<PAGE>

================================================================================


                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

       For the quarterly period ended September 30, 2001

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

       For the transition period from       to


                         Commission File Number 0-25361

                            ONYX SOFTWARE CORPORATION

             (Exact name of registrant as specified in its charter)


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


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


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


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

     The number of shares of common stock, par value $0.01 per share,
outstanding on October 31, 2001 was 43,285,038.

================================================================================

<PAGE>

ONYX SOFTWARE CORPORATION

                                    CONTENTS

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

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

         Consolidated Balance Sheets as of December 31, 2000
         and September 30, 2001..............................................  3

         Consolidated Statements of Operations for the Three and
         Nine Months Ended September 30, 2000 and 2001.......................  4

         Consolidated Statement of Shareholders' Equity for the
         Three Months Ended March 31, 2001, June 30, 2001 and
         September 30, 2001..................................................  5

         Consolidated Statements of Cash Flows for the
         Nine Months Ended September 30, 2000 and 2001.......................  6

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

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations....................... 16

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.......... 36

PART II-OTHER INFORMATION.................................................... 38

Item 6.  Exhibits and Reports on Form 8-K.................................... 38

SIGNATURES................................................................... 39

                                       2

<PAGE>

                          PART I-FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

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

<TABLE>
<CAPTION>
                                                                                    December 31,  September 30,
                                                                                        2000          2001
                                                                                    -----------   -------------
                                                                                           (Unaudited)
<S>                                                                                  <C>            <C>
                                     ASSETS
                                     ------
Current assets:
   Cash and cash equivalents ...................................................      $  11,492       $  15,380
   Short-term investments ......................................................          5,522           2,400
   Accounts receivable, less allowances of $1,732 in 2000 and $2,410 in 2001 ...         41,135          23,287
   Prepaid expense and other ...................................................          4,533           4,904
                                                                                    -----------   -------------
         Total current assets ..................................................         62,682          45,971

Property and equipment, net ....................................................         20,848          14,625
Purchased technology, net ......................................................          1,958             889
Other intangibles, net .........................................................         19,674          12,513
Other assets ...................................................................          3,878           1,433
                                                                                    -----------   -------------
         Total assets ..........................................................      $ 109,040         $75,431
                                                                                    ===========   =============


                      LIABILITIES AND SHAREHOLDERS' EQUITY
                      ------------------------------------
Current liabilities:
   Accounts payable ............................................................      $   6,792       $   3,634
   Salary and benefits payable .................................................          5,778           2,722
   Accrued liabilities .........................................................          4,691           5,389
   Income taxes payable ........................................................            808             492
   Current portion of capital lease obligations ................................            242             170
   Current portion of restructuring-related liability ..........................             --          13,417
   Deferred revenues ...........................................................         19,119          18,387
                                                                                    -----------   -------------
         Total current liabilities .............................................         37,430          44,211

Capital lease obligations, less current portion ................................            428             293
Deferred tax liability .........................................................          2,201           1,357
Minority interest in joint venture .............................................          2,895           1,879
Long-term restructuring-related liability, less current portion ................             --           9,543

Commitments and Contingencies

Shareholders' equity:
   Preferred stock, $0.01 par value:
     Authorized shares-20,000,000 shares;
     Designated shares-none ....................................................             --              --
   Common stock, $0.01 par value:
     Authorized shares-80,000,000 shares;
     Issued and outstanding shares-37,597,670 shares at December 31, 2000
        and 41,012,341 at September 30, 2001 ...................................         75,416         113,824
   Common stock issuable in acquisition ........................................          4,320           4,320
   Notes receivable from officers for common stock .............................           (157)            --
   Deferred stock-based compensation ...........................................           (413)         (1,013)
   Accumulated deficit .........................................................        (12,776)        (98,153)
   Accumulated other comprehensive loss ........................................           (304)           (830)
                                                                                    -----------   -------------
         Total shareholders' equity ............................................         66,086          18,148
                                                                                    -----------   -------------
         Total liabilities and shareholders' equity ............................      $ 109,040      $   75,431
                                                                                    ===========   =============
</TABLE>

          See accompanying notes to consolidated financial statements.



                                       3

<PAGE>


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

<TABLE>
<CAPTION>
                                                          Three Months Ended         Nine Months Ended
                                                            September 30,              September 30,
                                                        ----------------------    ----------------------
                                                           2000         2001         2000         2001
                                                        ---------    ---------    ---------    ---------
                                                            (Unaudited)                    (Unaudited)
<S>                                                     <C>          <C>          <C>          <C>
Revenues:
   License ..........................................   $  20,403    $   6,263    $  51,359    $  31,030
   Support and service ..............................      12,367       14,455       32,230       46,900
                                                        ---------    ---------    ---------    ---------
     Total revenues .................................      32,770       20,718       83,589       77,930
Cost of revenues:
   License ..........................................         877          169        2,368        1,657
   Amortization of acquired technology ..............         205          205          615          613
   Support and service ..............................       6,377        7,819       16,525       27,197
                                                        ---------    ---------    ---------    ---------
     Total cost of revenues .........................       7,459        8,193       19,508       29,467
                                                        ---------    ---------    ---------    ---------
Gross margin ........................................      25,311       12,525       64,081       48,463
Operating expenses:
   Sales and marketing ..............................      15,446       11,224       40,247       46,608
   Research and development .........................       6,136        4,902       14,678       17,975
   General and administrative .......................       2,979        3,505        7,556       12,255
   Restructuring and other related charges ..........        --         40,075         --         43,664
   Amortization and impairment of acquisition-related
      intangibles ...................................       1,346        8,830        2,903       12,076
   Amortization of stock-based compensation .........         105          164          457          700
                                                        ---------    ---------    ---------    ---------
     Total operating expenses .......................      26,012       68,700       65,841      133,278
                                                        ---------    ---------    ---------    ---------
Loss from operations ................................        (701)     (56,175)      (1,760)     (84,815)
Interest income, net ................................         181           98          664          540
Equity investment losses and impairment .............         (63)        (500)        (500)      (2,500)
                                                        ---------    ---------    ---------    ---------
Loss before income taxes ............................        (583)     (56,577)      (1,596)     (86,775)
Income tax provision (benefit) ......................         108         (279)         320         (382)
Minority interest in loss of consolidated subsidiary         --           (349)        --         (1,016)
                                                        ---------    ---------    ---------    ---------
Net loss ............................................   $    (691)   $ (55,949)   $  (1,916)   $ (85,377)
                                                        =========    =========    =========    =========

Net loss per share:
   Basic and diluted ................................   $   (0.02)   $   (1.37)   $   (0.06)   $   (2.17)
                                                        =========    =========    =========    =========

Shares used in calculation of net loss per share:

   Basic and diluted ................................      35,084       40,987       34,670       39,351
                                                        =========    =========    =========    =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       4

<PAGE>

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


<TABLE>


                                                                      Receivable
                                                                         from
                                                                       Officers                            Accumulated      Total
                                     Common Stock        Common Stock     for       Deferred    Accumu-       Other         Share-
                                     -------------       Issuable in    Common     Stock-Based   lated    Comprehensive    holders'
                                  Shares       Amount    Acquisition     Stock    Compensation  Deficit   Income (Loss)     Equity
                                ----------    --------   ------------ ----------  ------------  -------   -------------    --------
<S>                            <C>          <C>           <C>         <C>           <C>      <C>              <C>          <C>
Balance at January 1, 2001 .... 37,597,670    $ 75,416     $ 4,320      $ (157)     $  (413)  $ (12,776)     $  (304)     $ 66,086
     Issuance of common
       stock in connection
       with acquisition .......    185,463       5,659          --           --      (1,480)         --           --         3,819
     Amortization of deferred
       stock compensation .....         --          --                       --         310          --           --           310
     Exercise of stock
       options ................    401,072         560          --           --          --          --           --           560
     Proceeds from public
       offering, net of
       offering costs
       of $350 ................  2,500,000      31,525          --           --          --          --           --        31,525
     Comprehensive
       income (loss):
       Cumulative translation
         loss .................         --          --          --           --          --          --         (780)
       Unrealized losses on                                                                                      (12)
         marketable
         securities ...........         --          --          --           --          --
       Net loss ...............         --          --          --           --          --     (15,740)          --
       Total comprehensive
         loss .................                                                                                            (16,532)
                                ----------    --------     -------      -------     -------   ---------      -------      --------
Balance at March 31, 2001 ..... 40,684,205     113,160       4,320        (157)      (1,943)    (28,516)      (1,096)       85,768
     Issuance of common stock
       under ESPP .............    137,102         932          --           --          --          --           --           932
     Exercise of stock
       options ................    143,151          99          --           --          --          --           --            99
     Amortization of deferred
       stock compensation .....         --          --                       --         226          --           --           226
     Reversal of deferred
       stock compensation
       associated with
       terminated employees ...         --        (333)         --           --         333          --           --            --
     Warrants issued in
       connection with
       financing ..............         --          --         105           --          --          --           --           105
     Officer loan repayment ...         --          --          --          157          --          --           --           157
     Comprehensive
       income (loss):
       Cumulative translation
         loss .................         --          --          --           --          --          --           (4)
       Unrealized losses on
         marketable
         securities ...........         --          --          --           --          --          --           (4)
       Net loss ...............         --          --          --           --          --     (13,688)          --
       Total comprehensive
         loss .................                                                                                            (13,696)
                                ----------    --------     -------      -------     -------   ---------      -------      --------
Balance at June 30, 2000 ...... 40,964,458     113,963       4,320           --      (1,384)    (42,204)      (1,104)       73,591

     Exercise of stock
       options ................     47,883          68                                                                          68
     Amortization of deferred
       stock compensation .....         --          --          --           --         164          --           --           164
     Reversal of deferred
       stock compensation
       associated with
       terminated employees ...         --        (207)         --           --         207          --           --            --
     Comprehensive
       income (loss):
       Cumulative translation
         gain .................         --          --          --           --          --          --          276
       Unrealized losses on
         marketable
         securities ...........         --          --          --           --          --          --           (2)
       Net loss ...............         --          --          --           --          --     (55,949)          --
       Total comprehensive
         loss .................                                                                                            (55,675)
                                ----------    --------     -------      -------     -------   ---------      -------      --------
Balance at September 30,
  2001 . ...................... 41,012,341    $113,824     $ 4,320      $    --     $(1,013)  $ (98,153)     $  (830)     $ 18,148
                                ==========    ========     =======      =======     =======   =========      =======      ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        5

<PAGE>



                           ONYX SOFTWARE CORPORATION

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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                  Nine Months Ended
                                                                                                    September 30,
                                                                                                  2000        2001
                                                                                                --------    --------
                                                                                                     (Unaudited)
<S>                                                                                             <C>            <C>
Operating activities:
Net loss ....................................................................................   $ (1,916)   $(85,377)
Adjustments to reconcile net loss to net cash provided by operating activities:
    Depreciation and amortization ...........................................................      6,847      10,431
    Accretion of premium on investments .....................................................         51           5
    Deferred income taxes ...................................................................       (378)       (844)
    Non-cash stock-based compensation expense ...............................................        457         700
    Minority interest in loss of consolidated subsidiary ....................................       --        (1,016)
    Equity investment losses and impairment .................................................        500       2,500
    Impairment on intangible assets .........................................................       --         7,207
    Impairment on property, plant and equipment .............................................       --        13,335
    Changes in operating assets and liabilities:
       Accounts receivable ..................................................................     (7,895)     17,798
       Other assets .........................................................................     (4,666)       (362)
       Accounts payable and accrued liabilities .............................................      6,139      (5,450)
       Restructuring-related liabilities ....................................................       --        22,960
       Deferred revenue .....................................................................      5,849        (939)
       Income taxes .........................................................................        209        (316)
                                                                                                --------    --------
         Net cash provided by (used in) operating activities ................................      5,197     (19,368)
Investing activities:
Purchases of securities .....................................................................     (7,007)     (4,900)
Proceeds from maturity of securities ........................................................     20,740       8,017
Acquisitions of businesses, net of cash .....................................................     (2,127)       (869)
Purchases of property and equipment .........................................................    (10,449)    (11,737)
                                                                                                --------    --------
         Net cash provided by (used in) investing activities ................................      1,157      (9,489)
Financing activities:
Proceeds from exercise of stock options .....................................................      1,218         727
Proceeds from issuance of shares under employee stock purchase plan .........................        840         932
Payments on capital lease obligations .......................................................       (126)       (207)
Payments on long-term debt ..................................................................       (576)       --
Proceeds from shareholder notes .............................................................         55         157
Payments on operating line of credit ........................................................       (107)       --
Net proceeds from sale of common stock ......................................................       --        31,525
                                                                                                --------    --------
         Net cash provided by financing activities ..........................................      1,304      33,134
Effects of exchange rate changes on cash ....................................................          7        (389)
                                                                                                --------    --------
Net increase in cash and cash equivalents ...................................................      7,665       3,888
Cash and cash equivalents at beginning of period ............................................      3,691      11,492
                                                                                                --------    --------
Cash and cash equivalents at end of period ..................................................   $ 11,356    $ 15,380
                                                                                                ========    ========

Supplemental cash flow disclosure:

Interest paid ...............................................................................   $    168    $    174
Income taxes paid, net ......................................................................        512         778
Issuance of common stock and stock options in connection with acquisition ...................      2,261       5,659
Technology purchased through short-term debt ................................................        818        --
Warrants issued in connection with financing arrangement ....................................       --           105
</TABLE>

          See accompanying notes to consolidated financial statements.

                                        6

<PAGE>

                            ONYX SOFTWARE CORPORATION

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

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

2.   Summary of Significant Accounting Policies

Revenue Recognition

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

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

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

     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

                                       7

<PAGE>


                            ONYX SOFTWARE CORPORATION

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


service elements, license fee revenues are recognized on shipment of the
software, provided services do not include significant customization or
modification of the base product, and the payment terms for licenses are not
subject to acceptance criteria impacted by the services. In cases where license
fee payments are contingent on the acceptance of services, the Company defers
recognition of revenues from both the license and the service elements until the
acceptance criteria are met.

Concentration of Credit Risk and Major Customers

     Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is dispersed across many different geographic areas
throughout North America, Europe, Asia/Pacific and Latin America and consists of
companies in a variety of industries. The Company generally does not require
collateral or other security to support credit sales, but provides an allowance
for bad debts based on historical experience and specifically identified risks.
As of and for the three and nine months ended September 30, 2001, no single
customer accounted for more than 10% of total revenues or accounts receivable.

Foreign Currency Translation

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

Reclassifications

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

3.   Stock-Based Compensation

     Stock-based compensation includes stock-based charges resulting from
option-related deferred compensation recorded at the Company's initial public
offering and certain compensation arrangements with third-party consultants, as
well as the portion of acquisition-related consideration conditioned on the
continued tenure of key employees of certain acquired businesses, which must be
classified as compensation expense rather than as a component of purchase price
under accounting principles generally accepted in the United States. Stock-based
compensation was $105,000 and $164,000 for the three months ended September 30,
2000 and 2001, respectively, and $457,000 and $700,000 for the nine months ended
September 30, 2000 and 2001, respectively.

                                       8

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


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

<TABLE>
<CAPTION>
                                                                            Three Months Ended        Nine Months Ended
                                                                               September 30,            September 30,
                                                                            ------------------        -----------------
                                                                             2000        2001          2000       2001
                                                                            ------      ------        ------     ------
<S>                                                                         <C>         <C>           <C>        <C>
                                                                                (Unaudited)              (Unaudited)
    Support and service cost of sales .................................     $   24      $    3        $   90     $  169
    Sales and marketing ...............................................         40         140           205        440
    Research and development ..........................................         14           8            51         29
    General and administrative ........................................         27          14           111         62
                                                                            ------      ------        ------     ------
       Total amortization of stock-based compensation .................     $  105      $  164        $  457     $  700
                                                                            ======      ======        ======     ======
</TABLE>

4.   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.

<TABLE>
<CAPTION>
                                                                             Three Months Ended        Nine Months Ended
                                                                                September 30,             September 30,
                                                                            --------------------      -------------------
                                                                              2000        2001          2000       2001
                                                                            --------    --------      --------   --------
                                                                            (in thousands, except    (in thousands, except
                                                                                per share data)          per share data)
<S>                                                                          <C>        <C>           <C>        <C>
Net loss (A) ..........................................................     $  (691)    $(55,949)     $ (1,916)  $(85,377)
                                                                            ========    ========      ========   ========

Weighted average number of common shares (1)(B) .......................      35,084       40,987        34,670     39,351

    Effect of  stock options ..........................................           *            *             *          *
                                                                            -------     --------      --------   --------

Adjusted weighted average shares and assumed conversions (C) ..........      35,084       40,987        34,670     39,351
                                                                            =======     ========      ========   ========
Loss per share:
    Basic (A)/(B) .....................................................     $ (0.02)    $  (1.37)     $  (0.06)  $  (2.17)
    Diluted (A)/(C) ...................................................     $ (0.02)    $  (1.37)     $  (0.06)  $  (2.17)
</TABLE>

(1)  For purposes of determining the weighted average number of common shares
     outstanding, shares of restricted common stock acquired through the July
     1998 exercise of stock options in exchange for a promissory note to the
     Company are only considered in calculating diluted earnings per share. The
     outstanding promissory note was paid in full during the second quarter of
     2001 and the related 1,600,000 shares of common stock were released from
     restriction.

*    The effect of stock options are excluded from the computation of diluted
     earnings per share because the effects are antidilutive. Options to
     purchase 8,402,276 shares of common stock with exercise prices of $0.06 to
     $38.09 per share were outstanding as of September 30, 2000 and options to
     purchase 12,016,538 shares of common stock with exercise prices of $0.10 to
     $38.09 per share were outstanding as of September 30, 2001. Approximately
     1.0 million options to purchase common stock were cancelled during October
     2001 in connection with the workforce reduction enacted early in the fourth
     quarter of 2001. Additional shares may be cancelled at the expiration of
     the 90-day exercise period depending upon the exercise price of the options
     issued and vested relative to the market price of the Company's common
     stock during this period.

                                       9

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


5.   Accumulated Other Comprehensive Loss

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

<TABLE>
<CAPTION>
                                                                          December 31,       September 30,
                                                                              2000               2001
                                                                          ------------       -------------
                                                                                  (in thousands)
    <S>                                                                   <C>                <C>
    Unrealized currency loss ........................................          $  (277)            $  (785)
    Unrealized loss on marketable securities ........................              (27)                (45)
                                                                          ------------       -------------
       Total accumulated other comprehensive loss ...................          $  (304)            $  (830)
                                                                          ============       =============
</TABLE>

6.   Line of Credit

     In September 2001, the Company entered into a loan and security agreement
with Silicon Valley Bank, which contains a $15.0 million working capital
revolving line of credit that is secured by the Company's accounts receivable,
property and equipment, and intellectual property. This facility allows the
Company to borrow up to the lesser of 80% of its eligible accounts receivable or
$15.0 million and bears interest at the bank's prime rate, which was 6.0% as of
September 30, 2001, plus 1%. The facility expires in August 2002. As of
September 30, 2001, the Company had no outstanding borrowings under the working
capital facility; however, there was approximately $10.9 million in standby
letters of credit outstanding in connection with leases of equipment and its
facilities, of which $7.4 million represents a security deposit for tenant
improvements and rent associated with additional facilities in Bellevue,
Washington. As of the date of this filing, the total amount of standby letters
of credit outstanding was reduced to $9.9 million.

     The loan and security agreement with Silicon Valley Bank required the
Company to maintain certain financial covenants. Although the Company was not in
compliance with these covenants at September 30, 2001, Silicon Valley Bank has
granted a waiver.

7.   Long-Term Debt and Commitments

     In July 2001, the Company entered into a three-year operating lease
associated with equipment for its new Bellevue facility. The minimum lease
payments associated with this lease total $2.2 million. In connection with the
equipment lease, the Company posted a standby letter of credit for $1.0 million
as security.

                                       10

<PAGE>

                           ONYX SOFTWARE CORPORATION

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



8.   International Operations

     The Company reports operating results based on geographic areas. A summary
of key financial data as reported by operating segment is as follows (in
thousands):
<TABLE>
<CAPTION>
                                                                           North      Rest of
                                                                          America      World       Total
                                                                          --------    --------    --------
<S>                                                                       <C>         <C>         <C>
Quarter ended September 30, 2000 (unaudited):
   Revenues ...........................................................   $ 22,600    $ 10,170    $ 32,770
   Operating income (loss) (including acquisition-related amortization)      2,013      (2,714)       (701)
   Interest income, net ...............................................        178           3         181
   Depreciation and amortization ......................................      1,496       1,442       2,938
   Purchases of property and equipment ................................      3,120       1,609       4,729
   Long-lived assets ..................................................     40,048       2,728      42,776
   Total assets .......................................................   $ 84,957    $ 11,534    $ 96,491

Quarter ended September 30, 2001 (unaudited):
   Revenues ...........................................................   $ 14,223    $  6,495    $ 20,718
   Operating income (loss) (including acquisition-related amortization)    (45,332)    (10,843)    (56,175)
   Interest income, net ...............................................         98        --            98
   Depreciation, amortization and impairment of intangibles ...........      5,774       4,910      10,684
   Purchases of property and equipment ................................        781        --           781
   Long-lived assets ..................................................     13,560      15,900      29,460
   Total assets .......................................................   $ 51,565    $ 23,866    $ 75,431

Nine months ended September 30, 2000 (unaudited):
   Revenues ...........................................................   $ 61,335    $ 22,254    $ 83,589
   Operating income (loss) (including acquisition-related amortization)      7,587      (9,347)     (1,760)
   Interest income, net ...............................................        671          (7)        664
   Depreciation and amortization ......................................      3,713       3,134       6,847
   Purchases of property and equipment ................................      8,586       1,863      10,449
   Long-lived assets ..................................................     40,048       2,728      42,776
   Total assets .......................................................   $ 84,957    $ 11,534    $ 96,491

Nine months ended September 30, 2001 (unaudited):
   Revenues ...........................................................   $ 56,439    $ 21,491    $ 77,930
   Operating income (loss) (including acquisition-related amortization)    (58,337)    (26,478)    (84,815)
   Interest income, net ...............................................        539           1         540
   Depreciation, amortization and impairment of intangibles ...........      9,505       8,133      17,638
   Purchases of property and equipment ................................     11,152         585      11,737
   Long-lived assets ..................................................     13,560      15,900      29,460
   Total assets .......................................................   $ 51,565    $ 23,866    $ 75,431
</TABLE>

9.   Shareholders' Equity

Equity Financing Arrangement

     Although the Company has a potential $30 million equity financing
arrangement with Ramius Securities and Ramius Capital, the underwriting terms of
this facility were not approved by NASD, and the Company is currently unable to
access the facility. Unless Onyx can agree with Ramius on amendments to the
arrangement that satisfy the NASD's concerns, the Company will not obtain NASD
approval and will not be able to access the facility. The fees and the value of
the warrants, approximating $1.6 million, have been recorded in other current
assets and other current liabilities.

                                       11

<PAGE>


                            ONYX SOFTWARE CORPORATION

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

10.  Equity Investment Losses and Impairment

     During 1999 and 2000, the Company invested $3.5 million in a small number
of private companies. The carrying value of these investments is included in
"other assets" on the accompanying consolidated balance sheets and totaled $3.0
million at December 31, 2000 and $500,000 at September 30, 2001.

     One of these investments was accounted for using the equity method of
accounting due to the Company's ability to exercise significant influence, but
not control, over the investee. The entire balance of the $500,000 initial
investment in this company was reduced to zero during 2000 as the Company
recorded its proportionate share of the losses in the investee ($63,000 during
the three months ended September 30, 2000 and $500,000 during the nine months
ended September 30, 2000.)

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

     The Company reported impairment losses, which totaled $500,000 during the
three month period ended September 30, 2001 and $2.5 million during the nine
month period ended September 30, 2001, relating to other-than-temporary declines
in three of its cost basis equity investments based upon a recent review of
qualitative and quantitative factors surrounding the financial condition of the
investees. These other than temporary impairment losses were recorded to reflect
each investment at its estimated fair value. No other than temporary impairment-
related losses were incurred in 2000.

11.  Restructuring and Other Related Charges

     On September 30 2001, the Company approved a restructuring plan to reduce
headcount, reduce infrastructure and eliminate excess and duplicate facilities.
In the third quarter of 2001 the Company recorded approximately $40.1 million in
restructuring and other related charges and $43.7 million for the nine months
ended September 30, 2001.

                                       12

<PAGE>


                           ONYX SOFTWARE CORPORATION

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



The components of the third quarter charges are as follows (in thousands):

<TABLE>
<CAPTION>
                                                      Charge for the      Cash payments,
                                    Balance at      three months ended   amortization and       Balance at
                                   June 30, 2001    September 30, 2001      write-offs      September 30, 2001
                                   -------------    ------------------   ----------------   ------------------
<S>                                <C>              <C>                    <C>              <C>
Excess facilities................      $ --               $25,497             $(2,995)           $22,502
Employee separation costs........        309                  479                (788)                --
Asset impairments................        --                13,531             (13,531)                --
Other............................        116                  568                (226)               458
                                       -----              -------            --------            -------
Total............................      $ 425              $40,075            $(17,540)           $22,960
                                       =====              =======            ========            =======
</TABLE>

     Employee separation costs, which include severance, related taxes,
outplacement and other benefits, of $479,000 related to approximately 50
employees terminated during the third quarter. Approximately $309,000 of
employee separation costs incurred in the second quarter of 2001 was paid during
the third quarter of 2001 which related to a portion of the 116 employees
notified of termination prior to June 30, 2001. Subsequent to September 30, 2001
the Company announced additional layoffs of approximately 153 employees. These
employees were not notified of their termination until after September 30, 2001
and as a result their associated separations costs were not included in the
third quarter charge. Additional charges related to these terminations will be
accounted for in the fourth quarter of 2001. All functional areas have been
affected by the reductions.

     Excess facilities charges for the three and nine months ended September 30,
2001 were estimated at $25.5 million and $26.7 million respectively. These costs
are the result of our decision to reduce or exit certain domestic and
international facilities. The estimated facilities costs are based on current
comparable rates for leases in the respective markets. If facilities operating
lease rental rates continue to decrease in these markets, if it takes longer
than expected to find a suitable tenant to sublease these facilities, or if
other estimates and assumptions change, the actual loss could exceed this
estimate. Future cash outlays are anticipated through September 2005 unless
estimates and assumptions change or we are able to negotiate to exit the leases
at an earlier date. Assets disposed of or removed from operations consisted
primarily of leasehold improvements, computer equipment, office equipment,
furniture and fixtures. The estimated costs for asset impairments were $13.5
million for both the three and nine months ended September 30, 2001.

     For the nine months ended September 30, 2001, restructuring charges were
$43.7 million, of which $14.6 million related to asset impairments and other
non-cash charges, $6.1 million has been paid out in cash, and $23.0 million in
restructuring liabilities remain at September 30, 2001. The current portion of
restructuring-related liabilities totaled $13.4 million at September 30, 2001
and the long-term portion of restructuring-related liabilities totaled $9.5
million at September 30, 2001.

12.  Purchased Technology and Intangibles

     As a result of the Company's restructuring plans, the negative trends in
the marketplace, and the negative trends within the software market sector, the
Company performed a future cash flow analysis as required by Statement of
Financial Accounting Standard (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of. Based on this
analysis, the Company determined that the discounted cash flows for certain
business units are inadequate to support the remaining carrying value of certain
goodwill and intangibles and recorded an impairment write down during the third
quarter of 2001 totaling $7.2 million relating to CSN, Versametrix, and
RevenueLab.

                                       13

<PAGE>

                           ONYX SOFTWARE CORPORATION

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

13.  Litigation and Contingencies

     The Company and a few of the Company's officers and directors, have been
named as defendants in a series of related lawsuits filed in the United States
District Court for the Western District of Washington on behalf of purchasers of
publicly traded Onyx common stock during various time periods ranging from
January 10, 2001 to August 10, 2001. The complaints in these lawsuits allege
that various disclosures made by the Company regarding its financial prospects
and its results for the quarter and year ended December 31, 2000 violated the
Securities Exchange Act of 1934. Plaintiffs seek certification of a class action
for purchasers of Onyx common stock during the named class periods. None of the
complaints specifies the amount of damages to be claimed. Onyx intends to
vigorously defend itself and its executives and directors in these lawsuits.

     The Company and two of its officers have also been named as defendants in a
lawsuit filed in the United States District Court for the Southern District of
New York on behalf of purchasers through December 6, 2000 of Onyx common stock
issued pursuant to the February 12, 1999 registration statement and prospectus
for the Company's initial public offering. The complaint alleges that the
Company and the individual defendants violated the Securities Act of 1933 by
failing to disclose excessive commissions allegedly obtained by the Company's
underwriters pursuant to a secret arrangement whereby the underwriters allocated
IPO shares to certain investors in exchange for the excessive commissions. The
complaint also asserts claims against the underwriters under the 1933 Act and
the Securities Exchange Act of 1934 in connection with the allegedly undisclosed
commissions. The Company intends to vigorously defend itself and its officers
against this lawsuit.

     In October 2001, Thomas Weisel Partners LLC filed a lawsuit against the
registrant in the United States District Court for the Northern District of
California, San Francisco division. This lawsuit arises out of the registrant's
engagement of Thomas Weisel for services in connection with the signing of the
registrant's equity financing arrangement with Ramius Securities and Ramius
Capital. Weisel alleges in its pleadings that a payment of approximately $1.5
million became due under the engagement letter upon the signing of the
arrangement. The registrant has not made the payment because the underwriting
terms of its equity facility with Ramius were not approved by the NASD. Among
other claims, the lawsuit alleges breach of contract, and seeks unspecified
money damages. The Company intends to vigorously defend itself against this
lawsuit and believes it has several meritorious defenses.

     In addition, the registrant is involved in additional litigation in the
ordinary course of its business, none of which management believes will have a
material adverse effect on the Company.

14.  Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.

     SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.

     SFAS No. 142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS No.
121. We are required to adopt SFAS No. 142 effective January 1, 2002. We are
currently evaluating our intangible assets in relation to the provisions of SFAS
No. 142 to determine the impact, if any, the adoption of SFAS No. 142 will have
on our results of operations or financial position.

                                       14

<PAGE>

                            ONYX SOFTWARE CORPORATION

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

15.  Subsequent Event - Payment to Shareholders in the Form of Common Stock

     The Company issued 2,234,483 shares of common stock on October 1, 2001 in
satisfaction of the final installment of consideration due to shareholders of
Market Solutions Limited, a UK company acquired by Onyx in October 1999. The
number of shares of the Company's common stock issued in satisfaction of the
$4.32 million obligation was determined based on the average of the closing
prices of the Company's common stock on each of the three trading days prior to
issuance.

                                       15

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


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

Forward-Looking Information

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

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

Overview

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

History of Operations

     Onyx was founded in February 1994. We commercially released version 1.0 of
our flagship product, Onyx Customer Center, in December 1994. In our first three
years of operation, we focused primarily on research and development activities,
recruiting personnel, purchasing operating assets, marketing our products,
building a direct sales force and expanding our service business. Our revenues
totaled $2.2 million in 1995 and $9.6 million in 1996. In mid-1996, we
substantially expanded our operations to capitalize on our opportunity within
the rapidly emerging 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. In 2000, our
revenues grew to $119.3 million and we incurred a net loss totaling $4.7
million.

                                       16

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


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

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

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

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

     .    delay of new product releases can result in a customer's decision to
          delay execution of a contract or, for contracts that include the new
          release as an element of the contract, will result in deferral of
          revenue recognition until such release.

     Even though our revenues are difficult to predict, we base our decisions
regarding our operating expenses on anticipated revenue trends. Many of our
expenses are relatively fixed, and we cannot quickly reduce spending if our
revenues are lower than expected. During the first nine months of 2001, we saw a
shift in the buying behavior of our targeted new and existing customer base as a
result of economic conditions leading to a delay of our customers' capital
spending initiatives, which we believe was the primary reason we experienced a
significant license revenue shortfall relative to our original 2001 operating
plan. In addition, our revenues for the three months ended September 30, 2001
were adversely affected by the September 11, 2001 terrorist attacks on the U.S.,
which lead to further delays in capital spending initiatives of our prospects
and installed base and impacted our business.

     In this economic environment, we continue to believe it will be difficult
to predict our license revenue as capital spending initiatives of our targeted
new and existing customer base are delayed. Due to the uncertainty of near-term
sales growth, it was determined that Onyx's infrastructure, which had resulted
in 97% revenue growth in the prior year, was no longer sustainable. In April
2001, we began our restructuring efforts to reduce headcount, reduce
infrastructure and eliminate excess and duplicate facilities to re-align our
organization toward profitable growth. For the three months ended September 30,
2001, Onyx recorded approximately $40.1 million in restructuring and other
related charges, bringing the total restructuring and other related charges to
$43.7 million for the nine months ended September 30, 2001. Employee separation
costs, which include severance, related taxes, outplacement and other benefits,
totaled $479,000 during the third quarter of 2001 relating to approximately 50
employees terminated during the quarter ended September 30, 2001. Approximately
$309,000 of employee separation costs incurred in the second quarter of 2001 was
paid during the third quarter of 2001 which related to a portion of the 116
employees notified of termination prior to June 30, 2001. Subsequent to
September 30, 2001, we announced additional layoffs of approximately 153
employees. These employees were not notified of their termination until after
September 30, 2001 and as a result their associated separations costs were not
included in the third quarter charge. Additional charges related to these
terminations will be accounted for in the fourth quarter of 2001. All functional
areas have been affected by the reductions.

     Excess facilities charges for the three and nine months ended September 30,
2001 were estimated at $25.5 million and $26.6 million respectively. These costs
are the result of our decision to reduce or exit certain domestic and
international facilities. The estimated facilities costs are based on current
comparable rates for leases in the respective markets or estimated termination
fees. If facilities operating lease rental rates continue to decrease in these
markets, if it takes longer than expected to find a suitable tenant to sublease
these facilities, or if other estimates and assumptions change, the actual loss
could exceed this estimate. Future cash outlays are anticipated through
September 2005 unless estimates and assumptions change or we are able to
negotiate to exit the leases at an earlier date. Assets disposed of or removed
from operations consisted primarily of leasehold improvements, computer
equipment, office equipment, furniture and fixtures. The estimated costs for
asset impairments were $13.5 million for both the three and nine months ended
September 30, 2001.

                                       17

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


     For the nine months ended September 30, 2001, restructuring charges were
$43.7 million, of which $14.6 million related to asset impairments and other
non-cash charges, $6.1 million has been paid out in cash, and $23.0 million in
restructuring liabilities remain at September 30, 2001.

     We are continuing to align our operations and review our restructuring
efforts. In the near-term, we believe our costs and operating expenses,
excluding restructuring-related charges, will continue to decrease to a level
that is closer to our expected revenues while allowing us to continue to invest
in accordance with our strategic priorities. However, we may be unable to
achieve these expense reductions without adversely affecting our business and
results of operations. We may continue to experience losses and negative cash
flows in the near term, even if sales of our products and services continue to
grow.

Onyx's Results of Operations

     The following table presents certain financial data, derived from our
unaudited statements of operations, as a percentage of total revenues for the
periods indicated. The operating results for the three and nine months ended
September 30, 2000 and 2001 are not necessarily indicative of the results that
may be expected for the full year or any future period.

<TABLE>
<CAPTION>
                                                           Thee Months Ended     Nine Months Ended
                                                             September 30,         September 30,
                                                           -----------------     -----------------
                                                            2000       2001       2000        2001
                                                           -----      -----      -----       -----
<S>                                                        <C>        <C>        <C>         <C>
Revenues:
   License ...........................................      62.3%      30.2%      61.4%       39.8%
   Support and service ...............................      37.7       69.8       38.6        60.2
                                                           -----      -----      -----       -----
     Total revenues ..................................     100.0      100.0      100.0       100.0
                                                           -----      -----      -----       -----

Cost of revenues:
   License ...........................................       2.7        0.8        2.8         2.1
   Amortization of acquired technology ...............       0.6        1.0        0.7         0.8
   Support and service ...............................      19.5       37.7       19.8        34.9
                                                           -----      -----      -----       -----
     Total cost of revenues ..........................      22.8       39.5       23.3        37.8
                                                           -----      -----      -----       -----
Gross margin .........................................      77.2       60.5       76.7        62.2
Operating expenses:
   Sales and marketing ...............................      47.1       54.2       48.1        59.8
   Research and development ..........................      18.7       23.7       17.6        23.1
   General and administrative ........................       9.1       16.9        9.1        15.7
   Restructuring and other related charges ...........      --        193.4       --          56.0
   Amortization and impairment of acquired intangibles       4.1       42.6        3.5        15.5
   Amortization of stock-based compensation ..........       0.3        0.8        0.5         0.9
                                                           -----      -----      -----       -----
     Total operating expenses ........................      79.3      331.6       78.8       171.0
                                                           -----      -----      -----       -----
Loss from operations .................................      (2.1)    (271.1)      (2.1)     (108.8)
Interest income, net .................................       0.5        0.4        0.8         0.7
Equity investment losses and impairment ..............      (0.2)      (2.4)      (0.6)       (3.2)
                                                           -----      -----      -----       -----
Loss before income taxes .............................      (1.8)    (273.1)      (1.9)     (111.3)
Income tax provision (benefit) .......................      (0.3)      (1.3)       0.4        (0.4)
Minority interest in loss of consolidated subsidiary .      --         (1.7)      --          (1.3)
                                                           -----      -----      -----       -----
Net loss .............................................      (2.1)%   (270.1)%     (2.3)%    (109.6)%
                                                           =====      =====      =====       =====
</TABLE>

     Revenues

     Total revenues, which consist of software license and service revenues,
decreased 37% from $32.8 million in the third quarter of 2000 to $20.7 million
in the third quarter of 2001. Total revenues decreased 7% from $83.6 million in
the first nine months of 2000 to $77.9 million in the first nine months of 2001.
No single customer accounted for more than 10% of our revenues in any of these
periods.

                                       18

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


     Our license revenues decreased 69%, from $20.4 million in the third quarter
of 2000 to $6.3 million in the third quarter of 2001. Our license revenues
decreased 40%, from $51.4 million in the first nine months of 2000 to $31.0
million during the same period of 2001. License revenues in the third quarter
and first nine months of 2001 were primarily recognized upon delivery of
software, as all other revenue recognition criteria were met. We believe the
decrease in license revenues in the three and nine months ended September 30,
2001 compared to the prior year was primarily due to a shift in the buying
behavior of our targeted new and existing customer base as a result of economic
conditions as well as the September 11, 2001 terrorist attack on the U.S., both
factors leading to a delay of our customers' capital-spending initiatives.

     Our support and service revenues increased 17%, from $12.4 million in the
third quarter of 2000 to $14.5 million in the third quarter of 2001. Of the
increase, $1.2 million was due to increased consulting and training services and
$900,000 was due to increased maintenance and support revenues. Support and
service revenues represented 38% of our total revenues in the third quarter of
2000 and 70% in the third quarter of 2001. Our support and service revenues
increased 46%, from $32.2 million in the first nine months of 2000 to $46.9
million in the first nine months of 2001. Of the increase, $10.3 million was due
to increased consulting and training services and $4.4 million was due to
increased maintenance and support revenues. Support and service revenues
represented 39% of our total revenues for the first nine months of 2000 and 60%
in the first nine months of 2001. We expect support and service revenues to
decrease in absolute dollars in the fourth quarter because of our strategic
decision to provide more opportunities for our partners to engage with our
customers and due to the reduction in demand for our consulting services
resulting from the decrease in our license revenues in recent quarters. In
addition, we may experience a decline in maintenance revenues as customers elect
not to renew annual maintenance contracts primarily as a result of specific
economic circumstances facing each of customer. 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, the degree to which we provide opportunities
for our partners to engage with our customers and the ongoing renewals of
customer support contracts, as well as our overall sales of software licenses to
new and existing customers.

     Revenues outside of North America decreased 36%, from $10.2 million in the
third quarter of 2000 to $6.5 million in the third quarter of 2001. Revenues
outside of North America decreased 3%, from $22.3 million in the first nine
months of 2000 to $21.5 million in the same period of 2001. The decrease in
international revenues is attributed to lower international license revenues. We
believe the decrease in license revenues in the three and nine months ended
September 30, 2001 compared to the prior year was primarily due to a shift in
the buying behavior of our targeted new and existing customer base as a result
of economic conditions leading to a delay of their capital-spending initiatives.

     Cost of Revenues

          Cost of license revenues

     Cost of license revenues consists of license fees for third-party software,
amortization of acquired technology, product media, product duplication,
manuals, product fulfillment and shipping costs. Cost of license revenues
decreased 81%, from $877,000 in the third quarter of 2000 to $169,000 in the
third quarter of 2001. Cost of license revenues as a percentage of related
license revenues was 4% and 3% in the third quarter of 2000 and 2001
respectively. Cost of license revenues decreased 30%, from $2.4 million in the
first nine months of 2000 to $1.7 million in the first nine months of 2001. The
decrease in cost of license revenues as a percentage of related license revenues
resulted from a disproportionate decrease in third-party product sold during the
third quarter of 2001. Cost of license revenues as a percentage of related
license revenues was 5% for each of the nine months ending September 30 2000,
and 2001.

          Amortization of acquired technology

     Amortization of acquired technology represents the amortization of
capitalized technology associated with our acquisitions of EnCyc in 1998 and
Versametrix and Market Solutions in 1999. Amortization of acquired technology
was

                                       19

<PAGE>

                           ONYX SOFTWARE CORPORATION

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


$205,000 for each of the third quarters of 2000 and 2001. Amortization of
acquired technology was $615,000 in the first nine months of 2000 and $613,000
in the first nine months of 2001. During the third quarter of 2001, the carrying
value of the acquired technology asset associated with Versametrix was
determined to be impaired and the remaining balance totaling $222,000 was
charged to operating expense and included in amortization and impairment of
acquired intangibles. As a result of this impairment, amortization of acquired
technology should decrease in future periods.

          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 23%, from $6.4 million in the third quarter
of 2000 to $7.8 million in the third quarter of 2001. Cost of service revenues
increased 65%, from $16.5 million in the first nine months of 2000 to $27.2
million in the same period of 2001. The increase in dollar amount resulted
primarily from hiring and training consulting, support and training personnel
and an increase in the use of third-party service providers, which have a higher
cost structure than our internal resources. Our service employees increased 14%
from September 30, 2000 to September 30, 2001. Cost of service revenues as a
percentage of related service revenues was 52% in the third quarter of 2000
compared to 54% in the third quarter of 2001. Cost of service revenues as a
percentage of service revenues was 51% for the nine months ended September 30,
2000, compared to 58% for the nine months ended September 30, 2001. The increase
in cost of service revenues as a percentage of related service revenues is due
to a higher proportion of service revenues from consulting and training
services, which have a higher direct cost structure and therefore contribute
lower margins than our customer support services, coupled with a higher
percentage use of third-party service providers in our consulting engagements,
which contribute significantly lower margins than internal resources. The cost
of services as a percentage of service revenues may vary between periods
primarily for two reasons: (1) the mix of services we provide (consulting,
customer support, training), which have different direct 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 decreased 27%, from $15.4 million in the third quarter of
2000 to $11.2 million in the third quarter of 2001. The decrease in dollar
amount is attributed to restructuring activities and reductions in sales and
marketing headcounts, along with a decrease in sales commissions and bonuses.
Sales and marketing expenses increased 16%, from $40.2 million in the first nine
months of 2000 to $46.6 million for the same period of 2001. The increase in
dollar amount was primarily attributable to the expansion of our worldwide sales
and marketing organization in late 2000, which resulted in increases in
personnel-related costs associated with the employment of additional sales
representatives, sales engineers and marketing professionals in the first nine
months. The number of sales and marketing employees decreased 16% from September
30, 2000 to September 30, 2001. Sales and marketing expenses represented 47% of
our total revenues in the third quarter of 2000, compared to 54% in the third
quarter of 2001. Sales and marketing expenses represented 48% of our total
revenues in the first nine months of 2000 compared to 60% in the first nine
months of 2001. The increase in sales and marketing expenses as a percentage of
total revenues reflects the more rapid growth of sales and marketing expenses in
this period compared to the growth of revenues, where we experienced an
unexpected shortfall.

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

                                       20

<PAGE>

                           ONYX SOFTWARE CORPORATION

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


     Research and development

     Research and development expenses consist primarily of salaries, benefits
and equipment for software developers, quality assurance personnel, program
managers and technical writers and payments to outside contractors. Research and
development expenses decreased 20%, from $6.1 million in the third quarter of
2000 to $4.9 million in the third quarter of 2001. The decrease in dollar amount
is attributed to restructuring activities and reductions in the use of outside
contractors. Research and development expenses increased 22%, from $14.7 million
in the first nine months of 2000 to $18.0 million for the same period of 2001.
The increase was primarily due to an increase in the use of outside contractors
during the first half of the nine-month period. Research and development costs
represented 19% of our total revenues in the third quarter of 2000 compared to
24% in the third quarter of 2001. Research and development expenses represented
18% of our total revenues in the first nine months of 2000 compared to 23% in
the first nine months of 2001. The increase in research and development expenses
as a percentage of total revenues reflects the more rapid growth in research and
development expenses in this period compared to the growth of revenues, where we
experienced an unexpected shortfall.

     Although research and development expenses were affected by the
restructuring, those development projects that we believe to be most strategic
to our long-term growth were protected. We believe our research and development
investments are essential to our strategic priorities. As we gain visibility
into our long-term sales growth opportunity, we believe that we may need to
increase our research and development investment to expand our market position
and continue to expand our product line.

     General and administrative

     General and administrative expenses consist primarily of salaries, benefits
and related costs for our executive, finance, human resource and administrative
personnel, professional services fees and allowances for bad debt. General and
administrative expenses increased 18%, from $3.0 million in the third quarter of
2000 to $3.5 million in the third quarter of 2001. Included in general and
administrative expense in the third quarter of 2001 is approximately $600,000 in
professional service fees associated with additional review procedures performed
on revenue recognized in 1999, 2000 and the first quarter of 2001. General and
administrative expenses increased 62%, from $7.6 million in the first nine
months of 2000 to $12.3 million for the same period of 2001. Included in general
and administrative expense in the nine months ended September 30, 2001, is $2.5
million in bad debt expense compared to $1.35 million in bad debt expense
recorded in the first nine months of 2000. In addition to the increase in bad
debt expense, the increase in general and administrative expense was due to the
hiring of executive, finance, human resource and administrative personnel to
support the growth of our business, together with an increase in professional
fees. General and administrative costs represented 9% of our total revenues in
the third quarter of 2000 compared to 17% in the third quarter of 2001. General
and administrative costs represented 9% of our total revenues in the first nine
months of 2000, compared to 16% in the first nine months of 2001. The increase
in general and administrative expenses as a percentage of total revenues
primarily reflects the more rapid growth of general and administrative expenses
in this period, particularly in the areas of executive recruitment and
allowances for bad debt, compared to the growth of revenues where we experienced
an unexpected shortfall.

     In 2001, we have added key executive personnel we believe to be critical to
our near-term and long-term growth strategies. The expenses related to adding
these personnel will offset, in large part, our reduction in other general and
administrative expense areas enacted as part of our restructuring plan. As we
gain visibility into our long-term sales growth opportunity, we believe our
general and administrative expenses may increase as we expand our administrative
staff, domestically and internationally, and incur additional professional
services fees.

     Restructuring and other related charges

     Restructuring and other related charges of $40.1 million and $43.7 million
for the three and nine months ended September 30, 2001, respectively represent a
continuation of our efforts to reduce our overall cost structure. The $40.1
million

                                       21

<PAGE>

                           ONYX SOFTWARE CORPORATION

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



charge for the third quarter of 2001 consisted of $13.5 million in asset
impairments and non-cash property and equipment write-downs related to excess
facilities and facilities closures, $479,000 in severance related costs and
$25.5 million in space rationalization and other restructuring costs. Although
we are implementing our restructuring initiatives and anticipate lower payroll
related costs for the remainder of 2001, we may not realize cost savings from
these restructuring efforts in future periods.

     Amortization and impairment of acquired intangibles

     Amortization and impairment of acquired intangibles consists of intangible
amortization associated with our acquisitions of EnCyc in 1998, Versametrix and
Market Solutions in 1999, CSN Computer Consulting in 2000 and RevenueLab in
2001. Amortization and impairment of acquired intangibles totaled $1.3 million
in the third quarter of 2000 and $8.8 million in the third quarter of 2001. For
the first nine months of 2000, amortization and impairment of acquired
intangibles totaled $2.9 million and $12.1 million in the first nine months of
2001. The increase in amortization and impairment of acquired intangibles over
the prior year primarily results from an impairment write down during the third
quarter of 2001 totaling $7.2 million relating to the intangibles of CSN,
Versametrix, and RevenueLab. The impairments were determined after both
qualitative and quantitative analysis which indicated that the discounted future
cash flows from these business units did not support the remaining carrying
value of goodwill and other intangibles recorded from these acquisitions.

     Amortization of stock-based compensation

     We recorded deferred compensation of $2.2 million in 1998, representing the
difference between the exercise prices of options granted to acquire shares of
common stock during 1998 and the deemed fair value for financial reporting
purposes of our common stock on the grant dates. We recorded an additional $1.8
million in deferred compensation in connection with the options granted to new
employees in conjunction with the acquisition of RevenueLab in January 2001. We
amortized deferred compensation expense of $105,000 during the third quarter of
2000 compared to $164,000 in the third quarter of 2001. Amortization of
stock-based compensation totaled $457,000 for the first nine months of 2000 and
$700,000 for the first nine months of 2001. Deferred compensation is amortized
over the vesting periods of the options. Approximately $540,000 of deferred
compensation that was recorded in January 2001 in connection with options
granted to employees of RevenueLab was reversed during the nine months ended
September 30, 2001 after the termination of the employees' employment.

     Interest Income, Net

     Interest income, net consists of earnings on our cash and cash equivalent
and short-term investment balances offset by interest expense associated with
debt obligations. Interest income, net was $181,000 in the third quarter of 2000
compared to $98,000 in the third quarter of 2001. Interest income, net was
$664,000 in the first nine months of 2000 compared to $540,000 in the first nine
months of 2001. The decrease in interest income, net over the prior year is the
result of a lower average cash and investment base and lower interest rates
during the current period as compared to the same period of 2000.

     Equity Investment Losses and Impairment

     During the third quarter of 2000, we recorded a loss of $63,000 from an
equity-method investee representing our share of losses in this company. The
entire balance of the $500,000 initial investment in this company was reduced to
zero during 2000 as we recorded our proportionate share of the losses in the
investee. We reported impairment losses, which totaled $500,000 during the third
quarter of 2001 and $2.5 million during the first nine months of 2001 relating
to other-than-temporary declines in three of our cost-basis equity investments
based on a recent review of qualitative and quantitative factors surrounding the
financial condition of the investees. These impairment losses were recorded to
reflect each investment at its estimated fair value.

                                       22

<PAGE>

                           ONYX SOFTWARE CORPORATION

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

     Income Taxes

     We recorded an income tax provision of $108,000 in the third quarter of
2000 and a benefit of $279,000 in the third quarter of 2001. Our tax provision
for the first nine months of 2000 totaled $320,000 compared to a benefit of
$381,000 recorded in the first nine months of 2001. Our income tax provision
(benefit) recorded in all periods is the net result of income taxes in
connection with our foreign operations offset by the deferred tax benefit
associated with our international acquisitions of Market Solutions and CSN
Computer Consulting. We made no provision or benefit for federal or state income
taxes in any of these periods 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

     As of September 30, 2001, we had cash, cash equivalents and short-term
investments totaling $17.8 million. As of September 30, 2001, we had cash and
cash equivalents of $15.4 million, an increase of $3.9 million from cash and
cash equivalents held as of December 31, 2000. The increase in cash and cash
equivalents from year-end is primarily the result of the public offering we
completed in February 2001 offset by cash used to fund operations and capital
expenditures during the first nine months of 2001. We have invested our cash in
excess of current operating requirements in a portfolio of investment-grade
securities. Short-term investments totaled $2.4 million at September 30, 2001
compared to $5.5 million at December 31, 2000. The investments have variable and
fixed interest rates and maturities of less than one year. Our working capital,
excluding deferred revenues was $20.1 million at September 30, 2001 compared to
$44.4 million at December 31, 2000.

     We have a $15.0 million working capital revolving line of credit, which is
secured by our accounts receivable, property and equipment and intellectual
property. This facility allows us to borrow up to the lesser of 80% of our
eligible accounts receivable or $15.0 million and bears interest at the bank's
prime rate, which was 6.0% as of September 30, 2001, plus 1%. The facility
expires in August 2002. As of September 30, 2001, we had no outstanding
borrowings under the working capital facility; however, there was approximately
$10.9 million in standby letters of credit outstanding in connection with leases
of equipment and our facilities, of which $7.4 million represents a security
deposit for tenant improvements and rent associated with additional facilities
in Bellevue, Washington. As of the date of this filing, the total amount of
standby letters of credit outstanding was reduced to $9.9 million.

     The loan and security agreement with Silicon Valley Bank required us to
maintain certain financial covenants. Although we were not in compliance with
these covenants at September 30, 2001, Silicon Valley Bank has granted a waiver.

     Although we have a $30 million equity financing arrangement with Ramius
Securities and Ramius Capital, the underwriting terms of this facility were not
approved by NASD, and we are currently unable to access the facility. Unless we
can agree with Ramius on amendments to our arrangement that satisfy the NASD's
concerns, we will not obtain NASD approval and will not be able to access the
facility. As a result, no securities will be offered under the arrangement
unless and until we renegotiate the arrangement and obtain NASD approval, and we
may be unable to raise any funds under this facility.

     Our operating activities resulted in net cash inflows of $5.2 million in
the first nine months of 2000 compared to net cash outflows of $19.4 million in
the first nine months of 2001. Our operating cash inflows in the first nine
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 non-cash amortization charges, offset in part by
increases in other assets and accounts receivable. Our operating cash outflows
in the first nine months of 2001 were primarily the result of our operating loss
adjusted for non-cash amortization and impairment charges, decreases in accounts
payable and accrued liabilities, decreases in deferred revenues and increases in
prepaid expenses and other assets, offset in part by cash provided by
collections on accounts receivable.

                                       23

<PAGE>

                           ONYX SOFTWARE CORPORATION

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



     Investing activities provided cash of $1.2 million in the first nine 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 $9.5 million in the first nine
months of 2001, primarily for the funding of leasehold improvements and the
purchase of capital equipment associated with our new Bellevue, Washington
facility.

     Financing activities provided cash of $1.3 million in the first nine 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 $33.1
million in the first nine months of 2001 primarily due to the proceeds from our
sale of common stock in February, proceeds from the exercise of stock options
and stock issued through our employee stock purchase plan, offset in part by
payments on our long-term obligations.

     Our near-term restructuring costs and excess facilities along with our
ongoing operations may consume a material amount of our cash resources. It is
also possible that we will use a portion of our cash resources to acquire
complementary technologies or businesses; however, we currently have no
commitments or agreements with respect to any transactions of this nature.

     We believe that our existing cash and cash equivalents, investments and
available bank borrowings will be sufficient to meet our capital requirements
for at least the next twelve months. However, we are likely to 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 contain covenants that restrict our freedom to operate our business
or may have rights, preferences or privileges senior to our common stock and may
dilute our current shareholders' ownership interest in Onyx.

                                       24

<PAGE>

                           ONYX SOFTWARE CORPORATION

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


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

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

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

     .    market acceptance of our CRM software solution;

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

     .    budget and spending decisions by our customers;

     .    customers' decisions to defer orders or implementations, particularly
          large orders or implementations, from one quarter to the next, or to
          proceed with smaller than forecasted orders or implementations;

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

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

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

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

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

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

     .    our ability to successfully expand our operations, and the amount and
          timing of expenditures related to this expansion; and

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

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

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

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

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

     .    delay of new product releases can result in a customer's decision to
          delay execution of a contract or, for contracts that include the new
          release as an element of the contract, will result in deferral of
          revenue recognition until such release.

                                       25

<PAGE>

                           ONYX SOFTWARE CORPORATION

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

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

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

     The revenue growth and potential for profitability of our business depends
on the overall demand for CRM software and services. Because our sales are
primarily to corporate customers, our business also depends on general economic
and business conditions. A softening of demand for computer software caused by
the weakening of the economy, both domestic and internationally, has affected
our sales and may continue to result in decreased revenues and growth rates. As
a result of the economic downturn, we have also experienced and may continue to
experience difficulties in collecting outstanding receivables from our
customers. In addition, recent terrorist attacks upon the United States have
added or exacerbated economic, political and other uncertainties, which could
adversely affect our sales and thus our revenue growth.

     Our management team uses our proprietary software to identify, track and
forecast future revenues, backlog and trends in our business. Our sales force
monitors the status of all proposals, such as the date when they estimate that a
transaction will close and the potential dollar amount of such sale. We
aggregate these estimates regularly in order to generate a sales pipeline and
then evaluate the pipeline at various times to look for trends in our business.
While this pipeline analysis provides visibility to our potential customers and
the associated revenues for budgeting and planning purposes, these pipeline
estimates may not consistently correlate to revenues in a particular quarter or
over a longer period of time. The slowdown in the domestic and international
economies, as well as the effects of terrorist activity and armed conflict, may
continue to cause customer purchasing decisions to be delayed, reduced in amount
or cancelled, which could reduce the rate of conversion of the pipeline into
contracts during a particular period of time. A variation in the pipeline or in
the conversion of the pipeline into contracts could cause us to plan or budget
improperly and thereby could adversely affect our business or results of
operations. In addition, because a substantial portion of our sales are
completed at the end of the quarter, and often in the last weeks or days of a
quarter, we may not be able to adjust our cost structure in response to a
variation in the conversion of the pipeline into contracts in a timely manner,
which could adversely affect our business and results of operations.

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

     If we do not return to profitability in future quarters, our stock price
could decrease. We incurred net losses in each quarter from Onyx's inception
through the third quarter of 1994, from the first quarter of 1997 through the
second quarter of 1999, in all four quarters of 2000 and in the first three
quarters of 2001. As of September 30, 2001, we had an accumulated deficit of
$98.2 million. Our accumulated deficit and financial condition have caused some
of our potential customers to question our viability, which we believe has in
turn hampered our ability to sell some of our products. In the near-term, we
believe our costs and operating expenses, excluding restructuring-related
charges, will continue to decrease to a level that is closer to our expected
revenues while allowing us to continue to invest in accordance with our
strategic priorities. We may not, however, realize cost savings from these
restructuring initiatives in future periods. In particular, if we are unable to
successfully sublease or terminate our excess facilities, particularly in
Bellevue, Washington, we will incur continued substantial facilities costs for
which we will receive no economic benefit. In addition, we may be unable to
achieve cost savings without adversely affecting our business and results of
operations. We may continue to experience losses and negative cash flows in the
near term, even if sales of our products and services continue to grow.

     As we gain visibility into our long-term growth opportunity, we believe
that we may need to significantly increase our sales and marketing, product
development and professional services efforts to expand our market position and
further increase acceptance of our products. We may not be able to increase our
revenues sufficiently to keep pace with these growing expenditures, if at all,
and, as a result, may be unable to achieve profitability in the future.

                                       26

<PAGE>

                           ONYX SOFTWARE CORPORATION

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


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

     Support and service revenues represented 37% of our total revenues in 1999
and 38% of our total revenues in 2000. Due largely to the sequential quarter
decrease in license revenues, support and service revenues represented 60% of
our total revenues in the first nine months of 2001. We anticipate that service
revenues will continue to represent a significant percentage of total revenues.
Because service revenues have lower gross margins than license revenues, a
continued increase in the percentage of total revenues represented by service
revenues or an unexpected decrease in license revenues, as we experienced in the
first nine months of 2001, could have a detrimental impact on our overall gross
margins and thus on our operating results. We subcontract some of our
consulting, customer support and training services to third-party service
providers. Third-party contract revenues generally carry even lower gross
margins than our service business overall. As a result, our service revenues and
related margins may vary from period to period, depending on the mix of these
third-party contract revenues. Service revenues depend in part on ongoing
renewals of support contracts by our customers, some of which may not renew
their support contracts. In addition, service revenues as a percentage of total
revenues could decline if customers select third-party service providers to
install and service our products more frequently than they have in the past. If
service revenues are lower than anticipated, our operating results could fall
below the expectations of securities analysts or investors, which could result
in a decrease in our stock price.

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

     Our stock price may decrease due to seasonal fluctuations in our revenues.
We continue to experience significant seasonality with respect to software
license revenues. In recent years, we have recognized more license revenues in
our fourth quarter than in each of the first three quarters of a fiscal year and
have experienced lower license revenues in our first quarter than in the
preceding fourth quarter. We believe that these fluctuations are caused in part
by customer buying patterns and the efforts of our direct sales force to meet or
exceed fiscal year-end quotas. We expect that these seasonal trends are likely
to continue in the future.

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

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

     .    no history of sustained profitability;

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

     .    reliance on one product family;

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

     .    the need to implement our sales, marketing and after-sales service
          initiatives, both domestically and internationally;

     .    the need to execute our product development activities;

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

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

                                       27

<PAGE>

                           ONYX SOFTWARE CORPORATION

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


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

Our workforce reduction and financial performance may place additional strain on
our resources and may adversely affect the morale and performance of our
personnel and our ability to hire new personnel.

     In connection with our effort to streamline our operations, reduce costs
and bring our staffing and structure in line with our revenue base, we recently
restructured our organization with reductions in our workforce by approximately
166 employees during the second and third quarters of 2001 and an additional
workforce reduction plan enacted in the beginning of the fourth quarter of 2001
totaling approximately 153 employees. There have been and may continue to be
substantial costs associated with the workforce reduction related to severance
and other employee-related costs, as well as material charges for reduction of
excess facilities, and our restructuring plan may yield unanticipated
consequences, such as attrition beyond our planned reduction in workforce. This
workforce reduction has placed significant strain on our administrative,
operational and financial resources and resulted in increasing responsibilities
for each of our management personnel. As a result, our ability to respond to
unexpected challenges may be impaired and we may be unable to take advantage of
new opportunities. In addition, many of the employees who were terminated
possessed specific knowledge or expertise, and that knowledge or expertise may
prove to have been important to our operations. In that case, their absence may
create significant difficulties. Further, the reduction in workforce may reduce
employee morale and may create concern among existing employees about job
security, which may lead to increased turnover. This headcount reduction may
subject us to the risk of litigation.

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

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

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

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

     Our future revenues may be insufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable to generate
sufficient cash flow from operations or to obtain funds through additional
financing, we may have to reduce some or all of our development and sales and
marketing efforts and limit the expansion of our business. Although we have a
potential $30 million equity financing arrangement with Ramius Securities and
Ramius Capital, the underwriting terms of this facility were not approved by
NASD, and we are currently unable to access the facility. Unless we can agree
with Ramius on amendments to our arrangement that satisfy the NASD's concerns,
we will not obtain NASD approval and will not be able to access the facility. As
a result, no securities will be offered under the arrangement unless and until
we renegotiate the arrangement and obtain NASD approval, and we may be unable to
raise any funds under this facility.

                                       28

<PAGE>


                           ONYX SOFTWARE CORPORATION

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

     Our loan and security agreement with Silicon Valley Bank requires us to
maintain certain financial covenants. We were not in compliance with these
covenants at September 30, 2001, however, Silicon Valley Bank has granted a
waiver. If we are unable to maintain compliance with the financial covenants in
our loan and security agreement in the future, and if the bank decides to
restrict our cash deposits, our liquidity will be further limited and our
business, financial condition and results of operations could be harmed.

     We completed a secondary public offering of our common stock on February
12, 2001, which resulted in net proceeds to us of approximately $31.3 million.
We believe that our existing cash and cash equivalents, investments and
available bank borrowings will be sufficient to meet our capital requirements
for at least the next twelve months. However, we are likely to 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 funding on favorable terms, if at all. Any financing we obtain may
contain covenants that restrict our freedom to operate our business or may have
rights, preferences or privileges senior to our common stock and may dilute our
current shareholders' ownership interest in Onyx.

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

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

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

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

     In June 2001, we released version 3.0 of Onyx Employee Portal, the
Web-based version of our flagship product. This release represented a major
software architecture change to this product. In the event that prospects or
customers do not embrace this new product version, or that they are unable to
successfully deploy this product, our business will fail.

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

     We originally designed our products to operate exclusively on the Windows
NT and Microsoft BackOffice platforms. As a result, our primary market has
historically been to customers which have developed their enterprise computing
systems around these platforms, which limits our potential sales. In December
2000, we announced the platform release of a new product version designed to
operate on the Unix/Oracle platform. Due to the complexity of the development of
this new product version, we have delayed the expected date of general
availability until mid 2002. We




                                       29

<PAGE>

                           ONYX SOFTWARE CORPORATION

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

can make no assurances, however, as to whether such general release will occur
by this expected date, if at all. If and when this new product version becomes
generally available, we cannot predict the degree to which it will achieve
market acceptance. If our new product version does not achieve market
acceptance, our revenue growth will be limited. Moreover, enabling our products
to run on multiple platforms could lengthen the development cycle, thus delaying
the release date of future product versions or new products, which could further
limit our revenue growth.

If we are not able to compete effectively in the Internet-based products and
services market, demand for our products may be limited.

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

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

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

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

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

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

     To date, we have sold our solution primarily through our direct sales
force. As a result, our future revenue growth will depend in large part on
recruiting, training and retaining direct sales personnel and expanding our
indirect distribution channels, such as VARs, ASPs, original equipment
manufacturer, or OEM, partners and system integrators and consultants. We have
experienced and continue to experience difficulty in recruiting qualified direct
sales personnel and in establishing third-party relationships with VARs, ASPs,
OEM partners and systems integrators and consultants. Moreover, during the last
six months, we have reduced and restructured our sales organization in an
attempt to reduce expenses and increase efficiency relative to the market
demand. These restructuring efforts and future efforts to expand our sales force
may not prove successful and further, our ability to retain top sales personnel
may be impacted, which could reduce our sales or limit our sales growth.

                                       30

<PAGE>


                           ONYX SOFTWARE CORPORATION

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


If our customers cannot timely and successfully implement our products, demand
for our products and services will be limited.

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

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

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

     In the last year, we have replaced several members of our senior management
team. To integrate into our company, these new senior personnel must spend a
significant amount of time learning our business model and management system, in
addition to performing their regular duties. Accordingly, until these
individuals have become familiar with our business model and systems, their
integration may result in some disruption to our ongoing operations.

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

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

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

     To be successful, we must continue to enhance our current product line and
develop new products that successfully respond to changing customer needs,
technological developments and competitive product offerings. We may not be able
to successfully develop or license the applications necessary to respond to
these changes, or to integrate

                                       31

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


new applications with our existing products. We have delayed enhancements or new
product release dates several times in the past, including most recently, the
Oracle/Unix version of our product, and may not be able to introduce
enhancements or new products successfully or in a timely manner in the future.
If we delay release of our products and product enhancements, or if they fail to
achieve market acceptance when released, it could harm our reputation and our
ability to attract and retain customers, and our revenues may decline. In
addition, customers may defer or forego purchases of our products if we, our
competitors or major hardware, systems or software vendors introduce or announce
new products or product enhancements.

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

     To be successful, we must continue to expand our international operations
and enter new international markets. This expansion may be delayed as a result
of our recent operating expense reduction measures and general economic
conditions. If we do expand internationally, it will require significant
management attention and financial resources to successfully translate and
localize our software products to various languages and to develop direct and
indirect international sales and support channels. Even if we successfully
translate our software and develop new channels, we may not be able to maintain
or increase international market demand for the Onyx product family. We, or our
VARs or ASPs, may not be able to sustain or increase international revenues from
licenses or from consulting and customer support. In addition, our international
sales are subject to the risks inherent in international business activities,
including

     .    costs of customizing products for foreign countries;

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

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

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

     .    regional economic, cultural and political conditions, including the
          direct and indirect effects of terrorist activity and armed conflict
          on countries in which we do business.

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

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

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

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

                                       32

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


     .    our existing and potential key partners endorse a product or
          technology other than our solution;

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

     .    our existing and potential key partners do not have or do not devote
          the resources necessary to implement our solution.

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

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

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

     An enterprise's decision to purchase a CRM system is discretionary,
involves a significant commitment of its resources and is influenced by its
budget cycles. To successfully sell our solution, we generally must educate our
potential customers regarding the use and benefit of our solution, which can
require significant time and resources. Consequently, the period between initial
contact and the purchase of our solution is often long and subject to delays
associated with the lengthy budgeting, approval and competitive evaluation
processes that typically accompany significant capital expenditures. Our sales
cycles are lengthy and variable, typically ranging between two and twelve months
from our initial contact with a potential customer to the signing of a license
agreement, although the amount of time varies substantially from customer to
customer and occasionally sales require substantially more time. When economic
conditions weaken, sales cycles for sales of software products tend to lengthen,
and as a result, we have experienced longer sales cycles in the first nine
months of 2001. 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.

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

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

                                       33

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


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

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

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

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

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

     .    pay damages;

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

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

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

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

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

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

     In January 2001, we acquired RevenueLab, a provider of proprietary
go-to-market strategy and revenue acceleration programs. We are currently in the
process of integrating RevenueLab's business into our business. This

                                       34

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


integration is subject to risks commonly encountered in making acquisitions,
including

     .    loss of key personnel;

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

     .    potential disruption of our ongoing business; and

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

     We may not successfully overcome these or any other problems encountered in
connection with integrating RevenueLab. As part of our business strategy, we
expect to consider acquiring other companies. We may not be able to successfully
integrate any technologies, products, personnel or operations of companies that
we have acquired or that we may acquire in the future.

We have been named as a defendant in recently initiated securities class action
litigation that could result in substantial costs and divert management's
attention and resources.

     We are aware that Onyx and a few of our officers and directors, have been
named as defendants in a series of related lawsuits filed in the United States
District Court for the Western District of Washington on behalf of purchasers of
publicly traded Onyx common stock during various time periods ranging from
January 10, 2001 to August 10, 2001. The complaints in these lawsuits allege
that various disclosures made by Onyx regarding our financial prospects and our
results for the quarter and year ended December 31, 2000 violated the Securities
Exchange Act of 1934. Plaintiffs seek certification of a class action for
purchasers of Onyx common stock during the named class periods. None of the
complaints specifies the amount of damages to be claimed. Onyx intends to
vigorously defend itself and its executives and directors in these lawsuits.

     Onyx and two of its officers have also been named as defendants in a
lawsuit filed in the United States District Court for the Southern District of
New York on behalf of purchasers through December 6, 2000 of Onyx common stock
issued pursuant to the February 12, 1999 registration statement and prospectus
for our initial public offering. The complaint alleges that Onyx and the
individual defendants violated the Securities Act of 1933 by failing to disclose
excessive commissions allegedly obtained by our underwriters pursuant to a
secret arrangement whereby the underwriters allocated IPO shares to certain
investors in exchange for the excessive commissions. The complaint also asserts
claims against the underwriters under the 1933 Act and the Securities Exchange
Act of 1934 in connection with the allegedly undisclosed commissions. Onyx
intends to vigorously defend itself and its officers against this lawsuit.

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

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 October 31, 2001, our officers, directors and affiliated entities
together beneficially owned approximately 13.8% of the outstanding shares of our
common stock. As a result, these shareholders may, as a practical matter, be
able to exert significant influence over all matters requiring shareholder
approval, including the election of directors and approval of significant
corporate transactions such as acquisitions, and to block unsolicited tender
offers. This concentration of ownership may delay, deter or prevent a third
party from acquiring control over us at a premium over the then-current market
price of our common stock, which could result in a decrease in our stock price.

Our stock price may be volatile.

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

     .    future announcements concerning us or our competitors;

     .    actual or anticipated quarterly variations in operating results;

                                       35

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


     .    changes in analysts' earnings projections or recommendations;

     .    announcements of technological innovations;

     .    the introduction of new products;

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

     .    proprietary rights litigation or other litigation; or

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

     In addition, stock prices for many technology companies fluctuate widely
for reasons that may be unrelated to operating results of these companies. These
fluctuations, as well as general economic, market and political conditions, such
as national or international currency and stock market volatility, recessions or
military conflicts, may materially and adversely affect the market price of our
common stock, regardless of our operating performance. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against these companies.
Litigation brought against us could result in substantial costs and a diversion
of management's attention and resources, which could have a material adverse
effect on our business, financial condition and operating results. Our common
stock reached a high of $42.63 and traded as low as $1.75 on October 8, 2001. In
addition, we completed a secondary public offering of our common stock in
February 2001 at a price of $13.50 per share. The last reported sales price of
our common stock on October 31, 2001 was $3.78.

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

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

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

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

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 mainly to
the short-term nature of the major portion of our investment portfolio. All of
the potential changes noted above are based on sensitivity analysis performed on
our balances as of September 30, 2001.

                                       36

<PAGE>

                            ONYX SOFTWARE CORPORATION

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


Foreign Currency Risk

     The majority of our sales and 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
2001 and expect to continue to do so in the future, we do not anticipate that
foreign exchange gains or losses will be material to Onyx. Although we have not
engaged in foreign currency hedging to date, we may do so in the future.

                                       37

<PAGE>

                           ONYX SOFTWARE CORPORATION

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


                            PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

     The Company and a few of the Company's officers and directors, have been
named as defendants in a series of related lawsuits filed in the United States
District Court for the Western District of Washington on behalf of purchasers of
publicly traded Onyx common stock during various time periods ranging from
January 10, 2001 to August 10, 2001. The complaints in these lawsuits allege
that various disclosures made by the Company regarding its financial prospects
and its results for the quarter and year ended December 31, 2000 violated the
Securities Exchange Act of 1934. Plaintiffs seek certification of a class action
for purchasers of Onyx common stock during the named class periods. None of the
complaints specifies the amount of damages to be claimed. Onyx intends to
vigorously defend itself and its executives and directors in these lawsuits.

     The Company and two of its officers have also been named as defendants in a
lawsuit filed in the United States District Court for the Southern District of
New York on behalf of purchasers through December 6, 2000 of Onyx common stock
issued pursuant to the February 12, 1999 registration statement and prospectus
for the Company's initial public offering. The complaint alleges that the
Company and the individual defendants violated the Securities Act of 1933 by
failing to disclose excessive commissions allegedly obtained by the Company's
underwriters pursuant to a secret arrangement whereby the underwriters allocated
IPO shares to certain investors in exchange for the excessive commissions. The
complaint also asserts claims against the underwriters under the 1933 Act and
the Securities Exchange Act of 1934 in connection with the allegedly undisclosed
commissions. The Company intends to vigorously defend itself and its officers
against this lawsuit.

     In October 2001, Thomas Weisel Partners LLC filed a lawsuit against the
registrant in the United States District Court for the Northern District of
California, San Francisco division. This lawsuit arises out of the registrant's
engagement of Thomas Weisel for services in connection with the signing of the
registrant's equity financing arrangement with Ramius Securities and Ramius
Capital. Weisel alleges in its pleadings that a payment of approximately $1.5
million became due under the engagement letter upon the signing of the
arrangement. The registrant has not made the payment because the underwriting
terms of its equity facility with Ramius were not approved by the NASD. Among
other claims, the lawsuit alleges breach of contract, and seeks unspecified
money damages. The Company intends to vigorously defend itself against this
lawsuit and believes it has several meritorious defenses.

     In addition, the registrant is involved in additional litigation in the
ordinary course of its business, none of which we believe will have a material
adverse effect on the Company.


Item 6. Exhibits and Reports on Form 8-K

     (a) Exhibits

Number      Description
------      -----------
  3.1       Amended and Restated Articles of Incorporation of the registrant
  3.2       Amended and Restated Bylaws of the registrant (exhibit 3.2)(a)
  4.1       Rights Agreement, dated as of October 25, 1999, between the
            registrant and ChaseMellon  Shareholder  Services, L.L.C.
            (exhibit 2.1)(b)
 10.7       Loan and Security Agreement dated September 30, 2001 among the
            registrant and Silicon Valley Bank

(a)  Incorporated by reference to the designated exhibit to the registrant's
     Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.

(b)  Incorporated by reference to the designated exhibit to the registrant's
     registration statement on Form 8-A (No. 0-25361) filed October 28, 1999.

     (b)  Reports on Form 8-K
          None.

                                       38

<PAGE>


                           ONYX SOFTWARE CORPORATION

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


                                   SIGNATURES

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

                                  ONYX SOFTWARE CORPORATION
                                  (Registrant)


Date: November 9, 2001         By:            /s/ Brent R. Frei
                                   --------------------------------------------
                                                  Brent R. Frei
                                           Chief Executive Officer and
                                              Chairman of the Board


Date: November 9, 2001         By:            /s/ Brian C. Henry
                                   --------------------------------------------
                                                  Brian C. Henry
                                           Executive Vice President and
                                              Chief Financial Officer
                                           (Principal financial officer)


Date: November 9, 2001         By:            /s/ Amy E. Kelleran
                                   --------------------------------------------
                                                  Amy E. Kelleran
                                              Vice President Finance,
                                        Corporate Controller and Assistant
                                     Secretary ( Principal accounting officer)

                                       39