SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-K

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

For the fiscal year ended December 31, 2003

OR

[   ]  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 000-31003



Corio, Inc.



|Delaware                                                       | 77-0492528                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

959 Skyway Road, Suite 100
San Carlos, California    94070

650-232-3000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
                                      Common Stock

Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past
90 days.    Yes



Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.



Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).
Yes



The aggregate market value of voting stock held by
 non-affiliates of the Registrant, based upon the closing sale price of the Common
Stock on June 30, 2003, as reported by the Nasdaq National Market, was
approximately $56,785,000. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock,
based on Schedule 13G filings, have been excluded from the computation in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not a conclusive determination for other purposes.



As of February 27, 2004, there were 62,653,989 shares of
the Registrant's Common Stock outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Certain sections of the Registrant's Proxy Statement for
its Annual Meeting of Stockholders (the "Proxy Statement") to be held
on May 12, 2004, are incorporated by reference in Parts III of this Form 10-K.







Corio, Inc.

                                    INDEX TO

                           ANNUAL REPORT ON FORM 10-K

                        FOR YEAR ENDED DECEMBER 31, 2003



|Part I.    |                                                                                       | Page
|---------- | ------------------------------------------------------------------------------------- | ----
|Item 1.    | Business                                                                              | 3   
|Item 2.    | Properties                                                                            | 7   
|Item 3.    | Legal Proceedings                                                                     | 7   
|Item 4.    | Submission of Matters to a Vote of Security Holders                                   | 8   
|Part II.   |                                                                                       |     
|Item 5.    | Market for Registrant's Common Stock and Related Security Holder Matters              | 9   
|Item 6.    | Selected Financial Data                                                               | 10  
|Item 7.    | Management's Discussion and Analysis of Financial Condition and Results of Operations | 11  
|Item 7a.   | Quantitative and Qualitative Disclosures About Market Risk                            | 34  
|Item 8.    | Financial Statements and Supplementary Data                                           | 34  
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | 34  
|Item 9A.   | Controls and Procedures                                                               | 35  
|Part III.  |                                                                                       |     
|Item 10.   | Directors and Executive Officers of the Registrant                                    | 36  
|Item 11.   | Executive Compensation                                                                | 37  
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management                        | 37  
|Item 13.   | Certain Relationships and Related Transactions                                        | 37  
|Item 14.   | Principal Accounting Fees and Services                                                | 37  
|Part IV.   |                                                                                       |     
|Item 15.   | Exhibits, Financial Statement Schedules and Reports on Form 8-K                       | 38  
|Signatures |                                                                                       | 68  

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PART I



Forward-Looking Statements



This Report on Form 10-K includes statements that reflect
our belief concerning future events and financial performance. Statements which
are not purely historical in nature are called "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. We sometimes identify
forward looking statements with such words as "may", "will",
"should", "expect", "anticipate",
"estimate", "seek", "project", "plan",
"intend", "believe" or similar words concerning future
events.



You should not place undue reliance on these forward-
looking statements. They are subject to certain risks and uncertainties that may
cause actual results to differ materially from past results or our predictions.
Factors that could contribute to differences include, but are not limited to,
those risks and uncertainties identified under "Risk Factors" on pages
22 to 34. You should also carefully review the risk factors set forth in other
documents we file from time to time with the Securities and Exchange Commission
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.



All statements included in this document are based on
information available to us as of the date of this Report on Form

10-K, and we assume no obligation to update any such statements, or to update
the reasons why actual results could differ from those projected in forward-
looking statements.



Item
1.    Business

Overview



We were established
in September 1998 by acquiring all of the capital stock of Data Systems
Connectors, Inc., or DSCI. At that same time, we incorporated in Delaware. We
are an enterprise application service provider, or ASP. Our services include the
implementation and management of business software for companies. We perform our
services across a secure network from data centers, allowing our customers to
outsource some or almost all aspects of their application management services
needs. The solutions we provide our customers are services related to enterprise
software applications provided by companies such as Oracle, PeopleSoft, SAP,
Ariba and Siebel Systems, allowing our customers access to an application suite
which provides (i) enterprise resource planning functionality to assist in areas
such as human resources and finance, (ii) customer relationship management
functionality to assist in interactions with customers, and (iii) e-business
capabilities. We have arrangements with companies such as (i)Structure, XO
Communications, Qwest and various telecommunications providers to provide our
customers leading data center and network infrastructure technologies. Our
services are designed to accommodate the requirements of medium to large,
public, private, non-profit and public sector companies. By allowing our
customers to outsource certain information technology services needs, we enable
our customers to avoid many of the significant and unpredictable ongoing
application management challenges, and to reduce costs and extend the value of
their technology. By providing software application implementation, integration,
management and various upgrade services and related hardware and network
infrastructure, our services help reduce the information technology burdens of
our customers, enabling them to focus on their core businesses and react quickly
to dynamic market conditions.



We operate through two lines of business:



Application Management Services-Our application
management services consist of ongoing services for business software
application systems, which often includes providing the computers, data center
facilities and networks to support the software applications and working with
our customers to address problems that arise with these applications or the
computers or networks that run them.



Professional Services-Our professional services
engagements consist of discrete projects on behalf of our customers such as
implementing business software applications in a manner that meets the
customer's requirements.



Industry Background



Traditionally, organizations have installed, operated and
maintained enterprise software applications internally. The ongoing costs of
operating these applications, including patching, upgrading, training and
management expenses, are often significant, unpredictable and inconsistent and
may increase over time. The emergence of the Internet, the increased
communications bandwidth and the re-writing of enterprise software to be
delivered over internet protocol networks have  transformed the way enterprise
software applications are being provided to customers. Instead of in-house
installations, these applications are beginning to be hosted by third parties,
in which the hosting company maintains the applications on an off-site server
typically in a data center and delivers the applications to customers over the
Internet as a service. In addition, competitive pressures have led to a renewed
focus on core competencies, with many businesses concluding that building and
maintaining IT capabilities across their entire set of applications are not core
competencies. In response to these factors, companies are adopting hosted and
managed applications rather than managing them in-house.



The Corio Solution



We manage business software applications over a secure
network for a monthly fee. We offer our customers business software solutions
which we believe are among the best solutions available to meet the needs of our
enterprise customers. Our services provide customers the following business
benefits:



Lower and More Predictable
Costs.    Our customers gain access to services related
to applications offered by some of the leading software vendors hosted over a
secure network often without many of the significant and unpredictable follow-on
software support costs associated with internally-operated IT systems. We will
implement business software applications, for a fixed fee or on a time and
materials basis, and will host applications for a monthly fee.



Leading Applications.    We host
sophisticated enterprise applications for our customers. We offer hosted and
managed solutions for software from vendors who are recognized as being leaders
in their respective fields, such as Oracle, PeopleSoft, SAP, Ariba and Siebel
Systems.



Accelerated Time to Benefit.    We
can typically complete a standard implementation of our applications in 8 to 20
weeks. This allows our customers to avoid the longer implementation times
frequently experienced with installing and integrating customized, sophisticated
applications on their own and training and sometimes hiring IT staff to service
these applications. Our services enable customers to achieve their desired
benefits quickly by reducing the time required to establish or augment their IT
capabilities.



Focus on Core Business.    We
reduce the IT burdens of companies by providing application implementation,
management and various upgrade services and related hardware and network
infrastructure. By providing our customers with software, hardware and network
management capabilities, we enable companies to focus on their core
business.



Outstanding Service and
Support.    We are dedicated to providing our customers
quality customer service and support. Our IT professionals work with our
customers to manage our services and provide needed support. We assign to each
customer a support team composed of software application specialists, network
engineers, hardware engineers and customer support.



Services



Our service offerings consist of
application management services and professional services.



Application Management Services



Our application management services
consist of hosting and managing services for a suite of business software applications.The
application suite that we host and manage is designed to provide our customers
with enterprise resource planning tools and customer relationship management
solutions. We are responsible to our
customers for these services, regardless of whether we have developed, bought or
licensed the underlying technology. We typically guarantee service levels for
customers of at least 99% availability, excluding scheduled downtime. To
maintain this level of service, we have configured our hosted and managed
applications for capacity and performance and incorporated into our system a
sophisticated backup recovery process. We have also engineered automated upgrade
and testing tools that increase our efficiency, reduce our costs and improve our
ability to scale our operations. We provide these services through our
application management center, which manages and supports the software
applications, security infrastructure, networks, hardware and data centers, and
operates 24 hours a day, seven days a week.

As of December 31, 2003, our application management
services operations team consisted of 162 employees. We price our
application management services based on various factors, such as the complexity
of the system architecture, number and type of applications being licensed, the
number of users covered by a contract and the frequency of access to our
applications. The monthly fee for our application management services is
typically fixed for the life of the contract, subject to increases in the event
a customer requires additional applications, increases its number of users or
increases frequency of use. Most of our customer agreements have three year
terms.



Our application management services
include the following:



Customer
Support



Application
Management



Security
Management



Infrastructure
Management



Data Center and Network
Management



Professional Services



Our professional services, which
include initial implementation and ongoing project-related services, are
provided both by our professional services personnel and by third-party systems
integrators. We have established a professional services team to implement hosted applications quickly and efficiently. As of December
31, 2003, our professional services team consisted of 35 employees located
throughout the United States. We organize our professional services team by
geographic location and application expertise.



We perform professional services
pursuant to eitherfixed fee contracts or pursuant to arrangements where we will bill our
customers based on the time and costs incurred in connection with consulting, training and implementing applications.



"FastLane" is one of our implementation methodologies. The FastLane approach involves a team
of our IT professionals coordinating implementation of our services using our industry-specific implementation and configuration
templates.  Fastlane involves specific processes and steps
designed to make the implementation more efficient.



Technology



Our technology enables
integration, automation and hosted deployment of software applications and
facilitates the hosting of these applications.



IT Command and
Control



Automation



Hosted
Deployment



Customers



As of December 31, 2003, we had
approximately 106 application management services customers, consisting of small
to medium-sized technology companies and Fortune 1000 companies. As of December
31, 2003, we had approximately 26 active professional services contracts.



For the year ended December 31,
2003, one customer, Expanets, Inc. accounted for more than 12% of our total
revenues. Expanets, Inc., was recently acquired by Avaya Inc.  Although we have
a long-term contract with Expanets that was assumed by Avaya, we are unsure
whether Avaya intends to retain our services and Avaya is migrating Expanets
system to Avaya's system.  This presents significant risks regarding how long
Avaya/Expanets will remain a customer. For the year ended December 31, 2002, one
customer, Quadrem, accounted for 11% of total revenue and this customer renewed
its contract for a significantly lower amount in 2003. For the year ended
December 31, 2001 no one customer accounted for more than 10% of total
revenue.



Sales and Marketing



We sell and market our services
primarily through a direct sales force. Some of our software vendors and systems
integrators also pass sales leads on to us. Sales and marketing expenses,
excluding non-cash stock based compensation of $197,000 in 2003, $840,000 in
2002, and $309,000 in 2001, were $8.7 million for the year ended December 31,
2003, $10.5 million for the year ended December 31, 2002, and $21.8 million for
the year ended December 31, 2001. As of December 31, 2003, we had 45 sales and
marketing employees. Our sales organization is segmented by geographical
location.



We focus our marketing efforts on
achieving brand recognition, market awareness and lead generation. We market our
services through telesales, directed advertising and targeted events, including
tradeshows, conferences and seminars. Our current customers provide references
and we feature customer recommendations in our advertising and other promotional
activities.



Research and Development



Research and development
capabilities are essential to our strategy to enhance and expand the
capabilities of our services. We have invested significant resources in creating
a structured process for undertaking all our research and development and have
recruited engineers and software developers with relevant industry experience.
Research and development expenses, excluding non-cash stock based compensation
charges (credits) of $2,000 in 2003, $148,000 in 2002, and ($253,000) in 2001,
were $4.6 million for the year ended December 31, 2003, $6.3 million for
the year ended December 31, 2002 and $9.1 million for the year ended December
31, 2001. As of December 31, 2003, we had 26 employees on our research and
development team.



Competition



We compete primarily on the basis
of total cost of ownership, performance, service quality and security. Our
current and potential competitors primarily include:



| | o |  | application service providers and business process outsourcers,
such as Bluestar Solutions, CSC, Electronic Data Systems, Hewlett-Packard, IBM
Global Services, Surebridge and USinternetworking;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | o |  | systems integrators, such as Accenture and Bearing Point;
| | - |  | ---------------------------------------------------------



| | o |  | Internet service providers and web hosting companies, such as,
Cable & Wireless, DIGEX and Genuity;
| | - |  | ---------------------------------------------------------------------------------------------------



| | o |  | software vendors, including Oracle, PeopleSoft, SAP, and Siebel
Systems; and
| | - |  | ----------------------------------------------------------------------------



| | o |  | major technology providers, such as Microsoft;
| | - |  | ----------------------------------------------



The companies listed above may
form strategic relationships with each other to compete with us. These
relationships may take the form of strategic investments, joint-marketing
agreements, licenses or other contractual arrangements and may increase our
competitors' ability to address customer needs with their product and service
offerings. In addition, we believe that there is likely to be consolidation in
our markets, which could lead to increased price competition and other forms of
competition.



It is possible that new
competitors or alliances may emerge and gain market share. These competitors
could materially affect our ability to obtain new contracts. Further,
competitive pressure could require us to reduce the price of our products and
services, thus affecting our business, financial condition and results of
operations.

Proprietary Rights



Our principal proprietary rights
relate to our technology platform and processes and our trademarks. We also have
trade secrets relating to other confidential and proprietary information.



We rely on a combination of
copyright, trademark and trade secret protection, confidentiality and
nondisclosure agreements and licensing arrangements to establish and protect our
intellectual property rights. We cannot be certain, however, that these
instruments are sufficient to protect our technology or products.



The license agreements with our
customers limit their rights to the technologies that we offer and develop for
our customers. In addition, we seek to avoid disclosure of our trade secrets
through a number of means, including requiring those persons with access to our
proprietary information to execute nondisclosure agreements and restricting
access to such information. We have applied for the registration of certain
trademarks. To date, we have not secured registration of many of our trademarks.
In addition, we have applied for patents on certain technology but we currently
have no patents issued.





As of December 31, 2003, we had
314 employees, including 162 in application management services, 35 in
professional services, 45 in sales and marketing, 26 in research and development
and 46 in general and administration. None of our employees are represented by a
collective bargaining agreement. We have never experienced a work stoppage and
believe our relationship with our employees is good.



Item
2.    Properties



Our headquarters includes approximately 77,000 square
feet in San Carlos, California pursuant to a lease that expires in April 2010.
In fiscal 2002, we reviewed our facilities requirements and vacated
approximately 20,000 square feet of this facility. Related to this action,
we recorded an impairment charge of $3.8 million to record the estimated
loss associated with a portion of the remaining lease stream of the unoccupied
space. In May 2003, the Company signed an agreement to sublease the vacated
portion of its headquarters facility through the end of its lease. In the first
quarter of 2003, the Company adjusted its estimated loss related to the vacated
space and recorded an additional restructuring charge of $2.5 million to reflect
the terms of the sublease agreement.



We also lease approximately 17,000 square feet in
Phoenix, Arizona pursuant to a lease that expires in February 2009, 9,000 square
feet in Dallas, Texas pursuant to a lease that expires in April 2004 and 8,000
square feet in Rosemont, Illinois pursuant to a lease that expires in November
2005. We also lease approximately 20,000 square feet in Bangalore, India
pursuant to a lease that expires in May 2007. We also have various small offices
in certain other U.S. locations.



We believe that our existing facilities are adequate to
meet current requirements and that additional or substitute space will be
available as needed to accommodate any expansion of operations.



Item
3.    Legal Proceedings



In November 2001, a securities class
action lawsuit was filed in the U.S. District Court for the Southern District of
New York against Corio, certain of its officers and certain of the underwriters
involved in Corio's initial public offering. This is one of approximately 300
similar lawsuits in a coordinated proceeding sometimes referred to as "IPO
allocation lawsuits" or "laddering lawsuits." The plaintiffs
generally allege that the underwriters engaged in undisclosed improper practices
by giving favorable allocations of IPO shares to certain investors in exchange
for excessive brokerage commissions and/or agreements for those investors to
purchase additional shares in the aftermarket at predetermined higher prices.
The plaintiffs seek an unspecified amount of damages. In June 2003, the
plaintiffs in these cases presented a settlement proposal to all of the issuer
defendants. Under the proposed settlement, the plaintiffs proposed to dismiss
and release all claims against participating defendants in exchange for a
contingent payment guaranty by the insurance companies collectively responsible
for insuring the issuers in all the related cases, and the assignment or
surrender to the plaintiffs of certain claims the issuer defendants may have
against the underwriters. Under the guaranty, the insurers or companies will be
required to pay the amount, if any, by which $1 billion exceeds the aggregate
amount ultimately collected by the plaintiffs from the underwriter defendants in
all the cases. If the plaintiffs fail to recover $1 billion and payment is
required under the guaranty, Corio would be responsible to pay its pro rata
portion of the shortfall, up to the amount of the self-insured retention under
its insurance policy, which is $1 million. In July 2003, Corio tentatively
agreed to accept this settlement proposal. The settlement is subject to
acceptance by a substantial majority of the issuer defendants and execution of a
definitive settlement agreement. The settlement is also subject to approval by
the Court, which cannot be assured. If the settlement is not accepted by the
requisite number of defendants or if it is not approved by the Court or if it
otherwise is not consummated, Corio intends to defend the lawsuit vigorously.
However, the litigation is in the preliminary stage, and we cannot predict its
outcome. The litigation process is inherently uncertain. If the outcome of the
litigation is adverse to us and if we are required to pay significant monetary
damages, our business would be significantly harmed. This lawsuit may be time
consuming and expensive to defend and may divert management's attention and may
be costly to Corio even if the plaintiff's settlement proposal is
consummated.



In November 2001, Corio filed a demand for arbitration
against LivePerson, Inc. with the American Arbitration Association in San
Francisco County. The arbitration related to a dispute around a services
contract between the parties. On July 23, 2003, the arbitrator in this dispute
issued a judgment awarding Corio damages of $1,115,440 plus interest.
LivePerson, Inc. filed a motion to vacate the award in the Superior Court of
California. On November 18, 2003, the Superior Court of California issued a
judgment, relating to the arbitration, awarding Corio damages of $1,346,605 plus
interest from October 17, 2003 until the date of payment. LivePerson, Inc. paid
Corio $1,369,479 on December 18, 2003 and subsequently appealed the judgment.
For any portion of the cash paid that is affirmed on appeal or otherwise finally
committed, such cash received pursuant to this award will be recorded as
termination fee revenue.



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



No matters were submitted to a vote of security holders
during the quarter ended December 31, 2003.









PART II



Item
5.    Market for Registrant's Common Equity and Related
Stockholder Matters



Our Common Stock has been listed on The NASDAQ National
Market  under the symbol CRIO since our initial public offering on July 21,
2000. Prior to that date, there was no public market for our common stock. The
following table sets forth the high and low quarterly closing prices as reported
on the Nasdaq National Market for fiscal 2003, 2002 and 2001:





|                             | First
Quarter |  | Second Quarter |  | Third Quarter |  | Fourth Quarter
|---------------------------- | ------------- |  | -------------- |  | ------------- |  | --------------
|Year Ended December 31, 2003 |               |  |                |  |               |  |               
|High                         | $ 0.84        |  | $ 1.80         |  | $ 3.51        |  | $ 3.18        
|Low                          | $ 0.64        |  | $ 0.73         |  | $ 1.51        |  | $ 2.07        
|Year Ended December 31, 2002 |               |  |                |  |               |  |               
|High                         | $ 1.62        |  | $ 1.78         |  | $ 1.10        |  | $ 0.97        
|Low                          | $ 1.05        |  | $ 1.04         |  | $ 0.49        |  | $ 0.52        



On March 26, 2004, the last reported sale price of our
common stock on The NASDAQ National Market was $4.07 per share. As of March 26,
2004, we had approximately 7,200 beneficial shareholders. We have never declared
or paid any cash dividends on our common stock. Since we currently intend to
retain all future earnings to finance future growth, we do not anticipate paying
any cash dividends in the foreseeable future.

On October 22, 2003, the Company completed the purchase of the assets and the
assumption of certain liabilities of Nexus Technology, Inc. ("Nexus"). The
Company paid Nexus approximately $10.2 million, consisting of $1.9 million in
cash and 2,921,390 shares of Corio common stock. In addition, Nexus will be
entitled to receive an earn-out payment of up to $2.0 million payable in shares
of Corio common stock contingent upon Corio's attainment of specified revenue
milestones for the 3-month period ending December 31, 2004 from identified
existing and prospective customers of Nexus. The cash portion of the acquisition
consideration was paid out of Corio's available working capital. Per the asset
purchase agreement, $500,000 of the purchase price was deposited into escrow, to
be held as security for a limited period of time for any losses incurred by the
Company in the event, among other matters, of any breach by Nexus of the
agreements, covenants, representations and warranties it made under or in
connection with the purchase agreement.



The information required by this item regarding equity compensation plans is
incorporated by reference to the information set forth to the information under
the caption "Executive Compensation and Other Information" in the
Registrant's 2004 Proxy Statement.



Item
6.    Selected Financial Data



The following selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the Notes thereto included elsewhere in this Form 10-K
in order to fully understand factors that may affect the comparability of the
information presented below.

`Years Ended December 31,
                                                         -----------------------------------------------------
                                                           2003       2002       2001       2000       1999
                                                         ---------  ---------  ---------  ---------  ---------
                                                                 (in thousands, except per share amounts)
Statement of Operations Data                                                                                                    
Revenues:
    Application management services.................... $  60,179  $  43,559  $  36,731  $  15,326  $     746
    Professional services and other....................     8,559     12,585     14,840     29,620      5,036
                                                         ---------  ---------  ---------  ---------  ---------
    Total revenues.....................................    68,738     56,144     51,571     44,946      5,782
                                                         ---------  ---------  ---------  ---------  ---------
Costs and Expenses:
    Application management services *..................    47,756     43,053     40,572     32,564      6,297
    Professional services and other *..................     6,708     13,794     16,496     27,095      7,755
    Research and development *.........................     4,638      6,306      9,112     11,882      3,192
    Sales and marketing *..............................     8,700     10,499     21,783     34,090     11,930
    General and administrative *.......................     9,501     11,700     21,079     24,586     10,416
    Restructuring charges..............................     2,334      4,036      3,837         --         --
    Amortization of stock-based compensation...........       458      2,347      5,099     15,657      8,524
    Amortization of goodwill...........................        --         --        564      2,236      2,190
    Amortization of other intangibles..................     1,807        497         --         --         --
                                                         ---------  ---------  ---------  ---------  ---------
    Total operating expenses...........................    81,902     92,232    118,542    148,110     50,304
                                                         ---------  ---------  ---------  ---------  ---------
Loss from operations...................................   (13,164)   (36,088)   (66,971)  (103,164)   (44,522)
Interest and other income..............................       625      1,821      5,663      5,414        541
Interest and other expense.............................      (330)      (934)    (2,567)    (2,073)    (1,019)
                                                         ---------  ---------  ---------  ---------  ---------
Net loss before income taxes...........................   (12,869)   (35,201)   (63,875)   (99,823)   (45,000)
Tax benefit............................................        --        400         --         --         --
                                                         ---------  ---------  ---------  ---------  ---------
Net loss...............................................   (12,869)   (34,801)   (63,875)   (99,823)   (45,000)
Series E beneficial conversion charge..................        --         --         --    (20,158)        --
                                                         ---------  ---------  ---------  ---------  ---------
Net loss attributable to common stockholders........... $ (12,869) $ (34,801) $ (63,875) $(119,981) $ (45,000)
                                                         =========  =========  =========  =========  =========

Basic and diluted net loss per share................... $   (0.22) $   (0.66) $   (1.27) $   (5.15) $  (38.96)
                                                         =========  =========  =========  =========  =========

Shares used in computation, basic and diluted .........    57,228     53,103     50,296     23,290      1,155
                                                         =========  =========  =========  =========  =========
* Amortization of stock-based compensation not
   included in expense line item:
      Application management services.................. $      64  $     261  $     178  $     579  $     229
      Research and development.........................         2        148       (253)     1,591        923
      Sales and marketing..............................       197        840        309      4,204      2,769
      General and administrative.......................       195      1,098      4,865      9,283      4,603
                                                         ---------  ---------  ---------  ---------  ---------
      Total amortization of stock-based compensation... $     458  $   2,347  $   5,099  $  15,657  $   8,524
                                                         =========  =========  =========  =========  =========`

Effective January 1, 2002, we adopted the provisions of Statement of
Financial Accounting Standards No. 142 Goodwill and Other Intangible
Assets. In accordance with Accounting Principles Board Opinion No. 20,
Accounting Changes, the effect of this accounting change is reflected
prospectively. Supplemental comparative disclosure, as if the change had been
retroactively applied is presented in Note 1 to the financial statements.

`December 31,
                                                         -----------------------------------------------------
                                                           2003       2002       2001       2000       1999
                                                         ---------  ---------  ---------  ---------  ---------
                                                                              (in thousands)
Balance Sheet Data                                                                                                              
    Cash, cash equivalents, restricted cash
       and short term investments...................... $  42,711  $  51,656  $  85,997  $ 138,781  $  37,177
    Total assets.......................................    72,143     80,292    113,290    181,284     61,596
    Notes payable and capital lease
       obligations, less current portion...............       387        399      4,942     10,409      7,335
    Total stockholders' equity.........................    47,236     49,415     81,339    137,843     36,484`

Item 7.    Management's Discussion
and Analysis of Financial Condition and Results of Operations



Notes Regarding Forward-Looking
Statements



This Report on Form 10-K includes statements that reflect
our belief concerning future events and financial performance. Statements which
are not purely historical in nature are called "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange act of 1934. We sometimes identify
forward-looking statements with such words as "may", "will",
"should", "expect", "anticipate",
"estimate", "seek", "project", "plan",
"intend", "believe" or similar words concerning future
events.



You should not place undue reliance on these forward-
looking statements. They are subject to certain risks and uncertainties that may
cause actual results to differ materially from past results or our predictions.
Factors that could contribute to differences include, but are not limited to,
those risks and uncertainties identified under "Risk Factors" on pages
22 to 34. You should also carefully review the risk factors set forth in other
documents we file from time to time with the Securities and Exchange Commission
particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K.



All statements included in this document are based on
information available to us as of the date of this Report on Form

10-K, and we assume no obligation to update any such statements, or to update
the reasons why actual results could differ from those projected in forward-
looking statements.



Overview



For fiscal 2003, total revenues increased
22% compared to fiscal 2002 revenues and total operating expenses decreased 11%
compared to fiscal 2002 operating expenses. Revenue gains from our QCS and Nexus
acquisitions as well as from new sales bookings more than offset any revenue
loss due to terminated customers. Expenses decreased as we realized the benefits
of our automation, process improvement and cost management efforts. The
combination of these items resulted in a 63% improvement in our loss from
operations in 2003 compared to 2002. Our continuous drive for improvement
resulted in us realizing our highest customer satisfaction levels, as measured
through our customer satisfaction surveys, in the fourth quarter of 2003.



We have seen increased interest in our service offerings from
customer prospects in the latter half of 2003 and anticipate this momentum
continuing into fiscal 2004. To drive our sales growth and extend our market
share, we are making investments in our sales and marketing and professional
services areas in fiscal 2004. Our research and development team will continue
to focus on further automation and enhancement of our customer interaction
processes.  If our revenues were to increase in 2004, we anticipate that our
gross margins would also increase.

Critical Accounting Policies



Management's Discussion and Analysis of Financial
Condition and Results of Operations are based on our consolidated financial
statements. These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America, or GAAP. The preparation of financial statements and related
disclosures requires management to make judgments, assumptions and estimates
that affect the amounts reported in the financial statements and accompanying
notes.



Estimates are used for, but not limited to, the
accounting for revenue recognition, the allowance for doubtful accounts, certain
loss contingencies, valuation allowances and other special charges. Actual
results could differ from these estimates. We review the accounting policies we
use in reporting our financial results on a regular basis. In addition, our
senior management has reviewed these critical accounting policies and related
disclosures with our Audit Committee. We have identified the policies below as
critical to our business operations and the understanding of our financial
condition and results of operations:





Cash Basis Revenue Recognition Customers



We recognize revenue from application
management services as the services are provided to our customers provided that
collection of the receivable is reasonably assured. We regularly monitor the
payment activity and credit worthiness of our customers. If we determine that
collection of revenue from a particular customer or contract is no longer
reasonably assured, we designate those customers as "cash basis
customers" and start to recognize revenue from that customer on a cash
basis, after services have been rendered and payment for services has been
received.  We consider the following factors in determining whether collection
of revenue is no longer reasonably assured from a customer: (i) the customer's
payment history and outstanding receivables balance, (ii) the increased
probability of non-payment as a result of a deterioration in the customer's
financial health as indicated by our review of publicly available information,
bankruptcy announcements, or other factors demonstrating a serious weakness in a
customer's business such as significant layoffs, decreases in revenues, loss of
customers or litigation, or (iii) the increased probability of non-payment due
to service-related issues or the receipt of an early termination notice from a
customer.  If we receive any payment from a cash basis customer in advance of
services, we would recognize the payment as revenue as the services are
performed.  At the time a customer is designated as a cash basis customer any
uncollected accounts receivable are evaluated for collectibility.  Any amounts
that are deemed uncollectible are written off as a reduction to our revenue.
The remaining balances remain recorded on an accrual basis and are monitored for
collection. Subsequent receipts are applied to these balances before we
recognize any additional revenue.



If we believe that there is a reasonable chance that we will
receive payment from a customer, even if payment is not reasonably assured and
the customer is cash basis, we will typically not terminate the customer and
will continue to provide services to that customer. We have set forth below the
amount of revenue recognized from cash basis customers for the fiscal years
ended December 31, 2003, 2002 and 2001 and the period in which the
underlying services, which generated the revenue, were performed (in
thousands):

`Year Ended December 31,
                                                                             -------------------------------
                                                                               2003       2002       2001
                                                                             ---------  ---------  ---------
Cash Basis Revenue Recorded Related to Services Performed in Current Year.. $  19,147  $  14,745  $  15,898
Cash Basis Revenue Recorded Related to Services Performed in Prior Year....     3,030      2,268        734
                                                                             ---------  ---------  ---------
      Total Cash Basis Revenue Recorded.................................... $  22,177  $  17,013  $  16,632
                                                                             =========  =========  =========`



Revenue earned from cash basis customers but not recognized
due to the cash basis designation was $1.4 million, $3.0 million and $2.3
million for the years ended December 31, 2003, 2002 and 2001, respectively.
Since revenue related to these invoices is recognized on a cash basis, these
amounts have not been included in our accounts receivable balances.  In
addition, only one of our cash basis customers is obligated to pay recurring
application management services fees in advance.



Our revenue in the future could fluctuate significantly due
to the timing and amount of payments received from cash basis customers as well
as increases or decreases in the amount of customers designated as cash basis
customers.



We record all costs in connection with services provided to
cash basis customers as incurred.



Allowance For Doubtful Accounts



The allowance for doubtful accounts is based on our
assessment of the collectibility of specific customer accounts and the aging of
the accounts receivable. If there is a deterioration of a major customer's
credit worthiness or actual defaults are higher than our historical experience,
our estimates of the recoverability of amounts due us could be adversely
affected. We regularly review the adequacy of our allowance for doubtful
accounts through identification of specific receivables where it is expected
that payment will not be received in addition to establishing an unallocated
reserve that is applied to all amounts that are not specifically identified. In
determining specific receivables where collection may not be received, we review
past due receivables and give consideration to prior collection history, whether
a customer has been designated a "cash basis" customer, changes in the
customer's overall business condition and the potential risk associated with the
customer's industry among other factors. A general reserve is established for
all amounts which have not been specifically identified, based on applying a
graduated percentage to each invoice's relative aging category. The allowance
for doubtful accounts reflects our best estimate as of the reporting dates.
Changes may occur in the future, which may require us to reassess the
collectibility of amounts and at which time we may need to provide additional
allowances in excess of that currently provided. At December 31, 2003 and 2002,
our allowance for doubtful accounts was $591,000 and $843,000, respectively.



Loss Contingencies



We are subject to the possibility of various loss
contingencies such as the risks associated with estimates included in both our
restructuring liability and our professional services fixed fee contracts. We
consider the likelihood of the loss or the incurrence of a liability as well as
our ability to reasonably estimate the amount of loss in determining loss
contingencies. An estimated loss contingency is accrued when it is probable that
a liability has been incurred or an asset has been impaired and the amount of
loss can be reasonably estimated.



For our restructuring liability, we estimate the amounts
for employee severances, impaired assets and vacated office space. We evaluate
long-lived assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of any asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.



In addition, since we perform some of our professional
services on a fixed fee basis, if we incur more costs than estimated, our
profitability will suffer. Our process for tracking our progress to completion
on such arrangements is through individual detailed project plans and the
regular review of labor hours incurred compared to estimated hours to complete
the project. We believe this process results in a reasonable estimate of our
progress to completion. When estimates of costs to complete the project indicate
that a loss will be incurred, these losses are estimated and recognized
immediately. We regularly evaluate current information available to us to
determine whether such recorded losses should be adjusted.



Valuation Allowance



We provided a valuation allowance against our entire net
deferred tax asset, primarily consisting of net operating loss carryforwards as
of December 31, 2003. The valuation allowance was recorded given the losses we
incurred through December 31, 2003, and our uncertainties regarding future
operating profitability and taxable income. If we do not achieve profitability,
we will not fully realize these deferred tax assets.



Revenues



Our revenues consist of Corio application
management services revenues and professional services revenues. For customers
that engage us to perform implementation services, we typically recognize
professional services revenues as we implement our applications. We then
recognize monthly fees from the customer, consisting primarily of application
management services revenues, over the related application management service
contractual term. Our professional services revenues associated with
implementation initially had been relatively high compared to revenues for
application management services. As our customer base has grown, application
management services revenues has correspondingly grown as a percentage of
revenues. With respect to total revenue, revenue for services related to ERP
software applications - those applications related to the management of various
functions within a company, including human resources, finance, management,
manufacturing, supply chain, and sales - accounted for approximately 86% of
total revenue in 2003, 65% of total revenue in 2002 and 47% of total revenue in
2001. We expect that revenue related to ERP applications will continue to
account for a majority of our total revenue for the foreseeable future.



In the ordinary course of business, we have recorded revenue of $40,000 in
the year ended December 31, 2003 arising from transactions with one company with
which we had directors in common. At December 31, 2003, we have no accounts
receivable arising from such transactions. In the ordinary course of business,
we have recorded revenue of $2.3 million in the year ended December 31, 2002
arising from transactions with four companies with which we had directors in
common. At December 31, 2002, accounts receivable included $659,000 arising from
such transactions. In the year ended December 31, 2001, we recorded revenue of
$4.4 million arising from transactions with five companies with which we had
directors in common. At December 31, 2001, accounts receivable included $70,000
arising from such transactions.



Application Management Services
Revenues.



Our standard contract terms include
provisions for settlement fees in the event that a customer terminates its
contract prior to the expiry of the term. These settlement fees are recognized
as revenue when received. Because these events are unpredictable and uncertain,
the amount received in any one quarter may vary significantly and there may not
be any settlement fees in some future quarters. Included in fiscal year 2003
results are settlement fees arising from early terminations of approximately
$3.1 million. Included in fiscal year 2002 results are settlement fees arising
from early terminations of approximately $4.5 million. Included in fiscal year
2001 results are settlement fees arising from early terminations of
approximately $3.4 million and the recognition of prepaid revenue in the amount
of $712,000 from a customer that had filed for bankruptcy. These termination and
settlement fees were primarily the result of emerging high-growth companies
experiencing financial difficulties or discontinuing operations. As we focus on
customers that are larger and more stable and move away from high-growth
companies, revenue from termination and settlement fees may diminish as customer
terminations decrease. Also, the sales cycle for larger customers typically
takes longer and this may adversely affect our application management services
revenue.



Professional Services and Other
Revenues.



Since we implement some of our services
on a fixed fee basis, if we incur more costs than we expect in implementations,
our profitability will suffer. Our process for tracking our progress to
completion on such arrangements, is through individual detailed project plans
and the regular review of labor hours incurred compared to estimated hours to
complete the project. When estimates of costs to complete the project indicate
that a loss will be incurred, these losses are recognized immediately. In the
third quarter of 2003, we determined that our provision for contract losses that
we had recorded during fiscal years 2001 and 2002 was no longer appropriate due
to our decreased number of fixed fee contracts. We reduced our provision for
contract losses by $668,000 which resulted in a corresponding reduction to
professional services expenses in 2003. At December 31, 2003 and 2002, our
provision for contract losses was $153,000 and $821,000, respectively. Any
estimation process, including that which is used in preparing contract
accounting models, involves inherent risk. To the extent that our estimates of
revenues and expenses on these contracts change periodically in the normal
course of business, due to the modifications of our contractual arrangements or
changes in cost, such changes would be reflected in our results of operations as
a change in accounting estimate in the period the revisions are made.

We record payments received in advance of revenue
recognition as deferred revenues. Our deferred revenues were $4.0 million at
December 31, 2003 and $2.6 million at December 31, 2002. Deferred revenues at
December 31, 2003 and December 31, 2002 included $76,000 and $647,000
respectively of professional services revenues that will be recognized under the
percentage-of-completion method of contract accounting and $3.9 million and $2.0
million respectively of prepaid application management services revenue that
will be recognized ratably as earned over the term of the contract. We sometimes
invoice for an advance payment from customers under professional services
engagements, and our current payment terms under each type of arrangement is
generally net 30 days.



Impairment of long-lived assets



We evaluate our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of any asset to future
undiscounted net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. During fiscal 2003, we did
not record any impairment charges. During fiscal 2002, we recorded impairment
charges of $109,000.



Cap Gemini Ernst & Young



On September 27, 2000, Cap Gemini Ernst & Young U.S.,
L.L.C exercised its right to convert a portion of its initial warrant
representing 2,333,333 shares into 960,810 shares of common stock through a
cashless exercise. As these shares outstanding were repurchaseable under certain
circumstances, the fair value of these shares subject to repurchase were
remeasured each reporting period until May 2003, when the repurchase rights
lapsed. Expense of $416,000, $11,000 and $164,000 was recorded in sales and
marketing expense for 2003, 2002 and 2001, respectively, related to these
shares.



Nexus Technology, Inc.



On October 22, 2003, we completed the purchase of
substantially all of the assets and the assumption of certain liabilities of
Nexus Technology, Inc. ("Nexus"). We paid Nexus approximately $10.2 million,
consisting of $1.9 million in cash and 2,921,390 shares of Corio common stock.
In addition, Nexus will be entitled to receive an earn-out payment of up to $2.0
million payable in shares of Corio common stock contingent upon our attainment
of specified revenue milestones for the 3-month period ending December 31, 2004
from identified existing and prospective customers of Nexus.



Qwest Cyber.Solutions LLC (QCS)



In September 2002, we acquired certain assets of QCS's
application management services business, including customer contracts related
to the business, internally used and developed software, certain tangible assets
such as computers, servers, routers, firewalls and related equipment, and
accounts receivable. We also assumed certain liabilities of QCS as part of our
acquisition. We paid $15 million in cash for the acquisition and accrued direct
acquisition costs of approximately $1.3 million.



Results of Operations



The following tables set forth, for the periods presented, certain data
from our consolidated statements of operations as percentages of total
revenues.

`December 31, 2003
                                           Twelve Months Ended    Twelve Months Ended         versus
                                            December 31, 2003      December 31, 2002      December 31, 2002
                                          -------------------    -------------------    -------------------
                                                    Percentage             Percentage
                                                    of Total               of Total      Dollar   Percentage
                                           Amount   Revenues      Amount   Revenues      Change    Change
                                          --------- ---------    --------- ---------    --------- ---------
REVENUES:                                                                                                  
    Application management services..... $  60,179        88 %  $  43,559        78 %  $  16,620        38 %
    Professional services and other.....     8,559        12 %     12,585        22 %     (4,026)      (32)%
                                          --------- ---------    --------- ---------    --------- ---------
    Total revenues......................    68,738       100       56,144       100       12,594        22 %
                                                                                                           
COSTS AND EXPENSES:                                                                                        
    Application management services ....    47,756        69 %     43,053        77 %      4,703        11 %
    Professional services and other ....     6,708        10 %     13,794        25 %     (7,086)      (51)%
    Research and development ...........     4,638         7 %      6,306        11 %     (1,668)      (26)%
    Sales and marketing ................     8,700        13 %     10,499        19 %     (1,799)      (17)%
    General and administrative .........     9,501        14 %     11,700        21 %     (2,199)      (19)%
    Restructuring charges...............     2,334         3 %      4,036         7 %     (1,702)      (42)%
    Amortization of stock based compensa       458         0 %      2,347         4 %     (1,889)      (80)%
    Amortization of intangible assets...     1,807         3 %        497         0 %      1,310       264 %
                                          --------- ---------    --------- ---------    --------- ---------
    Total operating expenses............    81,902       119 %     92,232       164 %    (10,330)      (11)%
                                          --------- ---------    --------- ---------    --------- ---------%
Loss from operations....................   (13,164)      (19)%    (36,088)      (64)%     22,924       (64)%
Interest and other income...............       625         0 %      1,821         3 %     (1,196)      (66)%
Interest and other expense..............      (330)        0 %       (934)       (2)%        604       (65)%
                                          --------- ---------    --------- ---------    --------- ---------
Net loss before income taxes............   (12,869)      (19)%    (35,201)      (63)%     22,332       (63)%
Tax benefit.............................        --        -- %        400         1 %       (400)     (100)%
                                          --------- ---------    --------- ---------    --------- ---------
Net loss................................ $ (12,869)      (19)%  $ (34,801)      (62)%  $  21,932       (63)%
                                          ========= =========    ========= =========    ========= =========



                                                                                          December 31, 2002
                                           Twelve Months Ended    Twelve Months Ended         versus
                                            December 31, 2002      December 31, 2001      December 31, 2001
                                          -------------------    -------------------    -------------------
                                                    Percentage             Percentage
                                                    of Total               of Total      Dollar   Percentage
                                           Amount   Revenues      Amount   Revenues      Change    Change
                                          --------- ---------    --------- ---------    --------- ---------
REVENUES:                                                                                                  
    Application management services..... $  43,559        78 %  $  36,731        71 %  $   6,828        19 %
    Professional services and other.....    12,585        22 %     14,840        29 %     (2,255)      (15)%
                                          --------- ---------    --------- ---------    --------- ---------
    Total revenues......................    56,144       100       51,571       100        4,573         9 %
                                                                                                           
COSTS AND EXPENSES:                                                                                        
    Application management services ....    43,053        77 %     40,572        79 %      2,481         6 %
    Professional services and other ....    13,794        25 %     16,496        32 %     (2,702)      (16)%
    Research and development ...........     6,306        11 %      9,112        18 %     (2,806)      (31)%
    Sales and marketing ................    10,499        19 %     21,783        42 %    (11,284)      (52)%
    General and administrative .........    11,700        21 %     21,079        41 %     (9,379)      (44)%
    Restructuring charges...............     4,036         7 %      3,837         7 %        199         5 %
    Amortization of stock based compensa     2,347         4 %      5,099        10 %     (2,752)      (54)%
    Amortization of goodwill............        --        -- %        564         1 %       (564)     (100)%
    Amortization of intangible assets...       497         1 %         --        -- %        497          0%
                                          --------- ---------    --------- ---------    --------- ---------
    Total operating expenses............    92,232       164 %    118,542       230 %    (26,310)      (22)%
                                          --------- ---------    --------- ---------    --------- ---------%
Loss from operations....................   (36,088)      (64)%    (66,971)     (130)%     30,883       (46)%
Interest and other income...............     1,821         3 %      5,663        11 %     (3,842)      (68)%
Interest and other expense..............      (934)       (2)%     (2,567)       (5)%      1,633       (64)%
                                          --------- ---------    --------- ---------    --------- ---------
Net loss before income taxes............   (35,201)      (63)%    (63,875)     (124)%     28,674       (45)%
Tax benefit.............................       400         1 %         --        -- %        400       100 %
                                          --------- ---------    --------- ---------    --------- ---------
Net loss................................ $ (34,801)      (62)%  $ (63,875)     (124)%  $  29,074       (46)%
                                          ========= =========    ========= =========    ========= =========`





Years ended December 31, 2003, 2002 and 2001.



Revenues



Total revenues increased to $68.7 million for the year
ended December 31, 2003 from $56.1 million for the year ended December 31, 2002
and $51.6 million for the year ended December 31, 2001. For the year ended
December 31, 2003, one customer, Expanets, Inc. accounted for more than 12% of
our total revenues. Expanets, Inc., was recently acquired by Avaya Inc.
Although we have a long-term contract with Expanets that was assumed by Avaya,
we are unsure whether Avaya intends to retain our services and Avaya is
migrating Expanets's system to Avaya's system.  This presents significant risks
regarding how long Avaya/Expanets will remain a customer.  If we lose
Avaya/Expanets as a customer, or any other significant customer, or if a
significant customer makes a significant reduction in fees paid to us, and if we
are unable to replace this revenue with revenue from new or existing clients,
this will have a significant adverse effect on our ability to achieve
profitability and positive cash flow. For the year ended December 31, 2002, one
customer, Quadrem, accounted for 11% of our total revenues and this customer
renewed its contract for a significantly lower amount in 2003. For the year
ended December 31, 2001 no one customer accounted for more than 10% of our total
revenues.

During the late 1990's there was a significant increase in demand for new
applications licenses from the enterprise software vendors due to the concerns
over the year 2000, or Y2K, issue and dot com demand phenomena which, in turn,
drove increased demand for implementation services.  As this demand waned in the
2001-2003 time period, the size of the implementation services market decreased
as well. Corio's reduction in professional services revenue during this time
period is a reflection of this change in market condition.  Over the last few
years, a number of Corio's customers' businesses began to struggle or failed
entirely resulting in their inability to pay for Corio's services and,
therefore, lowered applications management services revenues from our existing
customer base.



Application Management Services
Revenues.



At December 31, 2003, our total number of application
management customers was 106, at December 31, 2002, the number of customers was
86 and at December 31, 2001 the number was 50. At December 31, 2003 and 2002, we
had a balance of $3.9 million and $2.0 million, respectively, for deferred
application management services revenues primarily from customers who prepaid a
portion of their contract. These deferred revenues will be recognized as the
related services are provided over the life of the contract.



Application management services gross
margins were 21% in 2003, 1% in 2002, and -10% in 2001. The increase in gross
margins was due to the increase in revenues and resulting economies of scale and
to cost cutting measures which included headcount reductions, automating of
processes to increase efficiencies, improved leveraging and scaling of resources
and renegotiating lower pricing with vendors. If revenue remains constant or
increases, we anticipate our application management services gross margin will
increase in fiscal 2004 compared to 2003 as we continue to recognize the
benefits of our cost-cutting measures and increased efficiencies.

Professional Services and Other
Revenues.

Revenues for the years ended December 31, 2003, 2002 and 2001 included
$682,000, $532,000, and $2.2 million, respectively, of payments from cash basis
customers. At December 31, 2003 and 2002, we had a balance of $76,000 and
$647,000, respectively, for deferred professional services revenues. These
deferred revenues, resulting from customer payments in advance of us performing
our professional services work, will be recognized as revenue as the related
services are provided over the contract period.



Costs and Expenses



Application Management Services
Expenses.

Application fees consist of rental license fees paid to
independent software vendors such as PeopleSoft and Siebel Systems, plus a
reserve established based on a claimed minimum commitment in connection with
rental license fees. Application fees were $136,000 in 2003, $970,000 in 2002
and $3.3 million in 2001. The decrease in application fees was due to our
decision in mid-2001 to require our new customers to obtain licenses directly
from our third party software vendors, rather than through us on a rental basis
as well as our loss of customers for whom we were contracted to provide licenses
prior to 2001.  Furthermore, in 2001 we reserved $1.0 million related to a
software vendor's claim that we owed them minimum commitment rental fees even if
our rental customer was not using the software or had terminated services.  In
spite of our decision to cease offering the rental model to new customers, a few
legacy rental customers remain whereby the customer pays Corio a monthly rental
fee and Corio in turn pays the software vendor a monthly rental fee. Less than
10% of Corio's current customers license pursuant to this rental model and Corio
expects these relationships to go away entirely over time.

Professional Services and Other
Expenses.

$1.7 million in 2003, $3.4 million in 2002 and $2.2 million in 2001. From
2002 to 2003, $6.7 million of the $7.1 million decrease in expense was
attributable to the following: a $3.1 million decrease in personnel costs,
$724,000 decrease in travel related expenses, a $1.7 million decrease in outside
contractor expenses, a $493,000 decrease in facilities expenses and $668,000 due
to adjustments to our provision for contract losses.  From 2001 to 2002, the
$2.7 million decrease in expenses was attributable to a $3.9 million decrease in
payroll costs due to lower headcount, offset in part by a $1.2 million increase
in subcontractor fees.



Research and Development
Expenses.



Sales and Marketing
Expenses.



General and Administrative
Expenses.



Restructuring
charges.



Amortization of Stock-Based
Compensation.



Amortization of Other
Intangibles.



Interest and Other Income and
(Expense).



Income Taxes.



Liquidity and Capital Resources



As of December 31, 2003, we had cash and cash
equivalents, short-term investments and restricted cash totaling $42.7 million,
a decrease of $9.0 million from the $51.7 million on hand at December 31, 2002.
The decrease was primarily the result of cash used for purchases of property and
equipment, payment of debt obligations and the purchase of substantially all of
the assets of Nexus in fiscal 2003. Included in the cash balance is restricted
cash of $7.7 million at December 31, 2003 and 2002.



The following table summarizes our cash flows from
operating, investing and financing activities:

`Years Ended December 31,
                                                    -------------------------------
                                                      2003       2002       2001
                                                    ---------  ---------  ---------
                                                                                  (
Net cash provided by (used in):
    Operating activities.......................... $     2.5  $   (12.1) $   (41.9)
    Investing activities..........................     (10.2)       9.6       27.8
    Financing activities..........................      (3.8)      (6.9)      (8.0)
                                                    ---------  ---------  ---------
Increase (decrease) in cash and cash equivalents.. $   (11.5) $    (9.4) $   (22.1)
                                                    =========  =========  =========`

For fiscal 2003, net cash provided by operating activities of $2.5 million
was comprised of a net loss of $12.9 million, reduced by $11.2 million of
depreciation, $1.8 million of amortization of goodwill and other intangibles,
$458,000 of amortization of deferred stock based compensation, a $1.7 million
decrease in accounts receivable and prepaid expenses and other current assets
and a $1.4 million increase in deferred revenue, and increased by a
$2.5 million decrease in accounts payable, accrued liabilities and other
liabilities.



For fiscal 2002, net cash used in operating activities of
$12.1 million was comprised of a net loss of $34.8 million, reduced by
$11.5 million of depreciation, $497,000 of amortization of goodwill and other
intangibles, $2.3 million of amortization of deferred stock based compensation,
a $4.1 million decrease in accounts receivable and prepaid expenses and other
current assets and a $3.8 million increase in accounts payable, accrued
liabilities and other liabilities.



For fiscal 2001, net cash used in operating activities of
$41.9 million was comprised of a net loss of $63.9 million, reduced by
$14.9 million of depreciation, $564,000 of amortization of goodwill and other
intangibles, $5.1 million of amortization of deferred stock based compensation
and a $4.0 million decrease in accounts receivable, and increased by a
$4.7 million decrease in accounts payable, accrued liabilities and other
liabilities.



For fiscal 2003, net cash used in investing activities
was $10.2 million. Investing activities consisted of the sale of short-term
investments of $46.7 million offset by the purchase of short-term investments of
$50.1 million, $1.7 million associated with acquisition costs and $5.4 million
for the purchase of equipment.

For fiscal 2002, net cash provided by investing
activities was $9.6 million. Investing activities consisted of the sale of
short-term investments of $84.8 million offset by the purchase of short-term
investments of $60.8 million, $15 million to purchase the application management
services business of QCS and $828,000 for the purchase of equipment.



For fiscal 2001, net cash provided by investing
activities was $27.8 million. Investing activities consisted of the sale of
short-term investments of $114.1 million offset by the purchase of short-term
investments of $75.6 million, an increase in restricted cash of $7.8 million and
$4.6 million for the purchase of equipment.



For fiscal 2002, net cash used by financing activities
was $6.9 million. Financing activities consisted of $7.7 million repayments
of equipment lease financing offset by sale of common stock of $793,000.



For fiscal 2001, net cash used by financing activities
was $8.0 million. Financing activities consisted of $9.8 million repayments of
equipment lease financing offset by sale of common stock of $1.7 million.



On October 22, 2003, the Company completed the purchase
of the assets and the assumption of certain liabilities of Nexus Technology,
Inc. ("Nexus"). The Company paid Nexus approximately $10.2 million, consisting
of $1.9 million in cash and 2,921,390 shares of Corio common stock, including
$177,000 related to legal expenses. The shares used as consideration were valued
at $2.83 per share, which was the average closing price two days before and
after the closing date. In addition, Nexus will be entitled to receive an earn-
out payment of up to $2.0 million payable in shares of Corio common stock
contingent upon Corio's attainment of specified revenue milestones for the 3-
month period ending December 31, 2004 from identified existing and prospective
customers of Nexus. The cash portion of the acquisition consideration was paid
out of Corio's available working capital. Per the asset purchase agreement,
$500,000 of the purchase price was deposited into escrow, to be held as security
for a limited period of time for any losses incurred by the Company in the
event, among other matters, of any breach by Nexus of the agreements, covenants,
representations and warranties it made under or in connection with the purchase
agreement.



Contractual Obligations

The following table summarizes our contractual cash obligations at December
31, 2003:

`Payments due by Period
                                     -----------------------------------------------------
                                                Less than     1-3        3-5     More than
                                       Total     1 Year      Years      Years     5 Years
                                     ---------  ---------  ---------  ---------  ---------
Capital lease obligations.......... $     906  $     510  $     396  $      --  $      --
Operating leases...................    27,250      4,414      8,630      8,521      5,685
                                     ---------  ---------  ---------  ---------  ---------
Total contractual cash obligations. $  28,156  $   4,924  $   9,026  $   8,521  $   5,685
                                     =========  =========  =========  =========  =========`



We expect that our current cash balances will be
sufficient to meet our cash requirements for at least the next 12 months.
However, any major change in the nature of the Company's business, or a
significant reduction in demand for its services, the acquisition of products,
the need for significant new capital expenditures, or the acquisition of other
business, could further utilize the Company's cash reserves. To the extent the
Company requires additional cash, there can be no assurances that the Company
will be able to obtain such financing on terms favorable to the Company, or at
all.



Recent Accounting Developments



In January 2003, the FASB issued FASB Interpretation No.
46 (revised December 2003 by FIN 46R), Consolidation of Variable Interest
Entities,which addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and, accordingly, should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
which was issued in January 2003. We will be required to apply FIN 46R to
variable interests in variable interest entities (VIEs) created after December
31, 2003. For variable interests in VIEs created before January 1, 2004, the
Interpretation will be applied beginning on January 1, 2005. For any VIEs that
must be consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN No. 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The Company believes the adoption of FIN No. 46R will not
have a material impact to its financial position, results of operations or cash
flows as the Company does not have any VIEs.

In December 2003, the SEC issued SAB 104, Revenue Recognition, (SAB
104) which rescinds and updates SAB 101, Revenue Recognition in Financial
Statements. SAB 104's primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements, which was
superceded as a result of the issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue recognition
principles of SAB 101 remain largely unchanged by the issuance of SAB 104.
Adoption of this provision did not have an impact in the Company's financial
position or results of operations.

ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS



RISK FACTORS



Risks Related to Our Business



We expect to continue to incur losses
and experience negative cash flow and we may never be profitable.



We have spent significant funds to date to develop and refine
our current services, to create and run our operations organization, to build
and run a professional services organization and to develop and run our sales
and marketing resources. We have incurred significant operating and net losses
and negative cash flow and have not achieved profitability. As of
December 31, 2003, we had an accumulated deficit of $260 million.



We expect to continue to invest significantly in our
organization to provide services, enhance current services and expand our
service offerings. We also may hire additional people in certain areas of our
company in order to support our business and promote and sell our services. In
addition, we expect to continue to incur significant fixed and other costs
associated with customer acquisitions and with the implementation and
configuration of software applications, and ongoing services, for customers. As
a result of all of these factors, to achieve operating profitability on a
consistent basis, excluding non-cash charges, we will need to increase our
customer base and number of customers, to increase our revenue, to decrease our
overall costs of providing services, including the costs of our licensed
technology and our operations and the costs of customer acquisitions. We cannot
assure you that we will be able to increase our revenues or increase our
operating efficiencies in this manner. Also, we may continue to invest in our
business faster than we anticipate growth in our revenues, and we may continue
to incur significant losses and negative cash flow for the foreseeable future
and we may never be profitable.



Because of the nature of our customer base, we may
experience greater than expected customer loss and instability as well as
difficulties collecting fees, which could result in reduced revenues.



A significant portion of our current revenue is derived from
technology and middle-market companies.  Middle-market companies consist of
companies or divisions with annual revenues of between approximately $200
million and $1 billion.  Technology and middle-market companies may be more
likely to be acquired, experience financial difficulties or cease operations
than companies that are larger and better established or are in more stable
industries.  In particular, technology and middle-market companies may
experience difficulties in raising capital needed to fund their operations.  As
a result, our client base will likely be more volatile than those companies
whose customer base consists of more mature and established businesses. Over the
past four years we experienced early terminations of customer agreements with
approximately one hundred customers, many of which entered into agreements with
us in 1999 and 2000 and whose terminations were based on the dot com crash and
many of which are no longer in business.  We expect additional customer
agreements to terminate in the future.  If we continue to experience greater
than expected customer loss or an inability to collect fees from our customers
in a timely manner because of this volatility, our operating results could be
seriously harmed.

The loss of key customers could reduce our revenues and
could be perceived as a loss of momentum for our business.



We have experienced customer attrition in the past and
expect to experience it in the future.  Historically, we have generated a
substantial portion of our revenues from a limited number of customers and we
expect that in the future a limited number of customers will continue to account
for a substantial portion of our revenues.  As a result, if we lose a major
customer for any reason, including non-renewal of a customer contract, failure
to meet performance requirements, or because of an acquisition or bankruptcy,
our revenues could be adversely affected.  We may lose customers if they are
acquired by a company which does not need access to the kinds of services we
provide, either because the acquiring company has in-house capabilities,
existing contractual arrangements that preclude them from using our services, or
for a variety of other reasons.  If we do not grow our revenue, we may never
achieve profitability or positive cash flow and therefore the loss of any
significant customers could adversely affect our operating results.  In
addition, our potential customers and investors may perceive any customer loss
as a loss of momentum in our business, which may adversely affect future
opportunities to sell our products and services and cause our stock price to
decline.  We cannot be certain that customers that have accounted for
significant revenues in past periods will continue to generate revenues in any
future period.



For example, one of our customers, Quadrem Hosting Ltd., who
represented 11% of total revenues in fiscal 2002, had its contract expire in May
2003. Although Quadrem renewed for a short-term contract, the new contract was
for significantly less recurring monthly revenue.  In addition, another
customer, Expanets, Inc., who accounted for 12% of our total revenue for fiscal
2003, was recently acquired by Avaya Inc.  Although we have a long term contract
with Expanets that was assumed by Avaya, we are unsure whether Avaya intends to
retain our services. Avaya is migrating Expanets's system that we are hosting to
Avaya's system and this presents significant risks regarding how long
Avaya/Expanets will remain a customer.  If we lose Avaya/Expanets as a customer,
or any other significant customer, or if a significant customer makes a
significant reduction in fees paid to us, and if we are unable to replace this
revenue with revenue from new or existing clients, this will have a significant
adverse effect on our ability to achieve profitability and positive cash
flow.



Our failure to collect payments for our services from
"cash basis" customers could significantly decrease our revenues and
profitability.



In the event we decide payment by a customer is no longer
reasonably assured then we designate that customer as a "cash basis"
customer. Historically we have generated a significant portion of our revenue
from payments by cash basis customers. The percentage of our customers
designated as cash basis customers as of the end of 2003, 2002 and 2001 was 12%,
29% and 42%, respectively.  For the years ended December 31, 2003, 2002 and
2001, we recorded revenue of $22.2 million (32% of total revenue), $17.0 million
(31% of total revenue) and $16.6 million (32% of total revenue), respectively,
related to services provided to cash basis customers. For the 2003 fiscal year
we did not recognize approximately $1.4 million in revenue related to services
provided during this period due to customers designated as cash basis customers
for which we did not receive payment.  For 2002, this amount was $3.0 million
and for 2001 it was $2.3 million.  A significant portion of our customer base
remains on a cash basis and we expect to continue to have a significant number
of customers on a cash basis going forward. For these customers we are at risk
of not receiving payment for services we have already performed. Failure by
these customers to pay could decrease revenue and result in Corio having
incurred costs to provide services without being compensated for those services,
which could adversely affect our ability to become profitable.



Our business and financial model is difficult to evaluate
because we have a limited operating history and is subject to constant change,
which may impact our ability to become profitable in the future.



We have a limited operating history as a provider of ASP
services. We began offering our ASP services in 1998, prior to which time our
predecessor company, DSCI, carried on a different business. Because our business
model is relatively new, it continues to evolve.  In the future, we may revise
our pricing model for different services, and our model for our customers to
gain access to third party software applications and other third party services
has evolved.  Additionally, as we attempt to move the focus of our customer base
away from smaller companies to larger, more established customers, the demand
for our services is uncertain and the sales process takes longer than with
smaller customers.  Changes in our anticipated business and financial model
could materially impact our ability to become profitable in the future.



The fact that we operate in a relatively new and rapidly
evolving industry exposes us to risks that may result in our inability to
successfully execute on our business model, which could adversely affect our
operating results.



The ASP market is relatively new and has not yet received
universal acceptance by the enterprises we target. An investor in our common
stock must consider these facts as well as the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages of
development, particularly companies in new and rapidly evolving markets such as
the market for Internet-based software application services. Some of the risks
and difficulties relate to our potential inability to:



acquire and retain customers, particularly larger, more
established companies required to create a stable revenue and customer base;



acquire new customers at a rate sufficient to create
growth taking into account loss of customers;



reduce costs associated with the delivery of services
to our customers;



expand and maintain our pipeline of sales prospects in
order to promote greater predictability in our period-to-period sales levels;



acquire or license third party software applications at
a reasonable cost or at a structure beneficial to us;



complete successful implementations of our software
applications in a manner that is repeatable and scalable;



integrate successfully software applications we manage
with each other and with our customers' existing systems;



continue to offer new services that complement our
existing offerings;



increase awareness of our brand; and



maintain our current, and develop new, strategic
relationships.



We cannot assure you that we will successfully address these
risks or difficulties. If we fail to address any of these risks or difficulties
adequately, we will likely be unable to execute our business model.



If we are unable to adjust our spending to offset future
revenue shortfalls, our short-term operating results could be adversely affected
causing our stock price to fall.



We expend significant sums in order to run our business and
to promote future growth in our business, operations, professional services,
research and development, and sales and marketing organizations. Although we are
monitoring our spending, we expect to continue to expend significant sums on
these activities. Because the expenses associated with these activities are
relatively fixed in the short-term, we may be unable to adjust spending quickly
enough to offset any unexpected shortfall in revenue growth or any decrease in
revenue levels. As our operating results fluctuate, they may fall short of the
expectations of public market analysts or investors. If this occurs, the price
of our common stock may fall.



Our quarterly operating results may fluctuate, which could
cause our stock price to fall.



Our financial results will vary due to factors such as the
nature of our services and the timing of payments received from cash basis
customers. For individual customers, we may recognize professional services
revenues associated with the implementation of our applications during the early
months of our engagement. We then recognize monthly fees from these customers,
consisting primarily of application management services revenues, over the
balance of the contractual relationship. As a result, for some customers we have
a high proportion of up-front professional services revenues associated with
implementation. We expect that our financial results may continue to vary over
time as monthly fees increase as a portion of total revenue. In addition, third
parties also provide professional services for some of our application
management services customers, and whether professional services will be
provided by us or by third parties may be difficult to predict. Changes in our
revenue mix from professional services revenues to application management
services revenues could be difficult to predict and could cause our quarterly
results and stock price to fluctuate.



Other important factors that could cause our quarterly
results and stock price to fluctuate materially include:



the timing of obtaining, implementing and establishing
connectivity with individual customers;



the loss of or change in our relationship with
important customers and our ability or inability to collect termination fees
from terminating customers;



any increase or decrease in termination fees,
settlement fees or judgments paid in a quarter versus other quarters;



the timing and magnitude of expanding our operations
and of other capital expenditures;



the timing and amount of payments received from cash
basis customers as well as the change in composition of these customers



costs, including license fees, relating to the software
applications we use;



changes in our pricing policies or those of our
competitors;



potential changes in the accounting standards
associated with accounting for stock options, stock or warrant issuances and for
revenue recognition; and



accounting charges we may incur in the
future relating to stock options, stock or warrant issuances.



Our financial results could vary over time as our ASP
business and financial models mature and evolve. For example, we historically
included a broad range of customer support in our fixed monthly fees but now
bill certain customers for support services in excess of specified limits in
certain circumstances. As another example, we are increasingly unbundling the
cost of software licenses from our fixed monthly fee and requiring our customers
to obtain licenses to enterprise software applications directly from third party
software providers. Any such changes to our business or financial model would
likely cause financial results to vary, which could cause our stock price to
fall.



In this regard, from time to time we negotiate with some of
our major third party software vendors to modify the pricing and other terms
currently in place with these vendors. We may agree to restructure our current
arrangements with some of our third party software providers. For example, we
are migrating customers, and currently plan to eventually migrate all customers,
from a model whereby some rent enterprise application licenses from us to a
model whereby they all purchase the licenses directly from independent software
vendors. Such pricing structures or business models may not in fact be more
beneficial to us and may ultimately hinder our ability to become profitable.



The loss of access to, or the obsolescence of, third party
software necessary to deliver our services may adversely affect our revenues and
increase our costs.



We offer our customers software application services for
applications from third parties such as PeopleSoft, Oracle, SAP, Ariba and
Siebel Systems. We have agreements in place with certain of our third party
software vendors, and our agreements with third party software vendors are non-
exclusive, are for limited terms and typically permit termination in the event
of our breach of the agreements.  Additionally, as we move more to "host-
only" relationships, whereby our customers must obtain licenses directly
from independent software vendors such as PeopleSoft, Oracle, SAP, Ariba and
Siebel, we may rely on the independent software vendors to consent to allow us
to access the software to provide our services. If we lose the right to host the
software from third party software vendors, if the cost of licensing the
software applications becomes prohibitive, or if we change the vendors from whom
we currently license software, our business and our customers' businesses could
be significantly disrupted, which could harm our revenues and increase our
costs. Our financial results may also be harmed if the cost structure we
negotiate in the future with the third party software vendors changes in a
manner that is less beneficial to us compared to our current cost structure with
software vendors. We cannot assure you that our services will continue to
support the software of our third party vendors, or that we will be able to
adapt our own offerings to changes in third party software. In addition, if our
vendors were to experience financial or other difficulties, it could adversely
affect the availability of their software. It is also possible that improvements
in software by third parties with whom we have no relationship could render the
software we offer to our customers less compelling or obsolete.



The limits imposed on our uses of the third party software
necessary to deliver our services may impair our growth and operating
results.



The licenses we have for the third party software for which
we provide hosting or application management services typically restrict our
ability to sell our services in specified countries and to customers with
revenue above or below specified revenue levels. For example, one of our
licenses restricts us from selling our services to customers with annual
revenues greater than various levels such as $1 billion, and restricts our
ability to sell to customers outside of North America. In addition, some of
these licenses contain limits on our ability to sell our services to certain
types of customers. Our operating results and ability to grow could be harmed to
the extent these licenses prohibit us from selling our services to customers to
which we would otherwise sell our services, or in countries in which we would
otherwise sell our services.



Poor performance of the software we deliver to our
customers or disruptions in our business-critical services could harm our
reputation, delay market acceptance of our services and subject us to
liabilities.



Our customers depend on our hosted software applications for
their critical systems and business functions, including enterprise resource
planning, customer relationship management and e-commerce. Our customers'
businesses could be seriously harmed if the applications we provide to them work
improperly or fail, even if only temporarily. Accordingly, if the software that
we license from our vendors or our implementation or ongoing management of such
software performs poorly, experiences errors or defects or is otherwise
unreliable, our customers would likely be extremely dissatisfied, which could
cause our reputation to suffer, force us to divert research and development and
management resources, cause a loss of revenues or hinder market acceptance of
our services. It is also possible that any customer disruptions resulting from
failures in our applications could force us to refund all or a portion of the
fees customers have paid for our services or result in other significant
liabilities to our customers.

We may fail to implement, host or manage enterprise
software applications successfully due to the complicated nature of the services
we provide, which would harm our reputation and sales.



Implementations and management of enterprise software
applications are very complex. We cannot assure you that we can convince
customers that we have the requisite expertise required to implement, host or
manage these applications. Our reputation will be harmed and sales of our
services would decline significantly if we are not able to complete successfully
repeated implementations of our enterprise software applications or if we are
not able to successfully manage enterprise applications, including those
applications with which we have limited or no implementation, hosting or
management experience to date.



Our inability to sufficiently expand our enterprise
software implementation and systems consulting capabilities could harm our
ability to service our customers effectively and could hinder our growth.



A failure to maintain and expand relationships with third
party systems integrators that we use to implement our services could harm our
ability to service our customers effectively. As we seek to provide applications
management services for larger, more established customers, they may frequently
utilize the systems integration and consulting services of independent, third
party systems integrators rather than Corio. In such cases, we may receive only
modest revenue for implementation and integration services if any. In addition,
we frequently contract with our customers for implementation on a fixed price
basis. As a result, unexpected complexities in implementing software
applications for our customers could result in unexpected losses for us or
increases in losses. Our business and reputation could also be seriously harmed
if third party systems integrators were unable to perform their services for our
customers in a manner that meets customer expectations.



Increased demand for customization of our services beyond
what we currently provide or anticipate could reduce the scalability and
profitability of our business.



Companies may prefer more customized applications and
services than our business model contemplates. Most of our customers have
required some level of customization of our services, and our customers may
continue to require customization in the future, perhaps to a greater extent
than we currently provide or anticipate. If we do not offer the desired
customization, there may be less demand for our services. Conversely, providing
customization of our services increases our costs and reduces our flexibility to
provide similar services to many customers. Accordingly, increased demand for
customization of our services could reduce the scalability and profitability of
our business and increase risks associated with completing software upgrades.



A significant increase in our customer base could strain
our operations and may result in our inability to properly manage our
organizational structure.



Growth could strain our operations and require us to incur
costs to upgrade our infrastructure and expand our personnel. If our customer
base grows significantly, we cannot be sure that we will successfully manage our
growth. In order to manage any such growth successfully, we must:



expand our management team, financial and information systems and
controls and operations team;



maintain a high level of customer service and support;



expand our implementation and consulting resources internally and with
third parties;



expand, train, manage and retain our employee base effectively; and

manage costs for employees, hardware, software, data centers and
networks in a manner that will permit our  business to scale

Any failure to effectively meet the above requirements could
adversely affect our business. In addition, if our customer base grows
significantly, there will be additional demands on our customer service support,
research and development, sales and marketing and administrative resources as we
try to increase our service offerings and expand our target markets. Any delay
in the implementation of, or disruption in the transition to, new or enhanced
systems and controls could harm our ability to accurately forecast demand for
our services, manage our billing of customers, manage our sales cycle and
implementation services and record and report management and financial
information on a timely and accurate basis. Moreover, any inability to expand
our service offerings and employee base commensurate with any increase in the
demand for our services could cause our revenues to decline.





Our inability to successfully perform required software
upgrades for our customers could cause interruptions or errors in our customers'
applications, which could increase our costs and delay market acceptance of our
services.



Our software vendors from time to time will upgrade their
software applications, and at such time we will be required to implement these
software upgrades for certain of our customers. Implementing software upgrades
can be a complicated and costly process, particularly implementation of an
upgrade simultaneously across multiple customers. Accordingly, we cannot assure
you that we will be able to perform these upgrades successfully or at a
reasonable cost. We may also experience difficulty implementing software
upgrades to a large number of customers, particularly if different software
vendors release upgrades simultaneously. If we are unable to perform software
upgrades successfully and to a large customer base, our customers could be
subject to increased risk of interruptions or errors in their business-critical
software, our reputation and business would likely suffer and the market would
likely delay the acceptance of our services. It will also be difficult for us to
predict the timing of these upgrades, the cost to us of these upgrades and the
additional resources that we may need to implement these upgrades. Additionally,
as we continue to evolve our business model to charge customers for the cost of
software upgrades, we may lose prospective customers who choose not to pay for
these upgrades. Therefore, any such upgrades could strain our development and
engineering resources, require significant unexpected expenses and cause us to
miss our financial forecasts or those of securities analysts. Any of these
problems could impair our customer relations and our reputation and subject us
to litigation.



Security risks and concerns may decrease the demand for
our services, and security breaches with respect to our systems may disrupt our
services or make them inaccessible to our customers.



Our services involve the storage and transmission of
business-critical, proprietary information, and security breaches could expose
us to a risk of loss of this information, litigation and possible liability.
Anyone who circumvents our security measures could misappropriate business-
critical proprietary information or cause interruptions in our services or
operations. In addition, computer "hackers" could introduce computer
viruses into our systems or those of our customers, which could disrupt our
services or make them inaccessible to customers. We may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. Our security
measures may be inadequate to prevent security breaches, and our business and
reputation would be harmed if we do not prevent them.



If we are unable to adapt our services to rapidly changing
technology, our reputation and our ability to grow our revenues could be harmed.



The markets we serve are characterized by rapidly changing
technology, evolving industry standards, emerging competition and the frequent
introduction of new services, software and other products. We cannot assure you
that we will be able to enhance existing or develop new services that meet
changing customer needs in a timely and cost-effective manner. For example, as
software application architecture changes, the software for which we provide
services could become out of date or obsolete and we may be forced to upgrade or
replace our technology. For example, this is of particular concern with regard
to our enterprise resource planning, or ERP, software, including PeopleSoft,
Oracle and SAP. The architecture of the software we currently use for ERP
applications is not designed to be hosted. We believe that future software may
be written to be hosted. Our existing software application providers may face
competition from new vendors who have written hostable software. It may be
difficult for us to acquire hostable ERP software from these new vendors and for
our software application providers to develop this software quickly or
successfully. In either event, the services we offer would likely become less
attractive to our customers, which could cause us to lose revenue and market
share. Performing upgrades may also require substantial time and expense and
even then we cannot be sure that we will succeed in adapting our business to
these technological developments. Prolonged delays resulting from our efforts to
adapt to rapid technological change, even if ultimately successful, could harm
our reputation within our industry and our ability to grow our revenues.



Our application management agreements are typically long-
term, fixed-price contracts, and if we are not able to manage our costs, these
agreements may become unprofitable for us.



We enter into agreements with our customers to provide
application management services for long periods, typically three years. Most of
these agreements are in the form of fixed-price contracts that do not provide
for price adjustments to reflect any cost overruns associated with providing our
services, such as potential increases in the costs of software applications we
license from third parties, and the costs of upgrades or inflation. As a result,
unless we are able to provide our services in a more cost-effective manner than
we do today and unless the number of users at individual customers increases to
provide us higher revenue levels per customer, we may never achieve
profitability for a particular customer. In addition, customers may not be able
to pay us or may cancel our services before becoming profitable for us.



Our business is relatively new and, accordingly, our business
and financial models may evolve as the understanding of our business evolves. We
may be unable to adjust our pricing or cost structure with respect to our
current customers in response to changes we make in our business or financial
model due to the long-term, fixed price nature of the application management
agreements we have with our customers. This potential inflexibility may hurt our
ability to become profitable.



Downward pricing pressure may decrease our revenue.



Customers often request reductions in pricing upon contracts
coming up for renewal and sometimes even prior to renewal.  We have accommodated
some of these requests in the past and may accommodate others in the future. As
information technology services evolve we have noted that customers expect these
services to be provided on a more efficient and cost-effective basis. We may not
be able to increase efficiencies so as to maintain current profit margins on an
individual customer basis, taking into account such reduced revenue. The
downward pressure on pricing may result in decreased revenues and may make it
difficult for us to become profitable.



Proposed changes to GAAP that may require recording
compensation expense for employee stock options.



The FASB and various legislative proposals have proposed
changes to GAAP that may require us to adopt a different method of determining
the compensation expense for our employee stock options. We currently use the
intrinsic value method to measure compensation expense for stock-based awards to
our employees. Under this standard, we generally do not consider stock option
grants issued under our employee stock option plans to be compensation when the
exercise price of the stock option is equal to the fair market value on the date
of grant. If any change to GAAP is adopted that requires us to adopt a different
method of determining the compensation expense for our employee stock options,
our reported results of operations may be adversely affected.



We have focused on reducing costs, particularly in certain
areas of our business, and these reductions may hinder sales and development of
new technology.



In response to the difficult business environment and in
order to try to bring our cost structure more in line with our revenues, we have
been focusing on reducing our costs for some time.  We have attempted to do this
in a way that permits us to continue to provide excellent levels of service for
customers, focusing on reducing costs by automating services, negotiating with
vendors and headcount reductions in areas that have less direct impact on
customers.  We have significantly reduced our marketing expenses and this may
adversely affect our ability to attract new customers and to increase our
revenues.  We have also significantly reduced our research and development
expenses and this may adversely affect our ability to develop new technology,
although we have attempted to augment our research and development capabilities
through less expensive means such as through our Indian subsidiary.



If we do not meet the service levels we establish in our
customer contracts, we may lose existing customers and revenue and our
reputation and ability to engage potential customers may be adversely affected.



Our application management services contracts contain service
level guarantees that obligate us to provide our applications at a guaranteed
level of performance. If we fail to meet those service levels, we may be
contractually obligated to provide our customers credit for free service. If we
were to continue to fail to meet these service levels, our customers would then
have the right to cancel their contracts with us. These credits or cancellations
could harm our reputation and hinder our ability to grow our revenues.



If we cannot obtain additional software applications that
meet the evolving business needs of our customers, the market for our services
may not grow and may decline, and sales of our services may suffer.



Part of our strategy may be to expand our services by
offering our customers services related to additional software applications that
address their evolving business needs. We cannot be sure, however, that we will
be able to license these applications at a commercially viable cost or at all or
that we will be able to cost-effectively develop the applications in-house. If
we cannot obtain these applications on a cost-effective basis or otherwise
cannot effectively expand our service offering and, as a result, cannot expand
the range of our service offerings, the market for our services may not grow and
may decline, and sales of our services may suffer.





We have many competitors and expect new competitors to enter
our market, which could adversely affect our ability to increase revenues,
maintain our margins or grow our market share.



The market for our services is extremely competitive and the
barriers to entry in our market are relatively low. We currently have no
patented technology that would bar competitors from our market.



Our current and potential competitors primarily include:

- application service providers and business process
outsourcers, such as Appshop, Bluestar Solutions, CSC, Electronic Data Systems,
Hewlett-Packard, IBM Global Services, Surebridge and USinternetworking;
- systems integrators, such as Accenture and  Bearing
Point;
- offshore providers such as Wipro, Tata and Infosys;
- software vendors, such as Oracle, PeopleSoft, SAP, Ariba
and Siebel Systems; and
- major technology providers, such as Microsoft.



Many of our competitors and potential competitors have
substantially greater financial, customer support, technical and marketing
resources, larger customer bases, longer operating histories, greater name
recognition and more established relationships in the industry than we do. We
cannot be sure that we will have the resources or expertise to compete
successfully in the future. Our competitors may be able to:



- develop and expand their network infrastructures and
service offerings more quickly;
- adapt to new or emerging technologies and changing
customer needs faster;
- take advantage of acquisitions and other opportunities
more readily;
- negotiate more favorable agreements with software
application vendors;
- devote greater resources to the marketing and sale of
their products; and
- address customers' service-related issues more
effectively.



Some of our competitors may also be able to provide customers
with additional benefits at lower overall costs or to reduce their application
service charges aggressively in an effort to increase market share. We cannot be
sure that we will be able to match cost reductions by our competitors.



Our competitors and other companies may form strategic
relationships with each other to compete with us. These relationships may take
the form of strategic investments, joint-marketing agreements, licenses or other
contractual arrangements, which arrangements may increase our competitors'
ability to address customer needs with their product and service offerings. We
believe that there is likely to be consolidation in our markets, which could
lead to increased price competition and other forms of competition that could
cause our business to suffer.



We may lose customers or have to credit customers for our
services if our network infrastructure is not delivered or serviced in a timely,
consistent and cost-effective manner by third parties.



We depend on third parties, such as XO Communications, Qwest
and (i)Structure, for our data center management services and for key components
of our network infrastructure. Our contracts with these data center and network
infrastructure providers are for a fixed term and for a specified amount of
services, which may be insufficient to meet our needs. The services we provide
could be materially disrupted by any disruption in the services provided by our
data center management service providers. For example, downtime caused by our
data center providers could materially disrupt our services, and, in the event
any of these data center providers terminate or decline to renew their contracts
with us, we could experience significant disruption and costs related to
migrating customers to a different data center. We depend on suppliers such as
Sun Microsystems for our computer hardware and WebMethods and Netegrity and
others for our software technology platform. If any of these relationships fail
to provide needed products or services in a timely and consistent manner or at
an acceptable cost, we may be unable to deliver our services to our customers in
an effective manner and these customers may terminate their contracts with us as
a result or demand credits against fees.  Some of the key components of our
infrastructure are available only from sole or limited sources in the quantity
and quality we demand.  We do not carry significant inventories of those
components that we obtain from third parties and have no guaranteed supply
arrangements for some of these components. Additionally, some of our service and
product providers have recently experienced financial difficulty, and financial
problems they experience may cause disruptions in our service, loss of customers
and expose us to additional costs.



Computer system failures could render us unable to service
our customers and may cause us to lose our customers and subject us to liability
and increased expenses.



Our operations depend upon our ability and the ability of our
third party data center and network services providers to maintain and protect
the computer systems on which we host our customers' applications. Any loss of
customer data or an inability to provide service for a period of time could
cause us to lose our customers and subject us to significant potential
liabilities. We currently use six data center providers to house our hardware
and to provide network services, but most of our customers are serviced at a
single site. While our data center and network providers maintain back-up
systems and we have disaster recovery processes, a natural disaster or other
disruption at their site could impair our ability to provide our services to our
customers until the site is repaired or back-up systems become operable. Some of
our data center providers, as well as our corporate headquarters, are located in
Northern California, near known earthquake fault zones. Our systems and the data
centers are also vulnerable to damage from fire, flood, power loss,
telecommunications failures, terrorist attacks and similar events.



Our inability to retain and hire qualified and effective
executive officers and critical personnel may adversely affect our ability to
successfully manage our business or achieve our business objectives.



Our future success depends upon the continued service of our
executive officers and other key personnel. None of our executive officers or
key employees is bound by an employment agreement for any specific term. Key
personnel may voluntarily terminate due to various reasons. If we lose the
services of one or more of our executive officers or key employees, or if one or
more of them decides to join a competitor or otherwise compete directly or
indirectly with us, we may not be able to successfully manage our business or
achieve our business objectives.



Our inability to retain and hire qualified and effective
personnel may adversely affect our ability to grow our business.



In the future, we may expand our sales, operations and
marketing efforts in order to try to increase market awareness and sales of our
services. We may also need to increase our technical staff in order to service
customers and perform research and development. There is competition for
qualified and effective sales, marketing, technical and operations personnel as
these personnel are in limited supply and in high demand and we might not be
able to hire and retain sufficient numbers of these personnel to grow our
business or to service our customers effectively. Also, past reductions in our
workforce, although designed to not affect service levels and demand generation,
may adversely affect these areas of our business.



In the event we are not able to achieve the anticipated
benefits from our acquisition of Nexus Technology, Inc. this may increase our
expenses without the expected increase in revenue, which will adversely affect
our operating or financial results.



In October 2003 we acquired substantially all of the assets
of Nexus Technology, Inc. as part of our efforts to expand our applications
management business and product offerings. The rationale for the asset purchase
was to expand Corio's customer base and expertise in the SAP market space.  SAP
AG is a significant software vendor, providing enterprise resource planning and
e-commerce software for businesses.  We expect Corio's overall revenues in this
market space to grow as a result of the asset purchase, however, we may
experience difficulties in achieving and may never fully realize this
anticipated benefit.  Potential risks with this acquisition include, among
others:



possible impairment of relationships with employees and
customers as a result of the acquisition of Nexus Technology;



inability to retain key employees of Nexus Technology;



inability to retain the SAP customers of Nexus
Technology;



diversion of management's attention from other business
concerns; and



difficulties in assimilation of acquired personnel,
operations, technologies or products.



In the event we are unable to retain Nexus Technology's SAP
customers or use this acquisition as a basis for expanding our customer base in
the SAP market, or in the event the risks identified above lead to increased
costs or a loss of benefits from the acquisition then we may never achieve the
anticipated benefits of this acquisition and this will adversely impact our
operating results.  In addition, Corio has an obligation to issue additional
shares of common stock to Nexus Technology in the event Corio attains specified
revenue milestones for the 3-month period ending December 31, 2004. Any such
issuance would dilute our existing stockholders and increase the costs of the
acquisition.



Any acquisitions of businesses, technologies or services
may result in distraction of our management and disruptions to our business and
additional costs.



In September 2002 and October 2003, we completed the
acquisition of the ASP assets of Qwest Cyber Solutions LLC and Nexus Technology,
Inc., respectively. The integration of the ASP assets of Qwest Cyber Solutions
and Nexus Technology into our business is ongoing, and we may experience related
disruptions and distractions as well as unexpected costs. We have lost, and may
continue to lose, customers acquired from Qwest Cyber Solutions, and we may
experience similar losses of customers acquired from Nexus Technology.



We expect that further consolidation in our industry may
occur. We may acquire or make investments in additional complementary
businesses, technologies or services if appropriate opportunities arise. From
time to time we may engage in discussions and negotiations with companies
regarding acquiring or investing in their businesses, technologies or services.
We cannot make assurances that we will be able to identify suitable acquisition
or investment candidates, or that if we do identify suitable candidates, we will
be able to make the acquisitions or investments on commercially acceptable terms
or at all. If we acquire or invest in another company, we could have difficulty
assimilating that company's personnel, customers, operations, technology or
products and service offerings. In addition, the key personnel of the acquired
company may decide not to work for us. These difficulties could disrupt our
ongoing business, distract our management and employees, cause customer loss,
increase our expenses and adversely affect our results of operations.
Furthermore, we may incur indebtedness or issue equity securities to pay for any
future acquisitions. The issuance of equity or convertible debt securities could
be dilutive to our existing stockholders.



Any inability to protect our intellectual property rights
could reduce our competitive advantage, divert management attention, require
additional intellectual property to be developed or cause us to incur expenses
to enforce our rights.



We cannot assure you that we will be able to protect or
maintain our intellectual property from infringement or misappropriation from
others. In particular, our business would be harmed if we were unable to protect
our technology platform and processes, our trademarks or our other software and
confidential and proprietary information. Agreements on which we rely to protect
our intellectual property rights and the trade secret, copyright and other laws
on which we rely may only afford limited protection to these rights. In
addition, we currently have no patents issued, which limits significantly our
ability to protect our proprietary rights in the event they are infringed. Any
infringement or misappropriation of our intellectual property could reduce our
competitive advantage, divert management attention, require us to develop
technology and cause us to incur expenses to enforce our rights.



Any infringement claims involving our technology or the
applications we offer or other lawsuits could cost a significant amount of money
and could divert management's attention away from our business.



If the number of software applications used by us and our
customers increases and the functionality of these products further overlaps and
integrates, software industry participants may become increasingly subject to
infringement claims. In addition, we have agreed, and may agree in the future,
to indemnify some of our customers against claims that our services infringe
upon the intellectual property rights of others. Someone may claim that our
technology or the applications or services we offer infringes their proprietary
rights. Someone may also claim that we do not have adequate licenses to perform
the services we offer. Any infringement claims, even if without merit, can be
time consuming and expensive to defend, may divert management's attention and
resources and could cause service delays. Such claims could require us to enter
into costly royalty or licensing agreements. If successful, a claim of
infringement against us and our inability to modify or license the infringed or
similar technology could adversely affect our business. In addition, if our
software vendors cease to offer their software applications to us because of
infringement claims against us or them, we would be forced to license different
software applications to our customers that may not meet our customers' needs.
This could result in a loss of customers and a decline in our revenues.



In November 2001, a securities class action lawsuit was filed
in the U.S. District Court for the Southern District of New York against Corio,
certain of its officers and certain of the underwriters involved in Corio's
initial public offering. This is one of approximately 300 similar lawsuits in a
coordinated proceeding sometimes referred to as "IPO allocation
lawsuits" or "laddering lawsuits." In June 2003, the plaintiffs
in these cases presented a settlement proposal to all of the issuer defendants.
Under the proposed settlement, the plaintiffs proposed to dismiss and release
all claims against participating defendants in exchange for a contingent payment
guaranty by the insurance companies collectively responsible for insuring the
issuers in all the related cases, and the assignment or surrender to the
plaintiffs of certain claims the issuer defendants may have against the
underwriters. Under the guaranty, the insurers or companies will be required to
pay the amount, if any, by which $1 billion exceeds the aggregate amount
ultimately collected by the plaintiffs from the underwriter defendants in all
the cases. If the plaintiffs fail to recover $1 billion and payment is required
under the guaranty, Corio would be responsible to pay its pro rata portion of
the shortfall, up to the amount of the self-insured retention under its
insurance policy, which is $1 million. In July 2003, Corio tentatively agreed to
accept this settlement proposal. The settlement is subject to acceptance by a
substantial majority of the issuer defendants and execution of a definitive
settlement agreement. The settlement is also subject to approval by the Court,
which cannot be assured. If the settlement is not accepted by the requisite
number of defendants or if it is not approved by the Court or if it otherwise is
not consummated, Corio intends to defend the lawsuit vigorously. However, the
litigation is in the preliminary stage, and we cannot predict its outcome. The
litigation process is inherently uncertain. If the outcome of the litigation is
adverse to us and if we are required to pay significant monetary damages, our
business would be significantly harmed. This lawsuit may be time consuming and
expensive to defend and may divert management's attention and may be costly to
Corio even if the plaintiff's settlement proposal is consummated.



Risks Related to our Industry



We cannot assure you that the ASP market will become
viable or grow at a rate that will allow us to achieve profitability.



Growth in demand for and acceptance of ASPs and their hosted
business software applications is highly uncertain. This is especially true
given the uncertainty in the macroeconomic environment. Companies in the ASP
industry, such as Pandesic and Red Gorilla and others, have ceased operations.
Other companies in the ASP industry, such as USinternetworking, have filed for
bankruptcy. We cannot assure you that this market will remain viable or, if it
becomes viable, that it will grow at a rate that will allow us to achieve
profitability. The market for Internet services, private network management
solutions and widely distributed Internet-enabled application software has only
recently begun to develop and is now evolving rapidly. We believe that many of
our potential customers are not fully aware of the benefits of hosted and
managed solutions. It is possible that these solutions will never achieve market
acceptance. It is also possible that potential customers will decide that the
risks associated with hiring ASPs in general (or smaller service providers in
particular) to implement and manage their critical systems and business
functions outweigh the efficiencies associated with the products and services we
provide. Concerns over transaction security and user privacy, inadequate network
infrastructure for the entire Internet and inconsistent performance of the
Internet and the financial viability of ASPs could also limit the growth of
Internet-based business software solutions.



Increasing government regulation could limit the market
for, or impose sales and other taxes on the sale of, our services, which could
cause our revenues to decline or increase our expenses.



We offer our suite of software applications over networks,
which subject us to government regulation concerning Internet usage and
electronic commerce. We expect that state, federal and foreign agencies will
adopt and modify regulations covering issues such as user and data privacy,
pricing, taxation of goods and services provided over the Internet, the use and
export of cryptographic technology and content and quality of products and
services. It is possible that legislation could expose us and other companies
involved in electronic commerce to liability or require permits or other
authorizations, which could limit the growth of electronic commerce generally.
Legislation could dampen the growth in Internet usage and decrease its
acceptance as a communications and commercial medium. If enacted, these laws,
rules or regulations could limit the market for or make it more difficult to
offer our services.



The taxation of commerce activities in connection with the
Internet has not been established, may change in the future and may vary from
jurisdiction to jurisdiction. One or more states or countries may seek to impose
sales or other taxes on companies that engage in or facilitate electronic
commerce. A number of proposals have been made at the local, state, national and
international levels that would impose additional taxes on the sale of products
and services over the Internet. These proposals, if adopted, could substantially
impair the growth of electronic commerce and could subject us to taxation
relating to our use of the Internet as a means of delivering our services.
Moreover, if any state or country were to assert successfully that we should
collect sales or other taxes on the exchange of products and services over the
Internet, our customers may refuse to continue using our services, which could
cause our revenues to decline significantly.





If we expand our business outside the United States we may be
subject to unfavorable international conditions and regulations that could cause
our international business to fail.



We have customers with international operations, have
established a subsidiary in India, and may expand our business outside of the
United States in the future. Conducting our business in international markets is
subject to complexities associated with foreign operations and to additional
risks related to our business, including the possibility that the scarcity of
cost-effective, high-speed Internet access and the slow pace of future
improvements in access to the Internet will limit the market for hosting
software applications over the Internet or adversely affect the delivery of our
services to customers. Additionally, some countries outside of the United States
do not permit hosting applications on behalf of companies. The European Union
has adopted a privacy directive that regulates the collection and use of
information. This directive may inhibit or prohibit the collection and sharing
of personal information in ways that could harm us. The globalization of
Internet commerce may be harmed by these and similar regulations since the
European Union privacy directive prohibits transmission of personal information
outside the European Union unless the receiving country has enacted individual
privacy protection laws at least as strong as those enacted by the European
Union privacy directive.



General political and economic conditions may reduce our
revenues and harm our operations.



Because of the economic downturn and political environment,
many industries have delayed or reduced technology expenditures. If this trend
continues, we may fall short of our revenue expectations, and ultimately may
fail to achieve profitability. Moreover, weakness in the technology sector as a
whole could negatively affect the cash flow of some of our customers, which in
turn could impact their ability to meet their obligations to us as they come
due. This could increase our credit risk exposure and harm our overall financial
position.



In addition, global and domestic political conditions,
terrorist acts, or acts of war (wherever located in the world) may damage or
disrupt global and domestic markets and negatively affect our business,
employees, customers, and suppliers, which in turn could have an adverse effect
on our operations and our overall profitability.



Market prices of Internet and technology companies have
been highly volatile, and the market for our stock may be volatile as well.



The stock market has experienced significant price and
trading volume fluctuations, and the market prices of technology companies
generally, and Internet-related software companies particularly, have been
volatile. The market prices of technology companies generally, and technology
service companies in particular, have been subject to significant downward
pressure. In the past, following periods of volatility in the market price of a
public company's securities, securities class action litigation has often been
instituted against that company. Such litigation could result in substantial
costs to us and a diversion of our management's attention and resources.



Many significant corporate actions are controlled by our
officers, directors and affiliated entities regardless of the opposition of
other investors or the desire of other investors to pursue an alternative cause
of action.



Our executive officers, directors and entities affiliated
with them, in the aggregate, beneficially own approximately 39% of our common
stock as of December 31, 2003. If they were to act together, these
stockholders would be able to exercise control over most matters requiring
approval by our stockholders, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may also
have the effect of delaying or preventing a change in control of our company,
which could cause our stock price to drop. These actions may be taken even if
they are opposed by the other investors, including those who purchased shares in
the initial public offering.



Delaware law and our charter, bylaws and contracts provide
anti-takeover defenses that could delay or prevent an acquisition of us, even if
an acquisition would be beneficial to our stockholders.



Provisions of Delaware law, our certificate of incorporation,
bylaws and contracts could delay, defer or prevent an acquisition or change of
control of us, even if an acquisition would be beneficial to our stockholders,
and this could adversely affect the price of our common stock.



Our bylaws limit the ability of our stockholders to
call a special meeting and do not permit stockholders to act by written consent.



We are subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law, which prohibits us from
engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction
in which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner.



Several members of our senior management have contracts
with us that provide for the acceleration of the vesting of their stock options
upon termination following a change of control, and members of our board of
directors have contracts with us that provide for the acceleration of vesting of
their stock options upon a change of control.



Our certificate of incorporation permits our board to
issue shares of preferred stock without stockholder approval. In addition to
delaying or preventing an acquisition, the issuance of a substantial number of
shares of preferred stock could adversely affect the price of the common stock.



Additional provisions of our certificate of incorporation that may serve to
delay or prevent an acquisition include a staggered board, advance notice
procedures for stockholders to nominate candidates for election as directors,
authorization of our board to alter the number of directors without stockholder
approval and lack of cumulative voting.



Item
7A.    Quantitative and Qualitative Disclosures About
Financial Market Risk



We develop and market our services primarily in the
United States. As we expand our operations outside of the United States, our
financial results could be affected by factors such as changes in foreign
currency rates or weak economic conditions in foreign markets. Because all of
our revenues are currently denominated in U.S. dollars, a strengthening of
the dollar could make our services less competitive in international markets.



Interest Rate Risk



The primary objective of our investment activities is to
preserve principal while at the same time maximize the income we receive from
our investments without significantly increasing risk. Some of the securities
that we have invested in may be subject to market risk. This means that a change
in prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed
interest rate at the then-prevailing interest rate and the prevailing interest
rate later rises, the fair value amount of our investment will probably decline.
To minimize this risk, we maintain our portfolio of cash equivalents and short-
term investments in a variety of securities, including Government Securities,
Commercial Paper, Corporate Bonds and money market funds. In general, money
market funds are not subject to market risk because the interest paid on such
funds fluctuates with the prevailing interest rate. The following table presents
the amounts of our cash equivalents and short-term investments that are subject
to market risk by range of expected maturity and weighted-average interest rates
as of December 31, 2003. This table does not include money market funds because
those funds are not subject to market risk.

`Maturing in
                                                         ---------------------------------
                                                                               Between
                                                          Three months     Three months and
                                                             or less       Seventeen months
                                                         ---------------   --------------- 
December 31, 2003 (in thousands, except percentages):
Included in cash and cash equivalents.................. $         6,117   $            --
Weighted average interest rate.........................            1.12 %              --
Included in short-term investments..................... $         3,514   $        16,077
Weighted average interest rate.........................            1.16 %            1.36 %`



Item 8.    Consolidated Financial
Statements and Supplementary Data



The Company's consolidated financial statements, together
with related notes and the report of KPMG LLP, the Company's independent
auditors, are set forth on the pages indicated in Item 15.



Item
9.    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures



None.



Item 9A.    Controls and Procedures

| | (a) |  | Evaluation of disclosure controls and procedures.
| | --- |  | -------------------------------------------------



Our management evaluated, with the participation of our
Chief Executive Officer and our Chief Financial Officer, the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information we are required
to disclose in reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.



| | (b) |  | Changes in internal controls.
| | --- |  | -----------------------------



There was no change in our internal
control over financial reporting that occurred during the period covered by this
Annual Report on Form 10-K that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.



PART III



Certain information required by Part III is omitted from
this report because the Registrant will file a definitive proxy statement within
120 days after the end of its fiscal year pursuant to Regulation 14A for its
annual meeting of stockholders to be held May 12, 2004 and the information
included therein is incorporated herein by reference to the extent detailed
below.



Item
10.    Directors and Executive Officers of the Registrant



The information concerning our directors required by this
Item is incorporated by reference under the caption "Election of
Directors" in the Registrant's 2004 Proxy Statements.

## Audit Committee

Our Company's audit committee currently consists of Aneel
Bhusri, Glenn Marschel and George Still.  Our Board of Directors has determined
that Mr. Still qualifies as an "Audit Committee Financial Expert" as defined in
the instructions to Regulation S-K, Section 401(h).

Code of Business Conduct and Ethics

Our Board of Directors has adopted a Code of Business
Conduct and Ethics that is applicable to all of our employees, officers and
directors, including our senior executive and financial officers. This Code is
intended to deter wrongdoing and promote ethical conduct among our directors,
executive officers and employees.  TheCode of Business Conduct and Ethicsis available on our corporate website.  We intend to post amendments to or
waivers from the Code of Business Conduct and Ethics on our website or as
otherwise required by the rules of the NASDAQ National Market.

Executive Officers of the Company



The following table sets forth certain information
concerning our executive officers:





|Name            | Age | Position                                         
|--------------- | --- | -------------------------------------------------
|George Kadifa   | 44  | Chairman, President and Chief Executive Officer  
|Brett White     | 41  | Executive Vice President, Chief Financial Officer
|Sal Jamil       | 40  | Executive Vice President, Chief Operating Officer
|John B. Ottman  | 46  | Executive Vice President, Worldwide Markets      
|Parmeet Chaddha | 39  | Senior Vice President, Corio Technologies        
|Arthur Chiang   | 46  | Senior Vice President, Corporate Development     



George Kadifa has served as our President, Chief
Executive Officer and as a director since August 1999. Prior to joining us, from
August 1992 to August 1999, Mr. Kadifa was Group Vice President and later Senior
Vice President of Industrial Sector Worldwide at Oracle Corporation, a supplier
of software for information management. Mr. Kadifa holds a B.S. in Electrical
Engineering from the American University of Beirut, an M.S. in Electrical
Engineering from the California Institute of Technology and an M.B.A. from the
Graduate School of Business at the University of Chicago.



Brett White has served as Executive Vice President, Chief
Financial Officer since October 2002. Prior to joining us, Mr. White served as
Chief Financial Officer of KANA Software, Inc., a leading provider of customer
relationship management software solutions, from May 2001 to May 2002. Mr. White
served in an executive finance role at marchFIRST (formerly

USWeb/CKS) from February 1999 to February 2001 and served in various senior
finance roles at Oracle Corporation, from April 1989 to February 1999, most
recently as Vice President of Finance, Worldwide Services. Mr. White holds a
B.A. in Business Economics from the University of California, Santa Barbara.

Sal Jamil has served as our Executive Vice President and Chief Operating
Officer since January 2002 and, prior to that, served as the Vice President in
charge of Professional Services since September 1999. Prior to joining us, from
June 1993 to August 1999, Mr. Jamil served as Group Vice President at Oracle
Corporation, a supplier of software for information management. Mr. Jamil holds
a B.S. in Mechanical Engineering from Syracuse University, a M.S. in Aerospace
Engineering from the Georgia Institute of Technology and a M.S. in Management
from the Georgia Institute of Technology.



John B. Ottman has served as Executive Vice President of
Worldwide Markets since December 1999. Prior to joining us, from November 1989
to November 1999, Mr. Ottman held various key management positions at Oracle
Corporation, most recently as Group Vice President of the Industrial Sector,
managing Oracle's sales ofenterprise resource planning, supply chain
management and Internet procurement software to the high tech, automotive,
aerospace and defense industries. Mr. Ottman's other management positions at
Oracle included Vice President, Global Alliances, Regional Manager and Area
Manager. Mr. Ottman holds a B.A. in History from Denison University.

Parmeet Chaddha has served as our Senior Vice President, Corio Technologies
since January 2001. Prior to joining us, from June 1999 to December 2000, Mr.
Chaddha served as co-founder and Chief Information Officer at MarketMakers,
Inc., a private company providing online marketing services. From September 1995
to November 1998, Mr. Chaddha served as founder and President of Zanza Software,
Inc., a web based business intelligence company. Mr. Chaddha holds a M.S. and
B.S. from the Massachusetts Institute of Technology.



Arthur Chiang has served as our Senior Vice President,
Corporate Development since July 2000 and, prior to that, served as Senior Vice
President, Operations from March 2000 to July 2000 and as Vice President,
Industry Solutions from August 1999 to March 2000. Prior to joining us, from
August 1997 to August 1999, Mr. Chiang served as Vice President, Worldwide
Professional Services at BEA Systems, an application infrastructure company. Mr.
Chiang holds a B.S. in Business Administration from the University of California
at Berkeley and a M.B.A. from the Graduate School of Business at the University
of Chicago.







Additional information required by Item 401 of Regulation
S-K with respect to the executive officers of the Company is incorporated by
reference to the information under the caption "Management" in the
Registrant's 2004 Proxy Statement.



Information with respect to certain corporate governance
matters is incorporated by reference to the information under the caption
"Corporate Governance" in the Registrant's 2004 Proxy Statement.



Information required by Item 405 of Regulation S-K is
incorporated by reference to the information under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" in the Registrant's 2004
Proxy Statement.



Item
11.    Executive Compensation



The information required by this Item is incorporated by
reference to the information under the caption "Executive Compensation and
Other Information" in the Registrant's 2004 Proxy Statement.



|Item 12. |  | Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
|-------- |  | ----------------------------------------------------------------------------------------------



The information required by this Item is incorporated by
reference to the information under the caption "Security Ownership of
Certain Beneficial Owners and Management" and "Equity Compensation
Plan Information" in the Registrant's 2004 Proxy Statement.



Item
13.    Certain Relationships and Related Transactions



The information required by this Item is incorporated by
reference to the information under the caption "Certain Relationships and
Related Transactions" in the Registrant's 2004 Proxy Statement.



Item
14.    Principal Accountant Fees and Services







PART IV



Item
15.    Exhibits, Financial Statement Schedule, and Reports
on Form 8-K



| | (a) |  | The following documents are filed as part of this Report:
| | --- |  | ---------------------------------------------------------



| | 1. |  | Financial Statements
| | -- |  | --------------------





|                                                                       | Page
|---------------------------------------------------------------------- | ----
|Report of Independent Auditors                                         | 40  
|Financial Statements:                                                  |     
|Consolidated Balance Sheets                                            | 41  
|Consolidated Statements of Operations                                  | 42  
|Consolidated Statements of Stockholders' Equity and
Comprehensive Loss | 43  
|Consolidated Statements of Cash Flows                                  | 44  
|Notes to Consolidated Financial Statements                             | 45  



| | 2. |  | Schedules
| | -- |  | ---------



The following financial statement schedule of Corio, Inc.
for the years ended December 31, 2003, 2002 and 2001 is filed as part of this
report and should be read in conjunction with the financial statements.





|Schedule II-Valuation and Qualifying Accounts | 66
|--------------------------------------------- | --



All other schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.



| | 3. |  | Exhibits:
| | -- |  | ---------



|Exhibit
Number |  | Description                                                                                                                         
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------
|3.1*           |  | Amended and Restated Certificate of Incorporation of the
Registrant                                                                 
|3.2*           |  | Bylaws of the Registrant                                                                                                            
|3.3            |  | Amendment to Bylaws of Registrant (approved in March
2004)                                                                          
|4.1*           |  | Form of Registrant's Common Stock Certificate                                                                                       
|4.2***         |  | Nexus Registration Rights Agreement dated October 22,
2003                                                                          
|10.1*          |  | Form of Indemnification Agreement entered into by and between
the Registrant and each of its directors and executive officers       
|10.2+*         |  | Hosting License Agreement dated June 30, 1999 between the
Registrant and Active Software, Inc.                                      
|10.5+*         |  | License and Hosting Agreement dated October 29, 1999 between the
Registrant and Commerce One, Inc.                                  
|10.6+*         |  | Host Server Solutions Service Agreement dated January 29, 1999
between the Registrant and Concentric Network, Inc.                  
|10.7+*         |  | Amendment No. 1 to Host Server Solutions Service Agreement dated
August 23, 1999 between the Registrant and Concentric Network, Inc.
|10.8+*         |  | Amendment No. 2 to Host Server Solutions Service Agreement dated
June 1, 2000                                                       
|10.9*          |  | Alliance and Co-Marketing Agreement dated April 20, 2000 between
the Registrant and Ernst & Young LLP                               
|10.10*         |  | Amended and Restated Investor Rights Agreement dated April 20,
2000 between the Registrant and Ernst & Young LLP                    
|10.11+*        |  | Outsourcer Alliance Agreement dated January 1, 1999 between the
Registrant and PeopleSoft USA, Inc.                                 
|10.12*         |  | Marketing Alliance Agreement dated February 10, 2000 between the
Registrant and SAP America, Inc.                                   
|10.13+*        |  | Value Added Industry Remarketer Agreement entered into by and
between the Registrant and Siebel Systems, Inc.                       
|10.14*         |  | Form of Change in Control Agreement entered into by and between
the Registrant and certain of its officers                          
|10.15          |  | Secured Promissory Note between the Registrant and Sal
Jamil                                                                        
|10.16          |  | Mortgage Assistance Agreement between the Registrant and Sal
Jamil                                                                  
|20.1*          |  | 1998 Stock Plan                                                                                                                     
|20.2*          |  | 2000 Employee Stock Purchase Plan and related
agreements                                                                            







|Exhibit
Number |  | Description                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|20.3**         |  | 2001 Stock Plan                                                                                                                                            
|23.1           |  | Consent of KPMG LLP                                                                                                                                        
|24.1*          |  | Power of Attorney (see page 70)                                                                                                                            
|31             |  | Certifications of CEO and CFO pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
|32             |  | Certifications of CEO and CFO pursuant to 18 U.S.C. Section1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                     

|+ |  | Confidential treatment has been granted for certain portions of
this exhibit.
|- |  | -----------------------------------------------------------------------------



|* |  | Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File No. 333-35402), which became effective July 21,
2000.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------



|**  |  | Incorporated by reference to the Registration Statement on Form
S-8, dated June 19, 2001.          
|--- |  | ---------------------------------------------------------------------------------------------------
|    |  |                                                                                                    
|*** |  | Incorporated by reference to Registrant's Current Report on Form
8-K, as filed on October 29, 2003.



| |     |  |                    
| | --- |  | -------------------
| | (b) |  | Reports on Form 8-K



On October 28, 2003, the Company
furnished a Current Report on Form 8-K in connection with the press release of
the Company's financial results for the quarter ended September 30, 2003.



On October 29, 2003, the Company furnished a Current Report
on Form 8-K in connection with the acquisition of substantially all of the
assets of Nexus Technology, Inc.







REPORT OF
INDEPENDENT AUDITORS



To the Board of Directors and Stockholders
   of Corio, Inc.:



We have audited the accompanying consolidated balance
sheets of Corio, Inc. and its subsidiary (the "Company") as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity and comprehensive loss and cash flows for each
of the years in the three-year period ended December 31, 2003. In connection
with our audits of the consolidated financial statements, we have also audited
the consolidated financial statement schedule, as listed in Item 15(a)(2).
These consolidated financial statements and consolidated financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and the
related consolidated financial statement schedule based on our audits.



We conducted our audits in accordance with auditing
standards generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Corio Inc. and its subsidiary as of December 31, 2003 and 2002, and
the results of its operations and cash flows for each of the years in the three-
year period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
related consolidated financial statement schedule, when considered in relation
to the consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.



As discussed in Note 1 to the consolidated financial
statements, the Company changed its method of accounting for goodwill and other
acquired intangible assets in 2002.



/s/    KPMG LLP



Mountain View, California
   January 26, 2004

---



CORIO, INC.
                             CONSOLIDATED BALANCE SHEETS
                            (in thousands, except share amounts)

`December 31,
                                                                           ----------------------
                                                                              2003        2002
                                                                           ----------  ----------
ASSETS                                                                                           
Current assets:
    Cash and cash equivalents............................................ $   15,440  $   26,908
    Short-term investments...............................................     19,591      17,031
    Accounts receivable, net of allowance of $591 and $843 at
        December 31, 2003 and 2002, respectively.........................      6,484       6,109
    Prepaid expenses and other current assets............................      2,502       3,421
                                                                           ----------  ----------
    Total current assets.................................................     44,017      53,469
Restricted cash..........................................................      7,680       7,717
Property and equipment, net..............................................     10,907      16,286
Goodwill.................................................................      6,484          --
Other assets.............................................................      3,055       2,820
                                                                           ----------  ----------
    Total assets......................................................... $   72,143  $   80,292
                                                                           ==========  ==========
LIABILITIES AND STOCKHOLDERS' EQUITY                                                             
Current liabilities:
    Accounts payable..................................................... $    6,759  $   10,004
    Accrued liabilities..................................................      7,216       7,723
    Accrued restructuring................................................        701       1,757
    Deferred revenue.....................................................      4,017       2,636
    Current portion of notes payable.....................................         --         272
    Current portion of capital lease obligations.........................        476       4,460
                                                                           ----------  ----------
    Total current liabilities............................................     19,169      26,852
Capital lease obligations, less current portion..........................        387         399
Accrued restructuring....................................................      4,068       2,472
Other liabilities........................................................      1,283       1,154
                                                                           ----------  ----------
    Total liabilities....................................................     24,907      30,877
                                                                           ----------  ----------
Commitments and contingencies (Note 7)

Stockholders' equity:
    Preferred stock: $0.001 par value; 10,000,000 shares
       authorized; none issued and outstanding...........................         --          --
    Common stock: $0.001 par value; 200,000,000 shares authorized;
         61,767,102 and 56,516,435 shares issued and outstanding at
         December 31, 2003 and 2002, respectively........................         61          56
    Additional paid-in capital...........................................    306,735     296,820
    Accumulated other comprehensive income...............................         12          98
    Deferred stock-based compensation....................................         (3)       (859)
    Accumulated deficit..................................................   (259,569)   (246,700)
                                                                           ----------  ----------
    Total stockholders' equity...........................................     47,236      49,415
                                                                           ----------  ----------
    Total liabilities and stockholders' equity........................... $   72,143  $   80,292
                                                                           ==========  ==========`

See accompanying notes to consolidated financial statements.

---



CORIO, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS 
                (in thousands, except per share amounts)

`Years Ended December 31,
                                                                                 -------------------------------
                                                                                   2003       2002       2001
                                                                                 ---------  ---------  ---------
Revenues:                                                                                                       
    Application management services............................................ $  60,179  $  43,559  $  36,731
    Professional services and other............................................     8,559     12,585     14,840
                                                                                 ---------  ---------  ---------
    Total revenues.............................................................    68,738     56,144     51,571
                                                                                 ---------  ---------  ---------
Costs and Expenses:                                                                                             
    Application management services *..........................................    47,756     43,053     40,572
    Professional services and other *..........................................     6,708     13,794     16,496
    Research and development *.................................................     4,638      6,306      9,112
    Sales and marketing *......................................................     8,700     10,499     21,783
    General and administrative *...............................................     9,501     11,700     21,079
    Restructuring charges......................................................     2,334      4,036      3,837
    Amortization of stock based compensation...................................       458      2,347      5,099
    Amortization of goodwill...................................................        --         --        564
    Amortization of other intangibles..........................................     1,807        497         --
                                                                                 ---------  ---------  ---------
    Total operating expenses...................................................    81,902     92,232    118,542
                                                                                 ---------  ---------  ---------
Loss from operations...........................................................   (13,164)   (36,088)   (66,971)
Interest and other income......................................................       625      1,821      5,663
Interest and other expense.....................................................      (330)      (934)    (2,567)
                                                                                 ---------  ---------  ---------
Net loss before income taxes...................................................   (12,869)   (35,201)   (63,875)
Tax benefit....................................................................        --        400         --
                                                                                 ---------  ---------  ---------
Net loss....................................................................... $ (12,869) $ (34,801) $ (63,875)
                                                                                 =========  =========  =========

Basic and diluted net loss per share........................................... $   (0.22) $   (0.66) $   (1.27)
                                                                                 =========  =========  =========

Shares used in computation-basic and diluted...................................    57,228     53,103     50,296
                                                                                 =========  =========  =========
                                                                                                                
* Amortization (reversal) of stock-based compensation not included in expense l                                 
    Application management services............................................ $      64  $     261  $     178
    Research and development...................................................         2        148       (253)
    Sales and marketing........................................................       197        840        309
    General and administrative.................................................       195      1,098      4,865
                                                                                 ---------  ---------  ---------
    Total amortization of stock-based compensation............................. $     458  $   2,347  $   5,099
                                                                                 =========  =========  =========`

See accompanying notes to consolidated financial statements.

---



CORIO, INC.
               STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
                      (in thousands)

`Deferred
                                                                                  Stock     Accumulated
                                                   Common Stock    Additional     Based        Other                     Total
                                               ------------------    Paid-in     Compen-    ComprehensiveAccumulated  Stockholders' Comprehensive
                                                Shares    Amount     Capital      sation      Income       Deficit       Equity         Loss
                                               --------  --------  -----------  ----------  -----------  -----------  ------------  ------------
Balance at December 31, 2000..................  49,288  $     49  $   299,052  $  (13,234) $        --  $  (148,024) $    137,843  $         --
Repurchase of common stock....................    (100)       --           (1)         --           --           --            (1)           --
Conversion of warrants to common stock........     420        --           --          --           --           --            --            --
Remeasurement and amortization of
  performance-based stock warrants............      --        --          164          --           --           --           164            --
Issuance of common stock upon
  exercise of stock options...................   4,747         5          211          --           --           --           216            --
Issuance of common stock under
  employee stock purchase plan................     710         1        1,520          --           --           --         1,521            --
Deferred stock-based compensation.............      --        --        5,332      (5,332)          --           --            --            --
Amortization of deferred
  stock-based compensation....................      --        --       (8,006)     13,105           --           --         5,099            --
Change in unrealized gain on investments......      --        --           --          --          372           --           372           372
Net loss......................................      --        --           --          --          -        (63,875)      (63,875)      (63,875)
                                               --------  --------  -----------  ----------  -----------  -----------  ------------  ------------
Balance at December 31, 2001..................  55,065        55      298,272      (5,461)         372     (211,899)       81,339       (63,503)
Remeasurement and amortization of                                                                                                   ============
  performance-based stock warrants............      --        --           11          --           --           --            11            --
Issuance of common stock upon
  exercise of stock options...................     305        --          104          --           --           --           104            --
Issuance of common stock under
  employee stock purchase plan................   1,146         1          688          --           --           --           689            --
Deferred stock-based compensation.............      --        --       (2,255)      2,255           --           --            --            --
Amortization of deferred
  stock-based compensation....................      --        --           --       2,347           --           --         2,347            --
Change in unrealized gain (loss) on investment      --        --           --          --         (274)          --          (274)         (274)
Net loss......................................      --        --           --          --           --      (34,801)      (34,801)      (34,801)
                                               --------  --------  -----------  ----------  -----------  -----------  ------------  ------------
Balance at December 31, 2002..................  56,516        56      296,820        (859)          98     (246,700)       49,415       (35,075)
Remeasurement and amortization of                                                                                                   ============
  performance-based stock warrants............      --        --          416          --           --           --           416            --
Issuance of common stock upon
  exercise of stock options...................   1,201         1        1,055          --           --           --         1,056            --
Issuance of common stock under
  employee stock purchase plan................   1,129         1          569          --           --           --           570            --
Issuance of common stock for
  acquisition.................................   2,921         3        8,265          --           --           --         8,268            --
Deferred stock-based compensation.............      --        --         (398)        398           --           --            --            --
Amortization of deferred
  stock-based compensation....................      --        --           --         458           --           --           458            --
Non-employee stock based compensation.........      --        --            8          --           --           --             8            --
Change in unrealized gain (loss) on investment      --        --           --          --          (86)          --           (86)          (86)
Net loss......................................      --        --           --          --           --      (12,869)      (12,869)      (12,869)
                                               --------  --------  -----------  ----------  -----------  -----------  ------------  ------------
Balance at December 31, 2003..................  61,767  $     61  $   306,735  $       (3) $        12  $  (259,569) $     47,236  $    (12,955)
                                               ========  ========  ===========  ==========  ===========  ===========  ============  ============`

See accompanying notes to consolidated financial statements.

---

CORIO, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

`Years Ended December 31,
                                                                       -------------------------------
                                                                         2003       2002       2001
                                                                       ---------  ---------  ---------
Cash flows from operating activities:                                                                 
    Net loss......................................................... $ (12,869) $ (34,801) $ (63,875)
    Adjustments to reconcile net loss to net cash
      used in operating activities:
        Depreciation ................................................    11,168     11,511     14,919
        Amortization of goodwill and other intangibles...............     1,807        497        564
        Amortization of deferred stock-based compensation............       458      2,347      5,099
        Amortization of warrants.....................................       428         25        201
        Asset impairment charge......................................        --         --      1,500
        Provision for allowance for doubtful accounts................       182        100         --
        Compensation for grants of stock, options and
           warrants in exchange for services.........................        24         24        768
        Accretion of investments.....................................       682        483        339
        Loss on retirement of assets.................................        --         52         --
        Changes in operating assets and liabilities:
            Accounts receivable......................................       799      2,480      3,962
            Prepaid expenses and other current assets................       919      1,592        552
            Accounts payable and accrued expenses....................    (4,223)     1,097     (4,909)
            Deferred revenue.........................................     1,381       (254)    (1,227)
            Other liabilities........................................     1,725      2,709        223
                                                                       ---------  ---------  ---------
     Net cash provided by (used in) operating activities.............     2,481    (12,138)   (41,884)
                                                                       ---------  ---------  ---------
Cash flows from investing activities:
    Purchase of short-term investments...............................   (50,063)   (60,770)   (75,612)
    Sales of short-term investments..................................    46,735     84,814    114,141
    (Increase) decrease in restricted cash...........................        37        132     (7,849)
    Purchase of property and equipment...............................    (5,357)      (828)    (4,623)
    Other assets.....................................................       171        310      1,726
    Cash received from termination fee netted against acquisition....        --      1,000         --
    Cash paid for acquisition........................................    (1,701)   (15,000)        --
                                                                       ---------  ---------  ---------
Net cash (used in) provided by investing activities..................   (10,178)     9,658     27,783
                                                                       ---------  ---------  ---------
Cash flows from financing activities:
    Proceeds from sale of common stock and exercise of stock options.     1,626        793      1,734
    Payments on debt obligations.....................................    (5,397)    (7,722)    (9,771)
                                                                       ---------  ---------  ---------
Net cash  used in financing activities...............................    (3,771)    (6,929)    (8,037)
                                                                       ---------  ---------  ---------
Net decrease in cash and cash equivalents............................   (11,468)    (9,409)   (22,138)
Cash and cash equivalents, beginning of period.......................    26,908     36,317     58,455
                                                                       ---------  ---------  ---------
Cash and cash equivalents, end of period............................. $  15,440  $  26,908  $  36,317
                                                                       =========  =========  =========
Supplemental disclosure of cash flow information:
    Cash paid for interest........................................... $     313  $     897  $   1,711

Supplemental non-cash investing and financing activities:
    Acquisition of property and equipment under capital leases....... $     608  $     407  $   4,193
    Deferred stock-based compensation................................ $    (398) $  (2,255) $   5,332
    Unrealized gain (loss) on investments............................ $     (86) $    (274) $     372
    Acquisition of property and equipment under short term financing. $   1,091  $      --  $      --`

See accompanying notes to consolidated financial statements.

---

CORIO, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1-The Company and Summary of Significant
Accounting Policies



The Company



Corio, Inc. ("Corio" or the
"Company") is a leading enterprise application service provider, or
ASP. The Company implements, integrates, and manages a suite of enterprise
software applications from leading vendors offered to its customers over a
secure network for a monthly fee. The Company also provides professional
services which include initial implementation and ongoing support services.



Principles of Consolidation

The consolidated financial statements include the accounts of
Corio and its wholly owned subsidiary. All intercompany accounts and
transactions have been eliminated.

Foreign Currency Translation

Exchange gains and losses arising from transactions
denominated in a currency other than the functional currency of the entity
involved and remeasurement adjustments for foreign operations where the
U.S. dollar is the functional currency are included in other income
(expense) in the accompanying consolidated statements of operations.

Use of estimates



The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.



Cash equivalents



The Company considers all highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents. Cash equivalents consist principally of cash on deposit in bank and
money market accounts that are stated at cost, which approximates fair value.



Restricted Cash



In connection with two facility leases, the Company is
required to provide letters of credit as security for the leases. The letters of
credit are available for a period of one year with automatic one year renewals.
The letters of credit are collateralized by a $7.7 million cash deposit at
December 31, 2003 and are recorded as restricted cash on the accompanying
balance sheet.



Investments in debt securities



The Company classifies its investments in debt securities
as available-for-sale. Available-for-sale securities are carried at fair market
value. Any unrealized gains or losses are recorded as a component of accumulated
other comprehensive income.



As of December 31, 2003 and 2002, all of the Company's
investments had contractual maturities within 18 months. As of December 31,
2003 and 2002, all investments were considered available-for-sale securities and
consisted of the following (in  thousands):



`Unrealized  Unrealized   Estimated
December 31, 2003                                                Cost        Gain        Loss      Fair Value
------------------------------------------------------------  ----------  ----------  ----------   ---------
Government agencies......................................... $    5,471  $        4  $       --   $   5,475
US treasury notes...........................................      2,763           4          --       2,767
Corporate bonds.............................................     11,345           5          (1)     11,349
                                                              ----------  ----------  ----------   ---------
                                                             $   19,579  $       13  $       (1)  $  19,591
                                                              ==========  ==========  ==========   =========





                                                                          Unrealized  Unrealized   Estimated
December 31, 2002                                                Cost        Gain        Loss      Fair Value
------------------------------------------------------------  ----------  ----------  ----------   ---------
Government securities....................................... $    7,470  $       29  $       --   $   7,499
Corporate bonds.............................................      9,463          69          --       9,532
                                                              ----------  ----------  ----------   ---------
                                                             $   16,933  $       98  $       --   $  17,031
                                                              ==========  ==========  ==========   =========`







Concentration of credit risk

Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash, cash equivalents, short-term investments, and
accounts receivable. At December 31, 2003, the Company held 74% of its cash and
cash equivalents and short-term investments with one financial institution. For
customer concentrations, see Note 13.



Fair value of financial instruments



The carrying amount of Corio's cash and
cash equivalents, short term investments, receivables, accounts payable, accrued
liabilities and debt obligations approximate their fair values due to the
short-term nature of these instruments. The fair market values
of Corio's capital lease obligations approximate their carrying values
based upon current market rates of interest.



Property and equipment



Property and equipment are stated at cost. Depreciation
and amortization are computed using the straight-line method over the estimated
useful lives of the assets, generally three to five years. Leasehold
improvements are amortized over the shorter of the estimated useful lives of the
assets or the lease term.



Goodwill



Effective July 1, 2001, the Company adopted certain
provisions of Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and effective January 1, 2002, the Company adopted the full
provisions of SFAS No. 141 and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting and broadens
the criteria for recording intangible assets apart from goodwill.



In accordance with Accounting Principles Board
("APB") Opinion No. 20, Accounting Changes, the effect of these
accounting changes is reflected prospectively. Supplemental comparative
disclosure, as if the change had been retroactively applied, is as follows (in
thousands, except per share amounts):



`Year Ended December 31,
                                                              ---------------------- -----------
                                                                 2003        2002        2001
                                                              ----------  ----------  ----------
Net loss as reported........................................ $  (12,869) $  (34,801) $  (63,875)
Goodwill amortization.......................................         --          --         564
                                                              ----------  ----------  ----------
Adjusted net loss........................................... $  (12,869) $  (34,801) $  (63,311)
                                                              ==========  ==========  ==========

Reported net loss per share-basic and diluted............... $    (0.22) $    (0.66) $    (1.27)
Goodwill amortization.......................................         --          --        0.01
                                                              ----------  ----------  ----------
Adjusted net loss per share-basic and diluted............... $    (0.22) $    (0.66) $    (1.26)
                                                              ==========  ==========  ==========`



Income taxes



The Company accounts for its income taxes in accordance
with the asset and liability method. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to affect taxable
income. Since inception, the Company has incurred net losses for federal and
state tax purposes, and anticipates losses for the foreseeable future. The
Company has therefore not recognized any tax provision for income taxes for
fiscal 2003, 2002 and 2001. The Company recognized a $400,000 tax benefit in
2002 after determining that a tax provision related to an exposure item recorded
in connection with the Company's acquisition of Data Systems Connectors, Inc. in
1998 was no longer needed due to the completion of a tax examination.



Stock-based compensation



The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock
Issued to Employees and complies with the disclosure provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation. Under APB No. 25, compensation expense is based on
the difference, if any, on the date of the grant between the fair value of the
Company's stock and exercise prices. Deferred compensation is amortized and
expensed in accordance with the graded vesting approach provided for in
Financial Accounting Standards Board ("FASB") Interpretation No. 28.



The Company accounts for stock issued to non-employees in
accordance with the provisions of SFAS No. 123 and FASB Emerging Issues Task
Force Issue No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services. The Company uses the Black-Scholes option pricing model to value
options granted to non-employees. The related expense is recorded over the
period in which the related services are received.



If compensation cost for the Company's stock-based
compensation plans had been determined based on the fair value at the grant
dates for the awards under a method prescribed by SFAS No. 123, the Company's
net loss would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):

`Year Ended December 31,
                                                              ---------------------- -----------
                                                                 2003        2002        2001
                                                              ----------  ----------  ----------
Net loss as reported........................................ $  (12,869) $  (34,801) $  (63,875)
Add stock-based employee compensation expense
   included in reported net loss............................        458       2,347       5,099
Deduct total stock-based employee compensation determined
  under the fair-value-based method for all awards..........     (5,764)     (9,939)    (18,512)
                                                              ----------  ----------  ----------
Pro forma net loss                                           $  (18,175) $  (42,393) $  (77,288)
                                                              ==========  ==========  ==========
Basic and diluted net loss per share:
    As reported............................................. $    (0.22) $    (0.66) $    (1.27)
    Pro forma...............................................      (0.32)      (0.80)      (1.54)`

The Company calculated the fair value of each option granted under the
Company's stock option plans on the date of grant using the Black-Scholes option
pricing model and calculated amortization using the graded vesting approach with
the following weighted-average assumptions:

`Year Ended December 31,
                                                              ----------------------  ----------
                                                                 2003        2002        2001
                                                              ----------  ----------  ----------
Expected life (in years)....................................        4.0         4.0         4.0
Risk free interest rate.....................................       2.54%       3.37%       4.71%
Volatility..................................................        105%        105%         90%
Dividend yield..............................................         --          --          --`

Weighted-average fair values per share of options granted under the Company's
stock option plans during the following years were:

`Year Ended December 31,
                                                              ----------------------------------
                                                                 2003        2002        2001
                                                              ----------  ----------  ----------
 Weighted-average fair values per share for options granted
  under the Company's stock option plans.................... $     0.94  $     0.66  $     1.06`

The Company calculated the fair value of each option granted under the
Company's employee stock purchase plan on the date of grant using the Black-
Scholes option pricing model with the following weighted- average assumptions:

`Year Ended December 31,
                                                              ----------------------------------
                                                                 2003        2002        2001
                                                              ----------  ----------  ----------
Expected life (in years)....................................        0.5   0.5 - 2.0   0.5 - 2.0
Risk free interest rate.....................................       1.06%       1.58%       3.17%
Volatility..................................................        104%        105%         90%
Dividend yield..............................................         --          --          --`



Weighted-average fair values per share of options granted
under the Company's employee stock purchase plan during the following years
were:

`Year Ended December 31,
                                                              ----------------------------------
                                                                 2003        2002        2001
                                                              ----------  ----------  ----------
 Weighted-average fair values per share for options granted
  under the Company's employee purchase plan................ $     0.45  $     0.29  $     0.31`

In August 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Asset, that is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, and portions of Accounting Principles Bulletin
Opinion 30, Reporting the Results of Operations. This standard provides a
single accounting model for long-lived assets to be disposed of and
significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. This standard also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
previously required. The Company adopted this standard on January 1, 2002. The
provisions of this standard did not have a significant effect on the Company's
financial position or operating results.



Revenue recognition

The Company generates revenue from application management
services, professional services and other revenues.

Application management services revenue consists of
monthly recurring fees for ongoing services, which are recognized as the
services are performed in accordance with SAB 104 and related interpretations
and start-up fees, which are recognized ratably over the term of the customer
applications management contract, generally three years upon the commencement of
hosting. We also recognize customer prepayments for application management
services revenues as the services are performed. In addition, fees for support
services, which are also recognized as revenue as the services are performed,
are included in application management services revenue. Our application
management services provide customers rights to access applications, hardware
for the application access, customer service, and rights to upgrades and updates
as provided to the Company under contract with the original software vendor.
Contracts for application management services include monthly or quarterly
minimum volume commitments by the Company's customers and fees for actual volume
usage. The Company analyzes various customer metrics, such as number of users
and amount of data storage, and compares them to the customer's contractual
limits. Should the contractual limits be exceeded, the Company invoices the
customer for the overage and recognizes the revenue, assuming all other revenue
recognition criteria have been met, during the month that the services were
performed. Application management services customers are typically billed
monthly with net 30 day payment terms.



Professional services and other revenues include revenues
from consulting services, implementation services and staff augmentation.
Revenue from consulting services is recognized using the percentage-of-
completion method for fixed-fee arrangements under the cost-to-cost method or as
the services are provided for time-and-materials arrangements. Losses resulting
from fixed-fee contracts are recorded at the time such losses are estimated to
exist. Revenue from time and materials contracts is recognized as services are
performed in accordance with SAB 104. The Company recognizes revenue from fixed-
fee contracts using a proportional performance method of accounting similar to
the percentage of completion method described in Statement of Position 81-1 (SOP
81-1). The Company tracks the progress of these fixed fee contracts based on a
review of detailed project plans and regular review of labor hours incurred to
date as compared to total estimated hours. Professional services customers are
billed as services are performed in accordance with the terms of their
individual contracts.



The Company recognizes revenue from
application management services as the services are provided to its customers
provided that collection of the receivable is reasonably assured. The Company
regularly monitors the payment activity and credit worthiness of its customers.
If the Company determines that collection of revenue from a particular customer
or contract is no longer reasonably assured, the Company designates those
customers as "cash basis customers" and starts to recognize revenue
from that customer on a cash basis, after services have been rendered and
payment for services has been received.  The Company considers the following
factors in determining whether collection of revenue is no longer reasonably
assured from a customer: (i) the customer's payment history and outstanding
receivables balance, (ii) the increased probability of non-payment as a result
of a deterioration in the customer's financial health as indicated by the
Company's review of publicly available information, bankruptcy announcements, or
other factors demonstrating a serious weakness in a customer's business such as
significant layoffs, decreases in revenues, loss of customers or litigation, or
(iii) the increased probability of non-payment due to service-related issues or
the receipt of an early termination notice from a customer.  If the Company
receives any payment from a cash basis customer in advance of services, the
Company would recognize the payment as revenue as the services are performed.
At the time a customer is designated as a cash basis customer any uncollected
accounts receivable are evaluated for collectibility.  Any amounts that are
deemed uncollectible are written off as a reduction to our revenue.  The
remaining balances remain recorded on an accrual basis and are monitored for
collection. Subsequent receipts are applied to these balances before the Company
recognizes any additional revenue.



If the Company believes that there is a
reasonable chance that it will receive payment from a customer, even if payment
is not reasonably assured and the customer is designated as a cash basis
customer, the Company will typically not terminate the customer and will
continue to provide services to that customer. If the Company analyzes an
individual customer's situation and determines that it is extremely unlikely
that the customer will pay for ongoing services, the Company will notify the
customer that if the customer does not pay within the notice period, the Company
reserves the right to terminate the contract and related services and to require
payment of the applicable termination fee and past amounts due. If, after such
notice, the customer does not pay within the cure period or justify its refusal
to pay, the Company will terminate its contract with the customer.

The Company has set forth below the amount of revenue
recognized from cash basis customers for the fiscal years ended
December 31, 2003, 2002 and 2001 and the period in which the underlying
services, which generated the revenue, were performed (in thousands):

`Year Ended December 31,
                                                                             -------------------------------
                                                                               2003       2002       2001
                                                                             ---------  ---------  ---------
Cash Basis Revenue Recorded Related to Services Performed in Current Year.. $  19,147  $  14,745  $  15,898
Cash Basis Revenue Recorded Related to Services Performed in Prior Year....     3,030      2,268        734
                                                                             ---------  ---------  ---------
      Total Cash Basis Revenue Recorded.................................... $  22,177  $  17,013  $  16,632
                                                                             =========  =========  =========`

Revenue earned from cash basis customers but not recorded due
to the cash basis designation was $1.4 million, $3.0 million and $2.3 million as
of December 31, 2003, 2002 and 2001, respectively.  Since revenue related
to these invoices is recognized on a cash basis, these amounts have not been
included in our accounts receivable balances.  In addition, only one of the
Company's cash basis customers is obligated to pay recurring application
management services fees in advance.



The Company's revenue in the future could fluctuate
significantly due to the timing and amount of payments received from cash basis
customers as well as increases or decreases in the number of customers
designated as cash basis customers.



The Company records all costs in connection with services
provided to cash basis customers as incurred.



In certain cases the Company has both professional
services and applications management contracts with the same customer.  In those
cases the Company determines whether or not the fees qualify for separate
accounting treatment as required by SAB 104 and EITF Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables.  When the services are separable,
the revenue for each element is recognized as noted above.  When the elements
are deemed to be inseparable, revenue is recognized over the term of the
customer applications management contract.

In November 2001, the Financial Accounting Standards Board
("FASB") issued a staff announcement regarding the income statement
characterization of reimbursements received for "out-of-pocket"
expenses incurred. This indicated that the FASB believes that reimbursements
received for out-of-pocket expenses should be characterized as revenue in the
income statement, where the service provider is the primary obligor with respect
to purchasing goods and services from third parties, has supplier discretion and
assumes credit risk for the transaction. The announcement is effective for
financial reporting periods beginning after December 15, 2001. Upon application
of the statement, comparative financial statements for the prior periods were
reclassified. For fiscal 2003, the Company recorded $621,000 and $636,000 of
reimbursed application and professional services expenses, respectively, as
revenues. For fiscal 2002, the Company recorded $859,000 and $1.1 million of
reimbursed application and professional services expenses, respectively, as
revenues. For fiscal 2001, $1,019,000 and $972,000, respectively, in
reimbursed application and professional services expenses, respectively, have
been reclassified as revenues.



Advertising costs



Advertising costs are expensed as incurred and totaled
$1,000, $153,000 and $472,000 for the years ended December 31, 2003, 2002 and
2001 respectively.



Comprehensive loss



Comprehensive loss, as defined, includes all changes in
equity during a period from non-owner sources. The tax effect of the unrealized
gain (loss) on short-term investments was insignificant. The Company's
comprehensive loss was $13.0 million, $35.1 million and $63.5 million, in 2003,
2002 and 2001, respectively.



Net loss per share



Basic net loss per share is computed by dividing the net
loss for the period by the weighted average number of shares of common stock
outstanding during the period (excluding shares subject to repurchase). Diluted
net loss per share is computed by dividing the net loss for the period by the
weighted average number of shares of common stock and potentially dilutive
common securities outstanding during the period. Potentially dilutive common
shares are excluded from the computation in loss periods as their effect would
be antidilutive.



The following table sets forth potential shares of common
stock that are not included in the diluted net loss per share as their effect
would have been antidilutive for the periods indicated (in thousands):

`------------------------------------------------------------
                                              2003                2002                2001
                                        ------------------  ------------------  -------------------
                                        Weighted            Weighted            Weighted
                                         Average             Average             Average
                                        Exercise            Exercise            Exercise
                                          Price    Shares     Price    Shares     Price    Shares
                                        --------- --------  --------- --------  --------- ---------
Preferred stock warrants...............$      --       --  $    1.70      746  $    2.52       900
Common stock subject to repurchase.....$      --       --  $    0.01    2,103  $    0.01     4,184
Common stock options and warrants......$    1.87   17,254  $    2.05   16,127  $    2.85    12,236`

Reclassifications



Certain reclassifications have been made to prior period
amounts to be consistent with current year presentation.



Recent accounting pronouncements



In November 2002, the EITF reached a
consensus on Issue 00-21, Revenue Arrangements with Multiple
Deliverables, addressing how to account for arrangements that involve the
delivery or performance of multiple products, services, and/or rights to use
assets. Revenue arrangements with multiple deliverables are divided into
separate units of accounting if the deliverables in the arrangement meet the
following criteria: (1) the delivered item has value to the customer on a stand-
alone basis; (2) there is objective and reliable evidence of the fair value of
undelivered items; and (3) delivery of any undelivered item is probable.
Arrangement consideration should be allocated among the separate units of
accounting based on their relative fair values, with the amount allocated to the
delivered item being limited to the amount that is not contingent on the
delivery of additional items or meeting other specified performance conditions.
The final consensus is applicable to agreements entered into in fiscal periods
beginning after June 15, 2003, with early adoption permitted. The Company
adopted this provision on July 1, 2003, the first period after June 15, 2003.
The provisions of this consensus did not have a significant effect on the
Company's financial position or operating results.



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



In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity, which establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope, many of which were previously classified as equity, as
a liability. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise shall be effective at the beginning
of the first interim period beginning after June 15, 2003. The adoption of SFAS
No. 150 did not have a material effect on the Company's financial condition or
results of operations.



In January 2003, the FASB issued FASB Interpretation No.
46 (revised December 2003 by FIN 46R), Consolidation of Variable Interest
Entities,which addresses how a business enterprise should evaluate whether
it has a controlling financial interest in an entity through means other than
voting rights and, accordingly, should consolidate the entity. FIN 46R replaces
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
which was issued in January 2003. We will be required to apply FIN 46R to
variable interests in variable interest entities (VIEs) created after December
31, 2003. For variable interests in VIEs created before January 1, 2004, the
Interpretation will be applied beginning on January 1, 2005. For any VIEs that
must be consolidated under FIN 46R that were created before January 1, 2004, the
assets, liabilities and noncontrolling interests of the VIE initially would be
measured at their carrying amounts with any difference between the net amount
added to the balance sheet and any previously recognized interest being
recognized as the cumulative effect of an accounting change. If determining the
carrying amounts is not practicable, fair value at the date FIN No. 46R first
applies may be used to measure the assets, liabilities and noncontrolling
interest of the VIE. The Company believes the adoption of FIN No. 46R will not
have a material impact to its financial position, results of operations or cash
flows as the Company does not have any VIEs.

In December 2003, the SEC issued SAB 104, Revenue Recognition, (SAB
104) which rescinds and updates SAB 101, Revenue Recognition in Financial
Statements. SAB 104's primary purpose is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements, which was
superceded as a result of the issuance of EITF 00-21, Accounting for Revenue
Arrangements with Multiple Deliverables. While the wording of SAB 104 has
changed to reflect the issuance of EITF 00-21, the revenue recognition
principles of SAB 101 remain largely unchanged by the issuance of SAB 104.
Adoption of this provision did not have an impact in the Company's financial
position or results of operations.

Note 2-Business Combination



On October 22, 2003, the Company completed the purchase
of the assets and the assumption of certain liabilities of Nexus Technology,
Inc. ("Nexus"). The Company paid Nexus approximately $10.2 million, consisting
of $1.9 million in cash and 2,921,390 shares of Corio common stock, including
$177,000 related to legal expenses. The shares used as consideration were valued
at $2.83 per share, which was the average closing price two days before and
after the closing date. In addition, Nexus will be entitled to receive an earn-
out payment of up to $2.0 million payable in shares of Corio common stock
contingent upon Corio's attainment of specified revenue milestones for the 3-
month period ending December 31, 2004 from identified existing and prospective
customers of Nexus. The cash portion of the acquisition consideration was paid
out of Corio's available working capital. Per the asset purchase agreement,
$500,000 of the purchase price was deposited into escrow, to be held as security
for a limited period of time for any losses incurred by the Company in the
event, among other matters, of any breach by Nexus of the agreements, covenants,
representations and warranties it made under or in connection with the purchase
agreement.

The shares of Corio common stock issued or issuable in connection with the
acquisition, including any shares that may become issuable under the earn-out
arrangement, are "restricted securities" within the meaning of the Securities
Act. Such shares were, or, in the case of any earn-out shares, will be, issued
in reliance on an exemption from the registration requirements of the Securities
Act. Corio granted Nexus Technology and its stockholders resale registration
rights with respect to the shares issued at the closing of the acquisition.



The following table summarizes the Company's allocation
of the total purchase price of $10.2 million to the assets acquired and
liabilities assumed from Nexus at the date of acquisition. The following is the
allocation of the Nexus purchase price (in thousands):

`Accounts receivable................................... $     1,391
Property and equipment................................         480
Other assets..........................................       2,603
Goodwill..............................................       6,484
Accounts payable and accrued liabilities..............        (177)
Other liabilities.....................................        (607)
                                                        -----------
Total................................................. $    10,174
                                                        ===========`

The Company recorded intangible assets for acquired application
management services and professional services customer contracts of $2.6
million, which is included in other assets in the accompanying consolidated
balance sheet. This intangible asset is being amortized over various estimated
lives of 4 months to 5 years. Accumulated amortization at December 31, 2003
was $265,000.



The Company's 2003 statement of operations includes the
operations of Nexus from October 22, 2003 to December 31, 2003. The unaudited
pro forma financial information in the following table illustrates the combined
results of the Company's operations and the operations of Nexus for the years
ended December 31, 2003 and 2002 as if the two entities were combined on January
1, 2002. The unaudited pro forma financial information is not necessarily
indicative of the results of operations which would have occurred if the Company
had constituted a single entity as of January 1, 2002 nor is it necessarily
indicative of the future results of the operations of the combined entity.



The unaudited pro forma financial
information is based upon the following assumptions and estimates, and is
presented for informational purposes:



the pro forma financial information
includes the recording of an identifiable intangible asset of approximately $2.6
million for acquired customer contracts, such asset will be amortized over
estimated useful lives ranging from 4 months to 5 years.



the pro forma financial information includes adjustments
to reflect the amortization expense of the identifiable intangible assets as if
Nexus had been acquired on the first day of the earliest period presented.



the pro forma financial information includes adjustments
to reflect 2,921,390 shares of common stock issued in connection with the
acquisition on the first day of the earliest period presented.



the pro forma financial information reflects a reduction
of interest income related to the $1.9 million in cash paid to acquire Nexus.
The interest rate was assumed to be 2%.





Unaudited Pro Forma Combined Condensed Statement of Operations

`Year Ended December 31,
                                                        ------------------------
                                                           2003         2002
                                                        -----------  -----------                         
                                                           (Unaudited)
                                                        (in thousands except
                                                          per share amounts)
Total revenues........................................ $    74,884  $    64,971
Total operating expenses..............................      89,975      103,104
                                                        -----------  -----------
Loss from operations..................................     (15,091)     (38,133)
Interest and other income.............................         597        1,800
Interest and other expense............................        (330)        (934)
                                                        -----------  -----------
Net loss before income taxes............. ............ $   (14,824) $   (37,267)
Tax benefit...........................................          --          398
                                                        -----------  -----------
Net loss...............................................$   (14,824) $   (36,869)
                                                        ===========  ===========
Basic and diluted net loss per share.................. $     (0.25) $     (0.66)
Shares used in computation-basic and diluted..........      59,859       56,024`



On September 20, 2002, the Company
completed the purchase of the assets and the assumption of certain liabilities
of the enterprise application service provider (ASP) business of QCS, a
subsidiary of Qwest Communications International Inc. The Company paid $15
million in cash for the acquisition and accrued direct acquisition costs of
approximately $1.3 million.



The Company also received $1 million in termination fees from
a QCS customer that was acquired which the Company netted against the $15
million purchase price as this termination was negotiated prior to the closing
of the transaction. Per the asset purchase agreement, $1.5 million of the
purchase price was deposited into escrow, to be held as security for a limited
period of time for any losses incurred by the Company in the event, among other
matters, of any breach by QCS of the agreements, covenants, representations and
warranties it made under or in connection with the purchase agreement. All or a
portion of the $1.5 million in escrow will be paid to the Company if specified
revenue levels are not met related to the customer contracts acquired from
QCS.



The Company acquired certain assets of QCS's ASP business,
including customer contracts related to the ASP business, internally used and
developed software, certain tangible assets such as computers, servers, routers,
firewalls and related equipment, and accounts receivable. The Company is
currently integrating the acquired business into its existing business and will
support the QCS customer relationships acquired as part of the acquisition.



The following table summarizes the Company's allocation of
the total purchase price of $16.3 million to the assets acquired and liabilities
assumed from QCS at the date of acquisition. As the estimated fair values of the
assets acquired and liabilities assumed exceeded the total purchase price, no
goodwill was recorded as a result of this transaction. The following is the
allocation of the QCS purchase price (in thousands):



`Accounts receivable.............................. $   5,900
Prepaid expenses and other current assets........     3,100
Property and equipment...........................     6,000
Other assets.....................................     2,700
Accounts payable and accrued liabilities.........      (500)
Deferred revenue.................................      (900)
                                                   ---------
Total............................................ $  16,300
                                                   =========`







The Company recorded an intangible asset for acquired
customer contracts of $2.7 million, which is included in other assets in the
accompanying balance sheet. This intangible asset is being amortized over an
estimated life of 18 months. Accumulated amortization at December 31, 2003 and
2002 was $1,544,000 and $497,000, respectively.





Note 3-Property and Equipment



Property and equipment, net, consists of the following
(in thousands):

`December 31,
                                                        ------------------------
                                                           2003         2002
                                                        -----------  -----------                         
Computer equipment.................................... $    34,391  $    29,745
Computer software.....................................      15,390       14,265
Furniture and fixtures................................       2,129        2,117
Leasehold improvements................................       2,702        2,702
                                                        -----------  -----------
Total.................................................      54,612       48,829
Accumulated depreciation and amortization.............     (43,705)     (32,543)
                                                        -----------  -----------
Property and equipment, net........................... $    10,907  $    16,286
                                                        ===========  ===========`



Property and equipment includes assets under capital leases of
$13,524,000 at December 31, 2003, and $17,302,000 at December 31, 2002.
Accumulated amortization of assets under capital leases totaled $13,168,000 at
December 31, 2003 and $13,284,000 at December 31, 2002.



Note 4-Accounts Receivable and Accrued Liabilities



The Company records accounts receivable when amounts are
billed in accordance with the contract terms or as services are performed under
non-cancelable contractual services arrangements. At December 31, 2003 and 2002,
the Company had outstanding invoices of $1,444,000 and $3,046,000 related to
customers which the Company deemed as cash basis due to the customer's credit
risks determined by the Company. Since the revenue related to the collection of
these invoices is recognized on a cash basis, these amounts have not been
included in the accounts receivable balances. Included in accounts receivable at
December 31, 2003 and 2002 was $332,000, and $1,443,000, respectively, of
unbilled receivables.



At December 31, 2003 and 2002, the Company's allowance
for doubtful accounts was $591,000 and $843,000, respectively. The amount
reported as of December 31, 2002 has been revised from the $403,000 previously
reported on the face of the consolidated balance sheet as of December 31, 2002.
The revision had no impact on the $6.1 million of net receivables reported as of
December 31, 2002.

Accrued liabilities consist of the following (in thousands):

`December 31,
                                                        ------------------------
                                                           2003         2002
                                                        -----------  -----------                         
Accrued license fees.................................. $     1,590  $     2,024
Accrued compensation and related benefits.............       1,503        2,264
Contributions to employee stock purchase plan.........         484          436
LivePerson contingency (see note 7)...................       1,369           --
Other.................................................       2,270        2,999
                                                        -----------  -----------
Total................................................. $     7,216  $     7,723
                                                        ===========  ===========`



Note 5-Restructuring Charge



The following table sets forth the Company's charges
taken against the restructuring and impairment accrual

`December 31, Additions/      Cash      December 31,
                                                           2002      Adjustments   Payments       2003
                                                        -----------  -----------  -----------  ----------
Office lease obligations.............................. $     3,355  $     2,473  $     1,059  $    4,769
Employee severance....................................         440           --          440          --
Asset abandonments....................................         434         (139)         295          --
                                                        -----------  -----------  -----------  ----------
                                                       $     4,229  $     2,334  $     1,794  $    4,769
                                                        ===========  ===========  ===========  ==========`



In May 2003, the Company signed an agreement to sublease the
vacated portion of its headquarters facility through the end of its lease, which
is March 2010. In the first quarter of 2003, the Company adjusted its estimated
loss related to the vacated space and recorded an additional restructuring
charge of $2.5 million to reflect the terms of the sublease agreement. The
impact of this charge was partially offset by the favorable resolution of a
liability related to various leases which resulted in a reduction of $139,000 to
the previously established restructuring reserve.

The following table sets forth the Company's charges taken against the
restructuring and impairment accrual

`December 31, Additions/      Cash      December 31,
                                                           2001      Adjustments   Payments       2002
                                                        -----------  -----------  -----------  ----------
Office lease obligations.............................. $        --  $     3,796  $       441  $    3,355
Employee severance....................................         106          712          378         440
Asset abandonments....................................         480          109          155         434
                                                        -----------  -----------  -----------  ----------
                                                       $       586  $     4,617  $       974  $    4,229
                                                        ===========  ===========  ===========  ==========`



During fiscal 2002, the Company reviewed its facilities
requirements and vacated a portion of its headquarters in San Carlos,
California. Related to this action, the Company recorded a charge of $3.8
million to record the estimated loss. The employee severance liability at
December 31, 2002 was paid in the first quarter of fiscal 2003.







Note 6-Income Taxes



The income tax expense differed from the amounts computed
by applying the statutory federal income tax rate of 34% to pretax income as a
result of the following (in thousands):

`Year Ended December 31,
                                                        -------------------------------------
                                                           2003         2002         2001
                                                        -----------  -----------  ----------- 
Federal tax at statutory rate......................... $    (4,375) $   (11,968) $   (21,718)
Excess of amount provided over amount required........                     (400)          --
State taxes...........................................          --           11           15
Amortization of intangibles...........................                       --          192
Net operating loss not benefited......................       2,878       11,178       19,731
Foreign tax differential..............................         (20)          --           --
Nondeductible expenses................................          32           41           81
Nondeductible stock compensation......................       1,485          738        1,699
                                                        -----------  -----------  -----------
Total income tax expense.............................. $        --  $      (400) $        --
                                                        ===========  ===========  ===========`

The types of temporary differences that give rise to significant
portions of the Company's deferred tax assets and liabilities are set out below
(in thousands):

`December 31,
                                                        ------------------------
                                                           2003         2002
                                                        -----------  -----------                         
Deferred tax assets:
    Accruals and reserves............................. $     2,761  $     1,658
    State income taxes................................           5            7
    Plant and equipment...............................         981          608
    Net operating loss and credit carryforwards.......      82,469       77,082
                                                        -----------  -----------
    Gross deferred tax assets.........................      86,216       79,355
    Valuation allowance...............................     (86,216)     (79,355)
                                                        -----------  -----------
    Total deferred tax assets......................... $        --  $        --
                                                        ===========  ===========`



Based on the available objective evidence, management believes
it is more likely than not that the net deferred tax assets will not be fully
realized, therefore, management has established a valuation allowance for that
portion of deferred tax assets. The valuation allowance for deferred tax assets
were $86,216,000 and $79,355,000 as of December 31, 2003 and 2002, respectively.
The net change in the total valuation allowance for the year ended
December 31, 2003 was an increase of $6,861,000.



The Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $219,071,000 and
$143,238,000 respectively, available to reduce future income subject to income
taxes. The difference between the federal and state net operating loss
carryforward is due to the state limitation rule for net operating loss. The
federal net operating loss carryforwards expire beginning in 2018 through 2023.
State net operating loss carryforwards expire beginning in 2009.



Included in gross deferred tax assets at December 31,
2003 is approximately $3,242,000 related to stock option compensation for which
the benefit, when realized, will be recorded directly to stockholders' equity.



Federal and California tax laws impose substantial
restrictions on the utilization of net operating loss and credit carryforwards
in the event of an "ownership change" for tax purposes, as defined in
Section 382 of the Internal Revenue Code. The Company has not yet determined
whether an ownership change occurred due to significant stock transactions in
each of the reporting years disclosed. If an ownership change occurred, annual
utilization of the net operating loss carryforwards could be reduced
significantly.



Note 7-Commitments and Contingencies



Leases



The Company leases office space and equipment under
noncancelable operating and capital leases with various expiration dates through
2010. Rent expense for the Company was $4,062,000, $4,462,000 and $5,540,000 for
the years ended December 31, 2003, 2002 and 2001, respectively. The terms of the
facility leases provide for rental payments on a graduated scale. The Company
recognizes rent expense on a straight-line basis over the lease periods.
Included in other liabilities at December 31, 2003 and 2002 is $1,283,000 and
$1,154,000, respectively, of rent expense incurred but not paid.



Future minimum lease payments under non-cancelable
operating and capital leases are as follows (in thousands):

`Capital     Operating
Years Ending December 31,                                 Leases       Leases
------------------------------------------------------  -----------  -----------                         
2004.................................................. $       510  $     4,414
2005..................................................         282        4,412
2006..................................................         114        4,218
2007..................................................          --        4,206
2008..................................................          --        4,315
2009 and thereafter...................................          --        5,685
                                                        -----------  -----------
Total minimum lease payments..........................         906  $    27,250
Less amount representing interest.....................         (43)  ===========
                                                        -----------
Present value of minimum lease payments...............         863
Less current portion..................................        (476)
                                                        -----------
Capital lease obligations, less current portion....... $       387
                                                        ===========`



Equipment financing notes payable



The Company financed its acquisition of certain equipment
with secured notes payable bearing interest ranging from 6% to 9% per annum and
payable in equal monthly installments of principal and interest. At December 31,
2003, the Company had no outstanding notes payable balance. At December 31,
2002, $272,000 was outstanding under these notes and was classified as a current
liability in the accompanying balance sheet.



Lease guarantees



In January 2001, the Company entered into a guarantee
with a lender for a maximum $7 million letter of credit as security on a
facility lease. The letter of credit is collateralized by a $7 million cash
deposit. The cash deposit is recorded as restricted cash on the balance sheet.



In connection with a facility lease, the Company is
required to provide a $680,000 letter of credit as security for the lease as of
December 31, 2003. A $680,000 cash deposit is held as collateral by a financial
institution for guarantee of the letter of credit. The cash deposit is recorded
as restricted cash on the balance sheet.



Loss contracts provision



The Company implements some of its professional services
on a fixed fee basis. The Company's process for tracking its progress to
completion on such arrangements is through individual detailed project plans and
the regular review of labor hours incurred compared to estimated hours to
complete the project. When estimates of costs to complete the project indicate
that a loss will be incurred, these losses are estimated and recognized
immediately. The Company regularly evaluates current information available to
determine whether such recorded losses should be adjusted. In 2003, the Company
determined that its professional services provision for contract losses that the
Company had recorded during fiscal years 2001 and 2002 was no longer appropriate
due to a decreased number of fixed fee contracts. The Company reduced its
provision for contract losses by $668,000 which resulted in a corresponding
reduction to professional services expenses in fiscal 2003. The professional
services provision for contract losses was $153,000 and $821,000 at December 31,
2003 and 2002, respectively.



Corio securities class action litigation



In November 2001, a securities class
action lawsuit was filed in the U.S. District Court for the Southern District of
New York against Corio, certain of its officers and certain of the underwriters
involved in Corio's initial public offering. This is one of approximately 300
similar lawsuits in a coordinated proceeding sometimes referred to as "IPO
allocation lawsuits" or "laddering lawsuits." The plaintiffs
generally allege that the underwriters engaged in undisclosed improper practices
by giving favorable allocations of IPO shares to certain investors in exchange
for excessive brokerage commissions and/or agreements for those investors to
purchase additional shares in the aftermarket at predetermined higher prices.
The plaintiffs seek an unspecified amount of damages. In June 2003, the
plaintiffs in these cases presented a settlement proposal to all of the issuer
defendants. Under the proposed settlement, the plaintiffs proposed to dismiss
and release all claims against participating defendants in exchange for a
contingent payment guaranty by the insurance companies collectively responsible
for insuring the issuers in all the related cases, and the assignment or
surrender to the plaintiffs of certain claims the issuer defendants may have
against the underwriters. Under the guaranty, the insurers or companies will be
required to pay the amount, if any, by which $1 billion exceeds the aggregate
amount ultimately collected by the plaintiffs from the underwriter defendants in
all the cases. If the plaintiffs fail to recover $1 billion and payment is
required under the guaranty, Corio would be responsible to pay its pro rata
portion of the shortfall, up to the amount of the self-insured retention under
its insurance policy, which is $1 million. In July 2003, Corio tentatively
agreed to accept this settlement proposal. The settlement is subject to
acceptance by a substantial majority of the issuer defendants and execution of a
definitive settlement agreement. The settlement is also subject to approval by
the Court, which cannot be assured. If the settlement is not accepted by the
requisite number of defendants or if it is not approved by the Court or if it
otherwise is not consummated, Corio intends to defend the lawsuit vigorously.
However, the litigation is in the preliminary stage, and we cannot predict its
outcome. The litigation process is inherently uncertain. If the outcome of the
litigation is adverse to us and if we are required to pay significant monetary
damages, our business would be significantly harmed. This lawsuit may be time
consuming and expensive to defend and may divert management's attention and may
be costly to Corio even if the plaintiff's settlement proposal is
consummated.



In November 2001, Corio filed a demand for arbitration
against LivePerson, Inc. with the American Arbitration Association in San
Francisco County. The arbitration related to a dispute around a services
contract between the parties. On July 23, 2003, the arbitrator in this dispute
issued a judgment awarding Corio damages of $1,115,440 plus interest.
LivePerson, Inc. filed a motion to vacate the award in the Superior Court of
California. On November 18, 2003, the Superior Court of California issued a
judgment, relating to the arbitration, awarding Corio damages of $1,346,605 plus
interest from October 17, 2003 until the date of payment. LivePerson, Inc. paid
Corio $1,369,479 on December 18, 2003 and subsequently appealed the judgment.
For any portion of the cash paid that is affirmed on appeal or otherwise finally
committed, such cash received pursuant to this award will be recorded as
termination fee revenue.



The Company is subject to other legal proceedings, claims and litigation
arising in the ordinary course of business. While the outcome of these matters
is currently not determinable, management does not expect that the ultimate
costs to resolve these matters will have a material adverse effect on the
Company's financial statements.



Note 8-Preferred Stock



Since inception the Company issued 35,415,000 shares of
convertible preferred and mandatorily redeemable preferred stock. In July 2000,
upon completion of the Company's initial public offering of its common stock,
all outstanding shares of the Company's preferred stock were converted to shares
of common stock. As of December 31, 2003, no shares of preferred stock are
issued or outstanding.



In April 2000, the Company issued 5,450,000 shares of
senior series E mandatorily redeemable preferred stock at $10.00 per share, for
aggregate net proceeds of approximately $54.5 million. The senior series E
mandatorily redeemable preferred stock converted to common stock upon the
Company's initial public offering at 73% of the price per share. The Company
recorded a $20.2 million charge for the beneficial conversion feature inherent
in this transaction which increased the net loss to derive net loss attributable
to common stockholders.



The Company currently has authorized for issuance 10
million shares of preferred stock.

Note 9-Common Stock



In July 2000, the Company completed an initial public
offering of 10 million shares of common stock. As of December 31, 2003, an
aggregate of 61,767,102 shares were issued and outstanding and no shares were
subject to repurchase. As of December 31, 2002, an aggregate of 56,516,435
shares were issued and outstanding including an aggregate of 2,102,604 shares
subject to repurchase at a weighted average price of $0.01 per share.





Common stock reserved



The Company has reserved shares of common stock for
future issuance as follows:

`December 31,
                                                                     ------------------------
                                                                        2003         2002
                                                                     -----------  -----------            
Exercise of outstanding options and warrants.......................  17,253,891   16,127,139
Exercise of preferred stock warrants...............................          --      745,828
Shares available for issuance under employee stock purchase plan...   2,037,126    1,752,897
Additional shares available for grant under the 1998
  and nonstatutory stock  option plans.............................   5,823,370    4,759,732
                                                                     -----------  -----------
Total..............................................................  25,114,387   23,385,596
                                                                     ===========  ===========`



Note 10-Alliance with Cap Gemini Ernst & Young



On September 27, 2000, Cap Gemini Ernst & Young U.S.,
L.L.C exercised its right to convert a portion of its initial warrant
representing 2,333,333 shares into 960,810 shares of common stock through a
cashless exercise. As these shares outstanding were repurchaseable under certain
circumstances, the fair value of these shares subject to repurchase were
remeasured each reporting period until May 2003, when the repurchase rights
lapsed. Amortization expense of $416,000, $11,000 and $164,000 was recorded in
sales and marketing expense for 2003, 2002 and 2001, respectively, related to
these shares.



Note 11-Stock Plans



Stock Option Plan



Under the Company's 1998 Stock Plan (the
"Plan"), the Company was authorized as of December 31, 2003 and
December 31, 2002 to issue up to 21,543,855 and 22,588,023 shares of common
stock, respectively, to directors, employees, and consultants. The Plan provides
for the issuance of stock purchase rights, incentive stock options and non-
statutory stock options. Effective in fiscal year 2000, the Plan provides for
automatic annual increases in the number of shares reserved for issuance under
the Plan in an amount each year equal to the lesser of (1) 6% of the outstanding
amount on such date, (2) 6,000,000 shares or (3) such lesser amount as may be
determined by the board of directors.



Stock purchase rights that have been issued under the
Plan are subject to a restricted stock purchase agreement, whereby the Company
has the right to repurchase the stock upon the voluntary or involuntary
termination of the purchaser's employment with the Company at the original
issuance cost. The Company's repurchase right lapses at a rate determined by the
Plan administrator, but at a minimum rate of 20% per year. As of December 31,
2003, no shares related to this Plan were subject to repurchase. As of  December
31, 2002, 2,102,604 shares were subject to repurchase at a weighted average
price of $0.01 per share.



Under the Plan, the exercise price for incentive stock
options is at least 100% of the stock's fair market value on the date of grant
for employees owning 10% or less of the voting power of all classes of stock and
at least 110% of the fair market value on the date of grant for employees owning
more than 10% of the voting power of all classes of stock. For nonstatutory
stock options, the exercise price is also at least 110% of the fair market value
on the date of grant for employees owning more than 10% of the voting power of
all classes of stock. Options generally expire in 10 years. However, the term of
the options may be limited to 5 years if incentive stock options are granted to
an optionee who owns stock representing more than 10% of the voting power of all
classes of stock. Vesting periods are determined by the Company's Board of
Directors and generally provide for shares to vest over a four-year period.



Nonstatutory Stock Option Plan



In May 2001, the board of directors approved to reserve
3,000,000 shares for issuance under the 2001 Nonstatutory Stock Option Plan (the
"NSP Plan") which provides for the issuance of common stock to
directors, employees, and consultants. Under the NSP Plan, the exercise price
and vesting period for the nonstatutory options will be determined by the Board
on the date of grant. Options granted under the NSP Plan will expire
ten years from the date of grant. Under the Company's NSP Plan, the Company
was authorized as of December 31, 2003 and December 31, 2002 to issue up to
1,483,406 and 1,639,834 shares of common stock, respectively. No options were
issued under this plan in fiscal 2003 and 2002. The options generally vest over
two to four years. In the event an employee terminates prior to vesting, the
Company has the right to repurchase the unvested shares.



A summary of the status of the Company's options under the Plans is as
follows:

`Options Outstanding
                                                          ----------------------
                                                Shares                 Weighted
                                               Available    Number      Average
                                                  for         of       Exercise
                                                 Grant      Shares       Price
                                              ----------- -----------  ---------
Balance, December 31, 2000...................  3,405,467  13,122,315  $    3.83
Shares reserved for grant....................  5,957,293          --  $      --
Granted...................................... (9,154,755)  9,154,755  $    0.73
Exercised....................................         --  (4,747,499) $    0.05
Cancelled....................................  5,344,872  (5,344,872) $    4.14
Repurchases..................................    100,000          --
                                              ----------- -----------
Balance, December 31, 2001...................  5,652,877  12,184,699  $    2.84
Shares reserved for grant....................  3,303,927          --  $      --
Granted...................................... (6,502,530)  6,502,530  $    0.91
Exercised....................................         --    (304,632) $    0.34
Cancelled....................................  2,305,458  (2,305,458) $    3.33
                                              ----------- -----------
Balance, December 31, 2002...................  4,759,732  16,077,139  $    2.04
Shares reserved for grant....................  3,390,986          --  $      --
Granted...................................... (5,257,237)  5,257,237  $    1.29
Exercised....................................         --  (1,200,596) $    0.88
Cancelled....................................  2,929,889  (2,929,889) $    2.21
                                              ----------- -----------
Balance, December 31, 2003...................  5,823,370  17,203,891  $    1.86
                                              =========== ===========`



The following table summarizes information concerning options outstanding as
of December 31, 2003:

`Options Outstanding           Options Exercisable
                          --------------------------------- ---------------------
                                       Weighted
                                       Average
                                      Remaining   Weighted              Weighted
                            Number    Contractual  Average    Number     Average
                              of         Life     Exercise      of      Exercise
Range of Exercise Prices    Shares     (Years)      Price     Shares      Price
------------------------- ----------- ----------  --------- ----------  ---------
$0.05-$  0.05............     34,225       4.74  $    0.05     34,225  $    0.05
$0.25-$  0.35............     44,550       5.35  $    0.26     44,550  $    0.26
$0.40-$  0.90............  7,983,130       7.94  $    0.60  4,542,067  $    0.52
$1.06-$  1.34............  3,016,320       7.98  $    1.26  1,878,447  $    1.23
$1.50-$  2.61............  2,727,339       7.51  $    2.10  1,552,755  $    1.90
$3.41-$  3.78............  1,038,100       7.86  $    3.53    528,499  $    3.58
$4.00-$  4.75............  1,891,988       6.80  $    4.74  1,004,335  $    4.74
$6.50-$ 14.25............    468,239       6.43  $   10.79    421,425  $   10.79
                          ----------- ----------  --------- ----------  ---------
                          17,203,891       7.68  $    1.86  ********** $    1.88
                          =========== ==========  ========= ==========  =========`



As of December 31, 2002, 6,492,935 shares were exercisable at a weighted-
average exercise price of $2.22 per share. As of December 31, 2001, 2,954,739
shares were exercisable at a weighted-average exercise price of $2.38 per share.



Stock-based compensation



In connection with stock options granted to employees to
purchase common stock, the Company recorded charges (credits) for stock-based
compensation of ($398,000), ($2,255,000) and $5,332,000 for the years ended
December 31, 2003, 2002 and 2001, respectively. Such amounts represent
unamortized deferred stock compensation for unvested options that were forfeited
upon termination of employment. The deferred charges for employee options are
being amortized to expense using the graded vesting approach, prescribed by FASB
Interpretation No. 28, through fiscal year 2004. Amortization of deferred stock-
based compensation expense, was $458,000, $2,347,000 and $5,099,000 for the
years ended December 31, 2003, 2002 and 2001, respectively.



In connection with stock options granted to non-employees
to purchase common stock, the Company recorded compensation expense of $8,000,
$0 and $1,600 in the years ended December 31, 2003, 2002 and 2001, respectively.
Such amounts represent, for non-employee options, the deemed fair value of the
option at the date of grant.



Employee Stock Purchase Plan



Under the 2000 Employee Stock Purchase Plan
("ESPP"), eligible employees may purchase common stock at a price
equal to 85% of the lower of the fair market value of the common stock at the
beginning or end of the offering period, which commences on each February 1st
and August 1st. Participation in the offering is limited to the lesser of 15% of
an employee's compensation or $25,000 per year, and may be terminated at any
time by the employee and automatically ends upon termination of employment with
the Company. A total of 5,021,751 shares of common stock have been reserved for
issuance under this plan of which 2,037,126 shares were available for issuance
as of December 31, 2003. Shares issued under this plan were 1,138,681 in 2003
and 1,146,343 in 2002. In addition, the ESPP provides for automatic annual
increases in the number of shares reserved for issuance under the ESPP, in an
amount each year equal to the lesser of (1) 2.5% of the outstanding shares on
such date, (2) 2,500,000 shares or (3) such lesser amount as may be determined
by the board of directors.



Note 12-Employee Benefit Plan



The Company sponsors a qualified 401(k) defined
contribution plan (the "Plan") covering substantially all of its
employees. Participants are permitted, in accordance with the provisions of
Section 401(k) of the Internal Revenue Code, to contribute up to 25% of their
earnings into the Plan. Contributions made by the Company are discretionary, and
the Company has not made any contributions since the inception of the Plan.



Note 13-Significant Customer Information and Segment
Reporting Information



The Company has adopted SFAS No. 131, which requires the
reporting of segment information using the "management approach"
versus the "industry approach" previously required. Based on the
information provided to the Company's chief operating decision maker for
purposes of making decisions about allocating resources and assessing
performance, the Company's operations have been classified into two reporting
segments (i) application management services and (ii) professional
services. Corporate expenses, including those for sales and marketing, general
and administrative and research and development, are not allocated to reporting
segments.



Disaggregated information is as follows (in thousands):

`Application
                                       Management   Professional
                                        Services     Services    Unallocated    Total
                                       -----------  -----------  -----------  ---------
For the Year Ended December 31, 2003                                                   
Revenues............................. $    60,179  $     8,559  $        --  $  68,738
Depreciation......................... $     9,723  $        15  $     1,430  $  11,168
Amortization of stock based compensat $        64  $        --  $       394  $     458
Amortization of intangible assets.... $     1,696  $       111  $        --  $   1,807
Segment loss......................... $   (10,663) $    (1,740) $      (466) $ (12,869)
For the Year Ended December 31, 2002                                                   
Revenues............................. $    43,559  $    12,585  $        --  $  56,144
Depreciation......................... $     9,211  $        52  $     2,248  $  11,511
Amortization of stock based compensat $       261  $        --  $     2,086  $   2,347
Amortization of intangible assets.... $        --  $        --  $       497  $     497
Segment profit (loss)................ $       138  $    (1,196) $   (33,743) $ (34,801)
For the Year Ended December 31, 2001                                                   
Revenues............................. $    36,731  $    14,840  $        --  $  51,571
Depreciation......................... $     9,536  $       238  $     5,145  $  14,919
Amortization of stock based compensat $       178  $        --  $     4,921  $   5,099
Amortization of goodwill............. $        --  $        --  $       564  $     564
Segment loss......................... $    (3,841) $    (1,656) $   (58,378) $ (63,875)`

The Company does not allocate all assets to its operating
segments, nor does it allocate interest income or interest expense.



Significant customer information is as follows:

`Percent of Total
                 Percent of Total Revenue       Accounts Receivable
              ----------------------------  -----------------------------
                   Year Ended December 31,          December 31,
              ----------------------------  -----------------------------
                2003      2002      2001      2003      2002      2001
              --------  --------  --------  --------  --------  -------- 
Customer A..       --        --        --        --        --        20 %
Customer B..       --        --        --        --        11 %      12 %
Customer C..       --        11 %      --        --        --        --
Customer D..       --        --        --        34 %      --        --
Customer E..       12 %      --        --        --        --        --`



For the year ended December 31, 2001, no one customer accounted for more than
10% of the Company's total revenue.



Note 14-Related Party Transactions



In January 1999, the Company entered into an outsourcer
alliance agreement with PeopleSoft for a software license to offer PeopleSoft
software to customers of the Company and for other rights and, in March 1999,
the Company entered into a software license and services agreement with
PeopleSoft for a license to use PeopleSoft software internally. One director of
the Company is also a director of PeopleSoft. Pursuant to the agreements, the
Company paid a total of approximately $152,000, $614,000 and $1.7 million to
PeopleSoft in 2003, 2002 and 2001, respectively.



In the ordinary course of business, the Company has
recorded revenue of $40,000 in the year ended December 31, 2003 arising from
transactions with one company with which we have directors in common. At
December 31, 2003, the Company has no accounts receivable arising from such
transactions. In the ordinary course of business, the Company has recorded
revenue of $2.3 million in the year ended December 31, 2002 arising from
transactions with four companies with which we have directors in common. At
December 31, 2002, accounts receivable included $659,000 arising from such
transactions. In the year ended December 31, 2001, we recorded revenue of $4.4
million arising from transactions with five companies with which we have
directors in common. At December 31, 2001, accounts receivable included $70,000
arising from such transactions.



Note 15-Selected Quarterly Financial Data (unaudited)

`March 31,      June 30,    September 30, December 31,
                                       ------------  ------------  ------------  ------------
                                             (in thousands, except per share data)
2003 Quarter Ended:                                                                          
Net revenues......................... $     19,003  $     17,051  $     15,540  $     17,143
Net loss............................. $     (5,155) $     (2,953) $     (2,257) $     (2,505)
Basic and diluted net loss per share. $      (0.09) $      (0.05) $      (0.04) $      (0.04)
Quarterly stock prices:
High................................. $       0.84  $       1.80  $       3.51  $       3.18
Low.................................. $       0.64  $       0.73  $       1.51  $       2.07
                                                                                             
2002 Quarter Ended:                                                                          
Net revenues......................... $     13,092  $     11,903  $     13,381  $     17,768
Net loss............................. $     (8,010) $     (7,730) $    (10,228) $     (8,833) (1)
Basic and diluted net loss per share. $      (0.16) $      (0.15) $      (0.19) $      (0.16)
Quarterly stock prices:
High................................. $       1.62  $       1.78  $       1.10  $       0.97
Low.................................. $       1.05  $       1.04  $       0.49  $       0.52`





|(1) |  | During the fourth quarter of 2002, an adjustment was made to the
Company's accrual for paid time off for employee vacation resulting in a
decrease in operating expenses of $570,000.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







SCHEDULE II



VALUATION AND
QUALIFYING ACCOUNTS

(in thousands)



`Additions
                                        Balance at   Charged to                 Balance at
                                       Beginning of   Costs and                   End of
             Description                  Period      Expenses    Deductions(1)   Period
-------------------------------------  ------------  -----------  ------------  ----------
Allowance for Doubtful Accounts:
    Year Ended December 31, 2003..... $        843  $       182  $       (434) $      591
    Year Ended December 31, 2002 (2).          816          100           (73)        843
    Year Ended December 31, 2001 (2).        1,411           --          (595)        816`

|(1) |  | Accounts written off                                                                                                                                                                                          
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | These amounts have been revised as discussed in the notes to the
Company's consolidated financial statements. This revision resulted in no change
to the net accounts receivable balances previously reported.









SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused this Report
on Form 10-K to be signed on its behalf by the undersigned, thereonto duly
authorized.



|      |  |                |  |  |  | CORIOINC.
|----- |  | -------------- |  |  |  | ---------
|      |  |                |  |  |  |          
|Date: |  | March 30, 2004 |  |  |  | By:      
|      |  |                |  |  |  |          
|      |  |                |  |  |  |          
|      |  |                |  |  |  | By:      
|      |  |                |  |  |  |          





POWER OF ATTORNEY



KNOW ALL PERSON BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints George Kadifa and Brett White,
jointly and severally, his attorney-in-fact, each with the power of substitution
for him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his
substitute or substitutes, may or cause to be done by virtue hereof.



Pursuant to the requirements of the Securities Act of
1933, this Report has been signed below by the following persons in the
capacities and on the dates indicated.



|Signature                                                   |  | Title                                                                                      |  | Date          
|----------------------------------------------------------- |  | ------------------------------------------------------------------------------------------ |  | --------------
|                                                            |  |                                                                                            |  |               
|/s/    GEORGEKADIFAGeorge Kadifa                            |  | Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer) |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    BRETTWHITEBrett White                                |  | Executive Vice President and Chief Financial Officer (Principal
Financial Officer)         |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    GARYWONGGary Wong                                    |  | Controller (Principal Accounting Officer)                                                  |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    RANDALLP. BAKERRandall P. Baker                      |  | Director                                                                                   |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    ANEELBHUSRIAneel Bhusri                              |  | Director                                                                                   |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    MARKFORMANMark Forman                                |  | Director                                                                                   |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    MARKHAUSERMark
Hauser                                |  | Director                                                                                   |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    GLENNW. MARSCHEL, JR.        
Glenn W. Marschel, Jr. |  | Director                                                                                   |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    TEDSCHLEINTed Schlein                                |  | Director                                                                                   |  | March 30, 2004
|                                                            |  |                                                                                            |  |               
|/s/    GEORGEJ. STILL, JR.        
George J. Still, Jr.     |  | Director                                                                                   |  | March 30, 2004
|                                                            |  |                                                                                            |  |               



|EXHIBIT INDEX |  |  | 
|------------- |  |  | 





|Exhibit
Number |  | Description                                                                                                                                                
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1*           |  | Amended and Restated Certificate of Incorporation of the
Registrant                                                                                        
|3.2*           |  | Bylaws of the Registrant                                                                                                                                   
|3.3            |  | Amendment to Bylaws of Registrant (approved in March
2004)                                                                                                 
|4.1*           |  | Form of Registrant's Common Stock Certificate                                                                                                              
|4.2***         |  | Nexus Registration Rights Agreement dated October 22,
2003                                                                                                 
|10.1*          |  | Form of Indemnification Agreement entered into by and between
the Registrant and each of its directors and executive officers                              
|10.2+*         |  | Hosting License Agreement dated June 30, 1999 between the
Registrant and Active Software, Inc.                                                             
|10.5+*         |  | License and Hosting Agreement dated October 29, 1999 between the
Registrant and Commerce One, Inc.                                                         
|10.6+*         |  | Host Server Solutions Service Agreement dated January 29, 1999
between the Registrant and Concentric Network, Inc.                                         
|10.7+*         |  | Amendment No. 1 to Host Server Solutions Service Agreement dated
August 23, 1999 between the Registrant and Concentric Network, Inc.                       
|10.8+*         |  | Amendment No. 2 to Host Server Solutions Service Agreement dated
June 1, 2000                                                                              
|10.9*          |  | Alliance and Co-Marketing Agreement dated April 20, 2000 between
the Registrant and Ernst & Young LLP                                                      
|10.10*         |  | Amended and Restated Investor Rights Agreement dated April 20,
2000 between the Registrant and Ernst & Young LLP                                           
|10.11+*        |  | Outsourcer Alliance Agreement dated January 1, 1999 between the
Registrant and PeopleSoft USA, Inc.                                                        
|10.12*         |  | Marketing Alliance Agreement dated February 10, 2000 between the
Registrant and SAP America, Inc.                                                          
|10.13+*        |  | Value Added Industry Remarketer Agreement entered into by and
between the Registrant and Siebel Systems, Inc.                                              
|10.14*         |  | Form of Change in Control Agreement entered into by and between
the Registrant and certain of its officers                                                 
|10.15          |  | Secured Promissory Note between the Registrant and Sal
Jamil                                                                                               
|10.16          |  | Mortgage Assistance Agreement between the Registrant and Sal
Jamil                                                                                         
|20.1*          |  | 1998 Stock Plan                                                                                                                                            
|20.2*          |  | 2000 Employee Stock Purchase Plan and related
agreements                                                                                                   
|20.3**         |  | 2001 Stock Plan                                                                                                                                            
|23.1           |  | Consent of KPMG LLP                                                                                                                                        
|24.1*          |  | Power of Attorney (see page 70)                                                                                                                            
|31             |  | Certifications of CEO and CFO pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
|32             |  | Certifications of CEO and CFO pursuant to 18 U.S.C. Section1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                     



|+ |  | Confidential treatment has been granted for certain portions of
this exhibit.
|- |  | -----------------------------------------------------------------------------



|* |  | Incorporated by reference to the Registrant's Registration
Statement on Form S-1 (File No. 333-35402), which became effective July 21,
2000.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------



|**  |  | Incorporated by reference to the Registration Statement on Form
S-8, dated June 19, 2001.          
|--- |  | ---------------------------------------------------------------------------------------------------
|    |  |                                                                                                    
|*** |  | Incorporated by reference to Registrant's Current Report on Form
8-K, as filed on October 29, 2003.

---