated with
debt obligations. Interest income, net was $291,000 in the second quarter of
2000 compared to $421,000 in the second quarter of 1999. In the first six
months of 2000, interest income, net was $483,000 compared to $535,00 in the
first six months of 1999. The decrease in both the second quarter and the six
months ended June 30, 2000 compared to the prior year periods is the result of
a lower average cash and investment base during the current periods as
compared to the same periods of 1999.

 Income taxes

  We recorded an income tax provision of $104,000 in the second quarter of
2000 and $110,000 in the second quarter of 1999 in connection with our foreign
operations. In the first six months of 2000 we recorded an income tax
provision of $212,000 and in the first six months of 1999, we recorded an
income tax provision of $187,000 in connection with our foreign operations. We
made no provision or benefit for federal or state income taxes 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

  Prior to our initial public offering, we primarily financed our operations
through private placements of our common and preferred stock. To a lesser
extent, we have financed our operations through equipment financing and
traditional financing arrangements. In February 1999, we completed our initial
public offering and issued 7,130,000 shares of common stock at an initial
public offering price of $6.50 per share, as adjusted to reflect the 2-for-1
split of our common stock effected March 1, 2000. We received approximately
$41.9 million in cash proceeds from the offering, net of underwriting
discounts, commissions and other offering costs.

  As of June 30, 2000, we had cash and cash equivalents of $14.1 million, an
increase of $10.4 million from cash and cash equivalents held as of December
31, 1999. The increase in cash and cash equivalents from year-end is primarily
the result of short-term marketable securities maturing during the first six
months of 2000, which were subsequently reinvested in securities with an
original maturity date of 90 days or less. We have invested our cash in excess
of current operating requirements in a portfolio of investment-grade
securities. Short-term marketable securities totaled $11.5 million at June 30,
2000. The investments have variable and fixed interest rates and maturities of
less than one year. In accordance with SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities," such investments are classified as
"available for sale." Our working capital at June 30, 2000 was $24.1 million,
compared to $30.1 million at December 31, 1999.

  As of June 30, 2000, we had an $8.0 million working capital revolving line
of credit with Silicon Valley Bank that was secured by our accounts receivable
and bore interest at the bank's prime rate, which was 9.5% as of June 30,
2000. This credit facility was increased to $15.0 million in August 2000 and
bears interest at the bank's prime rate. In addition to our accounts
receivable, Onyx's intellectual property was added as security against the
revolving line of credit. This facility allows us to borrow up to the lesser
of 80% of our eligible accounts receivable or $15.0 million. The facility
expires in August 2001. The agreement under which the line

                                      16
<PAGE>

of credit was established requires us to maintain specified financial ratios.
As of June 30, 2000, we had no outstanding borrowings under the working
capital facility; however, there was approximately $5.0 million in standby
letters of credit outstanding in connection with facility leases and a
guarantee posted in connection with the acquisition of CSN Computer
Consulting. We also have a term loan with Silicon Valley Bank which was
established for the purpose of financing new capital equipment purchases. This
facility operated as a revolver through August 1999, at which point the
facility converted to a 36-month term loan bearing interest at a rate equal to
the bank's prime rate plus 0.25%, which equaled 9.75% as of June 30, 2000. The
facility matures September 2002 and requires us to maintain specified
financial ratios. As of June 30, 2000, we had borrowed $63,000 under this term
loan facility. We were in compliance with all financial covenants of the
credit facility as of June 30, 2000.

  Our operating activities resulted in net cash inflows of $6.5 million in the
first six months of 2000 compared to net cash inflows of $1.6 million in the
first six months of 1999. The operating cash inflows in the first six months
of 2000 were primarily the result of cash provided by increases in deferred
revenues and other current liabilities coupled with income from our operations
adjusted for noncash amortization charges, offset in part by increases in
other assets. The operating cash inflows in the first half of 1999 were
primarily the result of cash provided by increases in deferred revenues and
other current liabilities, partially offset by cash outflows from our
operating loss in the first six months of 1999. The improvement in our
operating cash flow in the first six months of 2000 over the same period of
1999 is the result of reduced losses, increased non-cash charges within the
losses for 2000, increases in accounts payable and accrued liabilities and
deferred revenues offset by increases in other operating assets.

  Investing activities provided cash of $2.5 million in the first six months
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 $26.7 million in the first six
months of 1999, primarily for the purchase of short-term and long-term
securities following our initial public offering and the purchase of capital
equipment.

  Financing activities provided cash of $1.3 million in the first six months
of 2000 due to proceeds from the exercise of stock options and stock issued
through our employee stock purchase plan, offset in part by payments on
capital lease and other debt obligations. Financing activities provided cash
of $37.9 million in the first six months of 1999 primarily due to the proceeds
from our initial public offering, offset in part by payments on our credit
facility and capital lease obligations.

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

  .  enter new markets for our products and services;

  .  increase research and development spending;

  .  increase sales and marketing activities;

  .  develop new distribution channels;

  .  improve our operational and financial systems; and

  .  broaden our professional service capabilities.

These operating expenses 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 and are not involved in any negotiations with respect to any
transactions of this nature. We believe that our existing cash and cash
equivalents, investments and available bank borrowings will be sufficient to
meet our anticipated cash needs for working capital and capital expenditures
for 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. 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 dilute
your ownership interest in Onyx.

                                      17
<PAGE>

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 decline of 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 addition, our operating
results may not follow any past trends. As a result, our operating results for
a particular quarter or year may fall below the expectations of securities
analysts and investors, which could result in a decrease in our stock price.

  In the past, the software industry has experienced significant downturns,
particularly when general economic conditions decline and spending on
management information systems decreases. Our business, financial condition
and operating results may fluctuate substantially from quarter to quarter as a
consequence of general economic conditions. In addition, the fiscal or
quarterly budget cycles of our customers can cause our revenues to fluctuate
from quarter to quarter. As a result of all of these factors, we believe that
period-to-period comparisons of our operating results may not be a meaningful
basis to predict our future performance. 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
     to 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;

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

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

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

  Our stock price may decline due to seasonal fluctuations. 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 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. Our limited operating history makes it
difficult to forecast our future operating results. The new and evolving
nature of the CRM market increases these risks and uncertainties.

                                      18
<PAGE>

We have incurred losses and may not achieve profitability, which could cause a
decline in our stock price.

  If we do not return to profitability in future quarters, our stock price
could decline. 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, and in the first two quarters of 2000. As of June 30,
2000, we had an accumulated deficit of $9.3 million. We expect to continue to
devote substantial resources to our product development and sales and customer
support. As a result, we will need to generate significant quarterly revenues
to achieve profitability. Our business strategies may not be successful and we
may not be profitable in any future period as a result. 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 CRM and e-business markets.

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

  The market for CRM software is intensely competitive, fragmented and rapidly
changing. We face competition in the CRM software 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.

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

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

  To date, we have designed our products to operate exclusively on the Windows
NT and Microsoft BackOffice platforms. As a result, we have only marketed our
products to customers which have developed their enterprise computing systems
around these platforms. We recently decided to begin developing a version of
our products that will operate on platforms other than Windows NT and
Microsoft BackOffice. However, these development efforts may be unsuccessful
or involve significantly greater-than-expected costs. If we are unable to
develop product versions for new platforms in a timely and cost-effective
manner, we will be unable to market our products to many customers and our
revenue growth will be limited.

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

  The market for CRM products is still emerging, and continued growth in
demand for and acceptance of CRM products remains uncertain. Even if the
market for CRM software grows, businesses may purchase our competitors'
products or develop their own. We believe that many of our potential customers
are not fully aware of the benefits of CRM solutions and that these solutions
may never achieve market acceptance. We have spent, and will continue to
spend, considerable resources educating potential customers about our products
and CRM software solutions in general. However, even with these educational
efforts, market acceptance of our products

                                      19
<PAGE>

may not increase. We will not succeed unless we can educate our market about
the benefits of CRM solutions and about our ability to provide them in a cost-
effective and easy-to-use manner.

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

  Product license revenues from the Onyx e-Business Engine product family
accounted for approximately 50% of our total revenues, or 79% of total license
revenues, in 1999 and for 48% of our total revenues, or 80% of total license
revenues, in the first six months of 2000. We expect product license revenues
from the Onyx e-Business Engine 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 e-Business Engine 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 e-Business Engine product family and to develop,
introduce and establish customer acceptance of new and enhanced versions of
the Onyx e-Business Engine product family, our business will fail.

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

  To date, we have sold our products primarily through our direct sales force
and have supported our customers with our consulting and customer support
staff. Our future revenue growth will depend in large part on recruiting and
training additional direct sales, consulting and customer support personnel
and expanding our indirect distribution channels. We have experienced and
continue to experience difficulty in recruiting qualified sales and support
personnel and in establishing third-party relationships. We may not be able to
successfully expand our direct sales force or other distribution channels,
which could limit our ability to expand our business. We believe that customer
satisfaction is critical to our ability to compete in the CRM market, and we
rely on experienced consulting and customer support staff to support our
customers.

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

  Our future performance will also depend largely on the efforts and abilities
of our key technical, customer support, sales and managerial personnel and on
our ability to retain them. We have in the past experienced difficulty in
hiring qualified technical, customer support, sales and managerial personnel.
Our success will depend on our ability to attract and retain such personnel in
the future. In addition, the loss of any of our executive officers could limit
our ability to execute our business strategy. 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 software market in which we compete is characterized by rapid
technological change. Existing products become obsolete and unmarketable when
products using new technologies are introduced and new industry standards
emerge. For example, we may need to modify our products when third parties
change software that we integrate into our products. As a result, the life
cycles of our products are difficult to estimate. To be successful, we must
continue to enhance our current product line and develop new products that
successfully respond to technological developments. We have delayed
enhancements or new product release dates several times in the past and may
not be able to introduce enhancements or new products successfully or in a
timely manner in the future. If we delay release of our products and product
enhancements, it could harm our reputation and our ability to attract and
retain customers. 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.

                                      20
<PAGE>

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. We may not be able to
maintain or increase international market demand for the Onyx e-Business
Engine product family. We, or our distributors or resellers, may not be able
to sustain or increase international revenues from licenses or from consulting
and customer support. Our foreign subsidiaries operate primarily in local
currencies, and their results are translated into U.S. dollars. We do not
currently engage in currency hedging activities, but we may do so in the
future. Increases in the value of the U.S. dollar relative to foreign
currencies have not materially affected our operating results in the past. Our
operating results could be materially adversely affected if we enter into
license agreements providing for significant amounts of foreign currencies
with extended payment terms.

If our key partners and systems integrators fail to perform, our ability to
sell our products and services will be limited.

  We rely heavily on our relationships with a number of organizations that are
important to worldwide sales and marketing of our products. If we fail to
maintain our existing relationships, or to establish new relationships, or if
our partners do not perform to our expectations, our ability to sell and
market our products and services will be limited.

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

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

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

  .  our systems integrators do not have or do not devote the resources
     necessary to implement our products; or

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

Sales delays could cause our operating results to fluctuate, which could cause
a decline in our stock price.

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

  Support and service revenues represented 37% of our total revenues in 1999
and 39% of our total revenues in the first six months of 2000. We anticipate
that service revenues will continue to represent a significant percentage of
total revenues.

                                      21
<PAGE>

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

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

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

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

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

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
solution.

  We incorporate into our products certain software that is licensed to us by
third-party software developers, currently Sybase, Scribe Software, Greyware
Automation Products, Inso 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 this licensed software and that we could
replicate the functionality of this licensed software within a relatively
short period of time, approximately four to six months. However, a significant
interruption in the supply of this technology could delay our development
sales until we can find, license and integrate equivalent technology.

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, such breach.

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 certain versions of our products until
software problems were corrected, and in some cases have provided product
enhancements to correct errors in released products. Our new products or
releases may not be free from errors after commercial shipments have begun.
Any errors that are discovered after commercial release could result in loss
of revenues or delay in market acceptance, diversion of development resources,
damage to our reputation or increased service and warranty costs.

                                      22
<PAGE>

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

  In October 1999, we acquired Market Solutions, a privately held provider of
Web-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. We are currently in
the process of integrating these companies with our business. This integration
is subject to risks commonly encountered in making acquisitions, including,
among others, risk of loss of key personnel, difficulties associated with
assimilating technologies, products, personnel and operations, potential
disruption of our ongoing business, and the ability of their sales force,
consultants and development staff to adapt to our product line. 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.

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 June 30, 2000, our officers, directors and affiliated entities
together beneficially owned approximately 37.4% 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 two quarters. Future
announcements concerning us or our competitors, quarterly variations in
operating results, announcements of technological innovations, the
introduction of new products or changes in product pricing policies by us or
our competitors, proprietary rights or other litigation, changes in earnings
estimates or purchase recommendations by analysts or other factors could cause
the market price of our common stock to fluctuate substantially. 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
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.

  We recognize revenues from the sale of software product licenses on delivery
of our products if:

  .  persuasive evidence of an arrangement exists;

  .  collection is probable;

  .  the fee is fixed or determinable; and

  .  we can objectively allocate the total fee among all elements of the
     arrangement.

                                      23
<PAGE>

  We recognize revenues from customer support services ratably over the
contract term, typically one year, and recognize revenues for consulting and
training services as the services are performed.

  Statement of Position 97-2, "Software Revenue Recognition," was issued in
October 1997 by the American Institute of Certified Public Accountants and was
amended by Statement of Position 98-4. We adopted Statement of Position 97-2
effective January 1, 1998. The American Institute of Certified Public
Accountants has also issued Statement of Position 98-9, which is effective for
us for transactions entered into beginning January 1, 2000. However, full
implementation guidelines for this standard have not yet been issued. Once
available, these implementation guidelines could lead to unanticipated changes
in our current revenue accounting practices.

  Accounting standard setters, including the Securities and Exchange
Commission and the Financial Accounting Standards Board, are also reviewing
the accounting standards related to business combinations and stock-based
compensation.

  Any changes to these accounting standards or any other accounting standards
or the way these standards are interpreted or applied could require us to
change the manner in which we recognize revenue or the way we account for
stock compensation or for any acquisition we may pursue or other aspects of
our business, in a manner that could adversely affect our reported financial
results.

Remediation of undiscovered Year 2000-related computer problems could be
costly and time-consuming.

  We believe that the current versions of our internally developed software
products, as well as our management and information systems, are Year 2000
compliant. When the century changed, we experienced no disruption of our
business operations and no product failures as a result of Year 2000
compliance issues or otherwise. The costs we incurred in connection with
remediating our systems during 1999 were immaterial. At this time, we are not
aware of any material defects resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties
on which we rely. Nevertheless, some Year 2000 problems may not appear until
several months after January 1, 2000. As a result, we may still face claims
for undiscovered Year 2000 errors in our own products or for Year 2000 issues
arising from third-party products that we integrate into our products or with
which our products and systems exchange data. In addition, if our suppliers or
distributors encounter Year 2000 problems, our ability to deliver our products
and services could be disrupted.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

  We typically do not attempt to reduce or eliminate our market exposures on
our investment securities because the majority of our investments are short
term. We do not have any derivative instruments. The fair value of our
investment portfolio or related income would not be significantly impacted by
either a 100 basis point increase or decrease in interest rates due primarily
to the short-term nature of the major portion of our investment portfolio. All
of the potential changes noted above are based on sensitivity analysis
performed on our balances as of June 30, 2000.

Foreign Currency Risk

  Nearly all of our sales and the majority of our expenses are currently
denominated in U.S. dollars. As a result, we have not experienced significant
foreign exchange gains and losses. While we conducted some transactions in
foreign currencies during the first six months of 2000 and expect to continue
to do so in the future, foreign exchange gains or losses have not been and are
not expected to be material to Onyx. Although we have not engaged in foreign
currency hedging to date, we may do so in the future.

                                      24
<PAGE>

                          PART II--OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds

  (c) Sales of Unregistered Securities During the Quarter

  None.

  (d) Use of Proceeds

  On February 11, 1999, our registration statement on Form S-1, file no. 333-
68559, became effective. Proceeds to us, after accounting for $3.2 million in
underwriting discounts and commissions and $1.2 million in other expenses,
were $41.9 million.

Item 6. Exhibits and Reports on Form 8-K

  (a) Exhibits

<TABLE>
<CAPTION>
   Exhibit No.                            Description
   -----------                            -----------
   <C>         <S>
       3.1     Restated Articles of Incorporation of the registrant
               (incorporated by reference to the Quarterly Report on Form 10-Q
               (No. 0-25361), for the quarter ended March 31, 1999).

       3.2     Amended and Restated Bylaws of the registrant (incorporated by
               reference to the registration statement on Form S-1 (No. 333-
               6889) filed by registrant on December 8, 1998, as amended).

       4.1     Rights Agreement, dated as of October 25, 1999, between the
               registrant and Chase Mellon Shareholder Services, LLC
               (incorporated by reference to the registration statement on
               Form 8-A (No. 0-25361), filed on October 28, 1999).

      10.1     Office Building Lease dated June 6, 2000 between Onyx Software
               Corporation and Bellevue Hines Development, L.L.C. and First
               Amendment to Lease dated June 20, 2000.

      10.2     1998 Stock Incentive Compensation Plan as amended and restated
               July 1, 2000.

      10.3     Amended and Restated Loan and Security Agreement dated August 8,
               2000 between Onyx Software and Silicon Valley Bank.

      27.1     Financial Data Schedule.
</TABLE>

  (b) Reports on Form 8-K

  (1)  On May 1, 2000, we filed a current report on Form 8-K with respect to
       the departure of our Chief Financial Officer, Sarwat Ramadan.

                                      25
<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)

                                                   /s/ Brent R. Frei
Date: August 11, 2000                     By: _________________________________
                                                       Brent R. Frei
                                                 President, Chief Executive
                                             Officer and Chairman of the Board

                                                  /s/ Amy E. Kelleran
Date: August 11, 2000                     By: _________________________________
                                                      Amy E. Kelleran
                                              Interim Chief Financial Officer
                                                  and Assistant Secretary
                                               (Principal financial and chief
                                                    accounting officer)

                                       26
<PAGE>

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
     3.1     Restated Articles of Incorporation of the registrant (incorporated
             by reference to the Quarterly Report on Form 10-Q (No. 0-25361),
             for the quarter ended March 31, 1999).

     3.2     Amended and Restated Bylaws of the registrant (incorporated by
             reference to the registration statement on Form S-1 (No. 333-6889)
             filed by registrant on December 8, 1998, as amended).

     4.1     Rights Agreement, dated as of October 25, 1999, between the
             registrant and Chase Mellon Shareholder Services, LLC
             (incorporated by reference to the registration statement on Form
             8-A (No. 0-25361), filed on October 28, 1999).

    10.1     Office Building Lease dated June 6, 2000 between Onyx Software
             Corporation and Bellevue Hines Development, L.L.C. and First
             Amendment to Lease dated June 20, 2000.

    10.2     1998 Stock Incentive Compensation Plan as amended and restated
             July 1, 2000.

    10.3     Amended and Restated Loan and Security Agreement dated August 8,
             2000 between Onyx Software and Silicon Valley Bank.

    27.1     Financial Data Schedule.
</TABLE>

                                       27